```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

INCREASE PENALTIES FOR COMMON CARRIER VIOLATIONS OF THE COMMUNICATIONS 
                              ACT OF 1934

=======================================================================

                                HEARING

                               before the

          SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   on

                               H.R. 1765

                               __________

                              MAY 17, 2001

                               __________

                           Serial No. 107-27

                               __________

       Printed for the use of the Committee on Energy and Commerce

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
72-835                     WASHINGTON : 2001

_______________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Printing 
                                 Office
Internet: bookstore.gpo.gov  Phone: (202) 512-1800  Fax: (202) 512-2250
               Mail: Stop SSOP, Washington, DC 20402-0001

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

          Subcommittee on Telecommunications and the Internet

                     FRED UPTON, Michigan, Chairman

MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    BART GORDON, Tennessee
CLIFF STEARNS, Florida               BOBBY L. RUSH, Illinois
  Vice Chairman                      ANNA G. ESHOO, California
PAUL E. GILLMOR, Ohio                ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          GENE GREEN, Texas
NATHAN DEAL, Georgia                 KAREN McCARTHY, Missouri
STEVE LARGENT, Oklahoma              BILL LUTHER, Minnesota
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               DIANA DeGETTE, Colorado
HEATHER WILSON, New Mexico           JANE HARMAN, California
CHARLES ``CHIP'' PICKERING,          RICK BOUCHER, Virginia
Mississippi                          SHERROD BROWN, Ohio
VITO FOSSELLA, New York              TOM SAWYER, Ohio
TOM DAVIS, Virginia                  JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri                    (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Halprin, Albert, Partner, Halprin, Temple, Goodman, and Maher    17
    Holland, Royce J., Chairman and CEO, Allegiance Telecom, Inc.    23
    Jacobs, Hon. Leon, Chairman, Florida Public Service 
      Commission.................................................    32
    Sarjeant, Lawrence, Vice President, Regulatory Affairs, U.S. 
      Telecom Association........................................    35
    Solomon, David H., Chief, Enforcement Bureau, Federal 
      Communications Commission..................................    39

                                 (iii)

  

 
INCREASE PENALTIES FOR COMMON CARRIER VIOLATIONS OF THE COMMUNICATIONS 
                              ACT OF 1934

                              ----------                              

                         THURSDAY, MAY 17, 2001

              House of Representatives,    
              Committee on Energy and Commerce,    
                     Subcommittee on Telecommunications    
                                          and the Internet,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123 Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, barton, Stearns, 
Deal, Largent, Shimkus, Pickering, Fossella, Davis, Ehrlich, 
Terry, Tauzin (ex officio), Markey, Engel, Green, McCarthy, 
Stupak, Harman, Sawyer, and Dingell (ex officio).
    Staff present: Howard Waltzman, majority counsel; Yong 
Choe, legislative clerk; and Andy Levin, minority counsel.
    Mr. Upton. Good morning. Today's hearing is an important 
one to both sides of the broadband issue, and I believe that 
consumers are best served by competition in the free 
marketplace.
    I support the deregulatory goals of the Tauzin-Dingell 
bill, but I also believe that enhanced enforcement is an 
important ingredient in the mix. My door has been open to 
everyone since I became chairman, and in many meetings with 
CLECs and long distance providers over the past number of 
months one note that they consistently sounded was enforcement, 
enforcement, enforcement.
    I took that to heart and as chairman I have set about to 
strengthen the FCC's enforcement authority as the debate over 
the Tauzin-Dingell bill unfolded. And I am pleased that today 
the question is not any more if Congress will strengthen the 
FCC's enforcement, but when and how much.
    Today my goal is to seek consensus on what I believe is a 
common sense measure. It is a measure that I believe is firm, 
and it is also fair. We need to put this in proper context. 
While I strongly believe that we need to enhance the FCC's 
enforcement authority, it is important to recognize the 
entirety of enforcement regulation which ILECs currently face 
at both the Federal and State levels, none of which are 
mutually exclusive.
    Take the ILECs for example. At the Federal level, there is 
Section 208 of the Communications Act, which enables any 
company or person to file a complaint at the FCC against an 
ILEC for damages due to alleged violations of the Act.
    If damages are awarded by the FCC, the ILEC cuts a check 
directly to the aggrieved party. There is no cap on those 
damages, and the same goes for long distance companies.
    Then, there is Section 503, which deals with forfeiture 
penalties. These cases are brought by the FCC. If the FCC finds 
that an ILEC has violated the Act, rules, or regulations, the 
FCC can order a forfeiture penalty against the ILEC. And in 
these cases the check is cut by the ILEC to the U.S. Treasury. 
The same goes for long distance companies.
    In addition to this, certain ILECs have conditions imposed 
by the FCC as a result of mergers, which have mandated 
requirements and fines. Often these fines are an amount which 
exceed the forfeiture caps found in Section 503, which H.R. 
1765 would substantially increase.
    On top of this, the ILECs have obligations imposed on them 
by the States, and there are literally millions of performance 
measures which if not met result in automatic payments by the 
ILECs to the CLECs and/or the State treasury in a given State.
    All of this swirls around companies which by and large are 
good corporate citizens engaged in certainly a highly 
competitive, highly complex business, with massive regulatory 
obligations. They employ thousands of people in communities 
throughout our country trying to deliver a quality service to 
consumers at affordable rates.
    These are complex issues, and I wish there was a silver 
bullet. But I do know this: we need to give Chairman Powell and 
his colleagues more ammo to do the jobs, so that they can 
enforce the law.
    As everyone here knows today, my bill increases tenfold the 
current forfeiture authority of the FCC, from the current 
$100,000 up to $1 million per violation, and $1 million up to 
$10 million for a continuing series of violations, and for 
repeat offenders these penalties are increased up to $2 million 
per violation and up to $20 million for a continuing series of 
violations.
    And we also expand the statute of limitations for FCC 
enforcement actions from 1 to 2 years and provide the FCC with 
a cease and desist authority as an additional enforcement tool. 
We have added language that streamlines the State PUC 
procedures for resolution of disputes regarding interconnection 
agreements, and this language is identical to the amendment 
which Mr. Terry offered.
    In this important provision, however, I think there may be 
some misunderstanding, so I want to set the record straight. To 
the extent that carriers disagree about their obligations under 
interconnection agreements, H.R. 1765 would provide a fast 
track process through which the State PUCs would determine what 
the obligation of the carriers actually are.
    In the absence of State action, the FCC is still permitted 
to step in and act in this regard. Moreover, for the record, 
and most importantly to today's debate, this provision would 
not in any way limit the FCC's authority to enforce the Act, 
and we will clarify that further in the bill if we need to do 
so.
    As many of you know, I will seek to make an enforcement 
amendment in order in conjunction with the Tauzin-Dingell bill, 
H.R. 1542, makes its way through the legislative process with 
the Rules Committee.
    And I certainly appreciate the strong support of Chairman 
Tauzin and ranking member Dingell for that effort, and I am 
anxious to seek the input of all members as we move this 
process along.
    And I yield to my friend and colleague, Mr. Markey, for an 
opening statement.
    Mr. Markey. Thank you, Mr. Chairman, very much, and thank 
you for having this very important hearing.
    It is very clear that the current forfeitures and penalties 
available to the Federal Communications Commission are woefully 
inadequate to act as a deterrent to multi-billion dollar 
enterprises. As FCC Chairman Powell noted in his testimony to 
the subcommittee recently, the current fines are merely a cost 
of doing business for many of the companies in question.
    In other words, the corporate calculation appears to be 
that it is often cheaper to pay the fine than to do what the 
law requires, because to do what the law requires may actually 
result in more competition, and that is more costly to dominant 
carriers than paying puny fines every quarter for non-
compliance.
    The first issue when looking to give the FCC additional 
tools to focus on enforcement is whether we are prepared to 
give the Commission the human resources necessary to make any 
increase in forfeitures or enforcement of standards meaningful. 
Will we assure Chairman Powell that he will have adequate 
skills, staffing, to act as a cop on the beat?
    We can have all the fines and penalties in the world, and 
it will do little good, in my view, if there isn't anyone 
available to investigate a violation or adjudicate a dispute. 
If we are going to increase fines, penalties, and forfeitures, 
I think we need to explore further what level of fines actually 
acts as a deterrent to the already high rate of recidivism 
amongst several carriers.
    It makes little sense to take action merely to raise fines 
from trivial to paltry. In addition, we ought to explore 
whether enforcement action can be carried out on an expedited 
basis and if any applicable fines should be payable to the 
aggrieved party in a dispute. It does entrepreneurial companies 
little good if many months or years after a violation or 
serious dispute they are posthumously vindicated.
    The marketplace simply moves too fast, and slow enforcement 
in many cases may wind up being the same as no enforcement in 
many emerging markets. I think it would be much better if these 
fines went into the pockets of the entrepreneurial companies 
which were injured rather than into the pockets of bureaucrats 
in the Federal Government.
    I think that that would be a much greater threat to the 
large carriers across the country. If they harm someone, the 
government found them to be liable, and then those 
entrepreneurial companies received the fines. That would be a 
real threat and completely I think eliminate the likelihood in 
many instances that these large carriers would try to destroy 
the small companies.
    Moreover, we must explore as well the relationship between 
fines and penalties levied at the State level and those at the 
FCC. Our fines and penalties at the FCC should be considered in 
addition to any action a State takes, to take precedence over 
State action, and do monetary damages capped at the Federal or 
State level count fines levied by the other jurisdiction? This 
needs to be clarified.
    And, finally, I just want to mention a procedural point. 
This legislation represents a series of proposals on which 
subcommittee members may find a great deal of consensus. I am 
concerned that this bill has been described as a floor 
amendment to the Tauzin broadband legislation on which there is 
little consensus in the committee and no apparent interest in 
the Senate.
    Moreover, that legislation has the effect of 
decriminalizing many of the rule violations that are today in 
need of enforcement in order to ensure fair competition. I 
would hope that if we truly aim to increase enforcement of our 
laws and to be responsive to Chairman Powell's suggestion that 
we should attempt to get these proposals enacted into law, then 
perhaps we should move this bill separately and swiftly, so 
that the penalties at least are on the books, and the small 
companies are protected even as we debate the Tauzin bill I 
think for a very long period of time.
    So, again, I want to commend you, Mr. Chairman, and at this 
point I yield back the balance of my time.
    Mr. Upton. Thank you. Does that mean we can list you as a 
co-sponsor?
    Mr. Markey. As long as all these corrections are made 
exactly as I detailed them, yes.
    Mr. Upton. We recognize the chairman of the full committee, 
Mr. Tauzin.
    Chairman Tauzin. Thank you, Mr. Chairman. Mr. Chairman, I 
would like to observe this is the first time I have heard a 
deregulation bill described as a decriminalization bill. H.R. 
1542 deregulates; it doesn't decriminalize. It simply 
deregulates the provision of broadband service, and I want to 
make that clear on the record.
    And I want to thank you for this common-sense approach to 
address concerns that were expressed throughout the telecom 
industry and by the FCC. The current enforcement regimes of the 
FCC and the State commissions do not adequately police bad 
conduct on the part of common carriers.
    Enforcement of the 1996 Communications Act provisions with 
respect to obligations of common carriers is critical for 
competition to survive and to thrive. And the Act imposes 
responsibilities on common carriers that are indeed designed to 
ensure that the markets for both local and long distance 
telephone service are open and competitive.
    The problem is that the enforcement of those obligations is 
generally considered as a part of the common carrier's desire 
to enter a long distance business under 271 provisions. 
Currently, I think there are only two applications before the 
Commission. I think it is SBC's application for Missouri and 
Verizon's application in Connecticut. So that is the only place 
the Commission has any interaction with provisions of the Act 
designed to open the local markets in Missouri and Connecticut.
    The rest of the States lack that constant enforcement of 
the Act's provisions until the Bell companies in those States 
actually make application for long distance entry. So as we 
move the bill that was passed through our full committee, H.R. 
1542, which does in fact deregulate, not decriminalize, the 
provision of broadband services by telephone companies to 
Americans, it is important that we consider this measure to 
strengthen the enforcement rules that underline telephone 
service and the telephone infrastructure.
    The reason that becomes more important, obviously, is 
because the critics of 1542 argue that to deregulate broadband 
takes away one of the incentives from the common carriers to 
properly deregulate the local loop.
    Well, regardless of what incentives exist or don't exist, 
if we impose upon the Commission both the obligation and the 
authority to enforce the rules of open entry in the local loop, 
we are going to get that situation corrected. In fact, 
hopefully much sooner than later.
    The Upton bill does that. The bill increases the penalties 
that the FCC may impose on common carriers to a level that is 
far beyond just the cost of doing business. Some of the 
opponents of the broadband bill have attempted to dismiss the 
penalties as paltry and compare them to the annual revenues of 
the Bell operating companies. That argument is disingenuous at 
best.
    The Upton bill would increase the penalties tenfold for 
each violation of each day of a continuing violation. While the 
cap on a continuing violation is set at tenfold the current 
limit, I think the opponents of the bill fail to recognize that 
the cap only affects any single act or failure to act. Multiple 
violations would be accompanied by multiple million-dollar 
penalties.
    The total amount of these penalties could certainly far 
exceed what the opponents of this bill would like people to 
believe. The legislation also provides a shot clock for the 
resolution of disputes that arise out of interconnection 
agreements, and this is extremely important.
    The State commissions are currently charged by the 
Telecommunications Act with arbitrating interconnection 
agreements if parties cannot reach those agreements themselves. 
Interconnection agreements are critical for opening up local 
loop competition. And, therefore, the State commissions are in 
the best position to resolve interconnection disputes once they 
have been agreed to.
    If the parties disagree about their obligations under an 
interconnection agreement, then the States should, on a fast 
track basis, tell the parties what their obligations are. And 
the Upton bill makes the State commission the exclusive 
administrative remedy, so that a party that loses before a 
State commission does not prolong the dispute by appealing to 
the FCC for a different outcome.
    It empowers the State commissions to open up the markets 
much sooner. And this type of forum shopping that currently 
goes on undermines the enforcement of these interconnection 
agreements. The bill still preserves the authority of the FCC 
to take action in the absence of State action, but it gives and 
empowers the States with more authority to get the ball moving.
    In addition, the FCC would still have the authority to 
impose fines or violations of the Commission's Act and the FCC 
rules. Critics of this bill argue that this bill is meaningless 
because H.R. 1542 deregulates everything, and, therefore, there 
are no regulations left to enforce. That is simply not true.
    H.R. 1542 only applies to broadband services. It doesn't 
apply to telephone exchange services, nor to the facilities 
used to provide telephone exchange services. So even after the 
enactment of the broadband bill, there are plenty of rules for 
the FCC and the States to enforce--in fact, the most important 
rules, to open up those local markets in telephone service.
    And what critics of H.R. 1542 also know, but they won't 
tell you, is that a CLEC can use the underlying telephone 
infrastructure to provide broadband services. And the rule 
governing the availability of that infrastructure to CLECs has 
not been undermined by H.R. 1542.
    Mr. Chairman, I applaud you for introducing the legislation 
and holding a hearing. I am extremely disappointed that the 
critics of the broadband bill have lashed out now against your 
bill in a thinly veiled attempt to derail the broadband bill.
    Opponents of 1542 recognize that marrying the broadband 
bill with your bill on the floor, which I am committed to ask 
the Rules Committee to do, will give members an even stronger 
reason to vote for H.R. 1542. So instead of offering Chairman 
Upton constructive recommendations of how this bill could be 
improved, too many opponents have simply criticized the bill 
without those recommendations.
    We welcome recommendations on how to make this a better and 
a stronger provision. If the critics of H.R. 1765 are serious 
about improving enforcements of the Communications Act, they 
should do so.
    And, Mr. Chairman, I want you to know that I intend to 
continue to work with you as we move forward to the Rules 
Committee to ensure that the language you so carefully drafted 
with so many other members of this committee is, in fact, 
improved to the point where we can ask that it be added to the 
broadband bill, and will make that bill a much stronger bill 
and, more importantly, will serve as an underlying authority 
and responsibility on the FCC to open up local telephone 
markets the way they should have been opened up for many years.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you. I recognize for an opening statement 
ranking member of the full committee, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, I thank you. And, Mr. Chairman, 
I commend you for holding this hearing on H.R. 1765 and for 
your leadership in offering that legislation. I commend you and 
all of the original co-sponsors for taking such quick action on 
what is a very important issue.
    Chairman Powell has indicated that he has grave need of 
additional authorities and additional penalties. This confers 
upon the Commission the necessary authority to properly enforce 
the rules and regulations which they lay forth.
    It also affords us an assurance that people will listen 
with respect when the Commission addresses problems, and will 
perhaps enable us to substitute real, meaningful penalties for 
the kind of foolish constraints that have been imposed on the 
development of not only the broadband but internet and all the 
rest of telecommunications, because of the inability or 
unwillingness of the Commission to do the things that it was 
supposed to do under the Telecommunications Act.
    For years this committee has heard a tirade of complaints 
and accusations leveled against companies on both sides of the 
telephone wars. The new entrants to the telephone market accuse 
incumbent carriers of violating Telecom Act by not opening 
their markets to competition.
    Incumbents, in turn, charge the new entrants with bad 
faith, claiming that they cherrypick their best customers, and 
purposely don't serve residential customers in order to keep 
the bells from getting approvals to enter long distance. I 
suspect that there is substantial truth to both, but 
particularly to the last part.
    I sincerely doubt that either side has a monopoly on the 
truth. Thankfully, it is not our job to adjudicate the 
situation. Rather, it is our job to correct a situation which 
is impeding a number of important goals of this Congress. The 
first is competition. The second is broader service. The third 
is that we will see the law--the Telecommunications Act 
implemented as we had intended.
    However, we are now addressing this morning one important 
aspect, and that is we can make sure that if and when the law 
is broken it is remedied in a meaningful fashion and that 
penalties can be brought forward by the FCC in a way which will 
enable them to carry out their important mission.
    H.R. 1765 does, then, what we want. It substantially 
increases penalties for all common carriers for wrongdoing. It 
gives the FCC more authority and more flexibility to pursue 
violators, and I challenge anybody to come forward with a 
meaningful criticism or complaint about that.
    The bill provides ample deterrent to protect all 
telecommunications companies from anti-competitive behavior in 
the marketplace. And just as important it provides consumers 
with additional protections against slamming, against cramming, 
against telecommunications marketing abuses, and many other 
violations of the Act--something which currently the FCC lacks.
    The bill is a good one. I support it. However, there is one 
significant improvement which can be made to the bill, and I 
hope that you and the other co-sponsors will work with me to 
incorporate those changes that would implement that as the bill 
moves forward.
    I would note that violations of the Telecommunications Act 
ultimately harm telephone consumers. I believe it is only fair 
that the fines paid by the violators should flow back to 
benefit the consumers, and I would note that the consumers have 
great difficulty in terms of getting redress for wrongdoing 
which is done to them.
    I note that the CLECs have their hot little hands out to 
get this money themselves. I see no reason why the CLECs could 
not be enabled to continue to function as they can by a proper 
lawsuit against other wrongdoers in the telecommunications 
industry as opposed to having us confer upon them a large wash 
of money and the opportunity to generate new and frivolous 
complaints against others in the telecommunication industry.
    Therefore, I would propose that all fines and penalties be 
earmarked to reduce dollar for dollar the amount of the 
universal service surcharge that is currently collected from 
residential telephone consumers. I would like to note that this 
universal service surcharge is an extremely important part of 
assuring universal service, of seeing to it that the things 
that need to be done by our telecommunications service and 
system are available to everyone at an affordable cost, 
something which has made this country unique in terms of the 
availability of service to our users.
    To be clear, and I want to make that so, this proposal will 
not in any way reduce the amount of funding available for the 
e-rate program. It would simply reduce the amount of money that 
is collected from our constituents to pay for it by seeing to 
it that the fund is enriched by fines collected from 
wrongdoers.
    In this way, monthly telephone bills can still go down 
while still funding this important program. I hope we can work 
together to flesh out the details of this provision. I 
recommend its inclusion as an amendment on the floor.
    And, Mr. Chairman, I thank you for holding this hearing. It 
is a valuable one. And I yield back the balance of my time.
    Mr. Upton. Thank you. I would recognize for an opening 
statement Mr. Stearns.
    Mr. Stearns. I thank the chairman and commend you for 
holding this hearing on H.R. 1765. I am proud to be an original 
co-sponsor of this bill.
    And also, Mr. Chairman, I would like to recognize one of 
our witnesses this morning, the Chairman, Leon Jacobs, Jr., of 
the Florida Public Service Commission. I want to thank him for 
coming here. I understand it was pretty short notice, so we 
appreciate your coming here and welcome you.
    The Telecommunications Act, as we all know, is over 10 
years old now. It is now half a decade old. And during that 
markup we thought we had solved all these problems. And we are 
coming back, and I think rightfully so, with legitimate 
enforcement mechanisms.
    This bill that we are marking up now I support. It is a 
similar bill that Mr. Upton and I offered during the 
consideration of H.R. 1542, the broadband deregulation bill. 
The committee accepted one of my amendments creating specific 
and severe penalties totaling up to $10 million for failure to 
comply with specific legislation, but the amendment that Mr. 
Upton and I offered enhancing the FCC's enforcement authority 
under Title V of the Communications Act was determined not to 
be germane.
    So I am glad that Mr. Upton has put this together in a 
separate bill, and so I look forward to the hearing today. I 
would say to my colleagues I don't think this bill in any way 
is intended to favor ILECs or CLECs or IXCs over one another. I 
think it is something that Mr. Powell, the Chairman of the FCC, 
has called for, and I think we should go ahead and go forward.
    I think many on both sides of this issue will complain 
about the bill. And whether it should be part of the broadband 
bill, as the chairman indicated, I think is prudent, and I 
think it would help his bill. But as Mr. Markey has indicated, 
maybe it is a bill that we should mark up separately and get 
through and get moving, and I think that would be dependent 
upon how quickly this broadband goes to the Rules Committee and 
comes on the House floor.
    So, Mr. Chairman, I commend you for what you are doing. I 
think that we are moving in the right step forward here, and I 
yield back the balance of my time.
    Mr. Upton. Thank you. I would recognize for an opening 
statement Ms. McCarthy.
    Ms. McCarthy. Thank you, Mr. Chairman, for holding this 
important hearing on enhancing enforcement mechanisms in the 
Communications Act of 1934. I look forward to the testimony of 
the witnesses on this issue and the dialog that will follow.
    One of the promises of the 1996 Telecommunications Act was 
competition in the local phone service market. Congress removed 
many regulatory barriers, with the expectation that it would 
promote competition and benefit the public interest. Sections 
251, 252, and 271 of the Act were designed to give competitors 
access to incumbent local exchange carriers' facilities as well 
as provide incentives to incumbents to open their networks up 
to competitors. Despite our efforts to create a competitive 
local phone service market, most consumers have no choice in 
local phone service providers. Notwithstanding the efforts of 
Birch Telecom in my district, in my home State of Missouri, 
less than 1 percent of residential and small business consumers 
are provided service by a competitive local exchange carrier. 
Nationally, only 3 percent of residential and small business 
consumers receive local phone service from a CLEC. Clearly, 
competition is not flourishing.
    When Congress drafted the Telecommunications Act of 1996, 
it recognized how difficult it would be to foster competition 
in a former monopoly market. Incumbent phone companies have 
little incentive to open up their networks to competitors even 
when provided with incentives such as those provided under 
Section 271. CLECs have complained repeatedly that incumbents 
have used a variety of tactics to stymie competition. Failure 
to pay reciprocal compensation payments, long delays in orders 
for provisioning unbundled network elements, and charging 
above-market rates for wholesale services are just some of the 
actions used by incumbents to hinder the ability of CLECs to 
operate. FCC Chairman Michael Powell recently stated in a 
letter to the leaders of this subcommittee that ``CLECs may 
have been stymied by the practices of incumbent local exchange 
carriers that appear designed to slow the development of local 
competition.'' In that letter, the Chairman goes on say that 
current FCC authority is insufficient to enforce the local 
competition provisions of the Telecommunications Act. As Mr. 
Markey noted, anti-competitive behavior is not deterred, and 
fines are incorporated into business plans as a cost of doing 
business. These costs are inherently borne by consumers who end 
up paying higher bills.
    I am interested in hearing from the witnesses on what 
sections of the Communications Act need to be revised to give 
the FCC and the State public utility commissions the authority 
they need to stringently enforce the Act's market-opening 
provisions.
    My PSC commissioners have several reservations about the 
bill that Mr. Jacobs will comment upon. My questions concern 
whether the changes made are really enough to deter anti-
competitive behavior by incumbent phone companies. What other 
areas should this legislation address, if any, to make it 
stronger? Does Congress need to appropriate additional moneys 
to the FCC for its enforcement responsibilities?
    There is a general consensus among many of the members of 
this subcommittee that the FCC and State public utility 
commissions need greater authority to enforce the provisions of 
the Communications Act. I have heard from many in the 
telecommunications industry, as well as from consumer groups, 
but neither the FCC nor State public utility commissions have 
the enforcement tools they need to uphold the provisions of the 
Communications Act or regulations and orders stemming from it. 
I want to commend Chairman Upton for introducing this 
legislation and holding a hearing on this important matter. I 
hope the subcommittee will hold additional hearings on 
enhancing enforcement tools and move this legislation as a 
stand-alone bill. This issue is too important to be 
incorporated into H.R. 1542, the Internet Freedom and Broadband 
Deployment Act, a bill whose future is uncertain.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Upton. Thank you. I would yield to Mr. Terry for an 
opening statement.
    Mr. Terry. Thank you, Mr. Chairman. I want to express my 
appreciation to you for the way that you have handled these 
issues, molding them into a single bill and holding this 
hearing today. It is rare that I actually engage in an opening 
statement and have a formal statement.
    Well, it is almost 11, and we haven't yet come close to 
hearing from the witnesses. So if you will allow me, I am going 
to submit the formal statement and yield back the rest of my 
time.
    [The prepared statement of Hon. Lee Terry follows:]

PREPARED STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM 
                         THE STATE OF NEBRASKA

    Mr. Chairman, I want to commend you for holding this hearing on 
H.R. 1765.
    Last week during our markup of H.R. 1542, we discussed the 
importance of enforcement and giving the Federal Communications 
Commission (FCC) what they need to make the fines they levy no longer 
trivial. A number of good ideas surfaced during the markup not germane 
to H.R. 1542. I commend Chairman Upton for taking our ideas and 
crafting H.R. 1765, a bill that will put the ``teeth'' back into FCC 
enforcement.
    I want to bring to the attention of the committee a situation that 
happens all the time between the Incumbent Local Exchange Carriers 
(ILECs) and the Competitive Local Exchange Carriers (CLECs). In order 
for a CLEC to offer service over an ILEC's lines, the two parties must 
develop an interconnection agreement. In that agreement, both parties 
will agree to they types of services and facilities, and the prices at 
which services and facilities will be provided CLECs. For example, as 
part of an agreement, the ILEC will agree to provide loops to the CLEC 
within a certain timeframe. If they fail to do so, they would be in 
violation of the interconnection agreement.
    When a violation occurs, both parties must come together to solve 
the problem. However, if no resolution occurs, then the issue is sent 
to the state public utilities commission (PUC) and waits for the 
commission's decision. The problem is that the state PUC does not have 
to rule in a timely manner, which can be devastating to the CLECs, some 
of who do not have enough money to endure a protracted investigation or 
hearing.
    Mr. Chairman, you have addressed this concern in Section 2, by 
including the remedy that will bring disputes between the ILECs and 
CLECs to a quick resolution. Section 2 will give those CLECs, who find 
themselves in front of a state PUC, hope that in 60 days, a decision 
will be made. Granted, the decision may not be in their favor, but 
nevertheless, a decision will be made.
    Mr. Chairman, this enforcement section will allow any party to 
petition the State commission to arbitrate a dispute that has occurred 
from the interconnection agreement. The non-petitioning party may 
respond to the other party's petition and provide additional 
information to make their case. The State Commission may ask for 
additional information if necessary. If any party refuses or fails to 
respond in a timely basis to the request, the commission may proceed 
with the information they have before them. Once the petition is filed, 
the State Commission will only have 60 days to resolve the dispute. It 
is that simple.
    I believe very strongly in the need to establish limits on 
resolving disputes between the CLECs and the ILECs. Section 2 of H.R. 
1765 is an effective way of doing just that.
    Mr. Chairman, thank you again for this hearing. I yield back the 
balance of my time.

    Mr. Upton. Without objection, all members of the 
subcommittee will be afforded the opportunity to introduce 
their opening statement as part of the record.
    Ms. Harman?
    Ms. Harman. Thank you, Mr. Chairman. I am sorry that I 
won't be able to stay for all of the testimony because of a 
conflict, but I did want to come to say that I applaud you for 
trying to add penalties to the Telecom Act of 1996, a bill I 
voted for and I think the cornerstone of our telecommunications 
policy.
    I know there may be some issues relating to this amendment, 
but I think it is important that if Congress carefully fashions 
a law we provide adequate penalties to enforce it. And in that 
regard I truly applaud you for taking advantage of this 
opportunity to get that job done.
    Fines and penalties cannot be a cost of doing business. 
Fines and penalties have to hurt enough so that they deter 
wrongful conduct. I know that is what you are trying to 
accomplish here, and I want to work with you and with the 
committee to ensure that penalties and regulations are 
effective.
    Thank you very much.
    Mr. Upton. Thank you.
    Mr. Largent?
    Mr. Largent. Thank you, Mr. Chairman. I will make brief 
remarks, too, and just say that this is important legislation. 
My only concern is knowing that Chairman Tauzin intends to 
include H.R. 1765 as an amendment to H.R. 1542, and when it is 
considered on the floor, my concern is is that if for some 
reason something doesn't happen with the broadband bill in the 
Senate or on the floor, whatever, that we don't ever get to 
H.R. 1765.
    And so my hope is is that we would be able to introduce 
this independently if, for whatever reason, the broadband bill 
stalls out, because it is important.
    And I also want to make a note that yesterday in a speech 
to the National Press Club Ed Whittacker, the Chairman and CEO 
of SBC, stated that SBC has to comply with over 3 million 
performance measures on a daily basis to stay in compliance. 
And I will be interested in hearing from Mr. Solomon, the Chief 
of FCC's Enforcement Bureau, how many of those 3 million 
performance measures do we really need.
    And with that, Mr. Chairman, I will yield back my time.
    [The prepared statement of Hon. Steve Largent follows:]

PREPARED STATEMENT OF HON. STEVE LARGENT, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF OKLAHOMA

    Mr. Chairman, thank you for holding this morning's hearing to 
examine legislation which will grant the Federal Communications 
Commission (FCC) greater enforcement penalties and fines in an effort 
to achieve compliance with the Communications Act of 1934. In a perfect 
world there would be no need for a Section 503(b)(2)(B) or a Section 
208 to act as a deterrent for anti-competitive behavior by common 
carriers. However, to my knowledge that type of perfect world doesn't 
currently exist in the communications industry. Therefore, it is 
incumbent upon Congress and the FCC to play the role of an honest 
broker to maintain an even playing field and to preserve a modicum of 
competition.
    I believe H.R. 1765 is a good faith attempt to put all carriers on 
notice, be they incumbent local exchange carriers (ILECs), long 
distance carriers, and/or competitive local exchange carriers (CLECs) 
that strong and effective enforcement is critical to implement the '96 
Telecom Act. It appears that the FCC's current ability to levy fines 
and penalties are insufficient to discourage ILEC anti-competitive 
behavior. To quote from Chairman Powell's May 4, 2001 letter to 
Chairman Tauzin, ``Given the vast resources of many of the nation's 
ILECs, this amount is insufficient to punish and deter violations in 
many instances.''
    I believe that the enactment of this legislation will enhance the 
FCC's ability to police the '96 Act; however, I do have serious 
reservations linking the success of H.R. 1765 to the success or failure 
of H.R. 1542. It defies logic to link these two bills at the Rules 
Committee. H.R. 1542 is an Internet broadband deployment bill which 
precludes any State or federal regulatory or enforcement authority. 
H.R. 1765 is a circuit-switch voice enforcement bill. These conflicting 
bills, if combined, will only cause greater confusion to an already 
contentious issue.
    Enforcement is important--but enforcement needs to be based on 
reasonable and fair standards. SBC, the incumbent local carrier in 
Oklahoma, tracks nearly 3 million measures of its performance each 
month to comply with Sections 251, 252, 271 in its 13 state service 
territory region. This effort requires 172 full time personnel and 
millions of dollars in compliance costs. Clearly, it is virtually 
impossible to maintain a 100 percent compliance rate with 3 million 
performance standards.
    Southwestern Bell-Oklahoma's performance in providing wholesale 
service to CLECs, as measured by the FCC and endorsed by Justice in the 
Texas, Oklahoma, and Kansas Section 271 proceedings is consistently the 
best performance turned in by all of the SBC service territory states. 
SBC-Oklahoma average performance this past year has been 93.5%, a truly 
commendable achievement.
    In closing, it's imperative that Congress grant the FCC effective 
and meaningful enforcement tools to implement the '96 Act. But it's 
equally important to allow the Bell companies to have a reasonable and 
manageable number of performance standards with which they will have to 
comply. Otherwise, we are doing nothing more than creating a lot of 
busy work.
    I look forward to hearing from our witnesses.

    Mr. Upton. Thank you.
    Mr. Sawyer?
    Mr. Sawyer. Thank you, Mr. Chairman, not only for holding 
this hearing but for your insightful one-panel policy. It is a 
benefit to everybody.
    Let me associate myself with the remarks of the gentleman 
from Nebraska with regard to his opening statement and keep 
mine brief as well, associate myself with the comments of the 
gentleman from Michigan, particularly with regard to his 
thoughts on the universal service fund and the way in which 
that might take advantage of the efforts that we undertake here 
today.
    With that, I would yield back the balance of my time.
    Mr. Upton. Mr. Fossella?
    Mr. Fossella. No statement.
    Mr. Upton. Mr. Pickering?
    Mr. Pickering. Thank you, Mr. Chairman, for this hearing. 
And as we look at enforcement and opening the access to the 
local network to promote competition, I am still concerned that 
with this provision or this legislation, 1765, when you pair it 
with the legislation that we passed in the last week, the 
broadband bill, it is still fundamentally flawed, because you 
are removing the elements through interconnection and 
unbundling.
    We are cutting off capital. We are cutting off access to 
the network. We are undermining the core elements of the 1996 
Act that would promote local competition.
    So if you remove the elements with one hand and then say, 
``We are going to enforce something'' on the other hand, there 
is nothing there left to enforce to open the markets for local 
competition. So until that fundamental flaw is repaired and 
corrected, the enforcement provisions that we are talking about 
today are somewhat meaningless.
    The other problem that we see is if you cap at $10 million 
the penalties for companies that are in the $60- and the $70- 
and the $80 billion, in revenues per year, a $10 million 
insurance policy in an $80 billion a year business is basically 
a free path to say we can violate every law there is and just 
pay $10 million.
    So the penalties are insufficient, and we need to look at 
how we can strengthen not only the FCC authority on penalties, 
but what are some of the other non-monetary things that can be 
done to strengthen the FCC's hand, whether it is prohibitions 
on marketing, other types of prohibitions that would not 
disrupt the consumers' service but would be something that 
would be a true incentive for companies to comply--performance 
matrixes and performance contracts, looking at treble damages, 
if companies are violating these laws, everything that we can 
do to promote competition.
    And until we repair that side of it, it is hard to discuss 
entry into new markets without compliance of 251, 252, 271. 
When we get that balance, then I think that we are on the right 
path. But until then, we are still operating in a context 
which, in my view, is unworkable. I look forward to making it 
workable and making something that is both on the enforcement 
side and the local competition side, and then we can look at 
entry for the Bells.
    I do want to see competition in local markets. I want to 
see competition in the data market. I want to see competition 
in long distance. But we have got to--but we have to make sure 
that we have a balanced and sound framework to be able to do 
so.
    With that, I yield back, Mr. Chairman.
    Mr. Upton. Thank you.
    Mr. Engel?
    Mr. Engel. Thank you, Mr. Chairman. I very much appreciate 
the work that you and our other colleagues have done on 
enforcement issues of the FCC. I think that we all recognize 
that the existing fines are meaningless to the multi-billion 
dollar per year industry.
    Of course, we all wish that the common carriers met their 
obligations without such threats, but in this industry there 
must be a referee, and the referee must have the power to send 
a player into the penalty box.
    I also appreciate that we are actually having the hearing 
on this. I am supportive of changing these enforcement 
provisions to better reflect today's situation. But when these 
questions came up at the recent markup, I felt as if I didn't 
have enough information to judge what the proper level should 
be. So this is my opportunity to learn more, and I think it is 
very, very helpful.
    My overriding principle, Mr. Chairman, is that these 
enforcement provisions be applied to all common carriers. I 
know that some believe we should have a different, higher set 
for the RBOCs, but I believe that just isn't fair. The Federal 
Government is not supposed to choose sides in the marketplace.
    The bill offered by my friend, the chairman, also 
streamlines the procedures that the States use to resolve 
disputes regarding interconnection agreements. I believe giving 
the States more authority is necessary. The FCC does not have 
the resources it needs to do all that we ask.
    With such higher penalties, I suspect that challenges will 
increase and that demands on the time of the FCC staff will 
increase. Bringing the States into this earlier and granting 
them greater authority will relieve the FCC of some of the 
burden we have placed upon it.
    So I thank you, Mr. Chairman, for giving us this 
opportunity. I do think it is necessary. I just want to make 
sure that we are doing it right.
    Thank you.
    Mr. Upton. Thank you.
    Mr. Ehrlich?
    Mr. Ehrlich. Real briefly, Mr. Chairman, I thank you for 
the hearing. It is timely and important. I also want to give a 
kudo to the chairman. I think the process he has adopted here 
does make sense, subject to some of the caveats expressed by my 
colleagues here.
    I do want to associate myself with the remarks made by my 
colleague from Oklahoma and particularly Mississippi, and 
hopefully the testimony will focus on the FCC and what the FCC 
needs in the way of additional enforcement. This has been a 
very difficult issue for all of us, and I will yield back.
    Mr. Upton. Mr. Green?
    Mr. Green. Thank you, Mr. Chairman. As the original co-
sponsor, I support and believe this legislation will be a real 
benefit to any consumer with a phone line. Back in March when 
Chairman Powell came before our subcommittee and told us that 
the FCC needed expanded enforcement authority, I and you and a 
number of other members agreed with him.
    The current cap on common carrier fines are too low to 
serve as an effective barrier against anti-competitive behavior 
by our common carriers. Consumers don't care whether it was a 
CLEC or an ILEC that they just were slammed or crammed by. They 
care about fixing the problem and making sure that it doesn't 
happen again, and that the companies conducting these illegal 
practices are held accountable.
    After reading the testimony today of the witnesses, there 
is clearly differing opinions on whether the legislation goes 
too far or not far enough. This bill encompasses the vast 
majority of the suggestions put forth by Chairman Powell and is 
a reasonable compromise, giving the FCC new powers for 
competition.
    In addition, Mr. Chairman, I want to thank you for working 
with us and including reporting language in the bill that is 
part of the bill that we put in. Chairman Upton proposed 
increasing the levels of fines against common carriers. And I 
believe it is important to closely monitor whether our actions 
have a positive impact on the industry.
    Reporting provisions, including this legislation, require 
the FCC to report to Congress where there are increasing or 
decreasing--decreases in common carrier violations as a result 
of the passage of this bill. If reporting shows increases in 
common carrier violations, I would hope we consider raising the 
fines again to promote better compliance.
    My Mississippi colleague is correct that we need to make a 
good point that penalties should be enough to stop the improper 
activity. And, again, I am glad, Mr. Chairman, that we have 
this bill, and hopefully we will be able to deal with it in an 
expeditious manner. Thank you.
    Mr. Upton. Thank you.
    Mr. Deal?
    Mr. Deal. No statement.
    Mr. Upton. Mr. Davis?
    Mr. Davis. Thank you, Mr. Chairman.
    We thank you for your willingness to work with us on the 
issue we have before us today. I think it is clear that in 
introducing H.R. 1765 you are committed to changing the current 
practices of telecommunication providers who view the threat of 
monetary penalties under the Communications Act as small speed 
bumps on their violative actions rather than a concrete wall 
that would actually deter illegal business practices.
    For that reason, and in light of Chairman Powell's May 4 
letter on this matter, I applaud your bringing this issue 
before the subcommittee so quickly.
    I remain troubled by the fact that this important 
legislation which applies to all common carriers is being 
linked to legislation that directly benefits only one segment 
of carriers. These are companies who would not even be subject 
to the provisions of H.R. 1765 by virtue of their exemption 
from FCC and State authority under the operation of H.R. 1542.
    Certainly, a fair discussion of enforcement and the 
appropriate level of deterrent penalties is needed, but I 
wonder whether a single hearing with no opportunity to further 
study H.R. 1765 beyond today is giving it less than the 
attention it deserves.
    Since we are discussing a universe of telecommunications 
carriers that differs from those affected by H.R. 1542, I 
really believe its impact requires a much better understanding 
by members of this subcommittee than we are going to be able to 
gather just at this hearing. And to bring this bill to the 
House floor without further debate I think is a little 
premature.
    As you know, Mr. Chairman, I offered an en bloc amendment 
last week during our full committee markup of H.R. 1542 that 
would have achieved two things. First, it would have required 
the FCC to adopt clearly discernable performance metrics that 
will create standards by which we can determine whether an 
RBOC, for example, is cheating.
    However, these standards would have deferred to State laws 
and rules if a State commission had performance standards in 
place. And, second, the amendment would have increased 
significantly the monetary penalties for a Bell companies 
violation of these standards.
    I would note that the motive for directing these penalties 
to the Bell companies only was based on the fact that the 
underlying objective of H.R. 1542 was to provide deregulatory 
relief that would singularly benefit the Bells. While I think 
it is prudent for the subcommittee to heed Chairman Powell's 
request that the FCC be given the authority to levy forfeiture 
penalties of at least $10 million, the numbers themselves are 
not necessarily the most critical part of the debate.
    The most important point for us as legislators is to 
explore an analyze the current landscape of regulatory 
enforcement that has produced an environment where a $10 
million penalty translates into simply a cost of doing business 
with respect to a carrier's bottom line.
    As I noted last week, the RBOCs together have encouraged 
over $492 million in Federal and State penalties since December 
1999. I think we need to understand better, Mr. Chairman, why 
carriers are willing to incur these enormous costs, and I am 
not certain that a single hearing with a four-member panel is 
going to be able to give us enough information to make that 
determination.
    Aside from your intention to offer H.R. 1765 as an 
amendment to H.R. 1542 on the House floor, it is my hope this 
issue is one that the subcommittee will be able to flesh out 
further. I look forward to helping you in any way in making 
this possible.
    Thank you.
    Mr. Upton. I thank the gentleman from Virginia. For a 
little while I thought I was listening to that Fed Ex 
commercial the way that you went through that statement in 
quick order.
    I look forward to working with all members of the 
subcommittee. This legislation may, in fact, change based on 
the hearing today, in terms of stronger penalties, a number of 
things that are certainly open to me. But I look forward to 
listening to the testimony, interacting with the witnesses, and 
working with both sides of the aisle to have a better--even a 
better proposal.
    [Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF WYOMING

    Thank you, Mr. Chairman, for convening this legislative hearing 
today on your bill, H.R. 1765.
    As many have done already, I commend the intent of this 
legislation.
    For too long we've heard the complaints from various common 
carriers regarding competitive violations of the Telecommunications Act 
of 1996.
    Recently we heard from newly installed Federal Communications 
Commission Chairman Michael Powell regarding his desire to levy greater 
fines and receive greater enforcement tools to better enable his agency 
to combat these anti-competitive violations.
    As usual, this committee is quick to act. Unfortunately, in our 
haste to legislate a solution, as is usually the case, we've ignored 
some important provisions that make sense and hopefully will find their 
way into the final product.
    Mr. Chairman, beyond the fact that I'd like to see this bill 
enacted into law as a stand alone bill and not part of a larger 
package, I'd also like to see some consideration given to small and 
mid-size carriers be they incumbent local exchange carriers (ILECs) or 
competitive local exchange carriers (CLECs).
    A tiered system of fines or possibly a percentage of yearly revenue 
would make sense instead of a fixed amount geared mainly toward those 
large companies that seem to get the most attention.
    I think most would agree that it is absurd to force small 
businesses like RT Communications, Dubois Telephone, WyoCom or 
SilverStar operating in rural Wyoming that may only have a few hundred 
or a few thousand access lines to be lumped together with Qwest or AT&T 
in this regard.
    I would like to work with you, Chairman Upton, and with the 
Chairman of the Energy and Commerce Committee to craft a solution to 
this all too prevalent problem: treating small and mid-size companies 
the same way as we treat the telecommunications giants.
    Again, thank you for holding this hearing and I yield back the 
balance of my time.

    Mr. Upton. This concludes the opening statements by 
members. Our panel today includes Mr. Albert Halprin, partner 
of Halprin, Temple, Goodman and Maher; Mr. Royce Holland, 
Chairman and CEO of Allegiance Telecom; The Honorable Leon 
Jacobs, Chairman of the Florida Public Service Commission; Mr. 
Lawrence Sarjeant, Vice President, Regulatory Affairs, from the 
U.S. Telecom Association; and Mr. David Solomon, Chief of the 
Enforcement Bureau of the FCC.
    As many of you heard, the buzzers have sounded. We have a 
vote on the House floor. We are going to take a brief recess 
and come back to Mr. Halprin's testimony at about 11:25.
    [Brief recess.]
    Mr. Upton. More members are coming back.
    I also note that there are a number of subcommittees that 
are meeting all at the same time. And we do have a full 
committee markup early this afternoon, and there are a couple 
more votes expected on the House floor before we get there.
    So, Mr. Halprin, welcome. We have the 5-minute clock up 
here. If you can--all of your statements are made part of the 
record in their entirety. And if you could limit your remarks 
to 5 minutes, that would be terrific.
    Mr. Halprin?

    STATEMENTS OF ALBERT HALPRIN, PARTNER, HALPRIN, TEMPLE, 
    GOODMAN, AND MAHER; ROYCE J. HOLLAND, CHAIRMAN AND CEO, 
 ALLEGIANCE TELECOM, INC.; HON. LEON JACOBS, CHAIRMAN, FLORIDA 
     PUBLIC SERVICE COMMISSION; LAWRENCE F. SARJEANT, VICE 
 PRESIDENT, REGULATORY AFFAIRS, U.S. TELECOM ASSOCIATION; AND 
     DAVID H. SOLOMON, CHIEF, ENFORCEMENT BUREAU, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Mr. Halprin. Thank you very much, Mr. Chairman, members of 
the subcommittee. I very much appreciate the invitation. It is 
a pleasure to appear before you and with this distinguished 
panel.
    The proposals in H.R. 1765 to revise the enforcement 
penalties available to the FCC constitute a commendable and 
necessary first step toward safeguarding the pro-competitive 
mandates of the Act. Congress, however, should also take this 
opportunity to enhance consumer protection for residential and 
small business customers.
    As the FCC continues to eliminate traditional regulation of 
competitive markets and services, including eliminating all 
prior review of rates and practices, it is more important than 
ever that the Act provide deterrence from unlawful conduct 
which may escape regulatory notice or action for years.
    Because Congress is probably quite unlikely to engage in 
multiple amendments of the Communications Act to address 
various different types of carrier violations, I would hope the 
subcommittee could now consider a broader approach to enhanced 
enforcement which would add three additional mechanisms in 
addition to those contained in the bill not currently included 
in the language.
    First, the FCC should have the right and ability to 
delegate consumer protection authority over interstate rates 
and services involving residential and small business customers 
to State regulators who are better suited to determine whether 
such rates and terms of service are just and reasonable and to 
monitor and enforce remedial action.
    Second, the FCC and the States under delegation should have 
the ability to levy penalties on wilful violators that are 
equal to the amount a carrier wrongfully or excessively 
received as a result of their violation, plus an added penalty 
factor.
    And, third, the Commission and the States under delegation 
should be able to handle class complaints brought by consumers 
and small businesses who have been victimized through a pattern 
of rule violations by a carrier.
    Placing these arrows in the quivers of Federal and State 
regulators, in addition to the stepped up penalties that the 
chairman has proposed, would increase the ability of regulators 
to protect those small customers.
    The need to protect those customers has become all the more 
acute in an era when Congress and the FCC have properly 
deregulated most of the telecommunications industry. Detailed 
regulation, while appropriate in markets still in transition to 
competition, reduces competition and harms consumers in 
geographic or service markets which are meaningfully 
competitive.
    The FCC should, of course, continue to extend its 
deregulatory approach, as should Congress, to all competitive 
markets and services. But as it implements these policies, it 
no longer reviews in advance the rates or practices employed in 
virtually all cases involving long distance carriers and 
competitive local carriers.
    Now, policymakers are correct to eliminate these advance 
obligations and rules in order to allow the market to work 
properly. However, this kind of deregulation must be coupled 
with adequate provisions and enforcement tools to ensure that 
when abusive behavior exists it is brought to regulators' 
attention and stopped.
    Regulators must then be able to come down hard on carriers 
that seek to take advantage of a free market environment to 
engage in anti-consumer or anti-competitive practices. 
Deregulation without adequate enforcement or monitoring of the 
parts of the marketplace where competition has not extended or 
has broken down amounts to advocating responsibility to protect 
consumers.
    Laudably, through the legislative process, this 
subcommittee is addressing its responsibility to protect 
customers and competition. However, in my judgment, even the 
enhanced penalties in H.R. 1765 will not be a sufficient 
deterrent to an unscrupulous or a desperate carrier that 
recognizes it can still make substantial sums through excessive 
charges or unlawful practices, even if it pays the maximum 
fine.
    I am not, of course, suggesting reregulation of the widely 
advertised prices with which various carriers try to attract 
willing customers, and that constitutes the very large majority 
of offerings. Your competition has and will continue to 
discipline the market and protect and serve customers. Rather, 
I am addressing the limited areas of market failure, 
particularly those that involve a lack of consumer knowledge of 
or consent to a rate or practice.
    While limited, however, these can and have involved 
millions of customers and hundreds of millions of dollars. It 
is plain to me that State officials are aware of the magnitude 
of enforcement problems. They are concerned about fractured 
responsibility to confront anti-consumer activities, 
particularly involving residential and small business 
customers.
    I am certain that they would be delighted to work with this 
subcommittee and the FCC to develop new mechanisms to address 
this, and I would add in my last 8 seconds that this would have 
the salutary effect of freeing up existing resources without 
new money at the FCC to address competitive matters.
    Thank you, Mr. Chairman.
    [The prepared statement of Albert Halprin follows:]

PREPARED STATEMENT OF ALBERT HALPRIN, PARTNER, HALPRIN, TEMPLE, GOODMAN 
                                & MAHER

Introduction
    The Federal Communications Commission (``FCC'') plays a crucial 
role in implementing Congress' mandate, through the Telecommunications 
Act, to introduce competition, protect consumers, and ensure universal 
service. However, it is becoming increasingly evident that the 
Commission cannot do so without enhanced abilities to enforce laws and 
regulations by imposing adequate penalties upon violators and granting 
adequate relief to consumers, particularly residential and small 
business consumers. It also appears that the protection of these small 
consumers can be improved by involving the states as well. Through the 
proposals for stepped-up penalties in H.R. 1765, the Subcommittee has 
undertaken an excellent start in a process of bolstering the FCC's 
enforcement abilities. This process is necessary and highly desirable.
    The FCC, under the leadership of Chairman Michael Powell, and 
Congress led by this Committee and Subcommittee are forging a path to 
greater welfare through competition for consumers large and small. 
Based on over 20 years in the field, including hands-on regulatory 
experience, I have no doubt that American consumers will be the 
beneficiaries of these actions enabling telecommunications carriers to 
fully and fairly compete. Competition, rather than the micromanagement 
of market entry terms via regulators' negotiations, will best serve 
American consumers. Therefore, rule number one is that competition, not 
pervasive regulation, best serves the public interest. Its necessary 
corollary, discussed here today, is that unlawful acts by competitors 
must be deterred by effective, well understood enforcement mechanisms.
    Because Congress is unlikely to engage in multiple amendments of 
the Communications Act to address various types of carrier violations, 
the Subcommittee should now consider a broader approach to enhanced 
enforcement, which would add three additional mechanisms not currently 
included in the language of H.R. 1765. There are three different 
categories of violations that currently test the FCC's enforcement 
capabilities: (1) those that harm competitors; (2) those that harm 
major customers, such as large corporations and institutions; and (3) 
those that hurt residential and/or small business customers. It is the 
last category that is addressed the least by current procedures. 
Protecting residential and small business customers must be of at least 
equal concern to Congress and the FCC at this juncture as the 
protection of competitors. Residential and small business customers, 
who are the backbone of the U.S. economy, are the most vulnerable to 
anti-consumer practices, and they have the least ability to defend 
themselves when they are victimized by rule violations.
    This is particularly true in our era of deregulation (which I 
wholeheartedly support), when Congress and the FCC are properly 
reducing or eliminating prior review of carriers' rates and practices 
as markets grow more competitive. In line with the policy of Congress 
and the FCC, deregulation must be coupled with adequate enforcement for 
those limited areas where competition itself cannot adequately protect 
customers. This is particularly necessary to protect residential 
consumers and small businesses from violators seeking to take advantage 
of relaxed market regulation.
    Three legislative enhancements are necessary to boost enforcement:

 The FCC should have the right and ability to delegate consumer 
        protection authority over interstate rates and services 
        involving residential and small business customers to state 
        regulators, who are better suited to determine whether such 
        rates and terms of service are ``just and reasonable'' and to 
        monitor and enforce remedial actions.
 The FCC (and the states under delegation) should have the 
        ability to levy penalties on willful violators that are equal 
        or equivalent to the value or amount a carrier wrongfully or 
        excessively received as a result of the violation, plus an 
        added penalty factor (perhaps 25 percent).
 The Commission (and the states, under delegation) should be 
        able to handle ``class'' complaints brought by consumers and 
        small businesses that have been victimized through a pattern of 
        rule violations by a carrier.
    Placing these arrows in the quivers of federal and state 
regulators--in addition to the stepped-up penalties already 
contemplated in H.R. 1765--would increase the ability of regulators to 
protect all consumers as well as competitors in the rapidly changing 
environment of growing market-based competition.

The Proposed Legislation Is Necessary and Desirable
    This Subcommittee is to be commended and encouraged in turning its 
attention to the issue of whether the FCC currently has the proper and 
sufficient enforcement tools to protect the interests of consumers and 
business owners in the United States. With the proposals in H.R. 1765 
to increase penalties for violation of common carrier laws and 
regulations, this Subcommittee is making an excellent start in a timely 
effort to update and give teeth to the FCC's enforcement capabilities. 
Such an enhancement is both clearly necessary and highly desirable at 
this time, as the FCC works to implement the pro-competitive provisions 
of the Telecommunications Act of 1996.
    There is no question that the FCC must have the ability to levy 
meaningful penalties when common carriers violate the laws, rules, and 
orders that have been put in place to ensure that consumers and 
businesses receive high-quality telecommunications services and enjoy 
the full fruits of Congress' actions to introduce competition. The 
monetary caps on penalties contained in the Communications Act, while, 
perhaps, at one time sobering and strict, are inadequate to provide 
sufficient deterrence in today's era, when rule violators stand to gain 
either an improper competitive advantage or windfall profits as a 
result of their actions. If Congressional intent is to be realized 
through complete implementation of the Telecommunications Act, 
companies that violate the nation's laws concerning competition and 
consumer protection must be punished in a meaningful way. Even more 
important is deterring such conduct in the first instance. Put simply, 
the limits on fines and forfeitures that the FCC can impose under 
current law are out of date and certainly need to be revamped to 
provide any meaningful deterrence.
    Moreover, the Commission has all too often applied pressure or 
threats of penalties in an informal manner rather than through explicit 
enforcement processes. This has bred an atmosphere in which the FCC has 
conducted long, burdensome proceedings, during which it has used its 
limited authority to review license transfers and other functions as a 
pretext to engage in informal ``enforcement'' relating to actual or 
potential future anti-competitive conduct. The result frequently has 
been detailed, private-channel negotiations between the FCC and 
carriers, in which the Commission tries to achieve policy goals that 
may have little to do with the narrow purpose of its review in the 
first place. Nowhere has this become more prevalent than during the 
FCC's public interest reviews of mergers and acquisitions. Providing 
adequate enforcement tools will help in narrowly defining the 
Commission's role in overseeing such transactions which, as Chairman 
Powell has rightly made clear, are not, and should not be, substitutes 
for rulemaking or enforcement actions. Providing the FCC with 
sufficient explicit tools to enforce Congress' pro-competitive and pro-
consumer legislation would also help obviate the need or opportunity 
for the Commission to attempt to implement policy through informal 
threats, pressure and cajolery.
    Congress is taking the right step, at this juncture, to address the 
FCC's need for strong enforcement tools that will be applied through a 
more transparent and effective process, rather than through unseen 
negotiations with carriers, conducted through merger reviews and other 
proceedings. Through legislation, Congress can restore accountability 
and transparency, giving the public and the telecommunications industry 
more assurance that Congress' goals for competition, service quality 
and universal service will be met.
    However, even these enhanced penalties--while appropriate for the 
still pervasively regulated activity of providing facilities and 
services to competitors and the essentially competitive business of 
providing service to the largest of business customers--are not 
sufficient to deter all improper conduct by deregulated carriers such 
as long distance and competitive local carriers. In the past, some of 
those carriers--well aware of the lack of interest or ability in 
enforcing the Communications Act against them--have virtually ignored 
residential and small business complaints. Every state commission and 
the FCC has heard the frequent voices of customers who cannot even get 
some carriers to listen to their complaints or who lack the ability to 
correct problems even after determining that they exist.

A Comprehensive Approach Is Needed
    While the proposed legislation (H.R. 1765) marks a very good first 
step, it addresses only a portion of the current enforcement problems. 
Since it is highly unlikely and perhaps undesirable that Congress 
should continually revisit this issue through multiple and repeated 
amendments of the Communications Act, the Subcommittee should, at this 
time, address enforcement issues in a comprehensive manner. There are, 
in fact, three types of violations that can harm the public:

 Violations that harm competitors--These violations, through 
        which primarily incumbent local exchange carriers aim to 
        hamstring the ability of new market entrants (or existing 
        competitors) to operate effectively, will certainly for some 
        time be addressed through a combination of proscriptive rules 
        and enhanced penalties, such as those proposed in H.R. 1765. A 
        speedy and fair resolution of any and all complaints about such 
        conduct--once again, as addressed by H.R. 1765--is the most 
        important factor here.
 Violations that harm major customers--Such violations tend to 
        be less frequent than the other two types, since these 
        customers are better protected by the presence of competition 
        itself. Large customers' own market power as buyers provides 
        them with numerous choices of carriers and service packages and 
        tends to police bad behavior by any single carrier or group of 
        carriers. It is these customers who have certainly benefited 
        the most from the detariffing ordered by the FCC, as authorized 
        by the Telecommunications Act of 1996. The effects of 
        competition and detariffing should be backed up through the 
        formal complaint mechanism provided in the FCC's rules, 
        bolstered by stiff, enhanced penalties for violations and the 
        award of sufficient damages to justify filing a complaint.
 Violations That Harm Residential and Small Business 
        Customers--Such customers are the most in need of protection 
        from unjust and unlawful practices of carriers, because, as 
        individuals, they lack any power whatsoever in the market and 
        frequently have little recourse when confronted by clear 
        violations of laws and regulations. Despite laudable efforts at 
        the federal and state levels to increase protection and 
        consumer education in recent years, many such customers have 
        continued to be victimized by anti-consumer and anti-
        competitive practices, and many have little experience or 
        knowledge of how to seek help and compensation. This is even 
        more daunting since the resources necessary to prosecute a 
        complaint are far in excess of any possible recovery under 
        current rules. The need to protect residential and small 
        business customers is the area where enhancement of existing 
        enforcement tools is most clearly needed.
      Even the proposed enhanced penalties may not be sufficient 
        deterrence to an unscrupulous or desperate carrier that 
        recognizes it can make substantial sums through excessive 
        charges or unlawful practices even if it pays the maximum fine. 
        I am not addressing the widely advertised prices with which 
        various carriers try to attract willing customers which 
        constitute the very large majority of offerings. Here 
        competition has, and will, continue to discipline the market 
        and protect and serve customers. Rather, I am addressing 
        limited areas of market failure, particularly those that 
        involve a lack of consumer knowledge of, or consent to, a rate 
        or practice. While ``limited,'' however, these can involve 
        millions of customers and hundreds of millions of dollars.

Enforcement in an Era of Deregulation
    The need to protect consumers and small businesses in these areas 
where competition itself is insufficient has become all the more acute 
in an era when Congress and the FCC have properly deregulated most of 
the telecommunications industry. As it implements and promotes the pro-
competitive policies mandated by Congress, the Commission has stopped 
the prior review of the rates and practices employed in the market in 
almost all cases involving long distance and competitive local 
carriers. Moreover, certain carriers fought tooth-and-nail to prevent 
efforts by the FCC in recent years to implement mandatory detariffing, 
seeking to hide behind the protection afforded to them by the filed-
rate doctrine, at the expense of all consumers. These carriers sought 
to protect their own legal and market positions, but in the process 
they avoided providing consumers full and fair rights of protection 
under the provisions of contract law. The final implementation of 
detariffing by the FCC pursuant to the Telecommunications Act of 1996, 
coupled with the changes which would be made by H.R. 1765, should mean 
that major telecommunications customers will be sufficiently protected.
    Congress and the FCC are appropriately concerned about the 
potential for abuse that deregulation brings for some consumers. 
Deregulation starts by eliminating ex ante regulations that spell out 
in detail, in advance, all of the rules, reports, requirements and 
obligations that apply to carriers--and often prove to be a burden and 
barrier to free operation of the market. Detailed regulation, while 
appropriate in markets still in transition to competition, actually 
reduces competition and harms consumers in geographic or service 
markets which are meaningfully competitive. The FCC should continue to 
extend a deregulatory approach to all competitive markets and services.
    With the growth of competition, policy-makers are correct to reduce 
these ex ante obligations and rules in order to allow the market to 
work properly. However, this kind of deregulation must be coupled with 
adequate ex post provisions--enforcement tools--which ensure that, 
where abusive behavior exists, it is brought to regulators' attention. 
Regulators must then be able to come down hard on carriers that seek to 
take advantage of a free-market environment to engage in anti-
competitive or anti-consumer practices. Deregulation without adequate 
enforcement or monitoring of the parts of the marketplace where 
competition has not extended or has broken down may amount to simply 
abdicating responsibility to protect consumers. Laudably, through the 
legislative process, the Subcommittee is addressing its responsibility 
to protect customers and competition, and it is seeking to shore up the 
FCC's ability to live up to its enforcement responsibilities, as well.
    In my judgment, three enhancements are needed to bolster the FCC's 
ability to protect consumers and small business customers. Those are 
the following:

 Right of Delegation to the States--This is perhaps the most 
        important change involving residential consumers which Congress 
        could make at this time. The FCC is not, and never has been, 
        well equipped to decide whether particular rates for 
        residential or small business customers--or the practices that 
        go with those rates--are ``just and reasonable,'' or, in many 
        cases, to even be actively aware of what those rates and 
        practices are. State regulatory commissions, which are much 
        more attuned to activities in their own jurisdictions, are much 
        better equipped to investigate and act in those instances, and 
        to adopt procedures which will give residential and small 
        business customers meaningful access to the complaint process. 
        The FCC should have the right (and, perhaps eventually, even 
        the obligation) to delegate to state regulatory commissions its 
        authority to review complaints involving rates charged to 
        residential and small business customers for interstate 
        services, including local carrier rates such as surcharges and 
        interexchange (long distance) rates, as well as practices 
        involving these rates. The FCC should have this delegation 
        authority either on a permanent basis or, if need be, on a 
        trial basis, to determine the effect that any such delegation 
        would have on the regulation of interstate rates. The FCC could 
        also retain some form of appellate review--on a fast track 
        basis--of findings of violations.
 Meaningful Penalties--Where the economic benefits of trying to 
        ``sneak'' a violation past regulators may, in fact, result in a 
        gain of hundreds of millions--or even billions--of dollars to a 
        violator, a fine of $10 million or $20 million can hardly be a 
        significant deterrent. In the case of such a mammoth violation, 
        it may be a useless exercise to try to estimate or set, in 
        advance, a monetary figure to use as a cap on penalties. 
        Clearly, for certain companies, the benefits of engaging in a 
        massive violation--even if caught red-handed--can exceed the 
        costs of even the maximum penalties, making the ultimate pay-
        off well worth the risk. A better structure for assessing 
        penalties in the case of willful consumer fraud would be to 
        fine the company an amount equal or equivalent to the value or 
        amount received by the company as a result of its illegal 
        action, plus a penalty factor (perhaps 25 percent).
 Class Complaints--The FCC (and state regulators, through 
        delegation) must have the ability to deal with ``class'' 
        complaints brought by groups of affected consumers or small 
        businesses that have been victimized by rule violations or 
        anti-competitive practices. Violators should not have the 
        ability to divide and conquer, isolating small businesses and 
        residential customers and defeating their complaints one by 
        one. Virtually no individual will invest the money or resources 
        in pursuing a complaint for an amount which is a tiny fraction 
        of the cost. Millions of such violations add up to huge sums of 
        money, however. Therefore, where there is a pattern of anti-
        competitive practices affecting significant numbers of end 
        users, consumers should have the ability to unite in opposing 
        the practices that have harmed each of them. While the U.S. 
        District Courts currently may hear class action complaints, a 
        regulatory rather than a judicial solution is preferable. The 
        nation's communications expert agencies should be empowered to 
        protect consumers and small businesses.

State Regulators' Role
    Recent informal discussions with state commissioners and officials 
of the National Association of Regulatory Utility Commissioners 
(``NARUC'') have made it plain to me that state officials are aware of 
the magnitude of enforcement problems facing federal and state 
governments. Moreover, they are concerned about fractured 
responsibility to confront anti-competitive and anti-consumer 
activities in the industry. I believe that officials at NARUC and in 
many state regulatory commissions would be willing--indeed, eager--to 
work with the FCC in order to step up the level of consumer protection 
and to implement legislation designed to replenish regulators' 
enforcement toolboxes. As I have stated, state regulators have a role 
to play and are perhaps the best suited, where residential and small 
business customers are concerned, to apply enforcement policies. And 
there is undoubtedly a federal interest in crafting and applying a 
sensible approach to ex post enforcement actions nationally. Only 
through coordination between federal and state jurisdictions can the 
expertise and capabilities found on both levels be brought to bear both 
efficiently and effectively.
    In closing, this Subcommittee and its Chairman should be lauded for 
introducing and considering legislation to step up enforcement powers 
in the era of developing competition and substantial deregulation. The 
Subcommittee should ensure that it approaches this task in a 
comprehensive manner at this point in time, since the chances to 
revisit enforcement issues in the future may well be few and far 
between. I would be delighted to respond to any request by the 
Subcommittee and its staff to work on the language of legislation that 
would provide such a comprehensive boost to common carrier consumer 
protections. Thank you for your gracious invitation to speak before the 
Subcommittee today on this issue.

    Mr. Upton. Thank you.
    Mr. Holland?

                  STATEMENT OF ROYCE J. HOLLAND

    Mr. Holland. Thank you, Mr. Chairman, for inviting me to 
testify on this very important matter involving the FCC's 
enforcement.
    I am the Chairman and Chief Executive Officer of Allegiance 
Telecom. We are headquartered in Dallas, Texas, and we are a 
facilities-based competitive local exchange carrier that 
provides a wide array of voice and data services to the medium 
and small business sector.
    In my prior life I was Chairman of MFS Communications 
Company, which was one of the early stage competitive access 
providers in the pre-Telecom Act era.
    First, let me start by saying that I believe the 
Telecommunications Act of 1996 is one of the most significant 
pieces of commercial legislation enacted by Congress in the 
last 30 years, but stricter enforcement of this landmark 
legislation is truly needed if we are going to have a truly 
competitive marketplace for medium and small businesses and 
residential customers.
    Unfortunately, we have often found that when the incumbent 
is found liable for violations the punishment given is not 
severe enough to deter such behavior. In a hockey parlance, 
they get sent to the penalty box for 2 minutes. We need to see 
game misconducts and ten-game suspensions, the equivalent of, 
to get it done.
    I am really encouraged by what Chairman Powell has been 
doing at the FCC. I know he has gotten some bad press. It is 
totally unjustified. I was tremendously encouraged by his 
recent statement that when companies break the law he will hurt 
them and he will hurt them bad. But he also went on to say that 
he has inadequate tools to get that done.
    I applaud our new Chairman of the FCC for doing all he can 
with what he has, but what he needs is a much bigger stick to 
really get the job done in the right way.
    First, let me give you a few examples of the anti-
competitive conduct that we are dealing with on a day-to-day 
basis in the marketplace, and I will use Exhibit A, Verizon, 
the largest provider of local wireline telephone services in 
the country.
    No. 1, Verizon has consistently overcharged us for a 
variety of tariff services and then drags their feet and 
resists and refuses to reimburse us for those overcharges.
    No. 2, Verizon has withheld payment on a consistent basis 
pursuant to our interconnection agreements and tariffs.
    And, No. 3, Verizon has consistently used our own order 
information for cutting over a customer to our network to block 
those prospective customers from switching to Allegiance. This 
constitutes illegal self-dealing between our supplier and our 
competitor, who are both owned by the same company I might add.
    In addition, I think it is important for the members to 
understand that the success of competition in the small 
business and residential market is not solely threatened by the 
ILECs. AT&T, the original Ma Bell, has done more than its fair 
share to try to strangle the competition by unilaterally 
refusing to pay CLECs for the use of their networks to 
originate and terminate its long distance traffic.
    AT&T's predatory conduct is just as harmful to CLECs as its 
offspring. I would say that the rotten fruit all falls from the 
same dominant carrier tree when you get right down to it.
    Now, I am a businessman, and many of these problems boil 
down to the fact that I don't have the desire, the time, or the 
resources to file lawsuit after lawsuit to just get deadbeats 
to pay their bills.
    Now that I have laid out some of the problems, I would like 
to highlight a few recommendations that I have for the 
committee to consider. I will just hit these briefly, because 
they are discussed in more detail in my written testimony.
    One, don't limit the FCC's forfeiture authority to $10 
million, $10 million doesn't get it done with a company like 
Verizon that has $15 billion in quarterly revenue. Something 
more like 1 percent of revenue would be a more adequate 
measure. That is very consistent with what is done with the 
universal service fund.
    No. 2, is authorize the FCC to hire 25 special masters to 
adjudicate carrier-to-carrier disputes on an expedited basis, 
much the way that the Cannon-Conyers bill on the ADR processes 
limit the amount of lawsuits that can be done on that, kind of 
like major league baseball.
    No. 3, adopt measures to deal with the deadbeat dad 
syndrome, which seems to plague AT&T and its offspring, and 
there are other measures.
    Just in conclusion--I know my staff wrote this. They didn't 
realize my Texas accent moved a little slower. So let me just 
conclude by saying that I feel compelled to respectfully 
address the neutron bomb that is really lurking in the back of 
the room, and that is the Tauzin-Dingell measure reported by 
this committee last week, which will essentially reestablish 
the local loop bottleneck and preclude competition in most of 
the small- and medium-sized business markets and the mass 
market.
    Now, these bills should be joined. I think that would be a 
real problem, because I do need to qualify my testimony by 
basically saying that you could invoke everything I have 
suggested today, and you could even hire Judge Roy Dean, the 
hanging judge, and the famous law west of the Pecos, as the 
FCC's Enforcement Bureau Chief--no disrespect to Mr. Solomon--
but I still couldn't support this bill if H.R. 1542 were also 
enacted because, as Congressman Pickering pointed out, it would 
be a whole lot less to enforce because competition SME and 
residential markets would be bad.
    Let me just conclude by saying I have been somewhat of an 
outlier in that I am one of those rare people that have 
actually supported a couple of 271 applications by Verizon and 
withdrew opposition to one by SBC. I am not trying to keep them 
out of long distance. I know the 271 process can work. I have 
seen it work. It gives the ILECs everything they need.
    Also, the FCC has all the authority it needs in the Telecom 
Act to forbear from regulation when market conditions warrant. 
So I would say that we do not need other incentives for these 
companies. They don't need to cheat, and they don't need a 
government handout. Instead, I ask you respectfully to give 
Chairman Powell the enforcement tools he needs to make 
competition work for all Americans, not just for the Fortune 
1000.
    [The prepared statement of Royce J. Holland follows:]

 PREPARED STATEMENT OF ROYCE J. HOLLAND, CHAIRMAN AND CEO, ALLEGIANCE 
                             TELECOM, INC.

    Mr. Chairman and Members of the Subcommittee, I am Royce J. 
Holland, Chairman and Chief Executive Officer of Allegiance Telecom, 
Inc. Allegiance is a facilities-based, competitive local exchange 
carrier (CLEC) headquartered in Dallas, Texas that offers the small and 
medium sized enterprise (SME) market a complete package of 
telecommunications services, including local, long distance, 
international calling, high-speed data transmission and advanced 
Internet services including high speed dedicated access, web hosting, 
virtual corporate intranets, and an E-commerce platform. I appreciate 
this opportunity to testify before the Subcommittee on H.R. 1765. I 
wish to address one of the most daunting challenges affecting my 
industry: effective enforcement of Congress' mandate to open 
telecommunications markets to competition.
    Before I do so, let me provide the Subcommittee with some 
background about Allegiance. Since its founding in 1997, Allegiance has 
expanded its operations to serve 31 markets across the country with 
almost 4,000 employees. We had revenues of $285 million in 2000, an 
increase of 188% over the prior year. Allegiance has designed our 
networks using a ``smart'' build approach. We use a combination of our 
own network facilities, unbundled network elements leased from the 
incumbent telephone companies and, where it is available, fiber leased 
from third parties to provide service to small and medium sized 
businesses. To date we have installed more than 730,000 lines, 
approximately 90% of which are ``on switch.'' We have collocated in 636 
incumbent local exchange carrier central offices across the nation, and 
when we add five more markets this year to complete execution of our 
current fully-funded 36 market business plan, we will be addressing 57% 
of the total addressable U.S. business communications market.
    Prior to co-founding Allegiance, I was President and co-founder of 
MFS Communications Co., one of the pioneers in the competitive local 
telephone industry even before the passage of the Telecommunications 
Act of 1996. MFS grew from a privately held start-up operation to one 
of the Nasdaq 100 Index companies serving 52 markets in North America, 
Europe and Asia, with annual revenue of about $1 billion. MFS was 
purchased by WorldCom in 1996.
    The Telecommunications Act of 1996 was landmark legislation that 
offered consumers the promise of a choice of local telephone service 
providers for the first time in any of our lifetimes. No one expected 
that competitors would find it easy trying to break the monopoly 
strongholds controlled by the Regional Bell Operating Companies (RBOCs) 
and GTE. Nonetheless, five years after you so astutely determined that 
developments in technology and the public interest demanded that the 
government sanctioned protection for local telephone monopolies should 
be lifted, competitors have been able to capture a mere 8% of local 
telephone lines. At the same time, the RBOCs and GTE have joined forces 
to increase their size and domination of the nation's local telephone 
market, with the former Bell Atlantic acquiring New York Telephone, New 
England Telephone and GTE to become the behemoth Verizon and 
Southwestern Bell acquiring Pacific Telephone, Nevada Telephone and 
Ameritech. While Congress concluded that it would only be fair to open 
the long distance market to the RBOCs once they had opened their local 
markets to competitors and for that reason overrode the MFJ and Judge 
Harold Greene's oversight of the RBOCs, an unfortunate by-product of 
life without the MFJ and Judge Greene has been the concentration of 
control of the nation's local telephone market in the hands of 4 
megamonopolies, rather than the 8 that dominated the market in 1996. 
What this means for CLECs is that the Goliaths they must battle for 
both customers and network access have grown bigger, more powerful and 
more cocky about using their market power to keep their competitors at 
bay.
    Take Verizon as an example. According to its Year 2000 Annual 
Report, the Verizon companies are the largest providers of wireline 
communications in the United States with nearly 109 million access 
lines in 67 of the top 100 US markets and 9 of the top 10. Verizon 
serves one-third of the nation's households, more than one-third of 
Fortune 500 company headquarters and the Federal Government. Verizon 
has proudly trumpeted to Wall Street that it lost 29% fewer lines to 
competitors in the second half of 2000 than it did in the first half of 
the year. Statistics like these demonstrate that further deregulation 
of the RBOCs is not appropriate, and indeed would be extremely 
detrimental to the struggling competitive industry, at this time. The 
increase in concentration of control of the nation's local access lines 
since the passage of the 1996 Act means that more, not less, regulatory 
enforcement is needed if the pro-competitive goals of the Act are to be 
realized.
    In order to provide service to customers, CLECs need access to the 
networks and facilities of the incumbents, especially to the unbundled 
loops connecting customers to the network (also known as the last mile) 
and colocation space in the incumbents' central offices. In passing the 
Act, Congress recognized that competitors could not duplicate the 
ubiquitous facilities of the incumbents overnight and indeed that in 
most instances, the last mile could never be duplicated for the SME and 
residential mass markets. Sections 251 and 252 provide CLECs with 
access to the interconnection, unbundled network elements, colocation 
and wholesale pricing that we need to get into the local telephone 
market, but the rights afforded by the Act are ephemeral unless they 
can be expeditiously enforced without expensive and drawn out 
litigation. Although CLECs are big customers of the RBOCs as purchasers 
of interconnection trunks, colocation and UNEs, CLECs use those tools 
to compete for the same end users as the RBOCs. This inherent conflict 
between their roles as suppliers and competitors significantly 
diminishes the incentive the RBOCs have to open their markets. Even the 
carrot of Section 271 has not proven sufficient to compel strict 
compliance with the market opening provisions of the Act as evidenced 
by the fact that the RBOCs have filed for Section 271 relief in so few 
states.
    To help ensure that local telephone competition becomes a reality 
for all American consumers, Congress must give the FCC the resources to 
implement a regulatory scheme that has certainty and an enforcement 
program that has teeth. I appreciate this opportunity to make some 
suggestions about improving enforcement of the Act.

           CLARIFY THE FCC'S AUTHORITY TO ENFORCE SECTION 251

    A shortcoming of lax enforcement has been a perception by some of 
the ILECs that compliance with Section 251 of the Act is somehow 
voluntary and only to be achieved in order to receive Section 271 
authority to enter the inter-LATA market. Congress should make clear 
that the FCC has authority pursuant to Section 251 of the Act to 
resolve inter-carrier disputes and enforce interconnection agreements, 
statements of generally available terms and state tariff provisions 
that codify the RBOCs' obligations to provide interconnection, UNEs and 
colocation. While many state commissions have been vigilant in 
resolving interconnection disputes, the decisions have no precedential 
value outside of the state where the dispute was brought and the RBOCs 
often take the position that the decisions are applicable only to the 
parties to the dispute. For example, over the past several years, the 
Texas PUC has issued several decisions directing SBC to pay reciprocal 
compensation to CLECs. Despite these decisions, Verizon continued to 
resist its obligation to pay reciprocal compensation arguing that the 
PUC's rulings applied only to SBC. Even after the PUC issued a decision 
last fall specifically holding that Verizon was subject to the same 
reciprocal compensation obligations as SBC, Verizon has continued to 
withhold full payment of amounts owed to Allegiance on the grounds that 
the decision applies only to the CLEC that brought the action.
    Reinforcing the FCC's authority to enforce compliance with section 
251 and to decide interconnection disputes would allow for the 
development of precedent that has nationwide applicability and would 
relieve CLECs of the financial burden of bringing multiple complaints 
against every RBOC in every state in which they operate. The 
substantial financial resources that are currently being diverted to 
litigating interconnection rights on a state by state basis could be 
far better spent by the CLECs on developing and expanding their 
networks.

   PROVIDE THE FCC WITH ADDITIONAL RESOURCES TO ADJUDICATE COMPLAINTS

    The FCC has devoted enormous time and energy to promulgating rules 
to implement the market opening provisions of the Act. The FCC needs 
additional resources, however, to fund the staffing necessary to 
enforce those rules. The threat of enforcement must be constant enough 
and the penalties for noncompliance must be high enough to effectively 
deter anticompetitive behavior. Congress should appropriate sufficient 
funds to enable the FCC to double the size of the Market Disputes 
Resolution Division of the Enforcement Bureau and to hire 25 special 
masters with relevant legal and industry experience to hear and 
adjudicate complaints between incumbents and competing carriers.

     PROVIDE THE FCC WITH AUTHORITY TO REQUIRE PAYMENT PENDING THE 
      RESOLUTION OF BILLING DISPUTES AND TO AWARD PUNITIVE DAMAGES

    One very effective method RBOCs have employed to harm their 
competitors is to withhold or delay payments of amounts owed and to 
resist or delay providing credit for amounts overcharged under 
interconnection agreements or tariffs. Allegiance has faced this 
situation time and time again with Verizon. For example:

 Allegiance has been attempting for months to resolve a billing 
        dispute with Verizon East relating to the jurisdiction of local 
        and intra-LATA toll calls and to secure the payment to which it 
        is entitled. Allegiance has complied with Verizon's every 
        request to provide call detail records and other information 
        and has repeatedly requested meetings to respond to any 
        questions Verizon may have about the manner in which Allegiance 
        jurisdictionalizes minutes. Last week, Verizon informed 
        Allegiance that it disagreed with the methodology Allegiance 
        used to jurisdictionalize 287 out of the 124,000 minutes of use 
        being analyzed (i.e., less than 0.25%) and for this reason 
        would not make any payment pending further study.
 Since 1999, Verizon Texas has withheld payment of close to 
        $4.5 million in reciprocal compensation owed to Allegiance. 
        Allegiance has provided full call detail records to Verizon to 
        support its bills, but Verizon continues to withhold payment. 
        Verizon's most recent contention is that it cannot complete its 
        analysis until Allegiance supplies the street addresses of all 
        of its end users.
 Last year, Allegiance discovered that Verizon New York was 
        overcharging us approximately $38,000 per month for a tariffed 
        billing platform service. After months of discussion, Verizon 
        finally acknowledged its error and made partial reimbursement 
        in December. To this day, however, Verizon still has not 
        corrected its billing systems and continues to overcharge 
        Allegiance for the billing platform service.
 A recent audit of the colocation bills Allegiance receives 
        from Verizon revealed that Verizon has overcharged us over $3 
        million for DC power that we did not order. Despite escalation 
        of this issue to senior management, Verizon has made no 
        commitment to reimburse or credit Allegiance for the 
        overcharges.
    CLECs do not have the luxury of withholding payment as an offset to 
amounts owed or delaying payment to the RBOCs because the consequence 
of doing so is being cut off and denied access to the essential 
facilities we need to provide service to our customers.
    It is not only the RBOCs that have resorted to self-help to 
withhold payment to CLECs. CLECs all across the country have been 
forced to bring lawsuits against AT&T to collect payment of access 
charges for the use of their networks to originate and terminate the 
long distance calls of AT&T's customers. AT&T complained for years 
about the ILECs' access rates, but never withheld payment as it has 
done with the CLECs. The FCC repeatedly has ruled that carriers are not 
entitled to engage in self-help to withhold payment, but instead must 
pay amounts billed pursuant to tariff under protest and then bring an 
action to challenge the billings. Unfortunately, AT&T has ignored these 
rulings and continues to use the CLECs' networks to complete their 
customers' calls without payment, benefiting as it does from the delays 
involved as the complaint cases wend their way through the courts and 
the public utility commissions.
    If the CLEC industry is to survive, CLECs must have access to a 
forum that can resolve payment disputes on an accelerated basis and 
that can provide relief while the actions are pending. Congress should 
give the FCC authority to hear complaints arising under interconnection 
agreements or tariffs on an expedited basis and provide relief in the 
nature of a ``Deadbeat Dad'' remedies. If one party to the dispute has 
failed to pay charges billed by the other party, the FCC should be 
given authority to require payment of the full amount billed within 30 
days of the filing of the complaint unless the nonpaying party can show 
by clear and convincing evidence that the billing is fraudulent or 
otherwise invalid on its face. Such immediate relief is necessary to 
remove the benefits the RBOCs and AT&T currently realize by delaying 
payment and depriving CLECs of the revenues necessary to fund their 
operations.
    The Commission should also be given authority to process all such 
complaints under the Accelerated Docket rules set forth in 47 C.F.R. 
Part 1 Subpart E. The FCC should be required to resolve disputes on the 
merits within 60 days of the filing of the complaints and should have 
the authority to grant all relief necessary to remedy violations of the 
agreement or tariff, including, but not limited to, injunctive relief, 
compensatory damages and punitive damages.

     THE FCC SHOULD BE DIRECTED TO ADOPT PERFORMANCE STANDARDS AND 
         REGULATIONS TO IMPLEMENT ITS 271 ENFORCEMENT AUTHORITY

    The FCC should be directed to adopt a comprehensive set of self-
enforcing performance standards governing the provision of 
interconnection and unbundled network elements. While the carrot of 
entry into the long distance market provides some incentive for the 
RBOCs to provision interconnection and unbundled network elements at an 
acceptable level of performance in the months immediately prior to the 
filing of their Section 271 applications with the FCC, the performance 
standards that they are required to meet vary state by state. In 
addition, the RBOCs have shown a proclivity to backslide once 271 
relief has been granted and the carrot has been eaten. For example, in 
March 2000, just 3 months after it was granted authority to enter the 
long distance market in New York, the FCC found that Verizon had failed 
to meet its obligations under the Act to process orders from CLECs 
during the 2 months immediately following its 271 approval. Verizon had 
lost or mishandled orders submitted electronically by CLECs during 
January and February 2000, which seriously delayed the ability of CLECs 
to initiate service to their customers. In December 2000 and January 
2001, Verizon was forced to pay a total of $7.3 million in penalties 
for failure to provide CLECs with the minimum level of service required 
by the New York Commission. Although $7.3 million seems like a lot of 
money, RBOCs often view such penalties simply as a cost of doing 
business. The penalties currently being assessed against incumbents 
have not proven sufficient in size to deter discriminatory and 
anticompetitive behavior as Allegiance can attest.
    Verizon recently prevented Allegiance from processing orders for 
customers served by our New Rochelle, New York colocation facility for 
almost one month. We turned up the colocation in December of last year. 
On February 14, Verizon rejected Allegiance's orders for service that 
designated DSO pairs that Allegiance had installed in the New Rochelle 
colocation facility. Upon investigation, we learned that Verizon had 
moved 2600 Allegiance DSO pairs without warning or notification to 
alleviate congestion on its main distribution frame. Because Verizon 
had not updated its databases, its technicians were unable to find the 
new location of Allegiance's DSO pairs and claimed that they could not 
process our customer orders for that reason. On February 15, Verizon 
informed us that it had a frame to frame connectivity problem that 
prevented Allegiance's DSO pairs from being loaded into its databases. 
On February 20, Verizon informed us that our DSO pairs had been moved 
again--this time to an area of the central office where there was an 
ongoing union dispute prohibiting technicians from doing the wiring 
necessary to process Allegiance's customer orders. It was not until 
March 12, after daily calls and escalation of the issue to Verizon 
management, that Verizon finally moved the pairs to another location 
and rebuilt its databases so that Allegiance's orders could be filled. 
In the meantime, Allegiance was unable to initiate service to its 
customers.
    Allegiance currently has 80 orders for unbundled loops pending with 
Verizon in New York and Massachusetts for which it has been unable to 
obtain firm order commitment or installation dates from Verizon. Some 
of the orders for these loops were submitted as long ago as February 
and March. Verizon's delays in providing access to Allegiance mean that 
Allegiance cannot provide service to its customers on a timely basis. 
It is worth emphasizing again that New York and Massachusetts are the 
two states in which Verizon has been granted Section 271 authority to 
offer long distance service.
    CLECs cannot succeed in the marketplace unless they can offer their 
customers a level of service comparable to what those customers can get 
from the RBOCs. National self-enforcing performance standards would 
create an invaluable tool for monitoring RBOC compliance with their 
obligations under the Act and detecting incidences of discriminatory 
behavior. The FCC should be directed to adopt minimum performance 
benchmarks which RBOCs must meet in providing service to their CLEC 
customers with automatic monetary penalties to be paid to CLECs when 
the RBOCs' performance falls below the benchmarks. To monitor 
compliance, the FCC should require the RBOCs to publish monthly 
performance statistics on a state-by-state basis for installation and 
maintenance of interconnection trunks, UNEs and any other services 
CLECS purchase. The performance reports should compare the intervals 
within which the RBOCs actually install and repair similar facilities 
for themselves, their retail customers and their affiliates and the 
intervals within which they provide such services for CLECs. The 
reports should also compare the frequency and duration of service 
outages suffered by the RBOCs' retail customers and those suffered by 
CLECs. If, over a 12 month period, the reports reveal a deterioration 
in service quality in any state in which they operate, the RBOCs should 
be required to show cause why their rates for interconnection and UNEs 
should not be reduced on a going forward basis by an amount 
proportionate to the deterioration in service quality.
    In addition, the FCC should be directed to adopt rules that require 
RBOCs to provide automatic discounts on interconnection trunks, UNEs 
and special access services in any state where the actual installation 
and repair services they provide to CLECs are inferior to the services 
they provide to their retail customers and themselves. A sliding scale 
of discounts should be established based on frequency and extent of 
delays. For delays in installation of new services, the discounts would 
be applied to non-recurring charges. The RBOCs should not be permitted 
to assess any non-recurring charges for installation if service is not 
installed within the retail installation interval. For delays in 
repairing services, the discounts would apply to monthly recurring 
charges for the affected facilities. Self-enforcing penalties are 
imperative both because they will provide the right incentive for RBOCs 
to improve their performance and because CLECs receiving poor 
performance should not be required to pay full price.
    The FCC should also be directed to adopt rules to implement the 
enforcement authority granted in Section 271(d) and to deter 
backsliding from compliance with the competitive checklist once the 
RBOCs are allowed into the long distance market. Such regulations 
should incorporate a range of penalties for violations of 271 and 
should include mandated rate reductions for wholesale services and 
network elements, suspension of 271 authority, the imposition of 
material fines and revocation of 271 authority.

           INCREASE THE FCC'S STATUTORY FORFEITURE AUTHORITY

    We appreciate Chairman Powell's recognition that CLECs have often 
``been stymied by practices of incumbent local exchange carriers that 
appear designed to slow the development of local competition'' and 
applaud his request for increased forfeiture authority.1 But 
more is necessary. H.R. 1765's cap of $10 million dollars should be 
removed altogether or increased significantly to the point where the 
fine would significantly impact the quarterly financial results of an 
RBOC or AT&T. The FCC should also be authorized to require that all or 
a portion of a forfeiture assessed for violations of the Act or the 
FCC's rules be paid to the carriers injured by the violations, rather 
than to the Treasury, in an amount sufficient to compensate them for 
the damages caused by the violations.
---------------------------------------------------------------------------
    \1\ May 4, 2001 letter from Chairman Michael K. Powell to the 
Members of the House and Senate Commerce and Appropriations Committees.
---------------------------------------------------------------------------
    I also understand that H.R. 1765 contains a Cease and Desist 
provision, but I believe that provision is duplicative of the FCC's 
existing authority. The FCC has previously exercised its Cease and 
Desist authority in various slamming cases, in cases where cell towers 
violate height restrictions and also in the context of Qwest's illegal 
marketing of long distance services in-region.
    We have had additional experiences that we believe warrant Cease 
and Desist action as well. The RBOCs have the ability to thwart CLECs' 
efforts to attract and retain customers in a myriad of ways other than 
poor provisioning of the facilities needed to provide service. It has 
come to Allegiance's attention that Verizon appears to be engaged in a 
systematic attempt to thwart Allegiance's sales efforts by, among other 
things, calling our prospective customers after we submit orders to 
Verizon to switch the customer's service to Allegiance and offering the 
customers a better deal if they cancel their orders with Allegiance. 
This is an example of where the FCC should exercise its existing Cease 
and Desist authority to prevent Verizon or any other RBOC from engaging 
in this predatory practice.
    A few current examples will illustrate what I mean:

 We recently learned from a customer who cancelled his order 
        with Allegiance before his service had been switched from 
        Verizon that a Verizon representative called him shortly after 
        he signed on with Allegiance and offered to match Allegiance's 
        rates. Section 222(b) of the Act prohibits carriers that 
        receive proprietary information from another carrier from using 
        such information for their own marketing purposes. The only way 
        Verizon could have learned of the customer's impending 
        cancellation of service was through the order Allegiance 
        submitted to Verizon to convert the customer's service. This 
        was not an isolated incident. During the fourth quarter of 2000 
        and the first quarter of this year, more than 10% of the 
        customers who had signed up for Allegiance service in New York 
        and Massachusetts cancelled their orders before their service 
        was converted from Verizon.
 We learned from another customer who called Verizon to lift 
        his PIC freeze so that he could switch his service to 
        Allegiance that the Verizon representative responded, ``Are you 
        sure you know what you are asking me to do? Let me fax you over 
        a list of the problems Allegiance has caused and then you 
        decide if you still want me to remove the freeze.'' The FCC has 
        specifically determined that Section 222(b) prohibits a carrier 
        executing a customer's request to change carriers from using 
        such information to convince the customer not to make the 
        switch. This has not stopped Verizon.
    Competition is clearly harmed where an RBOC such as Verizon 
exploits the advance notice of a customer's impending cancellation of 
service that it receives in its position as the underlying network 
facilities provider to market its own services and win the customer 
back. Such conduct is clearly prohibited by the Act and I believe if 
the Enforcement Bureau would take a serious look at this situation, 
they would find it ripe for a Cease and Desist action. It is also not 
clear that carriers injured by such conduct have a private right of 
action for damages. To the extent that the FCC finds a carrier guilty 
of the misuse of carrier to carrier proprietary information and 
assesses a fine, it should be authorized to share a portion of that 
fine with the carrier injured by the violations.
    Under the FCC's new slamming rules, carriers that receive 
allegations from customers that they have been slammed are required to 
notify the unauthorized carrier of the customers' allegations. All 
carriers are required to file a report with the FCC twice a year 
stating the number of slamming allegations made against them and 
whether the allegations were valid, as well as the number of slamming 
allegations they received against other carriers and the identity of 
those carriers. Since the notification rules have become effective, 
Allegiance has received a disproportionate number of slamming 
notifications from Verizon New York and Verizon New Jersey. For 
example, during the week of April 23-27, 2001, 66% of the slamming 
notifications Allegiance received were generated by Verizon New York 
and Verizon New Jersey. Almost every notification we have received from 
Verizon bears the fax line of the Verizon General Business Services Win 
Back Group. The Win Back Group apparently takes a very liberal approach 
to the definition of a slam as we have learned when we contact the 
customers to investigate the slamming allegations and discover that a 
substantial majority are unfounded. Verizon's Win Back Group seems to 
categorize any instance where a customer decides to return to Verizon 
as a slam no matter what the circumstances. We have received slamming 
notifications on customers who have reported to us that they never told 
Verizon they were slammed. We received one slamming notification from 
Verizon on a former customer who had called Verizon to complain about 
its Verizon bill.
    Allegiance takes slamming very seriously and immediately terminates 
any employee found to have engaged in slamming. Allegiance does not 
believe, however, that the FCC intended for carriers to classify any 
instance where a customer elects to go back to its former carrier as a 
slam. Verizon's apparent abuse of the FCC's slamming notification rules 
has caused Allegiance to devote considerable staff time and resources 
to investigating allegations that have no basis. We have no means to 
recoup these resources. Again, to the extent that the Commission could 
assess substantial fines against carriers for such abuses, and share a 
portion of those fines with the victimized CLECs, CLECs could be 
compensated for the damages they incur.

      STATE ARBITRATION AND SAVINGS CLAUSE PROVISIONS OF H.R. 1765

    The state arbitration provision of H.R. 1765 does not go far 
enough. It requires states to arbitrate interconnection disputes within 
60 days. It may be helpful in some states to have a 60 day limit on 
decisions but in Texas, there are some proceedings that are dealt 
within a week. This is authority that states probably already have the 
discretion to exercise on their own. The language is also unclear as to 
whether the state decision is final and enforceable in state or federal 
court and sets no penalties for violating interconnection agreements. 
Further, the parties should be allowed to waive the deadline if it is 
mutually agreed upon.
    The final section is a savings clause for service quality 
enforcement, but it appears to be undermined if H.R. 1542, the Tauzin-
Dingell bill, were to become law. H.R. 1542 would strip away the 
service quality reports and with the defeat of the amendment offered by 
Congresswoman Eshoo these reports would disappear. It also appears this 
savings clause is limited to Section 252. Other provisions of H.R. 1542 
limit the state's authority to enforce the interconnection agreements, 
by taking away the states' rights to regulate high-speed services. 
Since these provisions are in section 292, not section 252, they are 
unaffected by this savings clause.

CONGRESS SHOULD CONSIDER A REQUIREMENT FOR STRUCTURAL SEPARATION OF THE 
                                 RBOCS

    As I noted above, the RBOCs have the ability and the incentive to 
deny their competitors full, fair and nondiscriminatory access to their 
networks. If the increased penalties do not sufficiently alter their 
behavior then I would suggest the only plausible solution at the end of 
the day would be for Congress to require structural, or at least 
functional, separation of the RBOCs' retail and wholesale operations. 
If the retail side of an RBOC's company was forced to purchase service 
for their customers under the same terms and conditions that CLECs are, 
the wholesale division would have significantly stronger incentives to 
improve provisioning and performance standards.

                               CONCLUSION

    The robust competition envisioned by the Telecommunications Act of 
1996 has been painstakingly slow to develop on a broad scale in the SME 
and residential mass markets. I believe that this is due primarily to 
the following three reasons:

 Instead of invading each other's monopoly service territories 
        and competing for each other's customers, the RBOCs have 
        focused on combining their forces to form even larger 
        monopolies and have devoted scant effort to complying with 
        Sections 251 and 252 of the Act. The RBOCs have abused their 
        dominant market power in many ways, including illegally 
        withholding payments for exchange of traffic with CLECs.
 AT&T, which was expected to become a significant competitor to 
        the RBOCs, has focused primarily on acquiring its own cable TV 
        monopoly, and has eschewed significant deployment of local 
        facilities except in the large corporate enterprise market. 
        AT&T has also used its dominant position in the long distance 
        market to favor the ILECs over new entrants in terms of paying 
        its access bills, thereby causing significant financial harm to 
        a number of CLECs.
 Despite good intentions, the FCC's enforcement authority, 
        enforcement resources and cumbersome and bureaucratic processes 
        are not geared to a dynamic competitive environment, and have 
        facilitated the constant delays and violations of the Act by 
        the RBOCs and AT&T.
    The bottom line five years after passage of the Act is that (1) 
competitive choices are available to you if you are a large 
corporation; (2) far more often than not you remain at the whim of the 
local monopolist if you a small or medium-sized business; and (3) most 
residential subscribers are still stuck with the same monopoly 
providers they had in 1996 for local phone and cable TV service. There 
is nothing that Congress can do to make the reluctant monopolists (the 
RBOCs and AT&T) compete with each other. However, Congress can 
significantly improve the opportunity for competition to develop in the 
SME and residential mass markets by arming the FCC with greatly 
increased enforcement powers. I urge you to strengthen the FCC's 
enforcement powers to help ensure that as the RBOCs and AT&T get 
bigger, the strides made by CLECs in providing consumers with 
competitive choices are not reversed. It is imperative that Congress 
make the penalties for noncompliance with the Act steep enough to serve 
as a deterrent as opposed to just a cost of doing business for the 
monopoly providers.

    Mr. Upton. Thank you.
    Mr. Jacobs?

                  STATEMENT OF HON. LEON JACOBS

    Mr. Jacobs. Good morning, Chairman Upton and members of the 
committee. As Congressman Stearns indicated, I am Chairman of 
the Florida Public Service Commission. But today I come 
primarily as Chairman of the Consumer Affairs Committee of the 
National Association of Regulatory Utility Commissioners, 
acronym NARUC.
    I first want to thank you for the opportunity to come 
today. And along with you and co-sponsors, including 
Congressman Stearns, I applaud your foresight in promoting this 
measure.
    It is an honor to be here and particularly the recognition 
implicit in your invitation of the critical role State 
commissions play in the transitions to a more competitive 
telecommunications market under the scheme Congress adopted in 
the 1996 legislation.
    I come here to give you my preliminary thoughts on H.R. 
1765 today. Because of the short time that has elapsed since 
the bill has been introduced, NARUC has not had an opportunity 
to form a consensus on this legislation. Similarly, the Florida 
Commission has not adopted a position.
    However, given the collective experiences of NARUC member 
commissions, I can assure you that there is a need for ongoing 
enforcements in these markets. And I can assure you also that, 
in principle, NARUC would embrace public policy that further 
empowers both the States and the Federal Communications 
Commission to effectively address improper business practices.
    In my opinion, the adoption of this bill is consistent with 
current collaborative enforcement efforts that are underway 
between the States and the FCC.
    We continue to see progress in the State and national 
action plan group. This is a group that was formed in 
conjunction with the FCC, and it consists of staff from NARUC 
committees, and the FCC's enforcement and consumer information 
bureaus, and the National Regulatory Research Institute.
    SNAP was formed with the mission of fostering a partnership 
between the FCC and State commissions to enhance consumer 
protection education, enforcement, and regulatory initiatives. 
Through SNAP, the FCC and States share the results of 
investigations and questionable business practices that may 
proliferate around the country.
    Through these efforts, the FCC and the States have 
demonstrated their desire to work collaboratively, to be more 
attentive to the needs of consumers and the concerns of our 
congressional leaders.
    As you are aware, NARUC has sent several letters opposing 
H.R. 1542, and I am not here to speak to that bill today, 
except to emphasize that the bill before us is a stand-alone 
bill, and, as you indicated, with some desire to deal with that 
later. I would encourage you and caution the committee to 
consider these enforcement measures separately and distinct 
from H.R. 1542.
    Speaking as Chair of the Consumer Affairs Committee, I feel 
obligated to relate two points. First, NARUC has established a 
consensus position opposing any legislation that undermines the 
market-opening components of the Act. Second, in attaching a 
progressive measure such as those found in H.R. 1765, it would 
not diminish NARUC's concerns and opposition to the 
diminishment of those market-opening measures.
    Therefore, as stand-alone legislation, I support the goal 
of increasing the penalties at the national level against 
companies found violating the FCC's rules and orders. Florida 
continues to receive complaints against companies that have 
already been fined or have settlements accepted by the FCC.
    In addition, I might add we receive complaints over matters 
that we find difficult to enforce at times, and as part of the 
dialog I will give you input on that. It appears that under 
certain circumstances the current level of penalties is not 
adequate in removing the incentives to violate current law.
    Chairman Powell's proposals for additional fines suggests 
that the FCC's current fining mechanisms are also inadequate.
    Finally, I suggest to the sponsors that they consider 
clarifying that all penalties assessed on carriers are taken 
what we call below the line, and be excluded from customer 
rates. While I applaud also the sponsor's recognition of the 
need for States to arbitrate interconnection agreements, there 
is a brief concern. Many States are trying to expedite these 
complaint resolution proceedings, but they present very complex 
issues requiring very important insight into the actual data 
that is occurring at the State level.
    A 60-day timeline would prove a bit tight. Currently, in 
Florida, we address complaints regarding interconnection 
agreements, and we have found that often issues involved in 
these cases are very complex. And in such cases substantial 
testimony and a full discovery process is vital.
    Let me conclude simply by saying that in addition to the 
service quality measures that you place in it, we applaud those 
as well, and we support increasing the penalties at a national 
level, working together with the FCC to protect consumers from 
companies involved in deceptive business practices and having 
States resolve disputes in a timely manner.
    Thank you.
    [The prepared statement of Hon. Leon Jacobs follows:]

   PREPARED STATEMENT OF HON. LEON JACOBS, CHAIRMAN, FLORIDA PUBLIC 
  SERVICE ON BEHALF OF THE NATIONAL ASSOCIATION OF REGULATORY UTILITY 
                             COMMISSIONERS

    Good morning. My name is Leon Jacobs, and I am here as the Chairman 
of the Consumer Affairs Committee of the National Association of 
Regulatory Utility Commissioners (NARUC). I am also the Chairman of the 
Florida Public Service Commission.
    Chairman Upton, I'd like to begin by thanking you and the other 
subcommittee members for the invitation to speak to you today. It is 
both an honor and a privilege to be here. I also sincerely appreciate 
the recognition, implicit in the subcommittee's invitation, of the 
critical role State commissions play in the transition to a more 
competitive telecommunications market under the scheme Congress adopted 
in the 1996 legislation.
    I have come here today to give you my preliminary thoughts 
regarding H.R. 1765.
    Because of the short time that has elapsed since the bill was 
introduced, NARUC has not had an opportunity to form a consensus view 
on this legislation. Similarly, the Florida Commission has not taken an 
official position on the bill. However, I can assure you that in 
principal, NARUC would embrace public policy that further empowers both 
the states and the Federal Communications Commission (FCC) to 
effectively address improper business practices.

               PROPOSED INCREASE IN FCC FINING AUTHORITY

    In my opinion, the adoption of this bill would not cause a 
deviation from the current collaborative enforcement efforts that are 
underway by the states and the FCC. We continue to see progress in the 
activities of the State and National Action Plan (SNAP) group, which is 
comprised of staff from the NARUC Staff Subcommittee on Consumer 
Affairs, the FCC's Enforcement and Consumer Information Bureaus, and 
the National Regulatory Research Institute.
    SNAP was formed at the NARUC's 110th Annual Convention, and its 
mission is to foster a partnership between the FCC and state 
commissions for the purpose of strengthening consumer protections in 
the telecommunications marketplace. Specific focus areas include 
cooperation in consumer education, enforcement, and regulatory 
initiatives. Through SNAP, the FCC and states are able to share results 
of investigations into questionable business practices involving 
companies in the telecommunications industry. Through these efforts the 
FCC and the states have demonstrated their desire to work 
collaboratively to be more attentive to the needs of consumers and the 
concerns of our congressional leaders.
    As you are aware, NARUC has sent several letters opposing H.R. 
1542, the ``Tauzin-Dingell bill.'' While I do not wish to address this 
bill at this hearing, I simply want to note that I am testifying on the 
bill before us as a stand alone bill.
    Therefore, as stand alone legislation, I support the goal of 
increasing the penalties at the national level against companies found 
violating the FCC's rules and orders. Florida continues to receive 
complaints against companies that have already been fined or had 
settlements accepted by the FCC for various violations. It appears 
that, under certain circumstances, the current level of penalties is 
not adequate in removing the incentives to violate current law. 
Chairman Powell's proposals for additional fines suggests that the 
FCC's current level of fining authority is not sufficient to make some 
activities unprofitable. Finally, I suggest to the sponsors of this 
legislation that they consider clarifying that all penalties assessed 
on carriers be taken ``below the line'' (as required by the current FCC 
rules) and be excluded from customer rates.

                      STATE ARBITRATION DEADLINES

    While I appreciate the sponsor's recognition of the need for states 
to arbitrate interconnection agreements, I am concerned that this bill 
provides only 60-day time frame for States to resolve these disputes. 
My concerns relate primarily to due process and the ability to build a 
clear record needed to render a fair decision. Currently, in Florida, 
when we address complaints regarding interconnection agreements, we 
have found that often the issues involved in these cases are very 
complex. In such cases, substantial testimony and a full discovery 
process may be needed to resolve these issues. Requiring that these 
cases be processed in just 60 days may impair our ability to address 
issues in a reasoned and well-informed manner.
    The Florida Commission and its staff have been exploring ways to 
handle these types of complaints in a more expedited manner. The 
complexity of the issues involved in a complaint is one factor that 
will likely be taken into consideration when deciding whether a case 
should be "fast tracked." Even if a case is ``fast-tracked,'' the time 
frame under discussion for such an expedited process is a minimum of 
approximately 100 days.

                     RESERVATION OF STATE AUTHORITY

    Finally, I appreciate the critical reservation of state authority 
in proposed section 252(e)(3) of the legislation to prescribe methods 
to ensure timely and effective compliance with any interconnection 
agreement, including the imposition of service quality performance 
requirements. The critical role service quality performance data plays 
in the transition to a more competitive environment is highlighted by 
NARUC's current position before the FCC opposing the elimination of 
service quality reporting requirements on the incumbent telephone 
companies.

                               CONCLUSION

    In summary, I support increasing penalties at the national level; 
working together with the FCC to protect consumers from companies 
involved in deceptive business practices; and having states resolve 
disputes in a timely manner, but recommend that the 60-day time frame 
be increased to at least 100 days.

    Mr. Upton. Thank you, Mr. Jacobs.
    Mr. Sarjeant?

                STATEMENT OF LAWRENCE E. SARJEANT

    Mr. Sarjeant. Good morning, Mr. Chairman and members of the 
subcommittee. Thank you for giving the United States Telecom 
Association the opportunity to testify and present its views on 
H.R. 1765, your recently introduced bill to increase penalties 
for violations of the Communications Act by common carriers.
    My name is Lawrence Sarjeant, and I am USTA's Vice 
President for Regulatory Affairs and General Counsel.
    Although its roots are in the local exchange industry, USTA 
has evolved into an association of multi-service telecom 
providers. Its members are ILECs, CLECs, IXCs, ISPs, CMRS 
providers, and video service providers. USTA's members service 
America's remote and rural communities from Alaska to Georgia, 
as well as its urban centers from New York to Los Angeles.
    USTA believes that regulators, competitors, and customers 
have at their disposal today sufficient vehicles through which 
they can pursue penalties, damages, performance adjustments, 
and remedial conduct from common carriers when it is proven 
that a common carrier has violated the Communications Act or 
the Federal Communications Commission's rules.
    For example, Section 209 damages provisions prescribe no 
cap on monetary damage awards in favor of complaining parties 
who successfully bring complaints against common carriers 
pursuant to Section 208.
    Notwithstanding our belief, though, USTA understands that 
you and other public policymakers believe that there is a need 
for greater enforcement and increased penalties for common 
carrier violations of the Communications Act and the FCC's 
rules. Therefore, I would like to offer several observations 
and suggestions concerning modifications to the enforcement 
process that are intended to ensure that procedural fairness 
accompanies any enhancements to existing enforcement and 
penalty provisions.
    If forfeiture penalties are to be increased, greater 
formality or structure should be incorporated into the 
proceedings leading to the assessment of a forfeiture penalty. 
A common carrier that is the target in a forfeiture proceeding 
should be entitled to an evidentiary hearing before a hearing 
examiner that is independent of the FCC staff that investigates 
the alleged violation and the FCC staff that brings the alleged 
violation forward for adjudication.
    All testimony should be taken under oath, and the target 
common carriers should have the right to call witnesses and 
cross examine those witnesses called to present testimony 
against it.
    Penalties in the amounts being considered should not be 
imposed without the accused having maximum due process 
protections. Penalties that are predicated upon a finding of 
wilful conduct require that ``wilfully'' be defined. The 
definition of ``wilfully'' should explicitly state that the 
alleged violator intended to violate the Act or the FCC rule.
    In other words, the FCC must be made to prove that the 
alleged violator knew it was acting unlawfully. It should also 
be made clear that the FCC bears the burden of proof. Where 
wilful conduct must be shown, it should be proven by clear, 
cogent, and convincing evidence.
    This higher burden of proof is warranted when sizable 
monetary penalties such as those presented in the bill are to 
be assessed as a way to punish common carriers for wilfully and 
repeatedly failing to comply with the provisions of the Act. 
This is particularly true when wilful conduct must be 
determined in a dynamic environment where rules are frequently 
changing in response to court decisions and changes in the 
telecommunications market.
    Section 2 of H.R. 1765 provides for a dispute resolution 
process with respect to those matters that are subject to 
interconnection agreements approved by a State commission 
pursuant to Section 252. We agree that this is the best 
approach as these interconnection agreements are within the 
State Public Service Commission's jurisdiction, and no other 
regulatory agency is in a better position to resolve disputes 
concerning local interconnection agreements.
    Finally, USTA is concerned about parity and 
proportionality. To the extent that forfeiture penalties in 
H.R. 1765 apply only to common carriers, it disregards the fact 
that communications firms that have historically not been 
treated as common carriers are now providing common carrier 
services.
    Regardless of the labels attached to them, firms that 
provide services that are functionally equivalent to those 
provided by traditional common carriers should be subject to 
the same forfeiture provisions. Consideration should be given 
to having one forfeiture penalty schedule for all entities 
subject to the Communications Act.
    Further, the FCC should be clearly instructed that the size 
of the common carrier, the number of residential subscribers it 
has, its service area, and other relevant factors, must be 
taken into consideration when determining the amount of the 
penalty to be assessed. The penalties are intended to be a 
deterrent to violations of the Communications Act, not a 
deterrent to a common carrier's ability to continue providing 
service to its customers.
    Thank you.
    [The prepared statement of Lawrence E. Sarjeant follows:]

 PREPARED STATEMENT OF LAWRENCE E. SARJEANT, VICE PRESIDENT REGULATORY 
     AFFAIRS AND GENERAL COUNSEL, UNITED STATES TELECOM ASSOCIATION

    Thank you Mr. Chairman and Members of the Subcommittee for giving 
the United States Telecom Association (USTA) the opportunity to testify 
and present its views on HR 1765 your recently introduced bill to 
increase penalties for common carrier violations of the Communications 
Act of 1934. I am Lawrence E. Sarjeant and I serve as Vice President 
Regulatory Affairs and General Counsel of USTA. I appear at the hearing 
today on behalf of the entire Association, which comprises of over 
1,100 members, including local exchange carriers ranging from the very 
smallest and most rural telephone company to the Bell Operating 
Companies, as well as non-ILEC affiliated CLECs.
    Of course, I am not here today to say that we warmly welcome and 
embrace you and your co-sponsors' efforts to increase enforcement 
penalties. Having said that, we realize that policymakers such as 
yourself and your co-sponsors believe that there needs to be more 
enforcement and increased penalties for violations of the Act or the 
Federal Communications Commission (Commission) rules when the 
deregulation contemplated by H.R. 1542 occurs. Under those 
circumstances, it seems that the purposeful thing for us to do is to 
provide you with the benefit of our thoughts and observations regarding 
the enforcement process and to make suggestions to you concerning how 
it can be modified to better ensure fairness and equitable outcomes.
    First, let me say that one of the reasons that we believe that this 
effort to increase penalties is not warranted is that effective 
enforcement provisions already exist in the Act. They have been there 
since 1934, but the focus seems always to be on the forfeitures under 
Section 503, with little attention given to Sections 207, 208 and 209.
    Section 207 provides that any person, meaning CLEC, DLEC, 
interexchange carrier, ISP, etc., may make a complaint to the 
Commission or bring suit against the common carrier in the United 
States District Court.
    If an aggrieved person brings the complaint to the Commission, then 
Section 208 becomes operative. Section 208 provides that if a common 
carrier does or has omitted to do some act in violation of the 
Communications Act, then the Commission takes up this petition. This is 
now done through a newly created Enforcement Bureau established under 
Chairman Kennard to place more emphasis on enforcement.
    After an investigation of not more than 5 months and a hearing, the 
Commission shall under Section 209 award damages if it determines the 
injured, complaining party is entitled to damages. There is no 
statutory limit on damages and the Commission has asserted its right to 
award permanent injunctive relief. Why is this not more effective than 
any forfeiture under Section 503?

Process
    Let me start my process suggestions with the one that I believe is 
the most important. Today, the Commission process for imposing 
forfeiture penalties is what I would call an unstructured one. There 
are usually no evidentiary hearings, no testimony taken under oath and 
no witnesses to be cross-examined. The Commission does have the 
statutory discretion to present these matters to an Administrative Law 
Judge pursuant to Section 503(b)(3)(A), but it rarely, if ever, 
exercises this discretion. A hearing before an Administrative Law Judge 
should be made mandatory if the alleged violator requests such a 
hearing, especially when the action may result in a substantial 
forfeiture.
    H.R. 1765 does not require such a hearing before an Administrative 
Law Judge, and we respectfully believe that it should. It is 
inappropriate and inconsistent with accepted principles of fairness for 
the Commission staff to serve as investigator, prosecutor and judge 
with respect to the adjudication of allegation sufficient to trigger a 
notice of apparent liability (NAL). Your bill follows the approach in 
current law of giving the Commission the discretion to present the 
issue to an Administrative Law Judge. Your bill, H.R. 1765, increase 
the penalties for some repeated violations to up to $20,000,000. A 
penalty in this amount requires, in our view, greater procedural due 
process, thus giving the accused at least a fair hearing before an 
impartial trier of facts and a fair opportunity to present its case, 
including the right to confront its accusers.
    H.R. 1765 also will increase other penalties to up to $10,000,000. 
We believe that for these forfeitures, as well, there should be a right 
to a hearing before an Administrative Law Judge, at the option of the 
alleged violator. Section 554 of the Administrative Procedures Act 
governs the procedures for such a hearing. What we are seeking here is 
not novel--it is common practice in state regulatory enforcement 
proceedings. Penalties of any significant amount should not be assessed 
without there having first been a judicatory hearing.
    Second, another process issue is the burden of proof. We would 
suggest that it be clearly established in your bill that the burden of 
proof be placed upon the government. The government should be required 
to prove its case by clear, cogent and convincing evidence, the 
standard applied in matters such as civil fraud where intention is 
required to be proven.

Willfully
    Section 503(b), which H.R. 1765 amends, provides that forfeitures 
will be assessed against common carriers that willfully and repeatedly 
fail to comply with the provisions of the Act. We strongly urge you to 
define willfully. In a recent enforcement proceeding, the Commission 
issued a Notice of Apparent Liability in which it said the following:
        ``It has been long established that the word `willfully' as 
        employed in Section 503(b) of the Act, does not require a 
        demonstration that . . . knew it was acting unlawfully. Section 
        503(b) requires only a finding that . . . knew it was doing the 
        acts in question and that the acts were not 
        accidental.11
---------------------------------------------------------------------------
    \1\ IN THE MATTER OF SBC COMMUNICATIONS, INC., DA 01-680 (March 14, 
2001) at B1., 2001 WL 253187 (F.C.C.)
---------------------------------------------------------------------------
    We have examined how the various Federal Courts 22 have 
interpreted the term willful in other federal statutes, and they all 
seem to have at least one common theme, which is that the alleged 
violator must have intended to violate the Act. The Commission says 
that if you did it, you therefore did it willfully unless it was an 
accident. The Commission, therefore, reads the word ``willfully'' out 
of the Act. This notion of intent to violate the Act must in our view 
be an essential part of your enforcement reform bill. Second, we would 
also urge that some allowance be made in this definition for ambiguity 
in the rules of the Commission which change so often. Since 1996, the 
Commission's rules regarding unbundled access to network elements have 
changed at least a dozen times not counting merger and Section 271 
conditions imposed by the Commission. At this time, two Notices of 
Proposed Rulemaking are pending in the Advanced Telecommunications and 
Local Competition dockets, which will be the Sixth Further Notice of 
Proposed Rulemaking in that docket alone. The reason that they change 
so often is that the Commission most continually modify and reinterpret 
the law based on changing market conditions. While we haven't always 
agreed with the changes made by the Commission or its evolution of 
market conditions, increasing competition requires that the FCC 
consider obligatory action where market condition warrant it.
---------------------------------------------------------------------------
    \2\ See, Valdak v. OSHRC, 73 F.3d 1466, 1466-1469 (8th Cir. 
1996)(willfulness is an act done voluntarily with either intentional 
disregard of or plain indifference to the requirements of the Act); 
Printy v. Dean Witter Reynolds, 110 F.3d 853, 859 (1st Cir. 
1997)(willfull means deliberate or intentional).
---------------------------------------------------------------------------

Dispute Resolution
    Section 2 of H.R. 1765 provides for a Dispute Resolution process 
with respect to those matters that are subject to interconnection 
agreements approved by a State pursuant to Section 252. This provision 
makes common sense. We believe that under the 1996 Act that these 
interconnection agreements are within state Public Service Commission 
jurisdiction, and we welcome prompt resolution of disputes.
    Section 252(c) requires that every interconnection agreement 
adopted by negotiation or arbitration must be submitted to the State 
Public Service Commission for approval. The Public Service Commission 
has the authority to approve or reject any agreement. In other words, 
there is no regulatory agency in a better position to resolve these 
issues than the State PSC that may have arbitrated the agreement and 
had to approve it.
    Section 2's Dispute Resolution process follows the model for 
disputes arising during the agreement negotiation process provided for 
in Section 252 (b). The State PSC is given sixty days to resolve a 
dispute. This seems to us to be ample time. H.R. 1765 adopts the same 
approach Judicial review of a State Commission actions as is in current 
law regarding other interconnection agreement determination, namely the 
right of any aggrieved party to bring an action in Federal District 
Court to determine whether the agreement is in compliance with Section 
251.

Parity and Size of Common Carrier
    The increased forfeiture penalties in H.R. 1765 apply only to 
common carriers. Why should penalties be increased only for common 
carriers? Why not all persons subject to the Act's jurisdiction such as 
cable companies and broadcasters. We must begin to bring greater focus 
to comparable treatment for functionally equivalent services and not be 
driven to disparate treatment based on the old and irrelevant labels 
applied to today's multi-services communications companies. What is in 
the bill now applies to all carriers, but at the end of the process 
will it apply only to incumbent local exchange carriers or will it 
apply to just Bell Operating Companies. Singling out only segments of 
those regulated under the same Act is a concern to us.
    Second, Section 503(b)(2)(D) of current law will be applicable to 
the increased and new penalties to be assessed under H.R. 1765. This 
subparagraph (D) requires the Commission to take into account the 
violators ability to pay among other considerations. Under this 
subparagraph; we would urge you to make clear to the Commission that 
this means that smaller carriers would have their size, number of 
residential subscriber and service area taken into account when 
prescribing a penalty. While intended to be a deterrent, revisions to 
the caps on penalties should not have unintended result of compromising 
the ability of any carrier to operate as on going business providing 
quality services to its customers. Forfeitures should be proportionate 
and the actual affect on consumers and competition should be taken into 
account.

    Mr. Upton. Thank you.
    Mr. Solomon, welcome.

                 STATEMENT OF DAVID H. SOLOMON

    Mr. Solomon. Thank you, Mr. Chairman. Good morning, Mr. 
Chairman and members of the subcommittee. We appreciate the 
opportunity to testify before you today, and particularly 
appreciate your interest in enhancing the FCC's enforcement 
tools, or, as you said this morning, Mr. Chairman, in giving us 
more ammo.
    I also want to comment just how much we at the FCC 
appreciated the visit that you and Chairman Tauzin had earlier 
this week. People at the Commission were--their morale was very 
much increased by the sense from you and Chairman Tauzin that 
you are interested in helping us do our job better, and we 
appreciate that.
    Strong and effective enforcement is critical to 
implementation of the 1996 Telecom Act. Chairman Powell has 
indicated on numerous occasions that he views enforcement as a 
central part of his vision for a more effective FCC dedicated 
to the deregulatory and pro-competitive mission of the 1996 Act 
as envisioned by Congress.
    Within the scope of the responsibilities that Congress has 
delegated to the FCC, he has charged us in the Enforcement 
Bureau with moving quickly to respond to either formal 
complaints that we get from carriers or competitors, and to 
requests for investigations, as well as reviewing our own 
information to look for possible areas for investigations.
    And in partnership with the States, we continue to be 
strongly committed to doing our best to make sure that we can 
facilitate implementation of the local competition provisions 
of the 1996 Act.
    And I want to mention with Chairman Jacobs here how much we 
at the FCC have appreciated the work he and others at NARUC 
have done in working with us to try to join resources so that 
when we work on consumer protection issues we are not 
overlapping with the States but we are working in concert.
    As Chairman Powell recently indicated in his letter to you 
and other members of the leadership, we do believe that our 
ability to enforce the 1996 Act and other provisions of the 
Communications Act could be enhanced by giving us additional 
enforcement tools. And we are very pleased that H.R. 1765 
incorporates some of Chairman Powell's proposals.
    I am going to focus on two of those proposals. One is the 
increase in the statutory caps for forfeitures, and the second 
is the increase in the period for the statute of limitations. 
On the statutory caps, as several members have indicated this 
morning, and some of the witnesses, the current caps of 
$120,000 and $1.2 million really don't serve as a sufficient 
deterrent or sanction for large companies that have income of 
billions of dollars.
    We think the increase tenfold to $1 million and $10 million 
will give us a significantly increased ability to have a 
deterrent effect from our actions and from the existence of the 
authority itself as well as impose serious sanctions in 
particular cases. And we strongly support that provision as 
well as the additional provision to have doubling of the fines 
in cases where a carrier has violated a cease and desist order 
by the FCC or has engaged in a repeated violation that harms 
competition.
    On the statute of limitations, let me explain a little some 
of the practical effects of the existing 1-year statute of 
limitations. We usually start an investigation in one of two 
ways. Either a competitor or another entity will come to us 
informally with information suggesting that there may be 
violations, or we will do a self-started investigation, perhaps 
based on reports that are filed by the carriers.
    In either case, it is often several months into the 1-year 
statute of limitations period when we really get started. If 
someone is bringing us information, it takes them some time to 
put together--to notice that violations may be occurring, to 
put together information sufficient to us to convince us to 
look into it. So it may be several months into the period when 
they bring us what they think is strong evidence of a serious 
violation or a pattern of violations.
    In addition, when we are looking into possible 
investigations based on reports we get from the carriers, 
typically the reports come in several months after the relevant 
period. For example, in June we might have a requirement that a 
carrier report on the first quarter from January to March. So 
if we get the report in June and it suggests violations in 
January, we have already eaten up about 5 months of the statute 
of limitations period.
    Then, once we start an investigation, we look to the 
carrier to give us additional information. And we typically 
issue an inquiry letter that leads to interrogatories or a 
request for documents. That information has to be evaluated, 
and we also have had experiences where the carriers may have 
incentives to engage in delay tactics in dealing with us, such 
that we have to issue additional letters.
    So we have had situations where, as we approach the end of 
the statute of limitations period and contemplate enforcement 
action, we either have to leave out some of the potential 
violations, have to go negotiate with the carrier potentially 
for an extension of the statute of limitations period, or have 
to work extremely quickly at the end to put our case together 
to beat the statute of limitations.
    So while it doesn't sound exciting, the increase from 1 
year to 2 years can have a significant practical effect.
    So in summary, again, we appreciate your efforts to look at 
increasing our enforcement tools and look forward to continuing 
to work with you.
    [The prepared statement of David H. Solomon follows:]

  PREPARED STATEMENT OF DAVID H. SOLOMON, CHIEF, ENFORCEMENT BUREAU, 
                   FEDERAL COMMUNICATIONS COMMISSION

    Good morning Mr. Chairman and members of the Subcommittee. I am 
pleased to appear today on behalf of FCC Chairman Michael K. Powell 
regarding H.R. 1765. We appreciate the interest of Chairman Upton and 
others on the Subcommittee and the full Committee in enhancing our 
enforcement tools.
    Strong and effective enforcement is critical to implementation of 
the Telecommunications Act of 1996. Chairman Powell has emphasized on 
numerous occasions his strong commitment to enforcement as a central 
part of his vision for a more effective FCC dedicated to implementing 
the competitive and deregulatory vision of Congress in the 1996 Act. 
Within the scope of responsibilities Congress has delegated to the 
Commission, he has charged the Enforcement Bureau to move quickly to 
respond to complaints or requests for investigations that we receive. 
Only in partnership with the states can we facilitate compliance with 
the local competition provisions of the 1996 Act and we will continue 
to work with the states to do so.
    Our common carrier enforcement efforts generally take place in one 
of three contexts. First, through the formal complaint process set out 
in section 208 of the Communications Act, the Commission decides formal 
complaints between private parties. These are generally the equivalent 
of private law suits filed in court. Second, as an adjunct to the 
formal complaint process, Enforcement Bureau staff provides mediation 
assistance to litigants or potential litigants in an effort to help 
them reach a private settlement of their disputes where feasible. 
Third, the FCC conducts informal investigations pursuant to sections 
218, 403 and 503(b) of the Communications Act. These investigations may 
lead to monetary forfeitures or consent decrees. While outside entities 
sometimes informally bring information to our attention in connection 
with such investigations, they are not parties to the investigation or 
any subsequent forfeiture proceeding. The only party to this type of 
FCC investigation is the subject of the investigation.
    As Chairman Powell recently indicated in a letter to the leaders of 
the House and Senate Commerce and Appropriations Committees, which I 
have attached to my testimony, the effectiveness of the Commission's 
enforcement efforts could be increased with the help of Congress. We 
are pleased that H.R. 1765 incorporates certain proposals made by 
Chairman Powell and, not surprisingly, we strongly support these 
measures.
    Specifically, I'd like to focus my remarks on two provisions of 
H.R. 1765 that would amend section 503(b) of the Communications Act: 
(1) the increase in the caps on the Commission's forfeiture authority 
for common carriers; and (2) the lengthening of the statute of 
limitations period for such forfeitures. Both of these provisions 
relate to the informal investigation process I mentioned before.

                      I. STATUTORY FORFEITURE CAPS

    Right now, under section 503(b) of the Communications Act and the 
inflationary adjustments provided for under the Debt Collection 
Improvement Act of 1996, the Commission can fine common carriers only 
$120,000 per violation or per day of a continuing violation. In the 
case of a continuing violation, the total fine cannot exceed $1.2 
million. Given the vast resources of the nation's large common 
carriers, including incumbent local exchange carriers and long distance 
carriers, this amount is an insufficient sanction or deterrent in many 
instances.
    H.R. 1765 would increase the statutory caps 10-fold to $1 million 
per violation or per day of a continuing violation and $10 million for 
continuing violations. We think these statutory increases would 
significantly strengthen our enforcement authority against incumbent 
local exchange carriers and other common carriers. Through deterrence 
as well as the impact of sanctions that we impose, we believe 
compliance with the Act and the Commission's rules should be increased, 
to the overall benefit of consumers. We thus strongly support this 
provision. For similar reasons, we also support the proposal to 
increase the caps to $2 million and $20 million in situations where a 
carrier has violated a cease and desist order or where there has been a 
repeated violation that has caused harm to competition.

                       II. STATUTE OF LIMITATIONS

    In addition to setting out forfeiture caps, Section 503(b) of the 
Communications Act spells out the procedure for the imposition of 
forfeitures and the timetable for the initiation of such actions. Under 
the statute, the Commission may impose a forfeiture through a hearing 
that begins with a Notice of Opportunity for Hearing or through a paper 
process that begins with a Notice of Apparent Liability. Under either 
process, the Commission may not impose a forfeiture penalty unless the 
carrier is notified of the charges and provided an opportunity to 
respond. For common carriers, the requisite notice must be issued 
within one year of the violation or violations at issue.
    As Chairman Powell has noted, this one-year limitations period has 
often proved an impediment to the Commission's enforcement actions. 
While it is certainly important that the Commission commence forfeiture 
proceedings before the evidence relating to the alleged violations 
becomes stale, it is imperative that the Commission have enough time to 
conduct a meaningful investigation into the matter before issuing a 
publicly available notice charging the carrier with apparent 
misconduct.
    Let me explain some of the practical constraints that the one-year 
limitation creates. In some situations, the Commission first hears 
about a violation from information informally provided by a competitor 
that has been harmed by the alleged violation. This can take several 
months as the harmed competitor determines whether there is a serious 
violation or pattern of violations at issue. In other instances, we are 
first notified of potential violations through incumbent carriers' 
required filings with the Commission, which often cover time periods 
dating back many months. Thus, when the Commission receives these 
reports, we are often already fairly deep into the limitations period. 
Moreover, once we start an investigation, much of the evidence relating 
to the alleged violation resides with the carrier whose conduct is 
under investigation. Accordingly, in both types of situations, to 
determine whether there is sufficient evidence of a violation to 
proceed, the Bureau is often required to send a letter to the carrier 
requiring the submission of relevant information and documents, and 
then await the carrier's response. Moreover, because some carriers 
employ mechanisms to slow the progress of our investigations, the 
Bureau is often required to send follow-up letters to the carrier 
before obtaining the information sought. This cuts still further into 
the limitations period.
    Because of the one-year statute of limitations for forfeiture 
proceedings, there have been instances in which the Commission has been 
constrained from commencing forfeiture proceedings. In other instances, 
we have been put in the unfortunate position of requesting that the 
subject carrier enter into an agreement to toll the running of the 
limitations period. While carriers often agree to such arrangements 
when they believe it is in their interest to do so, they do sometimes 
refuse. When they refuse, the Commission is left racing against the 
clock to make a decision on whether or not to initiate a forfeiture 
proceeding before the limitations period expires.
    These problems would be largely solved if the Congress were to 
extend the statute of limitations in Section 503(b)(6)(B) of the 
Communications Act to two years. Thus, we thus strongly support this 
provision in H.R. 1765 as well.
    Thank you again for this opportunity to testify. I would be happy 
to answer any questions you may have.

    Mr. Upton. Well, thank you very much. I appreciate all of 
your testimony. And I would just note for the record that as 
members are on other subcommittees, a number of folks have 
asked that they might be able to submit questions in writing, 
and we will take that opportunity to do so.
    Mr. Solomon, you and I have had a chance to talk a little 
bit about this legislation earlier in the week, and we did, by 
the way, appreciate very much our visit to the FCC. I know that 
I look forward to going down again, and also we will visit a 
number of sites particularly close by here in the future.
    Do you believe that the 2-year time limit is, in fact, 
adequate and sufficient on the statute of limitations?
    Mr. Solomon. I certainly think it will help give----
    Mr. Upton. Does it need to go beyond 2 years, or do you 
think 2 years is----
    Mr. Solomon. I think it will help give us the flexibility. 
Certainly, if Congress believes it should be somewhat longer, 
that would give us additional flexibility. Ultimately, it is a 
balance that Congress has to make between giving us the 
flexibility and ensuring that basically violations don't become 
stale in a way that is unfair to the target involved. But 2 
years should certainly help.
    Mr. Upton. A number of folks have come to us and suggested 
that your enforcement team doesn't have enough bodies. It needs 
more individuals, particularly as you look at all of the 
complaints that are filed. What is the size of your enforcement 
staff?
    Mr. Solomon. The size of the Enforcement Bureau is about 
285 people, although that includes enforcement across the broad 
areas of responsibilities. About 150 of those people are in 
field offices and focus pretty exclusively on technical 
enforcement, and then about half are in Washington.
    Certainly, as a government bureaucrat, we always like more 
resources. But we are heartened that Chairman Powell has 
allocated additional resources to enforcement and has charged 
us to go out and hire some people with litigation and 
investigatory experience that will be able to help us.
    Mr. Upton. Well, one of the things I want to make clear is 
not only should you have the proper tools in your arsenal to go 
after those that violate the rules, but you also have the 
sufficient staff.
    And I know that I look forward to working with the FCC, 
Chairman Powell, all the commissioners, yourself, as we look at 
having hearings later this year on FCC reform once we have the 
full complement of commissioners on board that, in fact they 
can help identify for us areas where you may need some more 
resources, and certainly I am prepared to try and help. Help is 
on the way, as I said the other day, to make sure that your 
resources--your human resources are adequate.
    But I am interested in learning more about the Section 208 
process. Could you describe how it works, how much time it 
often takes for those claims to get through, the amount of 
money that the FCC might have, in fact, recently assessed for 
Section 208? And also, confirm that it does go directly to 
aggrieved parties.
    Mr. Solomon. Right. There are two distinct processes, just 
to back up for a second. The Section 208 process is the formal 
complaint process. In that, essentially we act as a judge in a 
private lawsuit. And if damages are awarded, those damages do 
go directly to the parties.
    In the Section 503(b) forfeiture proceedings, those 
payments go to the Treasury, not into our pockets but to the 
Treasury.
    In a Section 208 complaint proceeding, it is a formal 
complaint. It is like a lawsuit. There are opportunities for 
discovery in various stages of the proceeding. We have been 
trying to move very fast on these complaints. Historically, the 
FCC did not act as fast as it should have. When we started the 
Enforcement Bureau in November 1999, there was a backlog of 
about 180 formal complaint cases, many several years old, but 
the worst that we acted on was from 1989.
    So one thing we have done is we have attacked that backlog, 
and there are a few cases still left but we have gotten out 
about 90 percent of the backlog, so that we are in a position 
to act more quickly on the new complaints.
    The length of time that they take to some extent varies on 
the complexity. Some cases are subject to statutory deadlines, 
and obviously we meet those deadlines. We did have one case so 
far----
    Mr. Upton. Is there a statute of limitations on 208, 
Section 208 complaints?
    Mr. Solomon. There is a 2-year statute of limitations on 
Section 208 complaints. So, actually, there would be a 
consistency if the forfeiture statute of limitations was 
increased to 2 years.
    So the length of time depends on the complexity, but we are 
certainly proud of the fact that we are getting to the point 
where we can say that our complaints are decided in a matter of 
months rather than, historically, it was in a matter of years.
    Mr. Upton. And in recent months, how many 208 settlements 
have been reached? And, in fact, do you have details of some of 
the fines and who those parties might have been, or where those 
dollars might have gone?
    Mr. Solomon. I don't know off the top of my head cases 
where we have awarded damages.
    Mr. Upton. You might be able to submit that for the record.
    Mr. Solomon. Okay. I will do that.
    Mr. Upton. That might be sufficient.
    My time has expired. Mr. Stupak?
    Mr. Stupak. Thanks, Mr. Chairman.
    On the Section 208, if it is 2 years now, should that be 
extended longer, that statute of limitations?
    Mr. Solomon. Again, that is a judgment call of balancing 
various figures.
    Mr. Stupak. So how do you define it in trying to--in your 
Enforcement Bureau in trying to process these cases? Do you 
find you have enough time, you don't have enough time? I guess 
we have to ask you, because you are the guys who deal with it.
    Mr. Solomon. I think in the damages context for private 
complaints we have not found the 2-year statute of limitations 
to be a particular problem. One of the procedures we have is 
that in the first instance a complainant can file an informal 
complaint, which basically meets the statute of limitation.
    So if they are running up against the 2-year period and 
haven't been able to get enough information to put together a 
formal complaint that meets our rules, they can essentially 
file a letter that basically serves for statute of limitations 
purposes, that is an informal complaint.
    It doesn't get adjudicated; it gets served on the other 
party, and there is potentially an attempt for them to settle 
it. So I don't think that has been a major problem.
    Mr. Stupak. Okay. When Chairman Powell testified, he asked 
for an increase of the forfeiture amount to about $10 million, 
and an increase in the statute of limitations, which is 1 year, 
to 2 years. I would assume that the Chairman's recommendation 
would serve as a floor and not as the ceiling?
    Mr. Solomon. Yes. He said at least those amounts.
    Mr. Stupak. Okay. In hopes of ensuring that we don't need 
to come back here again in a year or 2 to increase the FCC's 
enforcement power, shouldn't we give--attempt now to give the 
FCC more authority on forfeiture amounts and the length of time 
to pursue proceedings?
    Mr. Solomon. Well, the legislation certainly is a positive 
step, and I don't know that there is a magic number of what is 
the right amount. But, I mean, our main goal at this point is 
seeing an increase. And if Congress chooses to make it higher 
than the 2 million, that presumably would increase the 
deterrent effect even further.
    Mr. Stupak. And besides the statute of limitations and the 
$10 million, is there anything else in your Enforcement 
Bureau--you said it has been up since, what, 1999, I believe 
you said?
    Mr. Solomon. Right. Right.
    Mr. Stupak. Anything else you can think of that is not in 
H.R. 1765 that should be included, or some other ways to help 
you do your job?
    Mr. Solomon. Some other possibilities that were mentioned 
in Chairman Powell's letter that the subcommittee might want to 
consider--these provisions focus on the Section 503 forfeiture 
process.
    In the formal complaint process, currently we can award 
damages, but it is limited to compensatory damages, which 
essentially means that if after we adjudicate the complaint we 
find that, for example, if the rate should have been one rather 
than 10, the damages would be nine.
    So, in essence, the violator pays interest but nothing has 
really happened to him other than he has to give back what the 
other party deserved to begin with. So we have suggested the 
possibility of punitive damages, sort of similar to the treble 
damages in the antitrust laws, which would serve as an 
additional penalty and deterrent against carriers.
    Some other possibilities would be giving us the authority 
to award attorneys costs or fees in cases where we think there 
may have been particularly strong misbehavior or misbehavior in 
the litigation process itself.
    And then another possibility would be some sort of 
requirement for liquidated damages in the interconnection 
agreements to basically say that, if certain requirements 
aren't met, it is guaranteed that the incumbent LEC in this 
case would pay to the CLEC a certain amount to make up for that 
problem, without having an adjudication. It would be just 
automatic.
    Mr. Stupak. Thanks.
    Mr. Holland, Chairman Powell indicated that the need for 
increased enforcement authority is necessary in part to deter 
the violations that are leading to the demise of the CLECs. The 
Chairman specifically refers to measures to compensate harmed 
CLECs, besides cease and desist measures and the potential 
deterrent effects of increased penalties.
    In your view, does the bill provide such increased 
compensation to CLECs that suffered the effects of these 
violations? Is it adequate? That is what I am asking.
    Mr. Holland. I do not think it is adequate in that regard, 
because to be adequate it has to be something that gets the 
attention of senior management. I will just give you an 
example: $10 million would get my attention because that is 
almost 10 percent of my quarterly revenue, $1.2 million would 
also get my attention, as Chairman and CEO, because that is 
about 1 percent of my revenue.
    You know, $12,000, that wouldn't make much difference. 
Likewise, if you apply that same test to a large ILEC with 
about $15 billion in quarterly revenue, $10 million gets lost 
in the accounting in a quarter. I mean----
    Mr. Stupak. Just a part of doing business.
    Mr. Holland. Yes. It is truly just a cost of doing 
business. I mean, they spend more on that on local--more than 
that on local advertising or something, because that is less 
than one-tenth of 1 percent.
    Now, if you raise that limit up to 1 percent, like I was 
talking--like what $1.2 million would be to me, that is $150 
million. I can guarantee you with--let us take Verizon as an 
example. The Bells would be ringing with--at high decibel 
levels in the executive suite if the FCC were even threatening 
Verizon with a $150 million fine. You would get the chairman's 
attention, and I guarantee you resources would be brought to 
bear and heads would roll.
    That is what it really takes. And it is the type of thing, 
you know, almost like those nuclear weapons that sit--used to 
sit in the silos in North Dakota. You really didn't have to 
fire them, but the deterrent--the fact that they were there has 
some effect.
    But, really, it has to be sufficient enough to impact 
quarterly results. And 1 percent of revenue will impact 
quarterly results; .1 percent will not.
    Mr. Stupak. Thank you.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you, Mr. Stupak. I neglected to say from 
the great State of Michigan.
    I recognize the gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Although this hearing is on 1765, we all know it is sort of 
tied to our last week's activities. And I had an e-mail from my 
brother-in-law last night. He was updating his e-mail address, 
and he said, ``Here is my new e-mail address. I now have high-
speed internet access through the cable. It is a little more 
expensive, but it is''--and he is--affectionately I call him--
he is a computer geek, so he is----
    Mr. Upton. Did he ask you about 602(p)?
    Mr. Shimkus. No, he did not. And he, in essence, said, 
``This is exciting, but it is a little more costly.''
    So I want to start out and just ask Chairman Jacobs, what 
regulatory authority do you have over the cable industry?
    Mr. Jacobs. Let me start with Florida. We have none at the 
State commission level. And, generally, around the country you 
will find that State commissions have little, if any, 
authority. I know there is one State, and I can't remember 
which State it is, that has some authority.
    Mr. Shimkus. Thank you.
    Mr. Solomon, what regulatory authority does the FCC have 
over the cable industry?
    Mr. Solomon. Basically, we have the regulatory authority 
that is set out in the Cable Act of 1984, and in 1992, which is 
a series of discreet issues. It is not sort of comprehensive 
regulation over everything, but Congress gave us the authority 
of certain programming issues, certain ownership issues, and 
then in the 1996 Act Congress deregulated our rate authority.
    Mr. Shimkus. So very little.
    Mr. Solomon. Well, there is authority on certain discreet 
issues.
    Mr. Shimkus. Is there authority over high-speed internet 
services over cable?
    Mr. Solomon. I think these are issues the Commission is 
looking at.
    Mr. Shimkus. That is fair.
    Mr. Sarjeant, this question is for Mr. Sarjeant, and, 
again, back to Mr. Solomon. Mr. Holland stated in his testimony 
that one way to curb the motivation to engage in anti-
competitive behavior is to structurally separate RBOCs and 
retail and wholesale operations.
    What is your view of this idea? And do you think it would 
work?
    Mr. Sarjeant. It is an idea that I think is not going to, 
in the end, help the people who we really must be focusing on, 
and that is the consumers, because what it does is deprive 
companies who are currently integrated of the efficiencies of 
integration, if you wind up separating them out. And the remedy 
certainly does not do anything to cure the problems that the 
CLECs are having with the capital markets. It is not going to 
help them with their capitalization.
    So, in effect, what it does is perhaps inflict some 
inefficiency pain on large companies or integrated companies 
today, but for no gain for consumers and with little benefit, 
if any, for CLECs. So it hardly seems worth it.
    Mr. Shimkus. Mr. Holland, since I used your name, do you 
want to respond?
    Mr. Holland. Yes, sir. I had suggested structural 
separation or functional separation, one or the other, as 
something that would be--that I would favor if greatly 
increased enforcement and a much bigger stick--much bigger 
penalties didn't get the job done. I am not advocating that it 
be done today.
    I think ultimately----
    Mr. Shimkus. If I could interrupt, and we will just keep 
the dialog, when you say ``much greater penalties,'' much 
greater penalties as close to what is occurring in this 
legislation or even greater?
    Mr. Holland. As I mentioned before, $10 million would be 
nothing to a company that has $15 billion in quarterly revenue. 
It has to be significant enough to impact their quarterly 
financials, because that is what gets senior management's 
attention. I know that from my own experience.
    And, certainly, something like 1 percent of revenue will 
get you there. That is--in fact, having it based--pegged to 
percent of revenue is very consistent with the USF funding, but 
I think that that is worth a try, doing that.
    I think ultimately, though, if you are going to get to 
where every citizen in America has a competitive choice, you 
are going to ultimately wind up with structural separation, 
because, as an example, you never would have had the market 
share shifts of the magnitude you did in long distance if the 
Bell operating companies had had an incentive to discriminate 
in favor of AT&T vis-a-vis MCI.
    The reason for that was to open that market. I think 
ultimately that will happen in the local market, but I would 
say this. I think it will happen voluntarily at some point in 
time. I think the operating companies will come to the 
conclusion that if they really do--say, Verizon and SBC, if 
they want to be major global players, they really need to move 
toward true deregulation, which is to give up the bottleneck 
facilities, either to a tracking stock or a spinoff to 
shareholders.
    And those bottleneck facilities, when you get right down 
and cut to the chase, are the local loop and the collocation 
space. And then everyone is dealing with it separately.
    A great model for that is Empire City Subway in New York, 
which is a wholly owned subsidiary of Verizon that owns all of 
the communications conduit that everybody uses at the same 
rate, which is a tariff rate. So I think that is ultimately 
going to happen. We are not proposing it today, but if greater 
enforcement doesn't get the job done, we would propose it in 
the future.
    Mr. Shimkus. Mr. Chairman, if I may, I would like to get 
the FCC's response to the initial question. Do I need to 
restate it or----
    Mr. Solomon. This may sound overly bureaucratic, but as 
Chief of the Enforcement Bureau, I sort of view my role on 
these issues as Congress did not include that in the 1996 Act, 
so our job is to enforce what is there.
    Mr. Shimkus. You guys are speaking truth. I am glad to hear 
that. We may have--you know, it is a legislative prerogative, 
and you would have to enforce the legislative prerogative. And 
I appreciate that.
    Thank you, Mr. Chairman.
    Mr. Upton. Thank you, Mr. Shimkus.
    We have another vote, so I am going to ask maybe one or two 
questions, and maybe, Bart, do you have an additional question 
you want to ask as well?
    Actually, Mr. Engel is here. I should--Mr. Engel, do you 
have any questions? I should ask, have you voted yet or not?
    Mr. Engel. I have not.
    Mr. Upton. Okay.
    Mr. Engel. I have learned in 13 years to make the 3-minute 
dash over to the Capitol.
    Mr. Solomon, are cable operators providing telephone 
service classified as common carriers, and would they be 
subject to these fines?
    Mr. Solomon. The issue of how cable should be classified 
for various services is in the process of litigation and 
consideration in a number of contexts, so I don't want to 
answer it too generally other than to say that, to the extent 
they are acting as a common carrier, then they are subject to 
the rules governing common carriers. There is a lot of 
litigation over the issue of whether, in fact, or in what 
context they are acting as a common carrier.
    Mr. Engel. Okay. Thank you. In your testimony, you said 
that you strongly support extending the statute of limitations. 
How often does this interfere with the FCC's oversight 
abilities? Is 2 years enough? Should it be three?
    Mr. Solomon. I think 2 years will be of great help. We have 
had a lot of situations where because of the nature of our 
investigations we end up running against the 1-year statute of 
limitations, because we are still getting information from the 
carrier and evaluating it.
    But my sense is that it will make a big difference. We are 
usually sort of almost there, so giving us another year will 
really make a big difference.
    Mr. Engel. Okay. Thank you.
    Mr. Sarjeant, in your testimony, you say that the FCC could 
use Sections 207, 207, and 209 of the Communications Act to 
enforce its provisions. Why, in your opinion, is the FCC not 
doing so now?
    Mr. Sarjeant. Well, I think the FCC is doing so when a 
private party brings a dispute to it. As Mr. Solomon mentioned 
when he testified earlier, Section 208 is the adjudication of 
private party disputes. So while the FCC does have its own 
authority to initiate a complaint under 208, generally 
speaking, it awaits the parties to bring--a party to bring a 
dispute with another party to it.
    So I believe there have been 208 complaints that go to the 
question of interconnection and the application of Section 
251(c) and the rights and responsibilities under it.
    Mr. Engel. Mr. Solomon, would you agree to that or--with 
that, or would you----
    Mr. Solomon. Certainly, it is a process that is available 
and we get many complaints. I think in the local competition 
area the complaints we have acted on have been more in the 271 
area about whether the BOCS have in certain ways entered into 
the long distance market too soon. We do have some recently 
filed complaints that address other local competition issues as 
well.
    The other thing I would add is that, as I mentioned, 
compensatory damages are available, although it is often the 
case that what we will do is issue a ruling on liability and 
set the structure for damages, and then the parties will settle 
on damages. So it is not as often that we actually decide what 
the damages are.
    Mr. Engel. Thank you.
    Mr. Halprin, when the FCC Chair, Mr. Powell, was before our 
subcommittee, he stated his desire to have less upfront 
regulation, but then on the other end he said if he found 
someone was not playing by the rules he wanted the authority, 
and I am quoting him, ``to hit them hard and hit them fast.'' 
In your opinion, does H.R. 1765 succeed in this goal? Does it 
hit them where it hurts?
    Mr. Halprin. Mr. Engel, I think it is a good start. As I 
indicated, I think there are a number of other tools that can 
be added. I could not agree more with Chairman Powell, a) that 
it is important to move toward deregulating services and 
markets which are competitive, and, second, that adequate 
deterrence is necessary.
    Right now, the local phone companies are--I don't know if 
it is 3 million regulations, but are, as the Chairman said, 
pervasively regulated. The FCC has 8, 10 different ways to 
impact it, and one of the excellent things that Chairman Powell 
has done is said that he is going to use the statutory and 
regulatory mechanisms and not go into this ``let us make a 
deal'' attitude that we have had for too long, where almost 
every enforcement mechanism has been the result of private, 
off-the-record discussions.
    So I am extremely hopeful that Chairman Powell will, in 
fact, use those enforcement mechanisms, both for deterrence and 
for punishment where necessary, and the approach that he has 
taken is exactly right. I do think that it can be enhanced, 
particularly in the area where there are not regulations--that 
is, small businesses and residential consumers.
    Mr. Engel. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Upton. We are down to the 3-minute dash time. I 
appreciate your testimony. I want to announce again that those 
members who were not here to answer questions will submit some 
for the record. If you could answer them quickly, that would be 
appreciated.
    This hearing is now adjourned. Thank you.
    [Whereupon, at 12:20 p.m., the subcommittee was adjourned.]

```