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92–189 PDF 2006

S. HRG. 107–1136

FINANCIAL TURMOIL IN THE

TELECOMMUNICATIONS MARKETPLACE;

MAINTAINING THE OPERATIONS OF ESSENTIAL

COMMUNICATIONS FACILITIES

HEARING

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JULY 30, 2002

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ERNEST F. HOLLINGS, South Carolina, Chairman 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

BILL NELSON, Florida 

JOHN MCCAIN, Arizona 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

KEVIN D. KAYES, Democratic Staff Director 

MOSES BOYD, Democratic Chief Counsel 

JEANNE BUMPUS, Republican Staff Director and General Counsel 

(III)

C O N T E N T S 

Page 

Hearing held July 30, 2002 ..................................................................................... 1

Statement of Senator Allen ..................................................................................... 9

Statement of Senator Boxer .................................................................................... 10

Prepared statement .......................................................................................... 11

Statement of Senator Breaux ................................................................................. 7

Statement of Senator Brownback ........................................................................... 12

Prepared statement .......................................................................................... 13

Statement of Senator Burns ................................................................................... 5

Statement of Senator Cleland ................................................................................. 8

Statement of Senator Dorgan ................................................................................. 7

Statement of Senator Fitzgerald ............................................................................ 83

Statement of Senator Hollings ............................................................................... 1

Prepared statement .......................................................................................... 2

Statement of Senator McCain ................................................................................. 3

Statement of Senator Nelson .................................................................................. 10

Statement of Senator Wyden .................................................................................. 6

WITNESSES

Legere, John, Chief Executive Officer, Global Crossing, Limited ....................... 54

Prepared statement .......................................................................................... 57

Mohebbi, Afshin, President and Chief Operating Officer, Qwest Communications International, Inc. ....................................................................................... 70

Prepared statement .......................................................................................... 71

Powell, Hon. Michael K., Chairman, Federal Communications Commission ..... 14

Prepared statement .......................................................................................... 23

Sidgmore, John W., President and Chief Executive Officer, WorldCom ............. 62

Prepared statement .......................................................................................... 64

APPENDIX

Rose, John, President, Organization for the Promotion and Advancement 

of Small Telecommunications Companies (OPASTCO), prepared statement . 91

(1)

FINANCIAL TURMOIL IN THE 

TELECOMMUNICATIONS MARKETPLACE; 

MAINTAINING THE OPERATIONS OF 

ESSENTIAL COMMUNICATIONS FACILITIES 

TUESDAY, JULY 30, 2002

U.S. SENATE, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Committee met, pursuant to notice, at 9:30 a.m. in room SR–

253, Russell Senate Office Building, Hon. Ernest F. Hollings, 

Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. ERNEST F. HOLLINGS,

U.S. SENATOR FROM SOUTH CAROLINA 

The CHAIRMAN. Good morning. The Committee will please come 

to order. Let the Committee note that our distinguished Chairman 

of the Communications Subcommittee, Senator Inouye, is also the 

Chairman of the Defense Appropriations Subcommittee, and he is 

busily getting that bill ready for the floor, and could not be with 

us, but the Committee thought it was important that we proceed 

with this hearing. We particularly appreciate Chairman Powell 

being with us. I will put my statement in the record. 

I would just note that one of the principal interests that this 

Senator has and, of course, the Committee has is with respect to 

all of these telecommunications companies going bankrupt, out of 

business, or otherwise in financial difficulty, and at the same time 

the commission and the Government is charged with keeping current lines of communications to ensure there is no disruption. 

I would like to know from the Chairman what laws, if necessary, 

are needed, in addition to his authority now. Otherwise I would 

like to know how the commission intends to handle the requirement that there be no disruption from a bankrupt entity that is 

feeding into a for-profit last line, or CLEC, or otherwise Bell Company. They have got to keep those lines going, concerning bankruptcy, and how they are going to be paid. 

Otherwise with respect to the regulations themselves. On the one 

hand, distinguished Chairman, I was noted as saying there is probably too much competition. You are now going in the other direction, particularly with respect to regulations. We found—and Congress is in a fever to strengthen the regulations and strengthen the 

requirements. There was too much flexibility given these accountants and auditors, and yet I find the commission having hearings 

to try to cut back on the auditing and the accounting and the reguVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
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lations with respect to it. It should be explained to the Committee 

so we will understand what we are about. 

[The prepared statement of Senator Hollings follows:]

PREPARED STATEMENT OF HON. ERNEST F. HOLLINGS,

U.S. SENATOR FROM SOUTH CAROLINA

We are here this morning to address the state of the communications industry. 

As it stands, the industry is in the midst of a financial crisis. It is also experiencing 

a crisis of confidence, as it concerns the integrity of many of its key players. 

The economic downturn that took hold of the American economy close to eighteen 

months ago indeed set back growth in a number of American industries. The telecommunications industry, however, has been especially hard hit. In 2001, the sector 

lost 317,777 jobs, and in the first 6 months of 2002, the sector lost 165,840 jobs an 

increase of 27 percent from the same period in 2001. The magnitude of the sector’s 

present depression is exemplified by the fact that within this same period the industry lost $2 trillion in stock value. 

This economic devastation, however, has not been limited to the wireline companies. Both the wireless and cable industries also have had to deal with the negative 

effects of the market regression. 

Unfortunately, and especially as it concerns the telecommunications sector, these 

economic problems have been exacerbated by allegations of accounting fraud by key 

entities in the industry, on both the long distance and Bell company sides. The most 

significant cases, of course, involve WorldCom—the number two long distance provider in the country—and Qwest—a major provider of local service in the Midwestern and western states. Both have been accused of doctoring their books to the 

tune of billions, with WorldCom alone having faked profits and earnings in an 

amount of $3.8 billion. 

Although these revelations have occurred in concert with incidences of massive 

corporate fraud across the spectrum of the American marketplace, this does not negate the particular devastation that has been experienced by the telecommunications sector and the communications industry as a whole. Not only were investors 

duped and cheated, so were the companies’ competitors and potential competitors. 

By feigning earnings and profits, these companies were able to gain positions in the 

market that they otherwise may not have achieved. This is not right and cannot 

be tolerated. 

I helped write and remain a strong supporter of the 1996 Telecommunications 

Act. However, it doesn’t matter what act or law or philosophy governs the marketplace. When companies engage in out right fraud, no matter the particular industry, 

they gain the ability to upset the very purpose of those laws. 

As a consequence of the misdeeds that have occurred with these companies, millions of Americans risk a disruption of service. This hearing is designed to shed 

some light on this situation and to ensure that both the FCC and Congress are 

poised to take the appropriate action necessary to protect consumers, maintain stability in the market, and preserve the mission of achieving a dynamic competitive 

telecommunications marketplace. 

But we also cannot ignore the fact that part of the problems we are addressing 

involve larger policy issues—such as the broad policy of this Administration. We all 

know that the SEC has a major role in addressing the current crisis in the financial 

markets. This crisis has been precipitated not only by the fraud inside companies, 

but fraud that has been facilitated by accountants and financial analysts. But we 

should not be too surprised by the depth of restatements we are witnessing given 

that the current SEC chairman came into office making clear he would enforce SEC 

rules in concert with the Bush Administration’s ideology—pursue massive deregulation at all cost. Well we can see what that policy has gotten us—Enron and billions 

of lost investments by average every-day working Americans. I want to make sure 

this policy doesn’t destroy the telecommunications industry. 

As it stands, we must take at least three major actions. The first priority must 

be to ensure that consumers continue to receive service, especially as it concerns 

companies that are currently in, or may be on the brink of bankruptcy. Second, 

there must be efforts to address issues concerning the state of all industry sectors. 

At this point, these industries are so inter-connected that major problems in one will 

certainly affect the other. Lastly, we must also make sure that we ensure a dynamic 

and competitive telecommunications market. It would be tragic if regulators sought 

to use this current crisis as justification for forgoing the goals of securing competition in the industry. 

3

As noted, with regard to the financial troubles facing the telecommunications industry, my principal concern at this point is ensuring that consumers continue to 

receive service. This is particularly important since the nation’s ability to engage 

in commerce is heavily dependent on communications. Also, residential consumers 

rely upon the communications network in emergencies as well as for day-to-day activities. The U.S. communications network is the best in the world; thus, we, as policy-markers, must make sure that as we weather this difficult economic period, our 

communications network does not become a casualty of this period. 

The FCC has authority under Title Two of the Communications Act to intervene 

with respect to common carriers and work to maintain telecommunications service 

to consumers. I believe it will be useful to hear what actions the FCC is taking to 

address this issue in light of some of the existing bankruptcies. We also look forward to FCC guidance as to whether the FCC has sufficient authority, or needs additional authority, to ensure that consumers receiving communications services from 

companies that are not common carriers are, nevertheless, protected from abrupt 

service terminations. Most notably, with respect to Bell Broadband Service, I am 

concerned that the FCC is going down a path in which it could, in effect, relinquish 

its existing authority to intervene when a carrier terminates service. 

I look forward, as well, to hearing from the companies about what is being done 

to remedy improper accounting practices, in addition to having a better understanding of the difficulties that they are presently experiencing. An understanding 

of these difficulties hopefully will aid us in taking appropriate action as members 

of Congress to keep the nation’s viable telecommunications network properly functioning. 

As I noted previously, the telecommunications network is an interlocking network. 

Carriers receive and hand-off traffic to other carriers. Therefore, if a carrier goes 

into bankruptcy and is required to continue service, but cannot pay its debts, this 

could have an adverse impact on other carriers if those carriers are required to continue carrying the traffic of the carrier in bankruptcy without compensation. The 

FCC should carefully examine these potential domino effects and the extent to 

which they could prevent carriers from serving consumers. A point that deserves 

considerable emphasis, however, is the fact that the FCC must actively guard 

against allowing carriers to use these unfortunate economic situations as a means 

to undermine competitors or competition in general. 

With that said, I welcome the witnesses and look forward to hearing their testimony.

The CHAIRMAN. Senator McCain. 

STATEMENT OF HON. JOHN MCCAIN,

U.S. SENATOR FROM ARIZONA 

Senator MCCAIN. Thank you, Mr. Chairman. Thank you for holding the hearing on the turbulent state of economic affairs in the 

telecommunications industry. Today, we will hear more stories of 

hype and corporate greed, hype relating to the Telecommunications 

Act of 1996, and about the market for data traffic, and corporate 

greed by senior executives whose interests vastly diverged from 

that of their company’s shareholders. 

There are many important issues to address in this hearing. We 

must ensure that despite the looming financial crisis within the industry, consumers can expect continuity of telephone service, and 

that the integrity of our telecommunications network is secure. I 

hope that is the first subject that Chairman Powell will address 

this morning. 

We must also examine what must be done prospectively to ensure that the misbehavior of these companies does not take down 

the entire industry, including those companies that have not lied 

to investors. And we must also examine what lessons are to be 

learned from this collapse. 

Last week, the Los Angeles Times reported that some experts 

now believe that the root of the meltdown now sweeping the indusVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00007 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
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try may be the Telecommunications Act of 1996. The article states, 

and I quote, much of the vision of the 1996 Act was flawed, leading 

to more than $2 trillion in investment, much of it squandered in 

ways that may cause lasting economic damage. I do not need to remind anyone here I opposed the 1996 Act. I believe that by any 

measurement, it has not lived up to the promises of its sponsors 

when it was passed. 

We reached the extremes of rhetoric on the passage of that legislation. And it is not just the Members of Congress who hyped the 

bill. It was the lobbyists that wrote it, too. We must now review 

what has happened since the passage of the 1996 Act, and learn 

from our mistakes. 

In the late 1990s, there was similar hype about the demand for 

data traffic. Trillions of dollars were invested in data networks by 

banks, pension funds, employees, and every day Americans. Wild 

expectations fueled unprecedented investment. Much of that investment went toward infrastructure deployment that now spans the 

country. Massive networks capable of carrying unimaginable 

amounts of data traffic now sit in the ground untapped. 

There are perhaps many reasons why that capacity lies fallow, 

many relating back to the thousands of regulations spawned by the 

Telecommunications Act. But the unfolding story of these networks 

reveals as much about corporate malfeasance as it does the hyper 

regulation of the telecommunications industry. Not all the money 

invested in telecommunications in the 1990s funded infrastructure. 

Much of it went to line the pockets of corporate executives who 

were paid to know better about the markets in which their companies operated. They conducted a confidence scheme unlike any ever 

seen before. Some corporate executives appeared to participate in 

systematic get-rich schemes at the expense of unwitting investors. 

These executives hyped their product by reportedly overstating demand for their services. In the process, they ran up the stock prices 

of their companies to the point where they were worth many billions of dollars. These executives built a house of cards upon a 

foundation of their own overstated promises. 

Then, as this week’s Business Week reports, ‘‘a small group of 

CEOs and financiers managed to save the family silver before the 

house burned to the ground.’’ They pillaged the assets of these companies by granting themselves and selling huge volumes of stock, 

which is going on today, paying themselves exorbitant compensation, and, in some cases, arranging sweetheart deals for family and 

friends. 

The way these executives cut and run on their employees when 

the going got tough simply reaffirms my belief that top executives 

should be precluded from selling their holdings in company stock 

until they no longer manage the company. These companies are the 

poster children for the need for reforms that would ensure that the 

financial fate of top executives is inextricably tied to the long-term 

health of their company, in line with the investors whose interests 

they have been charged to represent. 

While Congress has acted, not enough, on accounting reform legislation that is now at the President’s desk, we need to establish 

more safeguards against corporate fraud in this country. This Committee has already heard too many stories of investors who lost 

5

their life savings due to fraudulent schemes. We will no doubt hear 

of more schemes today. Additional protections would help to ensure 

that such stories are not repeated. In my view, these changes are 

needed if we are truly committed to fully restoring the systemic 

checks and balances that will rebuild the faith of the American 

people in both our markets and the corporations who operate within them. 

Finally, Mr. Chairman, I would like to thank Chairman Powell 

for appearing before us today. Because of the mandates of this 

Committee he has had to cut short a much-deserved vacation to be 

here. I hope he can return soon. You have provided leadership at 

a tremendously challenging time. I commend you on the initiation 

of proceedings that attempt to answer the hard questions that have 

polarized the Congress. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. Senator Burns. 

STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA 

Senator BURNS. Thank you, Mr. Chairman, for this hearing 

today, and thank you for your leadership on this issue. My statement will be very short. As you know, we have already passed the 

Accountability Act, and the President signed it today. During that 

debate, I contemplated proposing an amendment to that legislation. 

However, after further reflection I determined that I wanted instruction and recommendations from the Department of Justice, so 

in response I wrote Attorney General Ashcroft on July 15 requesting to take a look at the forfeiture laws and how they could possibly be used against malicious corporate activity. 

Forfeiture has long been an effective enforcement tool in cases 

pertaining to narcotics and controlled substances, yielding hundreds of millions of dollars in revenue for the government from the 

resale of seized ill-gotten assets. Witnessing the damage done to 

our institutions, investor confidence and, of course, the every day 

American by these corporate scandals is it is in my thought that 

it is time to take aim on the untouchability of the wayward corporate executives, CEOs, and others who would imperil the life 

savings of their employees, their boards of directors, and send 

shock waves through the American economy should not be allowed 

to maintain a lifestyle that was bought by wealth achieved through 

deceptive practices. As I have said before, America must never reward deceit. 

Unfortunately, I have not yet received a response from my inquiry to the Justice Department, but I look forward to developing 

such an approach once they do respond. 

The bottom line is, those who play fast and loose with the life 

savings of hardworking employees and their lives and the ripple effects through supporting industries, see their lavish and luxurious 

assets confiscated, and this includes their second homes, their 

boats, or whatever, the enormous amount of cash that is tucked 

away in off-shore accounts. These corporate felons should be 

brought to justice and properly punished for their crimes. 

Finally, Mr. Chairman, today we look at the telecom marketplace, but it is important to remember that this financial fallback 

6

is not solely taking place in the telecom marketplace. It is throughout our economy. It is just not in one place. Life savings have been 

devastated. Consumer-end confidence has been swept away by an 

unprecedented avalanche of financial destruction. The very foundation of the American economy is at stake as we look to reform our 

system of corporate governance. 

I look forward to hearing from the witnesses today, and I appreciate the Chairman of the Federal Communications Commission in 

the middle of his vacation—I would just be madder than hell, to 

be right honest with you, but thank you for coming today, and we 

look forward to the testimony. 

The CHAIRMAN. Senator Wyden. 

STATEMENT OF HON. RON WYDEN,

U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you, Mr. Chairman. I appreciate your 

holding this hearing as well. It seems to me that the companies 

that we are going to hear from today are important symbols, and 

important symbols of both the crisis in the telecommunications sector and for the accounting reform bill that Congress passed and is 

being signed today. 

My colleagues have been right to talk about the innocent investors that have been shellacked by the companies and others that 

we are going to be considering today and in the days ahead, but 

it seems to me we also have to focus now on the consequences of 

the telecommunications meltdown, and it seems to me that if this 

continues, and particularly if there are service disruptions, this is 

going to radiate enormous damage to the American economy, and 

I particularly—and I, too, join in thanking Mr. Powell for coming—

want to hear about what he believes is the appropriate approach 

now, given the every different climate that we have compared to 

what it was when Mr. Powell assumed office. I think when Mr. 

Powell took on the job, the telecommunications sector looked very 

different, and he was hoping to chart a course to create more competitive waters. Instead, the Federal Communications Commission 

and Mr. Powell find themselves in the midst of a raging storm that 

has been sinking company after company and, in particular, I want 

to hear from the Federal Communications Commission and Mr. 

Powell, when is it going to stop? What can the Federal Communications Commission do now to help steer a course to calmer waters, 

and it seems to me that the current climate and the devastation 

we are seeing in the telecommunications sector requires a different 

approach than that that was envisaged early on, and I hope that 

Mr. Powell can tell us how, given the different situation, that the 

country faces today, what approach he can offer to help calm the 

waters and provide some assurance to consumers who are really up 

in arms about the prospect of losing service, seeing even more economic damage, and having it ripple, for example, to Internet connections and other areas that are so important to the public. 

Mr. Chairman, my thanks again to you and I look forward to 

working with you and Senator McCain and our colleagues on a bipartisan basis. 

The CHAIRMAN. Thank you. Senator Breaux. 

7

STATEMENT OF HON. JOHN B. BREAUX,

U.S. SENATOR FROM LOUISIANA 

Senator BREAUX. Thank you, and good morning. Thank you, Mr. 

Chairman, for having this hearing. I think it is very timely in the 

sense that I think that every day we pick up the paper and we 

have one more telecom company that is facing difficulties, Internet 

providers facing difficulties, and obviously, if you are looking at 

21st century jobs and the industrial and communications age, I 

think really these industries that are out there are having a very 

difficult time, and no matter whether you are long distance provider or service provider or Internet provider or content provider, 

it looks like every day we find yet another one of these very important industries having incredibly difficult problems. 

I think that when they come to Congress to look for help and solutions sometimes they find a political bottleneck, where we spend 

a great deal of time arguing about the politics of what we should 

do and precious little time looking at the real substance of what we 

do. 

We have had an approach that says, look, when it comes to 

broadband, which is incredibly important, that the FCC ought to 

be the one that tries to create a level playing field, that it is almost 

impossible for, I think, Congress to get into the technical details of 

what actually is a level playing field for these industries to compete. An appropriate forum is the agency that has been set up to 

regulate these industries, to help create level playing fields, and 

take it outside the political world, and we are attempting to do 

that, and I will ask the Chairman some questions if I have the 

chance. 

Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Very good. Senator Dorgan. 

STATEMENT OF HON. BYRON L. DORGAN,

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, thank you very much. Just 

briefly, and I know you want to get to Chairman Powell, I think 

we have had a good number of hearings on the issues of corporate 

governance, some of these scandals, bankruptcies, financial problems that have existed, and I think this hearing is a very important one in the context of what is happening in the telecommunications industry, especially with respect to some very high profile, 

very serious problems, and I would say to Chairman Powell I think 

the underlying message today, at least for me, is the importance 

of effective regulation, the importance of effective oversight. 

The market system is a wonderful thing, but the market system 

begs for effective regulation and oversight, and when it does not 

exist, whether it is at the FCC, the SEC, a dozen other federal 

agencies, FERC, when it does not exist, what happens is, we have 

very serious problems, and we likely will talk at some great length 

about the myriad of issues that are raised today with respect to accounting, accounting firms, law firms, CEOs—the one company 

that I have chaired hearings on I talked about a culture of corruption that existed inside that company. 

That was confirmed by the board of directors. There is not much 

a regulator can do about people with corrupt hearts who are runVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
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ning a company, but on the other hand, I think the underlying 

issue here must be that we need effective, aggressive regulation. 

Those who have the handle on the ability to do that in the executive branch of government must work with us to achieve that effective level of regulation and I hope this hearing is helpful in furthering that objective. 

Mr. Chairman, thank you very much. 

The CHAIRMAN. Thank you. Senator Cleland. 

STATEMENT OF HON. MAX CLELAND,

U.S. SENATOR FROM GEORGIA 

Senator CLELAND. Thank you very much, Mr. Chairman. 

In the 1960s in the Midwest, a small communications company 

used microwave technology to establish an internal communications system, just about the time that I was becoming a microwave 

radio officer in the United States Army Signal Corps. 

Twenty years later, this company, MCI, was one of the main reasons for the Department of Justice action and the resulting consent 

decree that ended Ma Bell. 

Today, almost 20 years later, this company, WorldCom, has become the Nation’s largest bankruptcy filing after a downward spiral that would almost predetermined to end in bankruptcy when it 

declared that $3.8 billion had been, quote, misclassified. 

However, this corporate mistake translates into not only a loss 

of billions by investors and unemployment for thousands, many of 

whom are in my state, but potential problems for people’s basic 

communications, upon which, Mr. Chairman, we thought the entire 

new economy of America was going to be built. 

WorldCom is the Nation’s number 2 long distance provider and 

a large local service provider. I have heard from someone in the 

telecom industry that WorldCom has threatened to cut off service 

to another company if they do not receive payment by this week. 

In Georgia, that would translate into 25,000 business lines. This is 

unacceptable, at the same time that the State of Georgia is thinking about a $2 billion contract with WorldCom to handle the internal telecommunications of the entire State of Georgia. 

How did we arrive at this point? A big part of this answer is the 

growth and promise of the Internet itself, and related economic 

trends that did not require actual assets, and allowed and even encouraged speculation and outrageous amounts of debt. Venture capital funds—I call them adventure capital funds—were virtually giving away money to anything with a .com at the end of its name, 

while more traditional businesses struggled just to get a loan from 

the bank. 

I do not think policymakers fully understand the approach many 

Internet-based companies were taking while they were posting 

massive gains in paper value, and the results of this speculation 

are playing out today with only $2 trillion in telecommunications 

stock value being eliminated. It was an era of buy now, pay later, 

but this Internet accounting contained some fatal errors in its system. 

Today, investors and employees are left empty-handed by these 

Internet accounting practices, while some of these executives were 

able to cash in through stock options and bonuses. I have said it 

9

time and time again, particularly in terms of Enron—it certainly 

applies now to the telecom industry—in my experience in the military, officers eat last. Within this economic combat, officers ate 

first. 

I applaud the Department of Justice for acting last week to make 

the arrest of Adelphia executives, and I hope their investigations 

will continue and charges and arrests will follow in cases that warrant action. It was said in the newspaper that this particular family used that company as a billion-dollar piggy bank. 

Chairman Powell, you are here with us today. Hopefully you can 

shed some light on where we have come from, where we are now, 

and what we ought to be doing. I hope that you can reassure us 

that the FCC is on the case and will take the necessary action 

against these companies and help us through this muddled environment. 

Last week, Congress passed with my support—the President will 

sign it into law—legislation that will strengthen corporate accounting standards, and I would like to reassure the citizens of my state 

and of this country that the role of government as a law enforcement body, regulatory body, and law-making body has been exercised recently to prevent these scandals from happening in the future and ensure current protections are enforced. 

I agree with Senator Dorgan, the marketplace is a wonderful 

thing, but without the countervailing power of government, it runs 

amok. This is an appropriate time to examine the role of the FCC 

in this telecommunications debacle, and I look forward to the 

Chairman’s testimony. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. Senator Allen. 

STATEMENT OF HON. GEORGE ALLEN,

U.S. SENATOR FROM VIRGINIA 

Senator ALLEN. Thank you, Mr. Chairman, and I very much appreciate your leadership and that of Senator McCain in holding 

this hearing. I will not refer to all of the concerns that were expressed by Senator Cleland, where the leaders are eating first and 

the troops last. The purpose of this meeting is to focus on that, but 

also, I think, to focus on the financial condition of Qwest Communications, Global Crossing, and WorldCom, and their ability to deliver services to customers through these financially trying times. 

Obviously, I care about this as Chairman of the Republican High 

Tech Task Force. I also care about this from my experience as Governor, where we worked very hard to get a lot of telecommunications companies and technology companies into Virginia. One of 

those was WorldCom. We in Virginia have a lot of technology. It 

is a strong technology state, but when something like this happens, 

obviously it adversely affects jobs as well as communications. 

Indeed, the Internet was invented in Virginia at the Pentagon, 

and 60 percent of all the world’s Internet traffic currently travels 

through Virginia, so we in Virginia have a vested interest in this 

telecommunications policy debate, and I am hopeful that when we 

examine these telecommunications companies, we will have a better understanding not only of what went wrong financially in poor 

planning and deceptive practices, and stealthy and possibly crimiVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00013 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
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nal accounting practices, but also how we are going to keep their 

communications systems in operation so that they, or whoever 

takes it over, can deliver communications systems that are vital to 

our whole economy and our whole country. 

Obviously, there are consequences of these bankruptcies for 

creditors who are not paid, for employees who are laid off, and last 

but most importantly, I do look forward to hearing from our Chairman of the Federal Communications Commission, Mr. Powell, on 

their efforts to assure that the WorldCom bankruptcy does not 

mean customers will lose their services. 

It is important that the Commission examine and work with 

WorldCom to maintain interconnection and ensure that data networks remain operational, and I thank the Chairman for cutting 

his vacation short to be here for this very important hearing, and 

I thank you, Mr. Chairman, and the Ranking Member, Senator 

McCain, for your continued perseverance and leadership on this 

important matter. 

Thank you. 

The CHAIRMAN. Thank you. Senator Nelson. 

STATEMENT OF HON. BILL NELSON,

U.S. SENATOR FROM FLORIDA 

Senator NELSON. Mr. Chairman, we are starting to examine how 

this particular part of America operates and how it does not operate very well. I think it is going to be a real challenge for us, specifically in this Committee, as to how this telecommunications industry is going to shake out over time, what kind of combines are 

there going to be as we look, for example, also in this Committee 

at the aviation industry and the kind of combinations that we are 

going to see there, or the kind of mergers. But one aspect of what 

is going to happen to this industry is the subject that you bring to 

the table today, and I appreciate that you have done it, the fact of 

us making sure that the FCC has the authority and the initiative 

necessary to stop these kind of crises that come up. 

We address part of it with the accounting reform legislation that 

we passed last week, but this Commission should not be afraid to 

use its section 214 authority to avoid service disruptions when 

problems arise and greater use of the Commission’s accounting disclosure requirement should be used to eliminate fraudulent business practices. 

Some attribute all of these problems to competition, and seek to 

use that as the excuse, but we have got to get to the bottom of how 

the Government’s appropriate oversight and regulatory authority is 

to keep these people on the straight and narrow. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Boxer. 

STATEMENT OF HON. BARBARA BOXER,

U.S. SENATOR FROM CALIFORNIA 

Senator BOXER. I would ask my full statement be in the record. 

I would just like to speak for about a minute. 

The CHAIRMAN. It will be included. 

Senator BOXER. Mr. Chairman, Senator McCain, thank you for 

staying on top of these issues. When we first heard about Enron, 

11

we thought it was just a case of one bad apple, as President Bush 

likes to say, and then we see there are others, a lot of rotten apples. It is beginning to look like there is an orchard here, and I will 

tell you, it is very disturbing, and to put it into specifics, there is 

a WorldCom employee in San Ramon, California, whose name is 

Steve Vivien. He worked for the company for 19 years, and he accrued over $400,000 in his 401(k) plan, and he has lost almost all 

of it. 

In meetings with my staff, Steve said, ‘‘I invested with 

WorldCom because I was a loyal employee who believed in the 

goals of the company and believed the company’s stated financial 

results. I am shocked,’’ he said, ‘‘that WorldCom stock is worth pennies and the company has filed for bankruptcy. I am angry that I 

lost my hard-saved money due to apparent fraud’’ and so it goes 

over and over, again and again, and in terms of my state CalPERS 

they invested in WorldCom bonds, $413 million. You know, how 

much can this go on with these pension funds. 

So you know, luckily we have diversity required in these funds, 

otherwise we could be in worse shape, but in any event I am looking forward to hearing from Mr. Chairman, and Chairman Powell. 

This has got to stop, because it is infecting our whole economy. 

Thank you. 

[The prepared statement of Senator Boxer follows:]

PREPARED STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM CALIFORNIA

Thank you, Mr. Chairman, for holding this hearing. The Commerce Committee, 

under your leadership, has taken a lead in investigating the recent corporate scandals in America. 

Before us today are FCC Chairman Powell and the heads of WorldCom, Global 

Crossing, and Qwest. In a sense, we have the watchdog and the foxes testifying here 

today. I assume we all know which side the foxes are on. The questions before us 

is: whose side is the watchdog on? 

I know where I stand. I stand with Steve Vivien. Steve is a WorldCom employee 

in San Ramon, California. He has worked for the company for nineteen years. During that time, he accrued a little over $400,000 in his 401(k) plan and now has lost 

almost all of it. 

In meetings with my staff, Steve said, ‘‘I invested with WorldCom because I was 

a loyal employee who believed in the goals of the company and believed the company’s stated financial results. I’m shocked that WorldCom stock is worth pennies 

and that the company has filed for bankruptcy. I’m angry that I lost my hard saved 

money due to apparent fraud.’’

I join Steve in his anger.

And I am also on the side of The California Public Employees’ Retirement System 

(CalPERS), California State Teachers’ Retirement System (CalSTRS) and Los Angeles County Employees’ Retirement Association (LACERA). These funds invested a 

combined $413 million in WorldCom bonds in May 2001 on behalf of California’s 

public employees. 

In deciding to invest in these bonds, these public pension funds relied on the Registration Statement that WorldCom had filed. The funds now allege that the Registration Statement contained misleading information about the company and that 

the banks who underwrote the offerings should have known this. Everything that 

I have read leads me to believe that these allegations are accurate and that my 

state’s pension funds were robbed. 

It is completely unacceptable that executives at these firms and others are floating to earth on golden parachutes while the savings of employees are plummeting 

to the ground without a safety net. 

All three of these companies, WorldCom, Global Crossing, and Qwest put out misleading numbers. As a result, investors and employees have lost billions of dollars 

and many Americans have lost faith in the system. And to add additional pain to 

12

this injury, these companies are crucial to our nation’s telecommunication system. 

They are part of the backbone of our economy. 

It is up to the FCC to make sure that our communication system works. It is the 

responsibility of the FCC to be informed on the state of the industry and to make 

sure that these companies are abiding by the rules that govern telecommunications. 

A lack of enforcement of those rules may have led to a sense of disrespect for rules 

altogether at these firms, whether they are accounting rules or rules related to competition or quality of service. If the FCC needs greater authority to enforce the law 

or greater authority to provide for the stability of our country’s communications system, then we should give them that authority. 

I have been amazed by the degree of arrogance with which various CEOs have 

come before us. Instead of contrition, we hear excuses. Instead of explanations and 

plans for making things right, we hear complaints that new reforms would be excessively burdensome. Instead of commitments to return ill-gotten gains, we find executives without any sense of guilt or shame holding on to their multi-million dollar 

homes and severance packages. 

Mr. Chairman, I commit to working with you to make things right. It is time we 

sided with the people. I know that is where you are and it is where I hope we will 

all end up.

The CHAIRMAN. Very good. Senator Brownback. 

STATEMENT OF HON. SAM BROWNBACK,

U.S. SENATOR FROM KANSAS 

Senator BROWNBACK. Thank you, Mr. Chairman. I would ask my 

full statement appear in the record. Thank you for holding the 

hearing. Thank you, Senator McCain, for your continued focus on 

this. I look forward to the presentations that will take place today. 

One of the things that I think is important for us to look at is 

the issue of fraud and lying that has taken place, and to call it for 

what it is in a number of cases. We must also look at and examine 

the Telecommunications Act of 1996. Some people are going to lay 

blame there, at the Telecommunications Act, and others will reject 

that. I would note that that act only promised people the opportunity to compete, and nowhere guaranteed any success, profitability, or reward, for what individuals would do. 

If we need to change that act to be able to address some of the 

issues in the market that have taken place, I hope the witnesses 

will bring that up, and address the specifics that should be addressed. I do not think we should lay corporate fraud or greed at 

the feet of the Telecommunications Act of 1996. Some people claim 

it is deregulatory, others would point out that it is not, but I would 

hope, if there are specifics that we need to change in that act for 

this issue and this system—I would note that while the stock market may be down, although I am pleased to see some of the rallying 

taking place, the telecommunications that we are providing to our 

people across this country and across this world continues to be the 

envy of the world. 

We provide excellent telecommunications at very good prices, and 

some may suggest too good a price, with what is taking place 

today. I would simply want to note that if people want to look at 

and change the Act, because they think we need to for the benefit 

of telephone subscribers, let us address that. Let us put those on 

forward, but I do not think you can lay the issues of corporate 

greed, of fraud, at the feet of the Telecom Act of 1996. I would hope 

we would separate those out into different pools of issues that we 

need to resolve and deal with. 

Thank you, Mr. Chairman. 

13

[The prepared statement of Senator Brownback follows:]

PREPARED STATEMENT OF HON. SAM BROWNBACK, U.S. SENATOR FROM KANSAS

Today the Committee convenes to review the status of our nation’s telecommunications market in light of the corporate accounting scandals that have rocked the 

foundations of the corporate world in America, as well as investor confidence in our 

nation’s corporate business leaders. I’m pleased that the Bush Administration has 

taken the lead in pursuing corrupt business practices, investigating companies suspected of wrong doing, and prosecuting those parties accused of perpetrating fraud 

on their shareholders and the public. Strong action to deal with such wrongdoers 

is appropriate, and can have a soothing affect on the market, as witnessed by the 

markets rise following the first arrests of accused corporate wrongdoers. 

Two of the companies attending today’s hearing have not been charged with 

wrongdoing, however they are under investigation. Another, WorldCom, has been 

charged with fraud for accounting certain expenses, like access charges, as capital 

expenses. As WorldCom’s internal audit revealed, this had the effect of padding the 

company’s books to the tune of $3.8 billion. Global Crossing and WorldCom are now 

in Chapter 11, and there is speculation that Qwest is not far behind. These developments, as well as what I have seen referred to as the ‘‘cratering’’ of the telecom sector in general, have raised questions about the stability of communications in the 

U.S. and the impact the current environment could have on consumers. 

While there can be no doubt that the telecom sector has been down for quite some 

time now, and this can be attributable to many factors such as increased competition and possible short-term over capacity, there can also be no doubt that the first 

priority in addressing what ails the telecom market today remains the issue of corporate governance. 

Fraud. Lying. These cannot and will not be tolerated. I am sorry to say that Mr. 

Sidgmore’s submitted testimony to this Committee is only representative of the very 

arrogance that has created a need for today’s hearing in the first place. For a company accused of such practices against its customers, investors, and competitors—

to which WorldCom owes hundreds of millions of dollars—to come before this Committee, and lay blame for its current woes on any and everything other than it’s 

own practices, is sad. 

The Telecommunications Act of 1996 promised only one thing—the opportunity to 

compete. Nowhere does the Act guarantee success, profitablity, or reward for inefficiency, nor should it. Unfortunately, some companies continue to believe the 

Telecom Act was social security for telecommunications companies—guaranteeing 

them profitability in new markets, and ensuring that they would make not only a 

minimum profit per subscriber, but guarantee them a minimum level of 

subscribership as well. The Committee is seeking to determine the status of the 

market. In my view, while the stock market may be down, the U.S. telecom market 

is still the envy of the world. We have the most seamlessly integrated and robust 

network of any nation. What we need to do to revive the market is to reintegrate 

reality back into it. 

Mr. Sidgmore’s testimony often references the concept of innovation. I see little 

that is innovative about a company seeking to enter a new market, such as 

broadband, through the use of the facilities of its competitors. To be sure, Mr. 

Sidgmore, any questions about Bell compliance with the Act can be addressed 

through tough oversight and enforcement. But we must also raise tough questions—

and provide answers finally—as to what is being enforced. 

In my view our telecom market is full of valuable and fully functioning facilities, 

even if some of the corporate structures that own them disappear or are required 

to undergo restructuring to make use of them. To the degree the current telecom 

doldrums continue, mergers and acquisitions may help to alleviate some of the market congestion that many believe continues to drag the industry down. Nobody prefers mergers to multiple competitors in a market, but let’s not kid ourselves about 

the reality of business and markets, and developments that would occur if we continue to experience market failures. The facilities at play are too valuable to lie dormant. 

This is not to say that there is not the potential for upheaval where consumers 

are concerned, and that is the first duty of this Committee: protect consumers. The 

Federal Communications Commission has authority under section 214 of the Act to 

ensure that failing common carriers continue serving consumers so they may transition to alternate service providers. I have no doubt that the FCC is prepared to act 

if developments require. 

14

The lack of section 214’s applicability to information service providers, such as 

cable companies that offer consumers cable modem service, is a different matter. As 

we have seen with @Home, the Commission has no authority to require them to continue serving consumers. Nor should the Commission reclassify information service 

providers as common carriers simply to address this deficiency in the law. I would 

certainly support legislation providing the Commission with the statutory authority 

to extend section 214-like protections to consumers subscribing to information services. 

Finally, while I am confident that the market will weather the current storm, and 

consumers will continue to be served, there are some developments associated with 

the bankruptcy of the second largest long distance company in the U.S. that need 

to be addressed. WorldCom is currently in arrears of several hundred million dollars 

in access charges and payments for the use of ILEC facilities. We must ensure that 

WorldCom’s reorganization and subsequent shedding of debt does not also create 

mounting problems for incumbent local exchange carriers, not only forced to compete with a WorldCom made leaner and meaner through Chapter 11 protection and 

reorganization, but through defacto subsidization of their competitive efforts by 

ILECs who are prevented from collecting debts owed. I have 36 independent telephone companies operating in my state, and many of them are very small. They 

cannot be expected to bear the brunt of WorldCom’s financial straits.

The CHAIRMAN. Very good. 

Chairman Powell, let the record show we invited the CEOs of 

Qwest, WorldCom, and Global Crossing, Mr. Anschutz, Mr. 

Winnick, and Mr. Ebbers, and for obvious reasons they have not 

accepted our invitation. We have got the next best, we think, appearing on the panel just behind, otherwise we welcome you to the 

Committee and we will be glad to hear from you at this time. Your 

statement in its entirety will be included. You can summarize or 

deliver it, as you wish. 

STATEMENT OF HON. MICHAEL K. POWELL, CHAIRMAN, 

FEDERAL COMMUNICATIONS COMMISSION 

Mr. POWELL. Thank you, Mr. Chairman. I will try to do a little 

of both, if I could. I appreciate the full extent of it being put in the 

record. 

I want to wish all of you a good morning, and I want to particularly commend Chairman Hollings and Mr. McCain for holding this 

hearing, because I think it is doing something extremely critical, 

which is focusing more broadly not only on the horrific accounting 

scandals that have dominated the headlines, but what are the 

broader implications for critical telecommunications services on 

which our individual citizens depend and our economy rests, and 

so I applaud the focus of the hearing, and I am always anxious and 

able to be an active participant in that discussion. 

As the Chairman of the Federal Communications Commission, 

before I go forward with my formal remarks, I would like to say 

one thing, given the tenor of some of the remarks I heard. I grew 

up in a leadership culture where officers eat last. I find deplorable 

and despicable the drumbeat of stories in which individual leadership purporting to act on behalf of an organization and institution 

with a public trust profit handsomely at the expense of not only the 

employees and their shareholders. I find such conduct in my cultural background despicable. 

A WorldCom MCI employee who I respect greatly, when calling 

me informing me about the current crisis, stated to me, Bill 

McGowan would be turning over in his grave, and I suspect that 

he is, and I think that is a tragedy. 

15

Moving forward, I am going to focus my comments on two areas. 

First, I want to discuss the immediate challenges posed by the 

WorldCom bankruptcy filing, and try to outline the Commission’s 

responses in areas which it possibly could improve in order to ensure the continuity of service. 

Second, just as importantly, I want to attempt to explain the current distress in the telecom market, how it came about, and the 

steps I believe are going to be critical for its recovery. Turning to 

the first topic, let me just state, protecting consumers from service 

disruption is the first and highest priority of the Government and 

the Federal Communications Commission, but I do want to say 

from the beginning, I am confident that we are not facing a crisis 

in the provision of service stemming from this bankruptcy. 

We have spent many hours reviewing the situation, and everything thus far confirms this view. We have had first-hand discussions with creditors and lenders, with senior WorldCom executives, 

with critical WorldCom customers and Government users. All are 

presently confident that there is no imminent threat of major service disruption, and as a personal endorsement, I am a customer of 

MCI WorldCom long distance, and nothing I have seen has prompted me to switch service at this time, and I do not plan to. 

In the last year, regrettably, the commission has had to cope increasingly with the specter of bankruptcy in this industry. Consequently, we have worked to develop responses to these situations 

in cooperation with our state colleagues that endeavor to do three 

things, first maintain the operation of the network, second, try to 

contain the fallout to prevent damage to other companies, and particularly consumers, and finally, to provide for an orderly transition 

of customers and assets should that become necessary. 

Our actions generally have four components, which I will go over 

briefly. The first I list as heightened alert. It has become more critical than ever that the Commission and the Government have significant advance warning of trouble in the sectors with respect to 

particular companies, and in anticipation of those dangers begin to 

prepare to ensure that it has adequate responses when and if 

bankruptcy comes about. 

In doing this, we have opened up many lines of communication 

that are relatively nontraditional for the Federal Communications 

Commission, particularly with lenders and creditors who are often 

calling the shots just on the eve of the bankruptcy filing in order 

to assess that imminency and possibility of a collapse. A day after 

the announcement of the problems at WorldCom, I traveled to New 

York City for the sole purpose of meeting with banks, investors, 

and others to discuss how critical the situation was and what the 

extent of possible collapse of the company was. We have increased 

our dialogue with the significant customer groups as well, particularly the Government, as a critical user in order to spot service 

degradation and service disruption. 

The second component that is vital is, the commission needs to 

be engaged actively in intergovernmental coordination. This is one 

of the first critical steps. For example, we immediately began discussions with the Department of Justice, which is charged with 

being our legal representative in any imminent bankruptcy proceeding. In the case of WorldCom, we have consulted with the DeVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00019 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
16

partment constantly in preparing our responses to the bankruptcy 

court, and coordinating strategy in order to achieve those three objectives I mentioned. Those dialogues are continuing. 

In addition, the Commission has long had formal relationships 

with the Government that aid in the protection of critical infrastructure. For example, we have a formal relationship with the National Communications System, which is responsible for monitoring 

and responding to mission-critical communication needs of the Federal Government. I also sit as a member of that organization, and 

we have been discussing the risk and possible responses. 

In addition, we sit on the JTRB, which is an executive agency 

which considers emergency responses to preserve critical communications in time of emergency for the Federal Government, and 

the commission has discussed risk and responses with the Office of 

Critical Infrastructure. 

And finally, given that there are allegations of fraud and 

misdoings in the WorldCom matter, we have been active as a member of the Corporate Fraud Task Force created recently by President Bush to ensure that there is a Government-wide coordination 

of the investigation, and we have also been in regular contact with 

state commissions, who often play a significant role in the context 

of protecting service in their jurisdictions and their appearances in 

bankruptcy court. 

I personally have monthly conference calls, and more is needed 

in order to try to coordinate our response and share our experiences, and importantly, of course, we consult with this Committee 

and the U.S. Congress to keep them appraised of the situation and 

to advise them if any congressional action will become needed or 

is imminent, and I do have some suggestions in that regard, which 

I will get to near the end of my testimony. 

The next phase is always the active engagement of the commission in bankruptcy proceedings, which is where we find ourselves 

today with respect to WorldCom. Bankruptcy actions often move 

extremely quickly, and the Commission must act promptly to assure the interests of consumers are protected before the court. 

Our authority, as has been mentioned by a number of Members, 

stems largely from section 214 of the Communications Act. Briefly, 

our rules require that WorldCom, for example, needs to incorporate 

specific wording advising customers of their right to file comments 

with the Commission against any proposed discontinuance of service. WorldCom must then file a copy of that notice with the Commission, and the Commission then can issue a public notice of the 

filing. WorldCom may only discontinue service on the 31st day 

after the public notice, but it is important to note that this 30-day 

grace period is a minimum required by the rules and the Commission may extend this period should be public interest warrant such 

an extension. 

The day WorldCom filed bankruptcy, we took several immediate 

actions to ensure our regulatory requirements would not be neglected. I promptly sent a letter to John Sidgmore, the CEO, advising him of his regulatory obligations. Additionally, I sent a letter 

to the company asking them to commit in writing to provide notice 

to customers of the company’s plans to exit the wireless resale 

17

business and to offer a transition plan for moving those customers 

to other networks. 

Our Interbureau Task Force stands ready to handle applications 

or other regulatory implications, and I am proud to say that at this 

point the company has been very forthcoming and cooperative in all 

of these regards. 

In addition to ensuring the company complies with the law, the 

commission will advise the bankruptcy court of our concerns with 

respect to the impact on consumers, and urge that any ordered 

shutdown provide for transition for customers. Given the significance of the bankruptcy involving WorldCom, our Deputy General 

Counsel flew to New York and appeared personally in the first 

hearing before the bankruptcy judge to urge consideration of important public policy objectives, which include, as I have noted, continuity of operations, the transition for any displaced customers, 

and due consideration of the impact on other telecommunications 

service providers that generally must continue serving bankrupt 

carriers. 

As an outgrowth of that participation, Judge Gonzalez last week 

granted interim approval for WorldCom to continue making its 

payments to the Federal Universal Service Fund. I know this is of 

significant importance to many Members of the Committee. 

Furthermore, the USAC, the Universal Service Administration 

Company, reports that presently WorldCom is current with its contributions to this important fund, that keeps high cost telephone 

service affordable. We have been advised that WorldCom expects to 

make its next payment, due in mid-August, and it will be made in 

a timely fashion. We will remain active in this bankruptcy phase. 

Finally, it is important to continue the dialogue with customers 

and consumers. In an effort to do so, the Commission believes it 

is important to use our resources to communicate with them about 

the risks and the options they have available. In this regard, recently we issued a consumer alert with respect to WorldCom that 

was reported widely by the media, advising citizens and consumers 

of the risks and the options available to them. We will continue to 

do so as needed. 

To date, I am proud to say, though, we are not prepared to sit 

at all on these laurels, that we have been fairly successful in managing the growing numbers of bankruptcy. In all of the 23 wireline 

or fixed wireless bankruptcy cases we have had since November of 

2001, an orderly transition was achieved, and all but the most 

minor disruptions of customer service were avoided. In every major 

bankruptcy situation that we have encountered, we have been and 

we will continue to act vigorously as an active and aggressive participant in these proceedings. 

Let me now turn to the other focus of this hearing which I think 

is vital, which is the broad turmoil in the telecommunications industry. As I said, while the corporate scandals are dominating the 

headlines, it is important to focus broadly on the distress that has 

hit the sector. It is important to note, for example, 24 hours before 

any of us learned about the wrongdoings at WorldCom its stock 

was still trading around $1, down from somewhere in the sixties. 

The stress long preceded the current raft of corporate misdeeds. 

Clearly, the telecommunications industry is riding on extremely 

18

stormy seas. This is an industry where nearly 500,000 people in 

the United States alone have lost their jobs, and approximately $2 

trillion of market value has been lost in the last 2 years. By some 

estimates, the sector is struggling under the weight of nearly $1 

trillion in debt, and most segments of this industry have seen precipitous declines in their individual stock values. The long distance 

industry alone is down 68 percent year to date, the wireless industry is down 71 percent year to date, and ILECs are down nearly 

40 percent. 

Clearly, there are very serious stresses on this important industry, but let me turn to an optimistic note. This market is not collapsing and is not going to fail over time in my estimation. Communications services remain vital to consumers around the globe. 

Communications traffic continues to increase at historically formidable rates if not the halcyon levels we have seen previously, and 

importantly the closing of time and distance barriers to information 

will continue to fuel global economic productivity and change all institutions of society, but again, albeit slower than once fantasized. 

It is in the interest of every citizen in the United States that this 

industry recover, and to ultimately succeed in bringing new and 

vital services capability to people’s lives. Recovery, however, is not 

going to occur overnight, and it is likely to require very difficult, 

and I will even say painful choices. Successful recovery is dependent on the collective efforts of Congress, federal and state regulators, the private sector and, importantly, the financial markets. 

A number of you have asked that I describe a little bit of how 

we got here. There are varying views, but an image is beginning 

to come into focus. The story at bottom I think is quite straightforward. It begins simply with the Internet gold rush. The Telecommunications Act of 1996 and the commercialization and mass 

market adoption of the Internet led to near hysterical beliefs that 

the opportunities for growth were limitless, talk of the Internet 

doubling every 100 days, infinite bandwidth and Internet time. 

These were the phrases that dominated the pages of magazines 

and newspapers. Very few in this country did not get swept up in 

the cloud of hot air. 

Investors, too, bought into and fed the hype literally, as they 

flooded the market with capital that was consumed by thousands 

of companies in all sectors of the telecommunications industry from 

wirelines, undersea wireless across the globe, and with global ambitions set out to build global networks, to win the race, to stay 

ahead of the expected demand, and in doing so, companies throughout the world amassed staggering amounts of debt in building 

nearly identical networks. 

The business model of the day would have made Kevin Costner 

proud. It was premised on a field of dreams. There was a belief 

that demand would materialize overnight in Internet time. Build it 

and they would come was the business model of the day for long 

haul carriers and many new entrants. The fiber gold rush was on, 

with carriers building massive national and global networks with 

astonishing amounts of capacity, by some estimates a five 

hundredfold increase in capacity. 

The problem in the story line is, they did not come. The demand 

turnout was not doubling every 100 days, as pundits hypothesized, 

19

but rather, merely every year. Anxious companies began to see the 

problem, and began to race to gain market share to boost revenues 

and pay down debts in hopes of being one of the survivors. Hyper 

competition ensued in various markets across the industry, as they 

contained more industry participants than the market could support, and vicious price wars ensued, driving down overall industry 

and individual company revenues. At the same time, many companies learned the painful lesson that traffic growth did not necessarily lead to a concomitant growth in revenues, as their markets 

were largely saturated. 

These companies quickly found out there was simply not enough 

money to go around to pay down debt and generate a return on the 

investment. As we now know, the results were devastating. As 

some telecom companies began to fail and enter bankruptcy, others 

sadly resorted to fraud and deception to continue to mask the core 

fundamental problems facing their companies and their industries. 

Some went so far in their deception to not only mask failure, but 

to actually inflate artificially revenue growth to make it look like 

the dream was real. 

The bursting bubble leaves us today with several core problems 

in the market segments that must be rectified. Accounting scandals 

have rocked an industry already fraught with problems, mountains 

of debt, inefficient industry structure characterized by excess capacity, lack of investor confidence, capital markets closing to new 

investment, and companies that have pulled back on capital spending in this capital-intensive industry, and there is collateral damage. Given the extraordinary interconnected and interdependent 

nature of the network the industry fallout hurts many suppliers in 

the value chains. 

As telecom companies have dramatically had to scale back their 

expenditures, equipment suppliers and manufacturers have been 

brutalized, with their revenues and values falling dramatically. 

The access to capital crunch has taken the fuel out of many of the 

CLEC’s operating in the industry, leading to bankruptcy in that 

segment as well. Long distance and wireless companies continue to 

face pricing pressures, along with cable companies’ and ILECs’ significant debt loads. 

Though the problems are significant, I believe recovery can be 

achieved, but several critical steps will have to be taken. If you will 

indulge me, I have brought a chart to try to illustrate the steps 

that I think are critical for recovery. They involve all sorts of players at all sorts of levels. Let me just explain it briefly as I go 

through each section. I have characterized it as a pyramid. At the 

top of that pyramid I think are our highest and most pressing obligations and tasks at hand. 

The first is to protect service continuity. As this hearing has 

tried to address itself to, we must work tirelessly as an institution 

with our state colleagues to absolutely ensure that service disruptions do not occur on a mass scale for our critical users and consuming public. This is our highest priority. 

Second, rooting out corporate fraud. The degree of deception and 

malfeasance that has been uncovered in recent weeks again is just 

deplorable. There is no hope for any sector of the economy if corporate leadership and government do not root out and stomp out 

20

such deception and breach of public trust. The Government must 

continue vigorously to seek out, prosecute, and jail corporate 

wrongdoers that have personally profited, often while defrauding 

the American public. Such actions have dealt a staggering blow to 

already suffering confidence levels. I commend the continuing swift 

and strong actions taken by the Government in bringing about 

those responsible for fraudulent actions. I commend the strong action taken by Congress in passing corporate oversight reform legislation which I understand the President is now signing into law. 

The new corporate leadership that is taking the helm has been 

put on notice. Our hope is, indeed our demand is that they lead 

with strong and ethical moral foundation. These actions by Congress, the Administration, and firms in the industry must continue 

not only to address core fundamental problems but to restore investor confidence in corporate America and in this industry. 

Third, restoring financial health and cleaning up the balance 

sheets. To address the capital shortage facing the industry, firms 

must work diligently to clean up the balance sheets to restore financial stability and reality to this industry. Companies have to 

become more transparent so that investors and buyers can assess 

the true value of their assets and their operations. As I said, they are laboring under $1 trillion in debt. Much of it 

will never be repaid, and will have to be written off by investors. 

As a result, capital markets are retrenching. Companies in need of 

financing to support their capital-intensive enterprises are suffering. Until firms substantially pay down debt, much-needed capital will continue to sit on the sidelines and recovery will be stalled. 

Many industry participants are finding ways to cut costs 

downsizing, shedding assets, et cetera, to try to lower expenditures. 

These are very painful but vital steps. If the steps are taken, we 

have a chance. No matter what one’s view of public policy and our 

ultimate objectives, they are simply unfunded mandates if capital 

will not flow to enforce the objectives we are trying to achieve. 

Finally, a cautious word in step 4 about prudent industry restructure. Candidly, it is difficult to imagine this industry stabilizing without some modest and prudent restructuring. The long 

haul markets are absolutely glutted with excess capacity that is exceeding demand dramatically, even given the strong growth in demand that we have seen. Additionally, in some sectors, revenues 

are being deleted as price wars and aggressive competition make 

it difficult to secure an adequate return on investment in a very 

capital-intensive enterprise. This is particularly acute in the long 

distance and wireless markets. The pressure will continue to 

mount for companies to restructure or exit the market completely 

by merger or Chapter 7. 

Depending on the facts of given transactions, such restructuring 

is not adverse to consumer interest. I would simply say that one 

cannot think long term about consumer benefits without considering long term the prospects of carriers that provide quality service to those consumers. 

For other industry participants, survival and help will depend on 

some prudent restructuring, but let me state quite clearly at this 

hearing I emphasize the word prudence, because some mergers 

clearly could present a severe threat to competition and may not 

21

and would not be in the public interest. That can only be determined upon careful and thorough review of a particular transaction. Regulators will have to walk an extremely fine line to 

achieve stability while not squelching competitive alternatives and 

opportunities, and we are committed to trying to walk that line as 

best we can. 

Fifth, during the meltdown, carriers became acutely aware, as I 

said, that traffic growth did not directly correlate with revenue 

growth. Communication markets in many sectors have matured, or 

are doing so quickly respect to core services and the opportunity for 

further penetration is waning. Therefore, to grow and expand revenues, companies must find and offer new services, not just find new 

customers. In so doing, companies must strive to stimulate the demand that will help bring them into line with current oversupply 

of excess capacity. 

I believe for the average citizen in a residential home for America, that opportunity rests in developing new services around residential broadband capability. The reasons are a couple. First of all, 

the provision of broadband service to residential consumers has the 

greatest room for substantial subscription growth over the next 

several years than any other. Currently, about 65 million households pay subscription rates to access the Internet. Approximately 

14 million of those do so through broadband connections, leaving 

at least more than 50 million households who are in a near-term 

addressable market. 

This market provides a rich source of potentially new revenue to 

help service the industry and stabilize it for consumers, and the 

benefits of the capability are too numerous to measure here in this 

testimony, but we must learn from our past mistakes of inflated expectations that simply will not line up with consumer demand, and 

recognize that build-out will achieve time to achieve a broadband 

future and harness its opportunities. 

The construction project that has taken place over the last 6 

years must now focus intensely on uncorking the network at the 

last mile and regulatory policy needs to lead the way. Let me emphasize that uncorking point. We have massive excess capacity in 

the long haul data networks. If we could uncork the flood of data 

services to the mass market, much of that excess capacity would 

be consumed in new and vital services for our citizens. 

Finally, and perhaps rightfully at the foundation of the pyramid 

is economic and regulatory reform. The long term prospects of the 

industry will not be bright if state and federal policymakers do not 

continue the hard work and diligent efforts to create genuine and 

viable economic foundations for services growth and competition. I 

think nowhere is this more pressing than in the local markets. 

Currently, the cold fact remains that the economic foundations remain fairly weak in local competitive markets, especially for new 

entrants and increasingly for incumbents. 

We, along with our state counterparts, must work together to improve the foundations through regulatory reform. We must consider 

rate rebalancing at the state level to provide carriers with flexibility and pricing. We must continue to doggedly pursue the worthy 

goals of universal service, which are ubiquity and affordability, as 

networks and new networks are deployed, and we must also proVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
22

vide incentives for effective and sustainable competitive entry 

through our network access policy for providing incentives to entrants and incumbents alike to produce efficient wholesale markets. We must continue also to engage in effective oversight enforcement of our regulations to ensure that competition is not stifled at the gate by unethical or, indeed, illegal conduct. 

Finally, let me conclude with how I believe this institution can 

help. First, I would ask the Congress to seriously consider extending and clarifying our section 214 discontinuance authority to bring 

it in line with the realities of today’s tumultuous marketplace so 

that we can unequivocally limit any service disruption in these 

troubled times. I am happy to work with this Committee in pursuing such legislation. 

Second, I would once again respectfully call upon Congress to 

adopt Chairman Upton’s proposal to help us put some real teeth 

in our enforcement authority by increasing the maximum fines allowable under the act from a meager $120,000 per incident to a 

million for a single violation, and from $1.2 million to $10 million 

for continuing violations, and to lengthen the statute of limitations 

for common carrier enforcement. It has remained my strong view 

that these increased penalties, along with stepped-up enforcement, 

will have a solid deterrent effect against illegal activities. 

While the House has adopted these measures, sadly, the Senate 

has yet to adopt a similar increase, and I would respectfully ask 

this Committee’s consideration of such legislation and assist us in 

obtaining it. 

Finally, I would urge the Congress to continue its deliberation 

and discussions to try and craft and implement legislation that 

would produce a healthy regulatory environment for the provision 

of broadband services. The importance of the development and deployment of broadband to all Americans is too important, in my 

mind, for Congress to ignore, and it must play a vital role in its 

deployment. Broadband very likely holds the key for the long-term 

recovery of the telecommunications industry and, indeed, our Nation’s long-term economic growth, and its ability to compete on the 

global stage. 

The Commission is committed to demonstrating leadership in 

this area by seeing through our core broadband policy proceedings, 

initiated at the end of last year. The importance of the development, however does merit that Congress take a look at the Telecommunications Act of 1996 and provide the regulatory framework 

for those services. 

Let me make clear, I take no position on the myriad proposals 

that are currently before the body. I only wish to emphasize my 

professional judgment that the importance of residential broadband 

to improving revenue growth, stimulating demand to drain excess 

capacity, merits the attention of this august body. 

I would welcome the opportunity to work with the Committee on 

these issues in the context of our longstanding bipartisan and productive approach to telecommunications reform. I thank the Committee for indulging my lengthy statement, and I am happy to take 

any questions you might have. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Powell follows:]

23

PREPARED STATEMENT OF HON. MICHAEL K. POWELL, CHAIRMAN, FEDERAL

COMMUNICATIONS COMMISSION

Good morning, Mr. Chairman and distinguished Members of the Committee. I applaud your decision to hold this hearing—one that looks more broadly at the turmoil 

in today’s telecommunications market and assesses its implications for the sector, 

public policy and consumers. I am pleased to participate in this important discussion. 

I will focus my comments in two areas: First, I will discuss the immediate challenges posed by WorldCom’s bankruptcy filing and outline our response, which will 

largely serve as a template for future bankruptcies, should they unfortunately occur. 

Second, I will attempt to explain the current distress in the telecom market—how 

it came about, and the steps I believe critical for its recovery. 

I. Protecting Consumers From Service Disruption

Protecting consumers from service disruption is our first and highest priority. Let 

me say at the outset that I remain confident that we are not facing a crisis in the 

provision of services stemming from WorldCom’s bankruptcy. We have spent many 

hours reviewing the situation and everything, thus far, confirms that view. We have 

had first- hand discussion with creditors and lenders, with senior WorldCom executives, and with critical WorldCom customers and government users. All are confident that there is not an imminent threat of major service disruption. I am a MCI 

WorldCom residential long distance customer and, for what its worth, have no plans 

to change my service based on what I have seen. 

In the last year, regrettably, the Commission has had to cope increasingly with 

the specter of bankruptcy in this industry. Consequently, we have developed responses to these situations, in cooperation with our state colleagues, that endeavor 

to achieve three goals (1) maintain the operation of the network, (2) contain the fallout to prevent damage to other companies or consumers, and (3) provide for an orderly transition of customers and assets, should that be necessary. Our actions generally have four components, all of which we have employed in addressing the 

WorldCom situation.

A. Heightened Alert

It is now more critical than ever to have significant advanced warning of trouble. 

In order to anticipate possible danger areas, the Commission is employing its industry analysts and other resources to keep close track of the financial health of the 

sector and individual companies. We have opened up new lines of communications 

with lenders and creditors—who often are calling the shots just before bankruptcy—

in order to assess the imminency of possible collapse. This was the purpose of my 

trip to New York days after the accounting scandal was revealed. We have increased 

our dialogue with significant customer groups, who can also warn of difficulty, by 

spotting service degradation and service disruption.

B. Inter-governmental Coordination

One of the first critical steps is to coordinate our actions with other government 

entities. The Department of Justice represents the Commission in bankruptcy proceedings, thus we have been in constant contact with the Department in preparing 

our responses to the court. Additionally, in cases such as this it is vital to understand what risks are presented to critical government operations and discuss responses with other federal agencies. The Commission has a formal relationship with 

the National Communications System (NCS), which is responsible for monitoring 

and responding to mission critical communication needs of the Federal government. 

The FCC is a member of that organization and has had discussions about the risks 

and possible responses, should any disruption become a serious threat. The FCC is 

also a member of the JTRB, which considers emergency responses to preserve critical communications needs of the government. Additionally, the Commission has discussed risks and responses with the Critical Infrastructure Protection Board. Finally, given that there are allegations of fraud, in the WorldCom matter, we have 

been active as a member of the Corporate Fraud Task Force, created recently by 

President Bush, to ensure government-wide coordination of the investigation. 

We also have been in regular consultation with State Commissions in an effort 

to assess the impact of bankruptcy on local markets and consumers, and coordinate 

our regulatory responses. State Commissions often play a key role in ensuring the 

continuity of operations and reconciling tensions between regulatory policy objectives and bankruptcy law. These efforts will continue throughout this proceeding. 

Importantly, we also consult and inform the Congress as to the status of these 

matters and advise where legislative action may be required. We have engaged in 

an important dialogue with Members of Congress to help them better understand 

24

developments in the telecommunications sector and to further explain the Commission’s role in the bankruptcy process. We have been asked to explore and have provided insight as to whether we believe the Commission needs any additional authority in the context of protecting consumers while carriers undergo bankruptcy proceedings. I renew that call for additional legislation today. Although it may be that 

Congress, in its good judgment, finds it appropriate to provide the Commission with 

additional authority in this area, as I have demonstrated and as I pledge to you 

today, the Federal Communications Commission will be unwavering in our use of 

each and every tool at its disposal to protect the interests of consumers in these difficult times.

C. Active Engagement in Bankruptcy Proceedings

Bankruptcy actions often move quickly and the Commission must act promptly to 

ensure the interests of consumers are protected before the court. Our authority 

stems largely from section 214 of the Communications Act. The Commission’s rules 

require WorldCom for example, to incorporate specific wording advising customers 

of their right to file comments with the Commission against such discontinuance. 

WorldCom must then file a copy of its notice with the Commission, and the Commission will then issue a public notice of the filing. WorldCom may only discontinue 

service on the thirty-first (31st) day after the issuance of the public notice. It is important to note, however, that this thirty (30)-day grace period is a minimum period 

required by our Rules and that the Commission may extend this period should the 

public interest warrant such an extension. 

The day WorldCom filed for bankruptcy, we took several immediate actions to ensure our regulatory requirements would not be neglected. I promptly sent CEO John 

Sidgmore a letter advising him of his regulatory obligations. Additionally, I sent a 

second letter to the company asking them to commit in writing to provide notice to 

customers of the company’s plan to exit the wireless resale business and to offer a 

transition plan for moving those customers to other networks. Our inter-Bureau 

task force stands ready to handle applications or other regulatory implications of 

WorldCom’s bankruptcy. 

In addition to ensuring the company complies with the law, the Commission will 

(as it did with WorldCom) advise the bankruptcy court of our concerns with respect 

to the impact on consumers and urge that any ordered shutdown, provide for a transition for customers. Given the significance of WorldCom, our Deputy General Counsel flew to New York for the initial hearing and worked with the Department of Justice to urge the Court to consider important public policy objectives; which include 

continuity of operations, a transition for any displaced customers, and due consideration of the impact on other telecommunications service providers that generally 

must continue serving the bankrupt carrier. 

As an outgrowth of this participation, Judge Gonzalez, last week, granted interim 

approval for WorldCom to continue making its payments into the Federal universal 

service fund. Furthermore, the Universal Service Administrative Company reports 

that WorldCom is current with its contributions to this important fund that keeps 

high-cost telephone service affordable. We have been advised by WorldCom that it 

expects that its next payment, due in mid-August, will be made in a timely fashion. 

In this bankruptcy phase, we will remain an active participant in the court proceedings and make additional preparations for possible questions and issues that 

arise. This may include a possible transfer of assets to other providers, which must 

be approved by the FCC.

D. Consumer/Customer Awareness

The Commission also believes it is important to advise consumers of the risks, if 

any, they are facing and remind them of options they may have. In this regard, we 

recently issued a consumer alert with respect to WorldCom that was reported widely 

by the media. (See Attachment A.) 

In sum, if companies in the telecom industry enter into bankruptcy, either to restructure or to cease operations completely, there will be no greater role for the Federal Communications Commission than to ensure the continuity of operations for 

consumers, and for critical government users. To date, we have been fairly successful. In all of the 23 wireline or fixed wireless bankruptcy cases we have seen since 

November 2001, an orderly transition was achieved and all, but the most minor, disruptions of customer service were avoided. In every major bankruptcy situation that 

we have encountered we have been, and will continue to vigorously be, an active 

and aggressive participant in the bankruptcy proceedings. 

II. The Broader Turmoil in the Telecommunications Industry

While the corporate scandals are dominating the headlines, it is very important 

for us to focus on the broader distress that has hit the telecommunications sector. 

25

I again applaud the Committee for taking up this important discussion. Clearly, the 

telecommunications industry is riding on very stormy seas. This is an industry 

where nearly 500,000 people in the United States alone have lost their jobs and approximately $2 trillion of market value has been lost in the last two years. By some 

estimates, the sector is struggling under the weight of nearly $1 trillion in debt. 

And, most segments have seen precipitous declines in stock values: The long distance industry is down 68 percent year-to-date, the wireless industry is down 71 

percent, the ILECs are down 40 percent. Clearly, there are very serious stresses on 

this important industry. 

However, this market is not collapsing and is not going to fail over time. Communications services remain vital to consumers around the globe. Communications 

traffic continues to increase at historically formidable rates. And, importantly, the 

closing of time and distance barriers to information will continue to fuel global productivity and change all institutions of society, albeit slower than once fantasized. 

It is in the interest of every citizen for this industry to recover and to ultimately 

succeed in bringing new and vital communications capabilities to people’s lives. Recovery, however, is not going to occur overnight and is likely to require difficult—

even painful—choices. Successful recovery is dependent on the collective efforts of 

Congress, federal and state regulators, the private sector and the financial markets.

A. How Did We Get Here?

In order to facilitate a recovery, we must understand what led to the current turmoil in the market. The story at bottom is quite straightforward. It begins with the 

Internet Gold Rush. The Telecommunications Act of 1996 and the commercialization 

and mass-market adoption of the Internet led to a near hysterical belief that the 

opportunities for growth were limitless. Talk of the Internet doubling every 100 

days, infinite bandwidth, and ‘‘Internet time’’ dominated the pages of magazines. 

Very few did not get swept up in the hot air. 

Investors, too, bought into and fed the hype—literally—as they flooded the market 

with capital that was consumed by thousands of companies. Companies in all sectors of the telecommunications industry, from wireline to undersea to wireless, 

across the globe and with global ambitions, set out to build national and global networks—some, as we all undoubtedly recall, by digging up streets to lay fiber, some 

through acquisition, some by bidding billions of dollars for spectrum, some by investing in foreign markets—to win the race to stay ahead of expected demand. In 

so doing, telecommunications companies throughout the world amassed staggering 

amounts of debt in building nearly- identical networks. 

The business model of the day was one of which Kevin Costner would be proud—

it was premised on ‘‘A Field of Dreams.’’ There was a belief that demand would materialize almost overnight. ‘‘Build it and they will come’’ was the business model of 

the day for long-haul carriers and many new entrants. The fiber rush was on, with 

carriers building massive national and global networks, with astonishing amounts 

of capacity. (By some estimates, a 500-fold increase in capacity.) The problem is they 

did not come—demand turnout was not doubling every 100 days, but rather every 

year. 

Anxious companies began to race to gain market share to boost revenues and pay 

down debt, in hopes of being a survivor. Hyper-competition ensued in various markets across the industry, as they contained more industry participants than the 

market could support and vicious price wars ensued, driving down overall industry 

and individual company revenues. At the same time, many telecommunications companies learned the painful lesson that traffic growth did not necessarily lead to concomitant growth in revenues, as their markets were largely saturated. 

There were not enough untapped customers from which to derive new revenue. 

To make matters worse, many of these companies had to write off revenues as many 

of their customers (namely, bankrupt ISPs and dot-coms) disappeared through 

bankruptcy. These companies quickly found out that there was simply not enough 

revenue to go around to pay down debt and generate a return on investment for 

all of the vast number of competitors that had previously flooded to the market. 

The results were devastating. As some telecom companies began to fail and enter 

bankruptcy, others resorted to fraud and deception to mask these core fundamental 

problems facing their companies. Some went so far in their deception to not only 

mask failure, but to inflate, artificially, revenue growth—to make it look like the 

dream was real. The bursting bubble leaves us today with several core problems in 

several market segments that must be rectified:

• Accounting scandals that have rocked an industry already fraught with problems;

• Mountains of debt—estimated at $1 trillion worldwide;

26

• Inefficient industry structures characterized by excess capacity;

• Lack of investor confidence;

• Capital markets closing to new investment; and

• Companies that have pulled back on capital spending in this capital- intensive 

industry.

Given the interconnected and inter-dependant nature of the telecom network, the 

industry fallout has caused collateral damage across the industry worldwide. As 

telecommunications companies have dramatically scaled back capital expenditures, 

equipment manufacturers and vendors have struggled as sales have fallen precipitously. The access to capital crunch has taken some of the fuel out of the CLEC industry leading to many bankruptcies over the past two years and increasing liquidity concerns. Long distance and wireless companies continue to face pricing pressures and along with cable companies and ILECs, significant debt loads. Though the 

problems are significant, recovery can be achieved if several critical steps are taken. 

I believe that there are six critical elements to managing the current turmoil and 

stabilizing the industry over time (See Attachment B): 

1. Protect Service Continuity 

The road to recovery begins with our tireless efforts to protect consumers by ensuring continuity of service and in maintaining the integrity and reliability of our 

Nation’s telecommunications network in light of the risks and realities stemming 

from current and continued bankruptcies. The Commission and our State counterparts will continue to work together and with telecommunications firms facing financial difficulties to stay well ahead of any service disruptions. We will also constantly keep the American public informed so that they too can take action to protect themselves if and when the need arises. 

2. Root Out Corporate Fraud 

The degree of deception and malfeasance that has been uncovered in recent weeks 

is deplorable. There is no hope for any sector of the economy if corporate leadership 

and government do not root out and stomp out such deception and breach of public 

trust. Governments must continue to vigorously seek out, prosecute and jail corporate wrongdoers that have personally profited (often) while defrauding the American people. Such actions have dealt a staggering blow to already suffering confidence levels. I commend the continuing swift and strong actions taken by the government in bringing those responsible for fraudulent actions to justice. I also commend the strong actions taken by Congress in passing corporate-oversight reform 

legislation, which the President is now signing into law. The new corporate leadership that is taking the helm has been put on notice. One hopes—and demands—

that they lead with a strong ethical and moral foundation. These actions by Congress, the Administration, and firms within the industry must continue not only to 

address core fundamental problems, but also to help restore investor confidence in 

corporate America and in the telecommunications industry. 

3. Restoring Financial Health: Cleaning Up the Balance Sheets

Next, to address the capital shortage facing the telecommunications industry, 

telecom firms must work diligently to clean up their balance sheets to restore some 

financial stability and reality to this industry. Companies will also have to become 

more transparent so that investors and potential buyers can assess the true value 

of the company’s assets. It is estimated that telecommunications companies worldwide are carrying approximately $1 trillion in debt, much of which will never be repaid and will have to be written off by investors. As a result, capital markets are 

retrenching and telecommunication companies in need of financing to support their 

capital-intensive enterprises are suffering. Until firms substantially pay down their 

debt, much needed capital will continue to sit on the sidelines and the recovery will 

be stalled. As we have seen, many industry participants are finding ways to cut 

costs, by downsizing, shedding assets, and significantly cutting back on capital expenditures to pay down debt. These are painful, but necessary steps. But, if these 

steps are taken, we must ensure that the integrity of the telecommunications network and the quality of service provided to consumers does not suffer. Alienating 

consumers during this time will only serve to further the pain as consumers turn 

away and take with them much-needed revenues. 

4. Prudent Industry Restructuring 

It is difficult to imagine the industry stabilizing without some modest and prudent restructuring. The long-haul markets are glutted with excess capacity that dramatically exceeds demand (even given the strong growth in demand that we have 

seen). Additionally, in some sectors, revenues are being diluted as price wars and 

27

aggressive competition make it difficult to secure an adequate return on investment 

in very capital intensive enterprises. This is particularly acute in the long distance 

and wireless markets. Pressure will continue to mount for companies to restructure 

or exit the market completely by merging with another. 

Depending upon the facts of any given transaction, such restructuring is not necessarily adverse to consumer interests. One cannot think about long-term consumer 

benefits without also considering the long-term prospects of carriers that provide 

quality services to consumers. For other industry participants, survival and health 

will depend on prudent industry consolidation. I emphasize ‘‘prudence’’ because 

some mergers clearly could present a threat to competition and may not be in the 

public interest. That can only be determined upon careful and thorough review of 

a particular transaction. Regulators will have to walk a fine line to achieve stability, 

while not squelching competitive opportunity. 

5. New Revenue Through New Services 

During the meltdown, carriers became acutely aware that traffic growth did not 

directly correlate with revenue growth. Many communications markets have matured (or are doing so quickly) with respect to core services and the opportunity for 

further penetration is waning. Therefore, to grow and expand revenues companies 

must offer new services. In doing so, companies must strive to stimulate the demand 

that will help bring it into line with the current over-supply of excess capacity. In 

the residential space, all indications are that the opportunities to develop new services and sources of revenue will come from residential broadband. The reasons are 

twofold. 

First, the provision of broadband services to residential consumers has room for 

substantial subscription growth over the next several years. Currently about 65 million households pay a monthly subscription rate to access the Internet. Approximately 14 million are doing so through broadband connections, leaving more than 

50 million households as a near-term addressable market. With the deployment of 

broadband over the next five to ten years, a whole new generation of the consuming 

public that will have grown up with the Internet as an integral part of their daily 

lives will enter the market, increasing the potential addressable market. 

Second, the development and deployment of broadband infrastructure will provide 

firms—from telecommunications to entertainment to information to equipment vendors—with the opportunity to develop new services that will use the broadband infrastructure to reach consumers. Today we envision, and companies are beginning 

to provide, home networking, telemedicine, distance learning and home security; tomorrow’s visionaries will take the infrastructure to new heights not understood or 

appreciated today. 

We must, however, be sure to learn from our past mistakes of inflated expectations that do not line up with consumer demand and recognize that the build-out 

will take time. To achieve this broadband future and to harness the opportunities 

it provides, the construction project that has taken place over the last 6 years must 

now focus on uncorking the network at the last mile, and regulatory policy must 

lead the way. Today, with the proliferation of cable modem services, DSL services 

and increasingly wireless platforms and other innovative networks, such as 

powerline, we are beginning the process of bringing capacity to the edges of the network—where it is needed most. 

6. Reform Economic and Regulatory Foundations 

Finally, the long term prospects of the industry will not be bright if state and federal policymakers do not continue to work hard and diligently to create genuine and 

viable economic a regulatory foundations for communications services growth and 

competition. Nowhere is this more pressing than in local markets. Currently, the 

cold fact remains that the economic foundations remain weak in local markets, especially for new entrants and increasingly for incumbents. Local firms, many of whom 

are being tasked with the chore of upgrading networks to provide one of the platforms to deliver broadband services, have little pricing flexibility for retail services. 

We, along with our state counterparts, must work together to improve these foundations through regulatory reform. For instance, we must consider rate rebalancing at 

the state level to provide carriers with greater pricing flexibility. We must continue 

to pursue doggedly the worthy universal service goals of ubiquity and affordability 

as new networks are deployed, based on sound economic principles. We must also 

provide incentives for more effective and sustainable competitive entry through our 

network access policies by providing incentives to new entrants and incumbents to 

produce an efficient wholesale market and by providing a regulatory framework that 

promotes competition, investment and innovation to deploy advanced networks. 

28

We must continue to engage in effective oversight and enforcement of our regulations to ensure that competition is not stifled at the gate. We must engage in better 

spectrum management that promotes more efficient use of spectrum while continuing to find ways to get more spectrum into the markets. 

If we accomplish these objectives, it will be the consumer that is the ultimate beneficiary through the proliferation and adoption of new innovative services that the 

consumer demands and values. For the past year, the Federal Communications 

Commission has initiated proceedings to effectuate this reform and we will work 

diligently to implement these fundamental policies that will provide regulatory clarity and certainty, survive judicial scrutiny and promote long-term sustainable competition and growth to serve the public interest. I pledge to you that we will accelerate our efforts to complete the task before us. 

III. How Congress Can Help 

We must all take the steps necessary for recovery and I ask that Congress also 

assist us in our efforts by providing the Commission with more tools to protect and 

promote the public interest. 

First, we ask that Congress extend and clarify our section 214 discontinuance authority to bring it in line with the realities of today’s marketplace so that we can 

limit any service disruption in these troubled times. Our authority under section 

214 is at best unclear and, at worst, does not extend to certain critical services such 

as the Internet backbone. 

Second, I once again, respectfully, call upon Congress to adopt Chairman Upton’s 

proposal to help us put some real teeth in our enforcement authority (as I did 15 

months ago to the House and over a year ago to the Senate) by increasing the maximum fine allowable under the Act from $120,000 to $1 million for a single violation 

and from $1.2 million to $10 million for a continuing violation and to lengthen the 

statue of limitation for common carrier enforcement. It has remained my strong 

view that these increased penalties along with the stepped up enforcement of our 

rules will have a solid, deterrent effect against illegal activities. While the House 

adopted these measures as part of H.R. 1542, the Senate has yet to adopt a similar 

increase in our enforcement authority. I respectfully urge you to pass legislation 

that would provide the Commission with increased enforcement authority to attack 

illegal activities. 

Third, I urge Congress to continue its deliberations and craft and implement legislation that produces the right regulatory environment for the provision of 

broadband services. The importance of the development and deployment of 

broadband services to all Americans is too important for Congress to ignore and it 

must play a vital role in its development. Broadband very likely holds the key for 

the long-term recovery of the telecommunications industry and for our Nation’s 

long-term economic growth and its ability to compete on the global stage. The Commission is committed to demonstrating leadership in this area by seeing through our 

core broadband policy proceedings initiated at the end of last year and the beginning of this year, and we will strive to complete those proceedings by year-end. The 

importance of the development, however, merits that Congress take a hard look at 

updating the Telecommunications Act of 1996 to provide the proper regulatory 

framework for broadband. 

I take no position on the myriad proposals that currently are before this body. 

I only wish to emphasize that the importance of residential broadband to improving 

revenue growth and stimulating demand to drain excess capacity, merits the attention of Congress. I would welcome the opportunity to work with the Committee on 

these issues, in the context of its longstanding bipartisan approach to telecommunications reform. 

I thank you for your time and I look forward to working with you all to implement 

our plan for recovery for the telecommunications industry. 

ATTACHMENT A 

Federal Communications Commission Assures WorldCom Customers

Concerning Continuation of Phone Service 

Washington, DC—The Federal Communications Commission (FCC) has issued 

this Consumer Bulletin highlighting the rights and protections consumers have in 

light of WorldCom’s bankruptcy filing. 

Michael K. Powell, Chairman of the FCC said, ‘‘Our consumer bureau has heard 

many consumer concerns about the WorldCom situation and its effect on telephone 

service. The FCC will not permit a cut-off of a customer’s service in the wake of 

WorldCom’s bankruptcy filing. The FCC has regulations in place to protect consumers’ telephone service, and we will vigorously enforce those rules.’’ 

29

The Consumer & Governmental Affairs Bureau (CGB) advises consumers:

• The WorldCom bankruptcy does not mean subscribers will lose their service.

• FCC rules prohibit abrupt cut-off of subscribers’ telephone service.

• FCC rules require a telephone company to provide written notice to affected 

consumers of any planned discontinuance of service. The notice must specifically state the customer has the right to file comments with the FCC.

• After notifying affected customers, telephone companies must file for permission 

from the FCC to cut-off service.

• The telephone company would not be permitted to terminate service until a 

minimum of 30 days after the FCC issues a public notice.

• The FCC can extend the termination date.

During the bankruptcy proceedings, WorldCom may sell its customer base to another company. If that occurs, consumers are protected by FCC regulations:

• The new company must provide the customer 30 days’ advanced notice of the 

transfer, including information about its rates and services.

• The customer may accept the new company or choose another company without 

penalty.

• A customer transferred to a new company without receiving notice is entitled 

to relief under the FCC’s slamming rules.

K. Dane Snowden, Chief of the FCC Consumer & Governmental Affairs Bureau, 

said, ‘‘Recent developments indicate WorldCom has the necessary funding available 

to continue operations during bankruptcy proceedings, without disruption of telephone service or interruption of the operation of its Internet backbone facilities. The 

FCC will continue to monitor the situation closely.’’

Chairman Powell has put WorldCom on notice of the FCC’s requirements and 

stressed the company’s obligations to its customers during the bankruptcy process. 

In a July 22 letter to WorldCom President and CEO John Sidgmore, Chairman 

Powell said, ‘‘ . . . The [FCC’s] process is intended to provide customers with a reasonable opportunity to find and transition to a new service provider, and the Commission will act promptly and vigilantly to ensure that customers are provided this 

opportunity. We will intervene in bankruptcy proceedings to advise the court if 

WorldCom or any other party to the proceedings takes steps that would result in 

an unnoticed termination of service.’’ (The full text of Chairman Powell’s letter is 

on the FCC Web site at http://www.fcc.gov/commissioners/powell/72202—

sidgmore.pdf.)

The FCC was represented at the first bankruptcy hearing in New York on July 

22 and is a party to the proceeding. 

State law may offer additional protections. Consumers should contact their state 

public utility commissions for additional information. 

Consumers with questions about the WorldCom situation can visit the FCC’s Web 

site at www.fcc.gov or call the FCC’s Consumer Center at 1–888–225–5322 (CALL 

FCC). 

30

ATTACHMENT B

The CHAIRMAN. Thank you, Chairman Powell. That is an excellent statement. 

Let me ask, when you say—that is what I was really interested 

in, the amendments to section 214, that you would greatly benefit, 

as you say, from a more definitive and concise statement of authority, for example, elaborate on that thought. Is it to regulate 

broadband like common carriers, or what? 

Mr. POWELL. Senator Hollings, section 214, which was the provision enacted with the original Communications Act of 1934, has 

been generally interpreted to apply mostly to carriers regulated 

under title 2, which are generally the telecommunications common 

carriers. There are increasing classes of service providers who do 

not have to obtain 214 licenses to be in operation, for example, 

cable service providers, Internet backbone providers, and other 

service carriers that are providing critical services. 

We have been successful to date, through the force of our own 

formal and informal actions, to provide orderly transitions in these 

cases, but there are questions marks as to whether, if we were in 

a serious dispute, whether section 214 would be sufficiently comprehensive to assert legal jurisdiction to insist on discontinuance 

procedures in the context of bankruptcy proceedings, so coverage, 

the scope of the provision should be considered as to whether we 

can more clearly make it applicable to other classes of critical service providers. 

Additionally, while I do not have immediate suggestions today, 

I think one could consider what other kinds of steps, in addition 


730powel1.eps
31

to the simple notice and discontinuance obligations, maybe perhaps 

more forceful authority the Commission may have in order to assure operations. 

I would highlight the Committee one source of tension in the context of the cases, which is conflict between the bankruptcy laws 

and the communications laws. It is not always entirely clear that 

the bankruptcy judge would necessarily accept our protestations of 

the need for discontinuance, and might nonetheless order shutdown. I can tell you I have personally been involved in a few bankruptcies, and we had a very close moment when the bankruptcy 

judge came very close to ordering shutdown precipitously, regardless of our assertion of 214 jurisdiction. 

The CHAIRMAN. There is one on appeal right now. 

Mr. POWELL. Indeed, there is, and fortunately to date we have 

usually been able to wrestle these situations to ground, usually 

through the regulated entity themselves, but I think why should 

we continue to stumble on this when we could potentially close that 

loophole. 

The CHAIRMAN. I am in agreement. Could you have yourself or 

your staff at the FCC just outline both ideas with respect to 214 

on the one hand to give you the proper authority and otherwise a 

conflict between the bankruptcy court and the Federal Communications Commission? We need that immediately so we can try to include it here this summer before we leave. We will make every effort possible to do so. 

With respect to—well, let me put it this way. What change would 

you make to the 1996 act, if any? 

Mr. POWELL. Senator, as I stated, I think in my formal remarks, 

I do think there needs to be some serious consideration about some 

of the convergent emerging services that are broadly clumped. 

The CHAIRMAN. Well, specifically broadband, I agree with you. 

The only thing is that the present broadband they are not subscribing to. It is $50 a month, and I have tried and tested out, and 

we are presently looking at the next generation broadband to see 

if we could not finance it, subsidize it with the auction moneys. 

What do you think of that? 

In other words, I look at Korea, and they have subsidized 

broadband and they have got it around to everyone. I am trying to 

subsidize that last mile with the next generation broadband with 

the combination of not only the fiber but Wi-Fi and others. Can I 

get your comment on that? 

Mr. POWELL. Yes, Senator, I will try. I think there are only a 

handful of ways in which Government can be effective when you 

are talking about a massive private capital expenditure to build 

new services. One is, the Government can help try to stimulate and 

aggregate demand. To the degree that the U.S. Government, as 

perhaps one of the largest purchasers of communications services 

committed itself, or obligated itself to the use of broadband services, it made efforts to do so as a permanent proactive matter, and 

if state governments and state institutions did a similar thing, the 

stimulation of demand certainly would help pool and lower the cost 

of deployment. 

I think the other area is, can you help pay for it somehow? It 

seems to me in government that can occur in one of two ways, diVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00035 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
32

rectly subsidizing services either at the customer producer level, or 

indirectly doing so by providing tax or other investment incentives 

for the construction and deployment of those. I am not an expert 

on the merits of those traditional government vehicles, but I do 

think that they are certainly worth some consideration. 

Finally, I think that it is important to note that regulatory policy 

is important here, though this can be complex and esoteric at 

times, because it is not easy enough to say something is a demand 

problem or a supply problem. Economics 101 teaches supply and 

demand are intrinsically linked. If demand is soft at high prices, 

part of the problem is the supply is not being provided at a price 

that stimulates demand, and that can have a lot to do with the 

cost, and the burdens associated with deploying service. Then you 

have a tragedy if the cost of providing such services far exceeds the 

consumer’s willingness to pay for them, and so one of the things 

that we are willing to tackle and consider more thoroughly, and 

there could be a legislative component to it, is the degree to which 

one can minimize or lower the regulatory costs or obligations associated with building and construction of that narrow infrastructure. 

I think one of the challenges presented to the Congress and presented to us is, it is very difficult to try to narrowly contain such 

kind of targeted limitations, but I still think that that effort is particularly worthy. 

The CHAIRMAN. Senator McCain. 

Senator MCCAIN. In your remarks and recommendations you cite 

a need to increase authority under section 214 in order to prevent 

disruption of telecommunications services. Do you believe that 

there is a possibility that without that increase in authority some 

services may be disrupted, i.e., WorldCom, or some other major 

bankruptcy? 

Mr. POWELL. At present, I do not think there is a circumstance 

that presents itself in that way, but I could hypothesize that a carrier not covered by 214, when the Commission tried to assert its 

requirements for discontinuance would refuse to comply, arguing 

that they were not covered by that provision, possibly with the aid 

and assistance of the bankruptcy court. 

One of the real struggles we often have is, we are trying to get 

blood from a turnip. Often, the bankruptcy judge, whose interest is 

protecting debtors and creditors, wants the service shut down to 

stop the bleeding, and when a regulator walks in and wants the 

operations to continue, it is interpreted as wanting the bleeding to 

continue, and it is a very difficult thing to try to strike a balance 

to continue to preserve transition disruption at the same time that 

an enterprise might be losing assets and revenue at a rapid pace, 

but yes, the short answer to your question is, I can imagine a situation where there would be a problem, but the answer is no that 

I do not presently see that situation in the context of WorldCom. 

Senator MCCAIN. Many believe that we are in a major crisis in 

the telecommunications sector. Do you agree with that? 

Mr. POWELL. Well, I have gotten into trouble for calling it a crisis, but I think you have to be naive not to suggest that it is a market in extremely fundamental duress. I mean, the statistics simply 

roll off the page in every measure you can imagine of the difficulties facing this issue. The reason I believe that it is not a crisis in 

33

the traditional sense of the word is, I do not believe that it is on 

the verge of complete failure. I do believe that it actually has real 

prospects for recovery, and will recover. 

I do think many of the fundamentals are presented, but I think 

none of them are achievable without many years of painful change, 

and I think that it would be naive and optimistic and probably 

drinking the same Kool-Aid we drank 5 years ago to suggest that 

there was any quick or magic bullet to that, or that policies that 

we genuinely believed in before do not deserve to come under equal 

amounts of scrutiny to try to prevent it happening in the future. 

Senator MCCAIN. We will have another set of witnesses that will 

give us their views, but I am concerned, and I think that all of us 

who serve are worried about a severe perception problem amongst 

average American citizens. Mr. Winnick of Global Crossing received $735 million in stock, plus millions in compensation, Mr. 

Cook $36 million, three members of the board, $516 million combined, Mr. Anschutz, $1.5 billion, Mr. Slater, $18 million, Mr. 

Nacchio, $226 million. The list goes on and on. The numbers are 

really staggering. 

At the same time, thousands of employees are now out of a job, 

and in many cases retirees have had their entire retirement wiped 

out. This strikes many American citizens as patently criminal. I 

was in a grocery store Saturday morning. Five people came up to 

me and said, why should these executives of bankrupt corporations 

be receiving hundreds of millions or billions of dollars? We had a witness, Mr. White, who made $70, $80 million, who 

was asked by Senator Dorgan whether he should give some of the 

money back, and he said no, of course not, because he did not do 

anything wrong. These employees and these retirees did not do 

anything wrong, either. 

I guess I am asking you a general question as a person who has 

served, but also deals with these people on a daily basis. I believe 

you were up on Wall Street just not long ago. Have you got any 

ideas as to what we should do about that? Should we require them 

to give some of that money back? Should we take them to court? 

Should we have just these class action suits, where the lawyers 

seem to get most of the money and the average stockholder does 

not, and how do you cure this? Do you think Congress should pass 

a law limiting the amount of compensation that a chief executive 

should receive? 

I do not think so, but yet in 1975 I believe the average executive 

compensation was some 20 times that of the average employee. 

Now, it is 500, or 1,000. The numbers are astronomical, and it is 

terribly exacerbated by the fact that employees are not working. I 

mean, there is no difference in their salary now. It is infinity now, 

because so many thousands of them have lost their jobs, and I 

know it is not exactly in your area, but you are a voice for the consumer. That is what one of the Federal Communications Commission’s primary responsibilities is. 

I wonder if you could just give us some of your overall views on 

this issue, perhaps in preparation for our next set of witnesses, and 

in preparation for perhaps further legislation, because I do not 

think the bill that we just passed goes nearly far enough, particularly in the area of stock options, which we did not even have a 

34

vote on, much less a determination on the part of Congress whether stock options should be treated as an expense or not, as Mr. 

Greenspan and Mr. Buffett and others believe they should. 

Thank you. Go ahead, Mr. Powell. 

Mr. POWELL. Yes, sir. Well, I have to confess as a public em- ployee who makes $133,000 and is prohibited by law from owning 

any stock, these sorts of drumbeats and stories are mind-boggling 

to me, and beyond any ability I have to understand or rationalize 

the choices, even try as I might just to simply understand it. 

I think what is more offensive, less than the aggregate amounts, 

is the timing, when there is relatively clear evidence that stock, 

employees’ pensions and things are plummeting, but senior officials 

are permitted to withdraw value while individual employees are 

prevented from doing so. That is like closing the gates on the bottom of the Titanic and heading for the lifeboats, so on a personal 

level I would just share your deep offense about the whole thing. 

Do I think it requires government intervention? Yes, I do, for 

simple reasons and others more complex. Simply put, because it is 

not just affecting those particular individuals. It is not just a private sector problem. It is a problem that affects society quite broadly on an individual wealth basis, but from my perspective, which 

I do know something about, I cannot tell you what a kick in the 

stomach the scandal has proven to an industry that could not take 

it. 

An industry that was already on the ground trying to get back 

up has been kicked mightily by the actions of a few individuals 

that have compromised the ability to recover for a very long time, 

so the economic health of the country and the recovery of the sector 

is extraordinarily dependent on a perception, not only a perception 

but a reality that that credibility is restored and such actions are 

prevented. 

I am not an expert on corporate governance or salaries or the appropriate measures. I do see things there that trouble me, but I do 

believe the bottom line is oversight. I think I continue to be 

amazed where the boards of directors are in the United States 

when these situations and judgments are being made about withdrawals and payments and compensation. 

I think they need to also be under the appropriate amount of 

scrutiny in their fiduciary responsibilities, and I think that everything that I have read and followed in the actions of this Congress 

demonstrate a remarkably swift response by the people’s House in 

an effort that seems to me to be generally on the right track, and 

I think that probably the institution will have to continue to monitor it and see whether additional actions are needed, but certainly 

I can only speak as a citizen, and I would be pleased and applaud 

the efforts of my representatives to tackle that problem. 

Senator MCCAIN. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Burns. 

Senator BURNS. Thank you, Chairman Powell, for appearing—my 

questions, I just have a couple of them—and your response to 

them, Mr. Chairman. 

The accountability act is being signed today by the President, 

and in your testimony you alluded that you need more transparency in your ability to audit and to gauge activities of those corVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
35

porations that fall under the common carrier clause. Does the accountability act that the President is signing today, does that give 

you enough authority, or does it present some answers to the challenges you have? 

Mr. POWELL. A quick answer is, I do not believe anything in that 

act goes directly to our authority, the Federal Communications 

Commission. I do not know of any provision in it that expands or 

alters——

Senator BURNS. It may expand to the Department of Justice, 

where maybe you could require it. I mean, I am vague on that. 

Mr. POWELL. I understand. Yes, to that extent, that it may mean 

that we as an institution have an opportunity to see things at an 

early stage, which could be appropriately referred to an institution 

that had the specific responsibility. 

I take an opportunity to explain that we have done a few things 

to try to increase those channels. For example, we have proposed 

a Memorandum of Understanding with the SEC that would create 

a mechanism by which, if in the course of our jurisdiction of regulatory activity we came upon things that looked to be at least 

prima facie problematic, we could make referral and share resources in pursuit of that. 

And then our role on the corporate task force, fraud task force 

created by the President I think also provides an opportunity to 

have a better flow of what we come into contact with, the agencies 

that would be responsible for the prosecution and investigation. 

Senator BURNS. In your remarks with regard to section 214, and 

I look forward to working with you and visits with you and the 

FCC. I think with the Chairman’s leadership and help on this, I 

think we can look at a way to approach 214. That is not the only 

area of 214 that maybe we have to take a look at the one we are 

providing here, but nevertheless, we look forward in working with 

you on that, but those are the two areas I think that are the building stones of everything else, before we do anything else. 

The other parts of it are the fraud and all of that. That is out 

there in the Department of Justice or whatever, but I think with 

you being here today and pointing out those particular areas, those 

key areas where reform and some, let us say, tinkering around may 

enable us to solve future problems should they arise in the same 

way, and with the free market they will arise, it is inevitable, and 

that is Economics 101. 

So I appreciate you coming in today, and answering these questions, and I look forward to working with you on 214 and any other 

suggestions you might have from your position, and I thank the 

Chairman. 

The CHAIRMAN. Very good. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. Thank you, as well, 

Mr. Chairman, for your helpful statement. 

Let me turn to the question first of fraud in the telecommunications sector. You mentioned the FCC is participating in the overall effort to root out corporate fraud, and I think that makes sense, 

because there is a lot of pressure out there, and when that is 

ratcheted up, you certainly have people trying to cut corners. What 

are the particular types of fraudulent practices in the telecommunications sector that you are especially concerned about now? 

36

Mr. POWELL. That is a good question, because it is important to 

try to distinguish whether there is anything particularly acute or 

unique to the telecommunications sector that is leading to this 

problem being more prominent than some other sectors, though I 

think a fair evaluation of the number of companies that have come 

under scrutiny crosses the wide range of spectrum of companies in 

corporate America, and is not limited to telecommunications. 

I think it is also interesting to note, at least for the moment, that 

the vast majority of telecommunications carriers that have come 

under scrutiny, or many of those carriers, as I said earlier, were 

most aggressive in their pursuit of the Internet gold rush. That is 

the extraordinary expectations and pressures to continue to deal 

with the ever-expanding competitive environment for those things 

may have put more pressure and led to a willingness to start cooking books in order to cover the previous actions of the Committee, 

so to my extent, I just always have a generalized concern about 

whether that kind of environment or culture would have reproduced itself in other companies, so I think that it is generally prudent to sort of be looking quite carefully at the sector, as well as 

related sectors in which these pressures might have been simulated. 

We have also undergone some internal efforts to sort of relook at 

any information or data that has come into our possession over the 

past year or so to consider whether we would want some of it recertified in the context of what we know about some companies’ willingness to cook the books on the financial side. 

Senator WYDEN. Are there companies now that you are looking 

at with an eye toward requiring them to recertify, because that 

strikes me as very important, and I really do want to know what 

you bring to the table in terms of this overall administration effort. 

I think there is a concern that there are other examples of books 

being cooked, and to hear that the Federal Communications Commission is looking to see whether there does not need to be a recertification of some companies I think could really give consumers 

some confidence that this is going to be tackled in a serious way. 

So can you confirm, is there an examination of whether some are 

going to have to be recertified? 

Mr. POWELL. I would describe it as, there is a consideration, because we are presently reviewing the kinds of accounts we have 

and the kind of data we have received in trying to make some 

thoughtful judgment about which kinds of things might be implicated. 

Senator WYDEN. I would urge you to be very vigorous on that. 

Let me talk about the consumer situation, and I have divided it 

into short term and long term. Short term, it seems to me what the 

consumer wants is no chaos with respect to service, and no disruption. You have described steps that are being taken, but long term 

for the consumer. What I am concerned about is the prospect that 

we are going to have far fewer choices and significantly less competition. What are you looking at to try to avoid that? 

Mr. POWELL. Well, as I mentioned, I would like to note a few 

things. First, with respect to the pressures for mergers and consolidations, as I mentioned, one of the most difficult tasks the commission will have, as well as the Antitrust Division or any other entity 

37

that is charged with considering those transactions, it is going to 

have to be extremely careful with regard to what kinds of combinations would have the beneficial effects of stabilizing the market, 

but not in a way that seriously damages or forecloses competitive 

opportunity. That would be a case-specific merger evaluation in the 

context of that. 

In addition, the Commission has initiated a number of proceedings in the hope and expectation that it would be able to create 

more sustainable economic and regulatory foundations to create 

more viable competitive entry in a way that would be more sustainable, given the severe constraints of capital that exist in the market. Those proceedings we have made an effort to try to accelerate, 

hopefully closer to the end of the year to try to bring some clarity 

and certainty in that area. 

We have also been particularly vigilant, I think, in the context 

of 271 applications to make sure that the large incumbent carriers 

continue to abide by those applications. I would note that in our 

first year we rejected just as many 271 applications as we approved, and maintained the line on a number of important elements in considering pricing, and then two final things I would 

mention, one which I have asked this body to consider. 

The first is, we have a proceeding which we are focusing intensely on trying to require real strong performance measures so 

that elements will be provided to competitive entrants in a much 

more timely and effective way that proceeding is underway as a 

part of the trilogy of proceedings we are doing. 

And then lastly, I have emphasized over and over again, I continue to think it is an important function that I do not think we 

are yet up to speed on, which is much stronger enforcement. To do 

that, I think we have created the organization and structure for 

doing that, but the resources for doing that in terms of not only 

money and personnel, but whether we have effective penalties, is 

an important question. 

Senator WYDEN. Let me if I might, Mr. Powell, ask one last question, and to contrast it to when you came to this room at your confirmation hearing. 

When you came to this room for your confirmation hearing, you 

described how you wanted to chart a course to new, more competitive waters in telecommunications, and my own view, and I think 

you could tell it from my desire, for example, was to have you review the books of a number of those that you have said are now 

under consideration by the Commission. I think that the current 

climate requires a very different regulatory approach than the one 

you envisaged when you came here for your confirmation hearing, 

and what I would like you to tell me is, what different regulatory 

tools, if any, are you using now than what you envisaged when you 

came to this room for confirmation? 

Mr. POWELL. Well, let me take it in two parts. First of all, I continue to think the course we charted continues to be a productive 

one. The course we charted was to create vehicles for the consideration of important questions about economic and regulatory foundations for effective and sustainable competition. When we charted 

that course, the stresses on the market were not unknown to us. 

38

Indeed, the CLEC market had begun collapsing long before we had 

even initiated the proceedings. 

I had held a number of very significant CLEC CEO summits 

with the leaders of many of the competitive industries to get a 

strong assessment of the kinds of problems they were facing and 

try to find ways to deal with them. From that effort is where the 

enforcement initiatives were born, the performance measures were 

born. These were things they specifically identified as critical, so 

that part of the course I think was a response to a growing recognition that the economic foundations continued to need work. 

Additionally, we are always buffeted by the winds that come 

blowing out of judicial judgments and litigation, which are constantly putting the commission back on its heels to relook at, reexamine decisions that are made in the context, and as early as a few 

months ago we are still dealing with massive decisions coming out 

of the Supreme Court and the DC Circuit over a statute passed 6 

and 7 years ago, and I have got to tell you, it is an extraordinarily 

challenging and frustrating thing to be halfway down and be constantly having to start over. 

So I think the vehicles are there. People will have legitimate and 

honest debates about what the outcome should be, but those outcomes are yet predetermined, and we have been looking at every 

one of those proceedings to consider questions that we might add, 

or additions that we might put on it to take into account the growing body of information that we are having. 

Finally, I would say that the current environment does give us 

pause to be cautious in a number of areas that seemed less problematic before. 

Senator WYDEN. It is correct that we need to look a bit more 

carefully at some of the streamlining of accounting functions that 

was originally contemplated at a time when there wasn’t apparent 

evidence of a need for some of those accounts. I think that we will 

now proceed much more slowly and consider whether any of those 

judgments that have already been made or were being contemplated continue to merit direction in that regard. That’s something we’ll do that is a change. 

We have had to spend, as we’ve talked about here today, a lot 

of time and resources developing a much more robust response and 

jurisdictional basis for managing disruption of service and bankruptcy proceedings. That’s taken an enormous amount of our attention and resources. That has now been added as a major component 

of our tenure and what we’re going to have to be focused on, sadly. 

But that’s where I think we’re going, and I think that we have 

most of what we need underway to that. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Breaux? 

Senator BREAUX. Thank you, Mr. Chairman. Thank you, Chairman Powell, for being with us, and for your statement. Early on 

in your statement, you said that WorldCom is still providing you 

your telephone service. I would just observe when WorldCom cuts 

off the telephone service to the Chairman of the FCC, we can probably all plan to attend a funeral in the very near future. 

Chairman POWELL. It happened once, but I’ll leave that out. 

[Laughter.] 

39

Senator BREAUX. Oh, it did. Hmmm, that’s a story. 

You mentioned several times in your testimony about potential 

for broadband services to really be a bright spot for the telecommunications industry in residential areas. The indications are 

that opportunities to develop new services will come from residential broadband. 

You talk about approximately 50 million households in the near 

term would be a potential broadband market that could be provided for and that there’s a great opportunity in all of the 

broadband services. It seems to me that we have a situation in 

broadband where almost 70 percent of the services are provided basically through cable services, which are generally unregulated, to 

a large extent. And the competition being the—for digital subscriber lines being basically the phone companies, which are heavily regulated as to what they can do and cannot do. 

As you know, we’ve introduced legislation that basically says—

look, I don’t think Congress is ever going to be able to decide the 

nitty gritty of what is the proper approach in some of these new 

technology areas—and the legislation basically says to the Federal 

Communications Commission to try and come up with some rules 

and regulations that create a level playing field in this new and exciting technology that you speak to. 

So I guess my general question would be, can the FCC, if given 

the appropriate amount of time, comply with a requirement like 

that to try and attempt to come up with a level playing field for 

the broadband services? 

Mr. POWELL. Well, if that were our task, I’m confident we could 

do it, yes. 

Senator BREAUX. In trying to figure—I’m glad to hear you say 

that—but in trying to figure out what would be an appropriate 

time—I mean, legislation, I think—I forgot what he said on 180 

days—is there a timeframe that the FCC would need to embark 

upon that type of a process? 

Mr. POWELL. Well, I’d put it this way. I think, at the very minimal, it would need to be 6 months. And I think, at the optimal, 

when you consider enormous amount of notice and comment and 

administrative procedures that would have to be followed to get the 

kind of full and complete record necessary to make those judgments prudently. But this body, when it created the Telecom Act 

in 1996, I believe gave the Commission 6 months to introduce the 

local competition rules. 

And to the credit of Chairman Hunt and all the hardworking employees who were running the show back then, they were able to 

accomplish that. But I would urge the Committee, as I must as the 

leader of the institution, to keep cognizant of the wide-ranging 

amount of portfolio we’re dealing with and whether, you know, we 

actually have the resources to have too many major efforts. We 

have 17,271 applications pending right now. We have five, six 

major proceedings hoping to conclude by the end of the year. We’ve 

been consumed by bankruptcy proceedings. So all of that would 

have an affect on timing. 

But I think, you know, given, you know, no other additional catastrophic drain of resources, that we could probably accomplish 

something like that in a, you know, eight to 10 month time. 

40

Senator BREAUX. Can you comment—I’m not sure you can—but, 

I mean, on the advisability? I’m just trying to figure out how we 

create a level playing field. I mean, I’m happy to do it from a congressional standpoint, which I think is really very difficult because 

of the battles that occur when you attempt to do some of these 

things. Can you comment on the advisability? I mean, our legislation that I’m part of basically says, ‘‘You do it.’’ And my question 

is really—from a policy standpoint is, is that something that makes 

policy sense—I mean, or not, or can you comment on that? 

I mean, we set policy, you carry it out, but I mean, you also head 

up the agency that supervises these industries. I mean, is that 

something that, not only as you said, you could do it, is it something that makes sense to attempt to do? 

Mr. POWELL. Yes, I suppose so, but I—I think I would answer 

this way. This commission, your commission, is best when it’s making technical and economic judgments that underlie broad policy 

conclusions by the people’s representatives, broadly represented by 

the Congress. And so I think one of the most difficult areas is when 

the commission is in grayer territory, when there isn’t a clearly 

demonstrated consensus in the legislature, and then we take the 

buffeting, too, of trying to make those very difficult decisions in an 

unambiguous environment. And I think that there would—there 

are some very fundamental threshold questions that I think would 

probably benefit from Congress in its wisdom making judgments 

initially about——

Senator BREAUX. Assuming that Congress said that, look, we 

want to have a level playing field. And it’s hard to say what’s a 

level playing field, but basically we’re talking putting everybody on 

an equal competitive basis. And it seems like a lot of the things 

that are needed to be done in order to accomplish that are very 

technical. I mean, there are pages of regulations that apply, I 

think, to the local phone companies if they’re going to get into this 

area. And a lot of it’s very technical. I mean, a lot of us really probably don’t know the details of what each one of those require. So 

it does seem to be a great deal of technical adjustments that would 

be made in order to create that level playing field. And as you’ve 

indicated, one of the things that the FCC is supposed to do is to 

handle the technical issues. I mean, am I correct in talking about 

that, or am I missing the point somewhere, or do you——

Mr. POWELL. No, I think you’re correct, but I also think that all 

those technical judgments have to stem from some very fundamental conclusions. For example, will there be a—will parity include wholesale access by other competitors on an intermodal 

basis? Right? I mean, if you really wanted to confer that judgment 

to me, we’d figure it out, but it’s one of the most fundamental 

things that I think is probably decided by this institution. Now 

then, whether we could technically figure how and what manner 

that is done, I am quite confident that we could. 

Senator BREAUX. Well, I’m not sure the policy direction is 

enough. I mean, policy direction is fairly simple, and our effort is 

to create a level playing field so everybody can compete with the 

same rules. And the question is, is that enough of a policy direction, or do you have—would we have to do more than that? 

41

Mr. POWELL. Well, I’d like to think about that more, but generally I think that I would lean toward wanting to discuss with 

Congress more fully slightly more than just a simple mandate to 

achieve parity, which is a relatively—bit of a——

Senator BREAUX. It’s in the eyes of the beholder, to a certain extent. 

Mr. POWELL. Yeah. 

Senator BREAUX. And I understand that. It’s very difficult to say, 

look, make it fair. I mean, how do you do that? I mean, you know, 

that’s what we’re struggling for. 

Mr. POWELL. But I will only offer to you that this is something 

we have worked on, thought about in the most exhaustive terms, 

and I know that you’ve often asked me to come and talk to you 

about it, and I openly and happily commit to any member to do 

that. I think it’s a very, very difficult area, and I think it’s very, 

very hard to think through, and—but we have done a lot of thinking about it and would be more than happy to engage in——

Senator BREAUX. Thank you. 

The CHAIRMAN. Senator Dorgan? 

Senator DORGAN. Mr. Chairman, thank you. 

Mr. Chairman, I could ask some questions—lengthy questions 

about all of these companies who will follow your WorldCom, Global Crossing, and Qwest. But let me, for purposes of this discussion, 

ask some questions about Qwest. Qwest serves 24 exchanges in 

North Dakota. Let me also say to you that I had a rather lengthy 

discussion with the new CEO of Qwest. I believe it was the week 

before last, and I was impressed. He comes from a no-nonsense 

side of the industry—many, many years steeped in that side of the 

industry. I was impressed with him, and I think he wants to take 

this company in the right direction. 

Having said all that, I want to try to get you to tell me and tell 

North Dakotans who are customers of Qwest who they should rely 

on, who they should look to for these kinds of problems. And I’ll 

give you an example. Qwest is in 24 exchanges in North Dakota. 

It offers DSL service in only four of them—4 of 24. Question, why? 

Qwest is also working in 27 other countries, has investments in 

27 countries. Qwest, as you know, while it couldn’t provide DSL 

service in 20 of the 24 exchanges it works on in North Dakota, it 

had the folks at the top of the company making a substantial 

amount of money even as they were making investments in foreign 

countries. Mr. Anschutz reaped $1.9 billion from company stock 

sales since 1998; Mr. Nacchio, over $300 million. And when he left 

the company, he was given a $15 million bonus on top of his $1.2 

million salary and then given a $10 million severance check as he 

went out the door. Now, that’s—for stewardship at a time when we 

are now told by the new CEO that it appears the company, during 

the 3 years most recent—2 years, rather—has exaggerated revenue 

and understated costs, and they will have to restate their earnings. 

Now, so here’s a company that says, ‘‘I want to invest in 27 other 

countries, but don’t want to do DSL in 20 of the 24 exchanges in 

the state of North Dakota. I want to sell $300 million worth of 

stock, some of them within 60 days after saying that the company 

would meet its targets, and then failing to meet the targets by 10 

percent.’’ He sold all that stock. In addition, it now appears that 

42

they were cooking the books, that the new CEO has to restate all 

these earnings and expenses. And if I’m a customer in Qwest in an 

exchange in North Dakota where I’m not able to get DSL service 

because Qwest says, ‘‘We’re not going to offer it,’’ who do I look to 

to see that this company is doing what it ought to be doing accounting-wise, in terms of executive compensation, service, DSL, 

and so on? Do I look to the FCC? Do I look to the SEC? Who do 

I look to? I’m a customer, and I see all this, and I think it stinks. 

I mean, it’s just disgusting. So who do I look to? 

Mr. POWELL. There was a lot in there. I’ll try to get through 

them. You don’t have DSL, I think you look to, one, the company. 

Why do I say them first? Because whether one thinks, regrettably, 

there is no provision I know of that compels a company to deploy 

service somewhere. That’s regrettable perhaps, but that company 

ought to account for the citizens in the state that it operates, why 

isn’t it providing a certain kind of service to them. 

But just as importantly, I think the North Dakota Commission, 

which is quite notable, has a lot to do with the conditions and the 

local exchange markets and can consider whether in the context of 

its regulatory responsibilities at the local level is complying fully 

or that citizens would prefer other judgments being made by that—

by that group, particularly when that group is fundamental to 

questions like whether it will grant 271 approval within the state, 

whether it will continue to consider regulatory requests of the company as it continues to operate. I think that they sit at the fulcrum 

of many of those decisions. 

Us, depending on what it involves, to the extent that it has an 

interstate component system, I think the Federal Communications 

Commission ought to serve them as well. 

On the accounting stuff, you know who I think they should have 

called is the state prosecutor and the Department of Justice if they 

are things that constitute criminal or other kinds of regulatory violations. 

And if it turns out that there are not sufficient laws that cover 

the kinds of conduct that creates that sort of outrage, they turn to 

you and they turn to this institution, which I think that the public 

has, and they ask for these conducts to be incorporated into a legal 

regime that would permit prosecution. 

Senator DORGAN. Would you agree that everyone has failed these 

customers at this point, given the recitation I’ve just offered you? 

For example, on 20 of the 24 exchanges, no DSL service. I guess 

it costs about, what, $100,000 to set up a station to extend beyond 

the station for DSL. They say, ‘‘Well, we don’t intend to spend the 

$100,000,’’ but then they give Mr. Nacchio a $10 million severance 

check on top of his $1.5 million bonus, on top of his $1.2 million 

salary, on top of his $300 million from the sale of stock, all during 

a period in which they apparently cooked the books. Do you agree 

that, if you’re a customer, you must think that everybody failed you 

and probably also would agree that if you’re a stockholder, you certainly think everybody has failed here? 

Mr. POWELL. Oh, yes. 

Senator DORGAN. And the reason——

Mr. POWELL. They probably do. 

43

Senator DORGAN.—the reason I asked the question earlier when 

I made the statement is—you know, first of all, I like you personally. I voted for your confirmation, but sometimes I get heartburn 

when I read the things you say in the newspapers and the speeches. You say, ‘‘I believe we should trust that the market will lead 

to the most beneficial outcomes.’’

I’m a great believer in the market. I’ve studied economics, and 

I taught economics, and I’m a great believer in the marketplace. 

I’m a firm believer that in many instances, you must—must—have 

effective regulation. For if you don’t have effective regulation, you 

will have a perversion of the market. And I worry very much about 

a philosophy that says, ‘‘Well, let me go take a break here and 

watch things for awhile.’’ I worry very much that that—when the 

part of the FCC—the SEC, FERC, the FCC—I worry very much 

that that gives people in this country less than they ought to get 

in terms of regulatory oversight. 

So I hope, Chairman Powell, that you are a tiger on these issues 

and you ratchet up an effort to say that on my watch, your watch, 

you’re going to use all the tools at your disposal to prevent these 

kinds of things from happening again. I regret all of this has happened, and it’s not—you know, I don’t know that you lay the blame 

to one particular location. There’s avarice and greed and, you 

know, some folks that are crooked and have a heart that doesn’t 

respect honesty and fairness and, you know, there’s a whole series 

of reasons. But I think it’s also the case that in hearings in here 

and the Energy Committee and elsewhere, we’ve seen federal agencies that have not done their job as—in their oversight role. So my 

hope is that you will be very aggressive. 

I wanted to ask about universal service here, but this is not the 

hearing to do that. And, as I said, I could have asked questions 

about the other two companies. I chose Qwest only because they 

serve 20 of 24 exchanges in North Dakota. You might want to respond to that, Mr.—Chairman Powell. 

Mr. POWELL. Sure, I’d be happy to. I make no apologies for believing in the importance of market principles in economics, but I 

often think that this is widely misperceived as not believing that 

regulation has a place in the operations of economic activity in the 

country. I don’t think I’ve ever said such a thing. I wouldn’t be 

doing the job I’m doing if I was a complete libertarian and believed 

in laissez faire. 

Indeed, I think that if you really look at our rhetoric rather than 

the reportage of it in trade magazines, you’ll find that we often employ our regulatory authority quite effectively to protect the interest of consumers. As I said, almost on any metric—people may not 

be happy with every 271 we’ve approved, but we’ve disapproved 

just as many because they have not met their regulatory obligations. 

In our call for stronger enforcement to punish wrongdoing of incumbent local exchange carriers that violate merger conditions and 

violate the conditions, we are calling for regulatory power to aid in 

enforcement efforts. Under our—under my leadership at the commission, we’ve brought more enforcement actions than any previous 

commission and have brought the largest and first fines against 

Bell operating companies of any Commission. That’s, to me, an imVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00047 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
44

portant regulatory function that we serve, and serve proudly, and, 

indeed, want more of that authority to do so effectively. 

I think that I also believe deeply that most of these policy judgments are first minted by you. And I have a very profound and sincere commitment to trying to be faithful to the objectives of that. 

Much of it, however, has been left to us for implementation. We 

struggle sometimes to find the balance in that. But I do believe 

that when we’re done, our record will show a good balance of understanding that it is not regulation versus deregulation. We need 

both, and we need to do both well. 

Senator DORGAN. Chairman Powell, thank you for that response. 

Let me just say, in conclusion, that what Senator Wyden talked 

about is important to many of us, as well. Fewer choices, by definition, almost always means less competition, and I worry about that 

in the context of all of this, as well. 

Mr Chairman, thanks for your indulgence. 

The CHAIRMAN. Surely. 

Senator Cleland? 

Senator CLELAND. Thank you, Mr. Chairman, and thank you, 

Chairman Powell. 

I’ve been sitting here listening to this, and several thoughts have 

come to mind. A line by William Butler Yeats that life is like a spiral staircase; we keep coming back to the same point, but always 

from a different perspective. 

When I was a young signal officer in Vietnam, particularly with 

an infantry battalion, I was the communications officer. It was my 

job to provide communications. It was my job to do job No. 1, service the battalion in terms of communications. If I didn’t, I got relieved, because somebody got hurt. 

And I think what we see now, as they say in my part of the country, there’s something bad wrong. I don’t know what it is. I wasn’t 

here—in government here when MCI, which is the precursor of 

WorldCom, ultimately took the Bell system to court and you had 

the breakup of the Bell system. Now WorldCom itself is bankrupt. 

I wasn’t here in the 1996 Telecom Act which glorified competition 

in the marketplace, and that was going to make it all well. Something’s bad wrong. 

We now have an implosion in the telecom industry that’s not 

only hurting our economy, it’s hurting America, and we are beginning to compromise job one. We’re coming back to this point of 

service, and that is our mission, but we’re coming at it at a different perspective. Some things have changed in the last 10, 20 

years, and something is wrong, because we’re winding up with 

Adelphia, where that family company was charged with, in effect, 

misappropriating a billion dollars. WorldCom misplacing $4 billion. 

Qwest accused of cooking the books. Global Crossing was going 

down. Something is bad wrong. 

I would like your opinion as to what went wrong and what you, 

the guardian of the telecommunication industry in this country and 

making sure that service is, indeed, the number-one priority of 

your agency and of this government, what we do to restore that 

service to the American people so they’re not threatened either 

with unemployment in the telecommunication industry, losing their 

401(k) plans to heartless CEOs, or being disrupted in their telecom 

45

service without which you can’t do personal business or regular 

business. What went wrong, and what do you propose to do about 

it? 

Mr. POWELL. Well, I would just abbreviate what I said in my 

statement about what went wrong. I think there was a gold-rush 

mentality in the 1990s. People rushed aggressively to be the winners. I think they over expended. I think they raised debts to staggering levels, and I think they couldn’t service them with revenue, 

and they destroyed themselves in that regard. I think the most 

fundamental crossing of the Rubicon was that some companies, 

under those unrelenting pressures, chose to cheat, and they chose 

to cheat in order to keep the party going, a party that was ultimately doomed to fail, but nonetheless, we were going to keep it 

going. 

I think the blame for that rests in lots of places, but in differing 

degrees. I think it certainly has to, first and foremost, rest with the 

failure of leadership of those units, failure of leadership in the governance of those units and those fiduciaries, like accounting firms 

and lawyers, who are charged with the sacred responsibility of trying to prevent that from happening. All of that fell apart in these 

cases. I think everybody’s doing the right thing to try to root out 

why that went wrong and how to prevent it in the future. 

From a matter of telecommunication policy, I think that we have 

an obligation to look at how did it get this far? Did we do anything 

to contribute to, stimulate, inadvertently facilitate the kinds of 

business judgments that led to getting to that moment of crossing 

the Rubicon? I think we’re looking at that hard. 

I think that we have to be aggressive and learn to be very effective in this bankruptcy context, something that’s new to the commission. As you were alluding to in the days of Ma Bell, you know, 

we didn’t have bankruptcies. This is a relatively new phenomenon 

to regulatory agencies at the state and at the federal level, and 

we’re working quickly to adopt responses so that as the transitions 

that need to take place to recover take place, consumers are not the 

ones who pay the price in terms of service. 

Those are some of the things that we’re going to do, and we keep 

looking tirelessly for other ways to do it. But we take seriously our 

responsibility and role to use our resources and our jurisdiction to 

do what we can to restore that confidence and credibility. 

And just as importantly, because I think the—it’s important to 

highlight that the commission does not have authority to regulate 

securities and banking questions, but that we do work as a sister 

agency with those institutions that do so that we can bring not 

only information as necessary, but expertise. The role I’ve played 

to date on a corporate task—fraud task force and with the SEC is 

to help explain what are access charges, how does this happen, why 

does the telecom carrier do this—help us be better at our job of investigation and prosecution, something that had not revealed itself 

to communication policy before, but I suspect is here with us from 

this point out. 

And we have opened up, as I said, Memorandums of Understanding. We’re working to develop our interagency participation 

with Justice. And I hope and pray and we’ll spend every effort we 

have trying to make sure that that bears fruit. 

46

Senator CLELAND. Thank you, Mr. Powell. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Allen? 

Senator ALLEN. Thank you, Mr. Chairman. And thank you, 

Chairman Powell, for your, in my view, very logical, outstanding 

statement and prioritization of the tasks of those issues that are 

within the jurisdiction of the FCC. 

I, first of all, agree with your approach of service continuity 

being No. 1, job No. 1. And that is important to make sure that 

our nation’s communications system stays reliable and useful. I 

also commend your more of the long-term—as you get down these 

priorities, your long-term vision of what needs to be done. 

There is also a thread of optimism there that it is still going to 

be good some day, somehow, in the future. Of course, right now we 

see this corporate meltdown. You see the fraud. You see the scandals. And I appreciate that you recognize the importance that all 

of this has on a lot of vendors and suppliers and others that are 

involved in it. 

Now, when you get to the—your second point, the rooting out 

corporate fraud, a lot of that’s, I think, going to be addressed by 

the bill that President Bush signed today: The Corporate Accountability Bill. When you get into three and four and five—restoring 

financial health, prudent industry restructuring to restore a competitive supply and demand matter and all, and revenue sources, 

services and so forth. You look at this as an economics matter in 

that obviously a tremendous amount of investment went into communications infrastructure. Clearly, either because the prices were 

not high enough to consumers or consumers did not demand the 

added access or the added services, they’re not recouping that investment. Thus, the bankruptcy, beyond all of the fraud and deception and so forth. 

Now, when you talk about these three companies and indeed, the 

rest of the industry, one of the reasons you mentioned as to why 

the industry is suffering so badly is it’s a supply and-demand matter. Now, the rate of consumer and business demand is continuing 

to grow. That’s staying stable and growing, not—albeit not at the 

rate they projected. None of this infrastructure is perishable. In 

other words, you can have fiber optics, and it’s not going to perish, 

it’s not going to atrophy from a lack of use. So the question is, is 

that—with the expectations never materializing, when you look—

and this is my understanding—that an estimated 39 million miles 

of fiber have been laid in the United States as part of this massive 

build out in the industry, yet only 10 percent of that fiber is use 

today. The CLECs, the ILECs, the cable carriers have spent billions of dollars, yet only 10 percent of the fiber capacity that is 

available is being used. 

Now, can you, from your perspective, comment on why this is the 

case? It clearly is a lack of demand. Is it cost? Is it content? Why, 

in your view, does this lack of demand exist? Because that’s what’s 

going to eventually, when you get into restoring financial health, 

restructuring revenue and so forth, that’s what’s going to have to 

come—either they’re going to have to drop their process or someVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
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thing is going to happen. But why do you feel that there is this 

lack of demand for this expanded investment in opportunity? 

Mr. POWELL. Sure, Senator. Let me start with something you alluded to which is, it’s a little bit of a mischaracterization to say 

that there really is a lack of demand. Doubling—Internet doubling 

every 100 days may be fanatical, but it is doubling every year. It’s 

an extraordinary growth rate by any historical measure of other 

services. So there is demand out there. People do want services. 

What’s astonishing is the incredibly quick way that the competitive 

pressures and carrier optimism led to infinite belief in the amount 

of supply that would be needed to meet demand. And we say demand is out of whack, but I don’t think any level of demand could 

swallow the kinds of capacity that has been put in the ground, certainly in the short-term, and of some question, ever. 

The thing that we haven’t had in this discussion is the relentless 

power of technology, which I think is the other part of the story 

that I didn’t allude to specifically, which is, whether we like it or 

not, no matter what the economy is doing, the laws of physics are 

dramatically increasing capacity and microprocessing power while 

simultaneously cutting costs, which means that every carrier out 

there has got a serious problem all the time. 

The minute I lay this fiber, the minute I throw this box on the 

end of it, you know, within a matter of months or a year, or if you 

follow Moore’s Law, 18 months, somebody’s going to be able to do 

twice as much at half the price. It’s sort of this declining cost curve 

forever phenomenon in which the technology is relentlessly undercutting the investments. And I think that one of the things is not 

only the physical capacity of the fiber, but the extraordinarily powerful exponential increases in its capability. Now we can light not 

16, but 280 more and constantly increasing capacity. Technology is 

just on a more vicious curve than consumer adoption and demand. 

And this is a big problem in the market on a going-forward basis. 

So, we should be careful not, I guess, not to fall for the false 

premise that, oh, all that capacity will always be usable; it’s just 

a matter of finding the killer app. I do think that part of the market’s going to have to fix itself, in terms of restructuring, to some 

degree, to cut out excess supply as opposed to just utilize it. 

But back to the other half of your question. I do think there’s 

still a lot of demand stimulation. This is the classic chicken-andthe-egg problem of new technologies, which is people don’t want to 

build it until there’s something to do with it; nobody wants to make 

anything to do with it until there’s something to do it on. And I 

think that it’s an iterative process. There’ll be a little of one, and 

then a little more of the other, and a little of one, and a little more 

of the other, until it hits a tipping point which it really finds something sweet. I’ve always believed that consumers generally do not 

think of themselves as ever buying pipes. I don’t think they care 

what’s in the ground. I don’t think they pay attention to where 

their NID is. I don’t think the average consumer knows what a 

NID is. All they want is that thing to work when it turns on. 

What they are buying is Amazon.com. What they are paying attention to, where they are gaining their value is in the services and 

content information they come to. I do think that stimulation of 

content and applications is a critical part of our modern economy 

48

and it’s a critical part to making this work. And I think that most 

have recognized that. I know Senator Burns and the Internet Caucus and the Congress talk a lot about that. Senator Hollings is trying to consider questions about copyright policy. All are integrated 

into the question of how to make content and applications sufficiently viable and cost effective so consumers will buy this thing. 

And when a consumer sits down and the computer is $50 for 

broadband, there’s a lot of people who say that’s not worth it. Let 

me tell you something. When I bought my wife my network for 

$150, and suddenly that $50 could serve every computer in my 

house and I could wow my neighbors by surfing my Internet on my 

back deck, which I do regularly, it’s suddenly worth it to me. And 

that’s something nobody every heard of almost a year and a half 

ago. 

So those things have got to keep coming, that suddenly slash 

what seems like ridiculous propositions into really value-added 

propositions. The danger is if everybody stops playing, or takes 

large hiatuses, it’s hard to keep that iterative process going. 

Thank you. My time’s up. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Nelson? 

Senator NELSON. Thank you, Mr. Chairman. 

Mr. Powell, I was particularly intrigued by your comment about 

No. 4, the prudent industry restructuring in which you stated, 

‘‘Survival and health will depend on prudent industry consolidation. I emphasize prudence, because some mergers clearly could 

present a threat to competition and may not be in the public interest. That can only be determined upon careful and thorough review 

of a particular transaction. Regulators will have to walk a fine line 

to achieve stability while not squelching competitive opportunity.’’

I certainly agree with those words that you spoke to the Committee. Could you give us some specific hypotheticals of what would 

be the—as this shakes out—as this industry shakes out, as combinations occur, which I said in my opening statement, which are 

inevitable, just like the airline industry? 

How are you, other than these words which are, I commend you, 

which are the watch words that you have to strive for as a regulator. But what do you have in mind as you see this industry on 

down the line so that we protect—through competition, protect the 

interest of the consumer? 

Mr. POWELL. Yes, sir. The—I should be quite frank and say that 

I’m asked this question a lot, and I always feel incompetent and 

unable to answer it effectively. Why? Because I don’t know how to 

hypothesize on what is a good combination and eminently thinkable, and what’s a bad combination eminently unthinkable. I can 

generalize about what the risks and possible dangers are and the 

possible benefits. 

But I was trained in antitrust and competitive policy and feel extremely strongly that these are enormously fact-intensive and casespecific reviews. The Department of Justice, when it reviews a 

transaction, often is collecting 800 and thousands of boxes of documents in an effort to assess the market and the particular 

strengths of the actual carriers and what services they have. And 

I think the understandable desire to be able to have a vision and 

know in advance that, if I were king for a day, I would put these 

49

two guys together and not let those two guys—one, is an arrogance 

that I don’t subscribe to. I don’t personally believe that I’m capable 

of doing that effectively. And even if I was, I don’t think that’s 

what you pay me to do. I think that the only thing we can do is 

be guided by those watch words and the process which we employ 

when they are presented to us and ensure that the proof is in the 

pudding of our implementation of it. And I hope that, if and when 

this occurs, that I’ll sit here and you will be pleased with the results, but I—I don’t know how to say unequivocally what they 

would be. 

Senator NELSON. All right, I’ll accept your answer——

Mr. POWELL. I don’t have any other ones. 

[Laughter.] 

Senator NELSON.—recognizing that you can’t go out and lay out 

a scenario. But by me asking the question——

Mr. POWELL. Sure. 

Senator NELSON.—we’re going to be watching you like a hawk. 

Mr. POWELL. You won’t be the only one. 

[Laughter.] 

Senator NELSON. But there are others who watch you for their 

own self-interest——

Mr. POWELL. That, I know as well. 

Senator NELSON. Are you going to be looking out for the——

Senator BURNS. And you’re not? 

Senator NELSON. No, I’m looking out for the interest of the average Joe Citizen who has benefited as a result of the increased competition that occurred. The fact of the cost of long-distance service 

today, the fact of the multiplicity of cell phones and wireless transmissions, I think has been a benefit of the increased competition. 

And that’s what I’m looking out for, Senator Burns. 

Now, let me ask you this. We are going to see some shake out 

from telecommunications bankruptcies. And as companies emerge 

from Chapter 11 having shed their debts, there’s always the possibility that they are going to undercut their debt-laden rivals, causing further collapses. Give me the benefit of your thinking with regard to how does the FCC take this scenario into account. 

Mr. POWELL. That is actually an excellent question to which I 

think a lot of discussion is ensuing. I don’t think there are a lot 

of great answers to that at the moment, in this sense, that, one, 

it’s not clear how genuine or imminent that kind of scenario is, but 

it is a possibility. It has occurred in industries in the past. I mean, 

we have a wonderful system that allows people to go into Chapter 

11 bankruptcy and reemerge having shed their assets. That ought 

to be a consumer-enhancing prospect. A company emerges 

healthier, more financially capable. 

It works really well on an individualized basis, but when you’re 

looking at a total industry, it runs the risks, as you point out, that 

I think are relatively legitimate, that that carrier emerges free of 

a lot of its debt that was burdening it before, but it is in competition with carriers that have successfully managed to stay out of 

bankruptcy, but are nonetheless struggling to maintain financial 

health while continuing to carry that sort of debt. And if what happens is the emerging carrier unleashes yet another price war with 

other carriers unburdened by the restrictions it had prior to bankVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00053 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
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ruptcy, there’s always the danger that the other carriers simply 

cannot compete on those unfair premises, that they simply cannot 

match prices with a company that has shed all its debt while you’re 

carrying $30 billion of it. And there has been scenarios postulated, 

at least in the press and among analysts, that other carriers could 

be forced into bankruptcy in an effort to compete. 

I don’t yet know how possible or imminent I think that is. I’m 

a little skeptical of this scenario happening on a large scale basis—

just out of instinct, to be honest, and sort of a look at the industry 

and whether—you know, how much more room in the bottom is 

there in long-distance pricing, for example. Will WorldCom emerge 

and charge 2 cents a minute? I doubt it. Although I’d like it on my 

bill, but——

So we don’t—we don’t know how imminent that scenario is, and 

we’re not quite sure what the government responses could be to it. 

It could be one—if it were really genuine, it could be one of these 

spiraling things that would be very difficult to figure out how to 

prevent. This is another area we’ll just have to continue to think 

about and——

Senator NELSON. In your mind, is there a role for the FCC in 

that scenario? 

Mr. POWELL. I’m not sure what it is, but I wish there was. I 

mean, I wish we could think of an effective way within our jurisdiction to help dampen that. I think one of the things that gets into 

painful areas is if there are restructuring and consolidations that 

provide price stability, if there are rules or procedures that could 

help minimize the rising costs of infrastructure or provide a more 

productive way for companies to both pursue financial health and 

remain competitive, I think we’d be very open to trying to pursue 

those rules and regulations, whether prices could be allowed to do 

things that they previously were not allowed to do, or impose new 

restraints that we previously wouldn’t have imposed. But I think 

it’s early in the thinking to offer specifics at this point. 

Senator NELSON. Thank you, Mr. Chairman. 

The CHAIRMAN. Chairman Powell, my colleague, Senator Dorgan, 

teaches me better tact or better manners or otherwise, because you 

have given me heartburn. But Senator Dorgan says he voted for 

you. So did I. And I’ve been always a good friend of the—and admirer of the Powells. Ms. Alma and my wife are good friends. The 

General and I got our honorary degrees together down at Tuskegee, 

and I work with him very closely as Secretary of State. I’ve got his 

appropriation. 

But the statements, as Senator Dorgan says, that you came on 

saying that the public interest was just too vague, it was hard to 

really determine, and otherwise that market forces, the market 

forces were going to operate—I can tell by your statement this 

morning that, I had an idea that you really didn’t know, but I can 

tell that’s an excellent statement. You’re a highly intelligent individual. But what really bothers me is, when you make these statements—when this thing occurred—I’ve got the quote where you 

thought that maybe the whole matter was as result of too much 

competition. We believe these markets didn’t need to be natural 

monopolies, and they could be competitive. Nevertheless, Chairman 

Powell went on to say that the—to permit the competitors access 

51

to the Bell networks may have contributed to the current telecommunications crisis by encouraging an ever proliferation of competitive entrants that together couldn’t justify the collective capital 

investment. 

Well, that’s just bootstrapping the fraud that’s been going on in 

the stock market that you rushed to, and Chairman Abernathy. 

That’s why I’m glad to see you here—Commissioner Abernathy—

she noted, quote, ‘‘The previous Commission seemed intent on stimulating competition as quickly as possible without regard to the 

kind of competition that was being promoted and whether or not 

it would be long-lasting and beneficial.’’

You see, it hadn’t been too much competition. The CLECs have 

gone, like you noted in your statement, from 300 down to 80, and 

everybody are back on their heels hardly able to survive, much less 

compete. But when you indicate there’s too much competition, that 

you’re streamlining the Class A accounting, cutting in half the requirements, giving flexibility, that’s exactly what we had too much 

with the Securities Exchange Commission—too much flexibility. 

And now we’re trying to tighten it. 

And then that, you’ve got hearings that communications really 

get out from under the regulations themselves by classifying them 

as information. That’s what’s been bothering me. But now that’s off 

my mind. Let me ask this. 

[Laughter.] 

The CHAIRMAN. With respect to actually getting to the point, you 

can see the interview that’s going on. That Bell Company cloud. 

Ranking Member McCain is exactly right. We did have the lobbyists’ lawyers write the bill. But we oversaw every bit of it. We 

asked them over a 4-year period. This communications law is very, 

very complicated. And so they would meet on a Friday, the Bell 

Companies, and on long distance on Tuesday morning, and they’d 

go back and forth to each lawyers checking each other. They all 

wanted to get into long distance, the Bell Companies. And instead, 

they didn’t want to compete at all, they wanted to hold on to their 

particular monopoly. They questioned what they had written, actually, as their own lawyers, the constitutionality. They kept us tied 

up in the courts. And here, 6 years later, now, we’re still—they’ve 

still got 90 percent of the last line, so there’s not too much competition. They’ve still got a monopoly. 

And what the gentleman from Louisiana says, that we want parity, we want parity. Parity? They’ve got parity. One, we’ve got a 

monopoly, the cable crowd, going into the residents, and the DSL 

crowd into the business. Both of them have got about 80 percent 

of it. Now, what we have resisted here on the Senate side is extending the monopoly. All this idea of giving them parity is giving 

them both a monopoly. That’s not competition at all, and we’re not 

about to vote for it. 

And even though this Tauzin-Dingell and the parity bill and the 

Bell Companies buying up all the lobbyists—every friend I’ve got 

in South Carolina has a lawyer that has been bought and come to 

see me, ‘‘What can we do to get together,’’ and that kind of stuff. 

You have to smile, and I have to smile. I go through it. It’s the full 

employment act. 

[Laughter.] 

52

The CHAIRMAN. But it’s the Tauzin-Dingell intermural and now 

called parity and everything else to extend the monopoly. They 

don’t want to compete. And what we have got to do doesn’t go along 

with that parity and—they think you—as a result of your market 

bent that you’ll do what they can’t to get through Congress. That’s 

what they really—that’s what the Senator from Louisiana wants 

you to do. Please don’t do that, and don’t worry about—some of 

these things here still bother me. 

When you talk about the fines, for example, we know irrespective 

of their fines or the amount, they just pass them on into the ratepayers. For example, Bell South has a total fine of $20.5 million, 

but they had total revenues of $20.13 billion. And Qwest had $878 

million in fines, but that’s onto revenues of $19.7 billion. And similarly, SBC had $639 million in fines, but that’s on $45.91 billion. 

And similarly, Verizon—Verizon paid $300.4 million in fines, but 

Verizon has $67.19 billion in revenues.′′ So they’re playing a sordid game. Here we are. We’ve got the demise and the downfall now of telecommunications. My idea and 

comments here this morning is to plead with you, as the chairman 

of that Commission, to continue on with competition, try to shortstop, and don’t let’s use the demise of telecommunications to be 

used to extend the monopoly. If they—if Bell Companies have lost 

any moneys—my Bell South is in the 22 countries. There’s Qwest 

and so forth was into all of these other countries. They’ve been investing everywhere. They’re not extending the competition. 

The only reason we didn’t re-regulate cable—and I would think 

maybe the next Congress will; I don’t mind saying that. But the 

only reason we haven’t done it is that’s been the only competition 

to the Bell Companies on getting out the broadband. That’s the actual fact here at this particular level in the Congress. 

So we’re trying to continue the competition. We want to make 

sure that the Bell Companies are not just increasing the fines. 

You’ve got to watch them more closely than that. And otherwise, 

I had some other notes here to comment on, but we’d be glad to 

yield to you for your comment. You can see what I’m getting at. 

They’re trying to get you to extend the Bell Company monopoly. 

That’s all it is. And they have held onto it and held onto it and 

thwarted at every turn anybody to try to get into that 251 and 

compete. And now they’ve even written you with respect to advance 

payments. Here the CLECs, like everybody else, are just teetering 

financially. And they say, ‘‘Well, if we can get the Commission, by 

gosh, to get advance payments and everything else like that and 

additional securities in order to do business, even though we have 

had a good financial picture all along, then that additional advance 

payments and financial securities being pledged and everything, 

that’ll really put the—40 of the other—remaining 80 under. I hope 

the Commission doesn’t go along with that particular—they’ve got 

every gimmick in the book to extend their monopolies, take you 

over and take me over, and I want to plead with you, you won’t 

allow it. 

Mr. POWELL. You left me speechless. 

[Laughter.] 

The CHAIRMAN. Yes, sir. You’ve got all the time. I’m going to be 

here. The rest of them can leave. 

53

[Laughter.] 

Mr. POWELL. I’m not so easily rolled over. I’ll just leave it at that. 

The CHAIRMAN. Very good, thank you very much. 

[Laughter.] 

The CHAIRMAN. Senator Burns? 

Senator BURNS. I am done with this witness. I’m looking forward 

to the next panel, sir. 

The CHAIRMAN. Good. I am, too. 

Senator Allen? 

Senator ALLEN. Mr. Chairman, I enjoyed listening to your questions. And in conjunction with what Senator Nelson said, the solution to this is not more monopolies or more regulation. Deregulation has generally been very, very good. Look at all the advancements. And I loved listening to you, Chairman Powell, on all the 

advancements. And maybe it won’t be all fiber optics. It may be 

wireless, satellites, other ways of delivering broadband or Internet 

services. And so my view is while these decisions that were made 

were obviously on poor business assumptions, wrong economic forecasts, and, on top of it all, the fraudulent or misleading statements, 

the solution is—in my view, is not a curtailment of competition. 

Competition is good. I think people will go into it now with eyes 

wide open. That is one of the reasons why some of the capital markets have shrunk, because they want to make sure there’s a rate 

of return. And through it all, what we do need to do, though—and 

this is what your role is—we have deregulation and regulation. We 

are for free markets. We trust free enterprise, but it is all under 

the rule of law, which is the regulations here, to make sure that 

people are complying with the laws. 

And I do appreciate, Mr. Chairman, that I find that this chairman of the FCC uses an attitude that I like to see in our judges, 

and that is he does not create law. He understands that elected 

leaders, whether in the Senate or the House, bills signed by the 

President, are the laws, and then he executes them. And where 

there is discretion and implementation, he uses it, but he’s a strict 

constructionist, so to speak, and I’m confident that the Chairman 

will do that. 

And I thank you, Mr. Chairman. You’re the right man at the 

right time in a time of crisis, but nevertheless I think you have the 

right principles, the right attitude, and the right priorities to get 

us through this and keep our communications the strongest in the 

world. Thank you. 

Mr. POWELL. Thank you. 

Senator ALLEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Dorgan? 

Senator DORGAN. Mr. Chairman, just an observation. Strict 

constructionism, I hope, means something different with respect to 

the courts than it does with the respect to regulators. I remain, of 

course, concerned that regulators use all of the tools at their disposal to address the kinds of things that we’ve seen recently in this 

country, which represents a carnival of greed, something that undermines our economic system. So I don’t quite understand the 

term ‘‘strict constructionist’’ with——

Senator ALLEN. If I may, Mr. Chairman? 

Senator DORGAN. Yes. 

54

Senator ALLEN. In light of what the Chairman was talking about 

and worries about what the SEC might do that exceeds its authority as per laws passed—duly passed, is what I’m talking about. 

Now, the Chairman, of course, has asked for increased fines to 

make these disparities in profits, versus the fines more meaningful 

to get compliance. He cannot have fines that exceed what is allowed by law, nor can he change competition rules when investments have been made by companies such as CLECs without authority from the Congress. I’m one who’s not real thrilled about 

changing those. But nevertheless, he cannot do what is not allowed 

by the legislative branch. 

Senator DORGAN. Yeah, I understand. The only reason I took the 

bait was that as I’ve watched the SEC, FERC, and other agencies, 

I have not seen any agency in danger of finding the limits of their 

authority. The problem has been just exactly on the other side. You 

know, an impression of a statue, while all the other things are 

going on around them. 

And I just—I want agencies—well, I don’t need to repeat it. I 

want agencies to be aggressive, using all of the tools at their disposal to deal with the kinds of things that we have now been confronting: avarice, greed, manipulation, cooked books, criminal behavior. And the result is people at the top left with a pocket full 

of gold, they got incredibly wealthy, and the people at the bottom 

lost their shirts, lost their jobs, lost their investments. And I just 

want regulators to use all the tools at their disposal. That’s the 

only point I make. 

The CHAIRMAN. Chairman Powell, I know you’ve interrupted 

your break to be with us, and you favored the Committee, and we 

appreciate it very, very much. 

Mr. POWELL. My pleasure, sir. 

The CHAIRMAN. Thank you. 

Mr. POWELL. Thank you. 

The CHAIRMAN. Next appearance will be the panel of John W. 

Sidgmore, the Chief Executive Officer and President of WorldCom; 

Mr. John Legere, Chief Executive Officer, Global Crossing, Limited; 

and Mr. Afshin Mohebbi, President and Chief Operating Officer of 

Qwest Communications International. 

We appreciate your patience, and we apologize for the long delay, 

but it was necessary. You could understand the questions we had 

of the chairman of the Federal Communications Commission. We 

welcome you, and each of your full statements will be included in 

its entirety, and you can summarize it, perhaps. That’s what I 

would suggest, the hour is late, a five or slightly over 5 minute 

summary. Or if you really want to, just go ahead and deliver the 

full statement. 

Mr. Legere, we’ve got a street named after you in Charleston, 

South Carolina. We call it Legere. It’s a French pronunciation. We 

welcome you, and we’ll be glad to hear from you first. 

STATEMENT OF JOHN LEGERE, CHIEF EXECUTIVE OFFICER, 

GLOBAL CROSSING, LIMITED 

Mr. LEGERE. Good morning, Chairman Hollings and Members of 

the Committee, and thank you very much for inviting me here 

55

today. We have a submitted a longer statement, and I’ll make a 

few summary comments in my opening remarks. 

Before I commend—before I begin, I really want to commend this 

group for holding this hearing to address, in a serious and thoughtful way, the financial turmoil facing the telecommunications industry, an industry that is vital to our Nation’s health and well-being. 

Since my last appearance before a congressional committee this 

past March, the industry-wide crisis has deepened, and several of 

our competitors have filed for bankruptcy. The time is right for 

congressional attention and expression of congressional confidence 

in the country’s telecommunications infrastructure. 

Having filed for bankruptcy protection in January, we’ve made 

significant progress at Global Crossing toward turning around the 

company. We hope that our experience and perspectives will be 

useful to the Committee as it assesses the prospects for the future 

of the telecommunications industry. 

Now, how did our Nation’s telecommunications industry, with its 

unparalleled infrastructure, advanced telecommunications service, 

and vigorous competition find itself in a state of financial crisis? 

Before attempting to answer that question, I’d like to talk briefly 

about Global Crossing and our experience. 

Our company was launched in 1997. And in just a few years, 

we’ve completed a global fiber optic network that spans 101,000 

miles and is operational now in 220 cities in 27 countries. We provide some of the world’s most advanced telecommunications services to tens of thousands of customers, both in the United States 

and around the world. Many of the world’s telecommunications carriers, multinational corporations and governments depend on us for 

their communication needs. And even in bankruptcy, we continue 

to sign up new customers based on the strengths of our state-ofthe-art Internet protocol-based network and our industry-leading 

advanced services as well as continued superior network performance and customer service. And, on behalf of Global Crossing and 

its employees, let me say how proud we are of that accomplishment. 

So what has happened to our industry over the last year or so? 

I believe we were caught in what I’ll call the ‘‘perfect storm’’ of unexpected drops in demand, rapidly declining prices, a perception of 

capacity glut by our customers, an economic and financial downturn, a closure of capital markets, and, finally, the debt we incurred to build our unprecedented global network. These factors 

cannot be oversimplified, and they have forced telecommunication 

companies of every sort—domestic as well as international, local as 

well as long distance, wireless as well as wireline, into the protection of the bankruptcy laws. 

Going into last year, the telecommunications industry and analysts who studied the industry foresaw a nearly unending appetite 

for capacity fueled by customer demand for broadband applications. 

At the time, the growth of the Internet usage was astonishing, 

posting gains of several hundred percent a year. New bandwidthconsuming applications seemed to be just around the corner, and 

the capital markets were providing funds to new telecommunications and Internet companies. 

56

Global Crossing as well as other next-generation telecommunications companies relied on these forecasts, as did capital markets 

that supplied the funds to build our businesses. We built our networks to meet this expected demand. In fact, we built ahead of demand by necessity, given the long lead times required to build new 

capacity. But demand forecasts were predicated, in part, on hurtling the last mile, deploying broadband to the home and to the office. And, for various reasons, take-up of broadband has taken a lot 

longer than industry experts had expected. 

In the middle of 2001, our customers began to perceive that there 

was an oversupply of capacity. Many of them decided to wait out 

the market hoping for prices to drop. And drop they did, much 

more rapidly and dramatically than had been forecast by all the industry analysts. 

Finally, the larger economic crunch hit our industry and hit 

hard. The economy slowed worldwide, affecting our business customers. And, at the same time, many of our carrier customers faced 

both slowing demand and financial difficulties of their own. Shortterm demand for our network and services began to decline rapidly 

in the last half of last year, and the cash needed to support our 

cost structure and business plan did not materialize. 

It has been suggested that our company and the industry’s financial issues were caused by accounting irregularities. Speaking for 

Global Crossing, it’s this perfect storm that I’ve described, not how 

we accounted for a relatively small portion of our overall revenues, 

that left us no choice but to file bankruptcy. We take very seriously 

the accounting allegations, and we’re cooperating fully with the 

SEC and other investigations in their inquiry into our accounting 

practices. But accounting practices are neither the cause nor the 

cure for the business problems that we faced at Global Crossing. 

Since I joined the company last October, through our bankruptcy 

filing and to this very day, we’ve taken aggressive measures to 

turn the company around. We reduced operating expenses by over 

50 percent, and capital expenditures by over 90 percent since last 

year, and far greater when compared to expenditures in 2001. 

We’re changing our cost structure. We’re redesigning our business 

model. But, importantly, we are not compromising at all on the 

quality of our networks or our service. We’ve focused on customer 

retention and lost very few customers. In fact, we’ve gained new 

ones. 

Despite all the odds, we’re delivering on our promises. We have—

thousands of dedicated and loyal employees have maintained service across our network. We’ve maintained—we’ve met or surpassed 

every operational financial target this year. And the future of our 

company is looking far brighter than it did in January, in a large 

measure due to some very painful but necessary actions that we’ve 

taken during the past year. We’re proud not to have compromised 

on the integrity of our expansive telecom infrastructure during 

these times, and customers in this Nation will benefit enormously 

from this in years to come. 

Now, is there a role for public policy as the industry moves 

through this painful period of transition? First, there should be a 

commitment to encourage fair competition in the telecommunications marketplace. Second, we urge the remaining telecommuniVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00060 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
57

cations bottleneck, the local market, to be opened up to the extent 

possible by enforcing and monitoring compliance with current regulations. Third, we believe that Congress ought to look at ways to 

ensure that fees and policies for access to public rights of ways are 

reasonable and also to ensure that competitors have access to 

buildings. Fourth, it’s essential to promote competition and, most 

important, bring down the price of local access so that promise of 

broadband can be realized. 

And maybe I can illustrate the last point by simply noting that 

sending a signal from London to New York on our network costs 

a fraction of the amount we pay to a local incumbent to terminate 

that same signal in Manhattan for the last-mile connection to a 

customer. 

In closing, we remain confident of the original vision of a global, 

seamless, fiber optic-based IP network with a full suite of advanced 

services. And when we emerge from bankruptcy, which we hope 

will be early next year, we fully believe that we will be in a position to create jobs and create value. 

With the cooperation of our industry partners, the financial markets, and the Congress, we can work together to restore the confidence of the American people. We believe that our industry can 

recover from this current financial crisis and will continue to serve 

as an integral part of the engine for economic growth. And on behalf of thousands of Global Crossing employees and customers, let 

me reaffirm that we very much expect to be a part of that recovery. 

Thank you once again for the opportunity to share our perspective. 

[The prepared statement of Mr. Legere follows:]

PREPARED STATEMENT OF JOHN LEGERE, CHIEF EXECUTIVE OFFICER, GLOBAL

CROSSING, LIMITED

Chairman Hollings and Members of the Committee, thank you for inviting us here 

today to discuss the state of the telecommunications industry. We want to commend 

you and this Committee for holding a hearing on the critical issue of how the industry’s financial health can be restored. This hearing will make a significant contribution to the continuing public dialogue on how we can ensure that the communications infrastructure on which the American people have come to rely is not compromised while the industry makes its way through a period of transition. By holding this hearing, you are sending a positive signal to the financial markets and to 

the public that Congress is confident that our Nation’s telecommunications companies will weather the financial turbulence that we face and that government and 

the private sector can work together to address the issues in a cooperative and constructive manner. 

Despite the much-publicized economic problems of the telecommunications sector, 

we should not lose sight of the fact that our country has the world’s most sophisticated and advanced communications infrastructure and services. Propelled by our 

enterprising culture and funded by private capital, America’s communications companies have created networks that are unparalleled anywhere in the world—networks that are critical to maintaining our Nation’s security and our leadership in 

the world economy. Every day, Americans are able to reap the substantial benefits 

of innovation, efficiency and competition that are the product of these investments. 

Global Crossing and its thousands of employees are proud participants in this 

competitive market. We have completed a global fiber optic network that spans 

101,000 route miles. We provide some of the world’s most advanced telecommunications services to tens of thousands of customers, both in the United States and 

abroad. For our company, for our employees and, most of all, for every one of our 

customers, which include many of the largest telecommunications carriers in the 

world, we ask that this Committee and the Congress do what they can to ensure 

that competition in the telecommunications industry remains healthy. Ensuring 

58

that the industry remains strong and competitive is vital to delivering the innovation and cost efficiencies on which the global economy depends. 

We are here today because America’s telecommunications industry is threatened 

by a financial crisis of enormous and unexpected proportions. I hope to share some 

observations on the sources of this crisis and on how the industry can best survive 

it. Global Crossing believes that government can play an important role in helping 

those segments of the communications industry that are in a state of turmoil to recover. Today’s hearing is part of our collective opportunity to restore confidence and 

rebuild the industry. 

Given the expressed interests and responsibilities of this Committee, today I intend to address the following: (i) the formation and growth of Global Crossing; (ii) 

the profound changes in the telecommunications industry, which began in mid-2001, 

and have brought us to where we are today; (iii) the status of the various governmental inquiries into Global Crossing; (iv) Global Crossing’s performance since it 

filed for bankruptcy on January 28 of this year; and (v) our vision for the future. 

I believe that the industry-wide crisis we are experiencing is a product of the 

interplay among the overall business environment, changing patterns in the supply 

and demand for network capacity, marketplace perceptions, access to capital and the 

regulatory environment. These are among the principal industry-wide factors that 

have caused not only Global Crossing, but also many other companies, to declare 

bankruptcy within the past 15 months. The pandemic nature of the problem we are 

facing is demonstrated all-too-clearly by the broad range of telecommunications companies that are now in bankruptcy: they are U.S.-based, as well as international; 

they own subsea cables, as well as terrestrial systems; they provide long distance 

services, as well as local access; and they are built on wireless, as well as wireline, 

technologies. 

It is important to emphasize that despite the popular perception that this industry’s problems stem from alleged accounting irregularities at a handful of companies, the turmoil we are experiencing is far more complex and more fundamental 

than the media have led many to believe. Allegations of accounting irregularities 

properly need to be addressed and may play larger or smaller roles in the difficulties 

faced by particular companies. Only by understanding the fundamental business 

factors underlying today’s crisis, however, can we all work together to restore the 

strength of this vital sector. 

Formation and Growth of Global Crossing 

Global Crossing was created by visionaries who saw an unmet need in the marketplace for an integrated global high-capacity, fiber-optic network under common 

control. Throughout the history of the telecommunications industry, international 

traffic had been handed off, from one national carrier to another. As the world entered the age of the Internet, some saw that these legacy networks had neither the 

capacity nor the functionality to provide adequately for the envisioned Internetbased services. The vision of the founders of Global Crossing was to facilitate, in 

a more cost-effective manner, the worldwide transport of the surging traffic flows 

stimulated by the emergence of the Internet. 

Global Crossing was launched in 1997 and became a publicly traded company in 

1998. The founders of the Company successfully raised substantial amounts of private capital, capital that was essential to Global Crossing’s ability to compete with 

the huge incumbent players (such as, AT&T) and to the construction of a new fiberoptic network that reached most of the world. Based on the widespread belief in 

multiple independent forecasts of rapid growth in demand for data services, the capital markets supported the project and construction was completed in record time. 

Today, as a result of these efforts, Global Crossing has 101,000 route miles of 

fiber worldwide, fully operational in 220 cities in 27 countries. In addition, the Company has built a large and loyal customer base of public and private entities of all 

sizes. Our customers range from Kay Bee Toy Stores, with hundreds of stores worldwide, to the British Foreign Commonwealth Office, with over 240 embassies around 

the globe. Just last week, we announced that we are now linking research telescopes 

around Europe over our fiber-optic network, allowing research institutions worldwide to advance the science of astronomy. We connect thousands of financial institutions, completing millions of transactions every day over our network. 

Our backbone network makes it possible for Americans to phone their relatives 

and friends in Europe, Asia, Latin America and Australia for dramatically lower 

costs because those calls can be transmitted over our fiber-optic backbone. And, our 

network is an important backbone for the Internet, enabling people and businesses 

to communicate in ways we simply could not have imagined just a decade ago. Despite our Chapter 11 filing and the substantial cost restructuring that we have undertaken, the size and reliability of our network continues to attract some of the 

59

world’s most important companies, financial institutions, and governments as customers. As a major supplier of wholesale capacity and services, our network supports nearly every major carrier in the world. 

As our operations have continued without interruption, even as we proceed with 

our Chapter 11 reorganization, we are fortunate to have lost very few of our customers. We are enormously grateful for the loyalty of the thousands of customers 

who have understood that the value of Global Crossing’s services was not diminished simply because we had to restructure our finances. That new customers are 

willing to trust us with their critical communications needs validates the vision of 

Global Crossing’s founders and gives us confidence for the future. Our experience 

suggests that continuing to focus on customers and service is essential if the industry is to emerge from the current crisis with renewed vigor. 

Although we are a global concern, the vast majority of our customers and most 

of our employees reside in the United States. Our corporate headquarters are in the 

United States and we have network operations centers here. Global Crossing is an 

integral part of the Nation’s vital communications infrastructure, and we are doing 

everything we can to keep it that way. Our future as a company depends on it. 

Changes in the Telecommunications Industry 

The Committee has asked how we got to where we are today. To answer that 

question, we need to take ourselves back to how the telecommunications world 

looked just a few short years ago, when optimism—and demand forecasts—appeared 

nearly unbounded. Throughout the late 1990s and well into 2001, the telecommunications industry and those in the financial world who analyzed the industry foresaw 

an unending appetite for additional bandwidth capacity. Growth of Internet usage 

was astonishing, posting gains of several hundred percent a year, increases that 

were forecast to continue for some time, both in the United States and around the 

world. Enterprise customers were moving toward feature-rich, IP (Internet Protocol)-based networks of just the sort that we have built at Global Crossing. Many 

observers foresaw a world in which graphics, music and movies, with other gigabitrich content, would flow directly to the home, and where new applications—games, 

virtual reality, distributed computing—would consume huge quantities of bandwidth. 

In part, these expectations relied significantly on overcoming the last hurdle in 

the telecommunications world: the last mile. High-bandwidth intercity and international networks were constructed to facilitate commerce and satisfy consumer demand. Consumers and businesses, we all thought, would embrace broadband applications. But, those applications depend on making sure that broadband networks go 

right to the home and office. And, although Global Crossing serves few individual 

consumers, we are an important supplier of network facilities and services to other 

telecommunications providers and businesses who count individuals among their retail customers. 

Even leaving aside the slow deployment and take up of broadband to the home, 

today there remain significant constraints on local access for thousands of businesses. This is particularly so for those outside the main metro areas. For new telecommunications competitors, who want to satisfy that demand, the costs of local access are still high, given the current structure of the industry. 

Global Crossing and other next-generation telecommunications companies relied 

on forecasts of explosive demand for bandwidth, forecasts that were based on expectations of new applications and on hopes of addressing and resolving the issues of 

access and cost of local infrastructure. We built out our networks to meet this expected demand. Creating bandwidth, whether across oceans or land, is not instantaneous. Due to the long lead times necessary to plan, finance and construct new facilities, companies such as ours always have to build ahead of actual demand, which 

requires that our planning for new facilities looks ahead for several years. With actual and projected growth rates for capacity that approached 100 percent annually, 

it is clear that planning ahead for even one year implied the need to build massive 

amounts of capacity ahead of actual demand. For these reasons, we always have 

more capacity than we would need to serve our present customers. In short, at any 

point in time and in any one market, supply may well, and quite appropriately, exceed the existing demand. 

For this reason, Global Crossing, like other large telecommunications companies, 

understood that, as new capacity came on-line, there might well be a temporary excess of the supply of capacity over demand in some markets and for a limited period 

of time. Multiple independent studies undertaken at the time, however, suggested 

that demand would continue to increase at very high rates and that any temporary 

oversupply would be extremely short-lived. The reports of experienced industry analysts indicated that any overcapacity would be swallowed up within a year or two 

60

in all geographic areas. Multiple industry experts and analysts predicted that the 

temporary oversupply in trans-Atlantic capacity would be consumed by 2003, and 

in trans-Pacific capacity by 2004. These same studies suggested that even after this 

supply had been exhausted, demand would continue to grow by leaps and bounds 

for years to come. 

What happened in the middle of 2001, however, is that our customers increasingly 

perceived that there was an oversupply of capacity. In fact, competing systems were 

built, while many more were announced, but never built. Carrier and enterprise customers decided to wait out the market because they thought that if they held off 

on making purchases, they could negotiate a better deal from telecommunications 

providers. In addition, deployment of broadband across the last mile was turning 

out to be slower than had been forecast by industry experts. For these reasons, demand for our network and services did not increase as much as we had planned, 

in significant measure because our carrier customers did not continue to buy capacity to serve their retail users. 

At the same time, and partly as a consequence of the perception of a supply glut, 

prices dropped more rapidly than had been expected in many of the major markets 

that we serve. Our industry had been accustomed, of course, to price declines that 

were driven by advances in technology that were even more rapid than those experienced in the computer industry in recent decades. In the market for broadband telecommunications capacity, the declines in prices had been more than offset by the 

exploding demand for more capacity, leading to growing revenues. By the end of 

2001, however, while price declines had continued to exceed forecasts and expectations, the demand for capacity had slowed. 

In addition to the slower-than-expected rollout of broadband applications, the 

broader economic crunch hit our industry, and hit it hard. The economy slowed 

down in the United States and worldwide, and our service revenues did not grow 

as rapidly as we had predicted. The capital markets, which had previously enabled, 

even encouraged, the existence of many emerging telecommunications and Internet 

companies who were large purchasers of bandwidth, closed down for these companies. Even the large incumbent telecommunications carriers, who were large customers of ours, had financial challenges of their own, whether from the economic 

slowdown, increased competition, the demands of improving their own networks or 

acquisitions of 3G wireless licenses at auction in Europe. 

We were not the only telecommunications company to get caught in this ‘‘perfect 

storm’’ of slowing growth in demand, declining prices, a perceived glut and an economic and financial downturn. We had incurred over $8 billion in debt in order to 

construct and operate our global network and, as the year progressed, we realized 

that it would be increasingly difficult to meet the requirements of that debt. 

Early in the fourth quarter of 2001, I was asked to serve as Global Crossing’s 

CEO. My leadership team and I quickly undertook the further steps that were needed to streamline the company’s operations. We eliminated layers of management, 

implemented dramatic cost reductions, including a reduction in force from nearly 

14,000 to 5,000 employees, and redesigned the company’s business and financial 

models. Despite these necessary and painful measures, it became apparent that our 

debt service, coupled with a realistic assessment of the market opportunities in the 

context of a continued slow-down in the economy, required Global Crossing to explore all its options. 

Towards the end of the year, we accelerated discussions with banks and potential 

investors. As the pressure of loan obligations increased, however, our advisors counseled us that the Company’s situation called for measures more drastic than originally expected, and, with great regret, we filed for bankruptcy protection on January 28 of this year. 

We were neither the first nor the last telecommunications company to seek bankruptcy protection. As The Wall Street Journal reported in early 2001, telecommunications companies had borrowed more than $1.5 trillion from banks since 1996 and 

issued over $600 billion in bonds in order to invest in their networks. Given these 

debt loads, many telecommunications enterprises were forced to cut back their operations and, in the case of some, file for bankruptcy. Inevitably and unfortunately, 

many people who were employed by them, and many others who invested in these 

companies, personally experienced the ensuing turmoil. 

Government Inquiries 

The media continue quite naturally to highlight allegations of accounting irregularities and the role that they may have played in bringing about the current crisis. Each of us sitting at this table is reportedly the subject of government inquiries 

into various accounting practices. With respect to Global Crossing, the media have 

reported that the government is examining issues related to the accounting methods 

61

or procedures our company used for sales and purchases of capacity in the form of 

Indefeasible Rights of Use, or IRUs, in connection with concurrent transactions with 

our carrier customers. 

I do not believe that the way in which Global Crossing accounted for specific 

transactions played any role in our financial troubles. The sale and acquisition of 

capacity via contracts known as IRUs is an essential part of creating efficient networks. Transactions involving IRUs are legitimate and important to both buyers 

and sellers of capacity and have been used for many years in the industry. Accounting for the concurrent transactions raised several very complex issues; in fact, we 

spent a great deal of time working with our independent auditors to determine how 

to account for them appropriately. 

It is far too simplistic to assert that the widespread problems in the telecommunications industry were caused by particular methods of accounting. Whether other 

companies’ difficulties are accounting-related, we cannot say. At Global Crossing, 

however, we know that the transactions in question represented a relatively small 

portion of our business, and that our accounting for them does not explain why we 

found it necessary to seek bankruptcy protection. 

We are, of course, cooperating fully with the investigations by government bodies 

into our accounting practices. We have provided documents and testimony to the 

SEC regarding the subject transactions and precisely how we accounted for them. 

We have also made our employees available to be interviewed by the staff of the 

Energy & Commerce Committee of the House of Representatives, and in March I 

testified before the Subcommittee on Oversight and Investigations of the Financial 

Services Committee of the House of Representatives. For our own part, Global 

Crossing’s Board of Directors has appointed a special committee of independent directors, which is conducting a review of the Company’s accounting practices for the 

concurrent transactions. 

Post-Bankruptcy Events at Global Crossing 

I believe there are important lessons to be learned from our experience at Global 

Crossing as we look forward. Our network is still fully operational. We have thousands of dedicated and loyal employees who have maintained uninterrupted service 

across our network since our bankruptcy filing. We have substantially cut our capital and operating expenditures, and we have met all of our operational goals. 

Delivering top quality service is still our highest goal. We continue to meet the 

national and worldwide needs of our tens of thousands of customers. The fact of our 

bankruptcy has not disrupted or affected a single customer. It is our hope that the 

steps we have taken will allow Global Crossing to continue to compete as an ongoing 

business. We are aggressively pursuing plans to emerge from Chapter 11 with our 

network intact. 

Our financial performance since filing for Chapter 11 protection has met or exceeded our expectations. We are winning new customers and retaining our existing 

customers at rates higher than we had forecast. We continue to achieve an availability rate of 99.999 percent on our IP network, a level of performance that 

matches the best in the industry. Since we filed for Chapter 11 protection, our revenue, earnings, and cash have all exceeded the expectations that we established 

with our creditors. At the same time, our monthly operating expenses are now 40 

percent lower than they were at the end of last year. IP traffic across our network 

shows healthy growth in light of the current environment. 

What does the future hold for Global Crossing? It is hard to say, because we are 

in the middle of a complex restructuring process governed by the bankruptcy law. 

The future ownership of the company is being determined by the confidential auction that is now proceeding, and we expect to present the results of that auction 

to the Bankruptcy Court next week. Although our future is not entirely certain, we 

believe that we will emerge from this process with our network intact, and with 

new, more efficient ways of running our business. 

Before I conclude, let me add some thoughts on the role of government in restoring financial health to the telecommunications sector. 

Although some have argued that, in a time of turmoil, it may be appropriate for 

government to intervene in the market, to apply a heavier regulatory hand to the 

telecommunications industry, we believe that the FCC should stay on course in instituting measures that ensure fair competition and a level playing field between 

incumbents and new competitors. We believe the FCC, supported by the Congress, 

can continue to play an important role, working with industry and Wall Street, to 

assist the industry in transitioning out of our financial crisis. 

We urge the Committee, along with the rest of Congress, the Administration and 

the FCC, to do what they can to open up the remaining telecommunications bottleneck in the local market, including through enforcement and monitoring of the obliVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
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gations of Section 271 of the Communications Act. With respect to the local market, 

it is essential to do what is needed to promote competition and, most importantly, 

to bring down the prices of local access so that the promise of broadband can be 

realized. In addition, Congress has an opportunity to legislate on the issue of the 

fees charged for public rights of ways and for access to buildings. Adopting nondiscriminatory policies and ensuring that fees are reasonable, to allow fairer access 

to public rights of way, will help stimulate demand, promote consumer choice and 

lay the foundation for a healthier industry. 

We believe that this industry will, one way or another, come through this difficult 

period. We cannot be sure how long the crisis will last. At Global Crossing, we started down the path of restructuring nearly a year ago. We have demonstrated that 

a turn-around is possible where management implements a focused and pragmatic 

plan, including often painful, but necessary, cost-reductions. This week, we expect 

that the competitive bidders who have come forward with proposals to invest in 

Global Crossing will make their final offers. And, early next year, we expect to 

emerge from the Chapter 11 process. When we do, we fully intend to continue serving our customers, just as we remain confident in our founding vision, of a global, 

seamless fiber-based IP network. 

Mr. Chairman and Members of the Committee, the current financial turmoil need 

not have a permanent effect on our world-leading telecommunications industry. 

With the cooperation of our industry partners, the financial markets, the Congress, 

the Administration and the FCC, we can restore the confidence of the American people and the world. During the last decade, our country has undergone a communications revolution that has produced substantial social and economic benefits. We believe that the industry will recover from its current financial crisis and that it will 

continue as an integral part of the engine for economic growth. On behalf of the 

thousands of Global Crossing employees and our customers, let me reaffirm that we 

very much expect to be part of that recovery and resurgence.

Thank you, once again, for inviting us to testify.

The CHAIRMAN. Very good, sir. 

Mr. Sidgmore? 

STATEMENT OF JOHN W. SIDGMORE, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, WORLDCOM

Mr. SIDGMORE. Good morning, Mr. Chairman and Members of 

the Committee. 

My name is John Sidgmore, and I’m the president and CEO of 

WorldCom. There are three points that I would like to highlight as 

I begin. First, despite our Chapter 11 filing, WorldCom will continue to deliver world-class service to all of its customers—residential customers, business customers, and the government—without 

disruption. Second, on behalf of WorldCom, I want to apologize for 

the accounting irregularities that we discovered and disclosed last 

month. 

We share the outrage of the American public, and we are committed to cooperating with investigators of all kinds—and there are 

many—to identify the wrongdoers and to taking the appropriate 

steps to ensure that this can never happen again, and to move forward as a highly ethical company. And, finally, we strongly urge 

policymakers to reaffirm their commitment to pro-competitive policies. 

Let me return to the subject of serving our customers. There is 

a perception that when a company files for bankruptcy protection, 

its business operations cease. In our situation, this is just not the 

case, and service will not be disrupted. To be sure, WorldCom has 

been through a very difficult period recently. When I became 

WorldCom CEO at the end of April, the company was facing very 

serious, but not insurmountable financial problems. We undertook 

a plan to cut costs and to restructure our debt. But before we could 

63

complete those efforts, WorldCom on June 25th disclosed accounting irregularities that require the company to restate our earnings 

for 2001 and for the first quarter of 2002. These accounting irregularities led directly to our Chapter 11 bankruptcy filing on July 

21st. Because of the need to restate earnings, we suddenly lacked 

audited financial statements, which in turn caused the public debt 

markets to close to our company. Critically required financing, 

which we had been very, very close to obtaining—I would say within hours—was no longer available, and some of our existing credit 

was withdrawn. The only door left open to us at that time was 

debtor and possession financing, which is only available in connection with a Chapter 11 filing. Entering Chapter 11 allowed us to arrange for up to $2 billion in such financing, $750 million of which has been secured already. 

Ironically, it is because of our Chapter 11 filing that we now have 

the financial wherewithal to continue serving all of our customers—again, without any disruption. 

I would like to further commend FCC Chairman Michael Powell 

for his efforts to reassure a nervous marketplace. It has been very, 

very helpful. And we will continue to work closely with this Committee and the FCC to ensure that customers continue to receive 

our highest-quality service. 

Second, WorldCom has been very proactive in responding to the 

accounting irregularities matter openly, expeditiously, and responsibly. And I want to make it clear that we reported ourselves. Our 

board of directors moved very swiftly and decisively to terminate 

our CFO and to report that matter to the SEC and to the public 

immediately. We have cooperated fully with the various official investigations by the SEC, the Justice Department, and those in Congress. 

William McLucas, the former chief of the enforcement division of 

the SEC, was retained to perform an independent investigation of 

the facts and circumstances that underlie these numbers that were 

problematic. 

Further, two new members have been elected to our board: Nicholas Katzenbach, a former U.S. attorney general, and Dennis 

Beresford, a former chairman of the Financial Accounting Standards Board. Both were appointed to a special investigative Committee of the board that will oversee the McLucas investigation. 

Just yesterday, I appointed a new CFO, John DeBell, and a chief 

restructuring officer, Greg Rayburn. They are two of the most highly qualified and experienced restructuring executives that are 

available. They will play very key roles in our efforts to emerge 

from bankruptcy as quickly as possible with a very healthy business. 

Third, I’d like to amplify on the need to preserve telecommunications competition. We think Congress got it right when it passed 

the pro-competition Telecommunications Act in 1996. Hundreds of 

new competitors entered the marketplace at that time, and network investment boomed. New technologies were deployed. Customers enjoyed innovative services and lower prices. 

A couple of years ago, however, the sector began to experience 

significant problems, as were discussed before. Several factors, including a bad economy, excess capacity, pricing pressures, conVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00067 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
64

verged to create, to use Mr. Legere’s words, a kind of perfect 

storm—and I guarantee you we did not rehearse this—that ripped 

through the telecommunications industry. 

But there is good news. The competitive telecommunications sector, while battered, is far from destroyed. Competition can survive, 

and the industry can prosper, but it can only do so if we remain 

committed to the pro-competition principles underlying the Telecommunications Act. The 1996 act set the right policy direction. We 

think it must be fully implemented and enforced. 

In conclusion, Mr. Chairman, I assure you that we will work 

hard to regain your trust and the trust of the American people. We 

plan on emerging from Chapter 11 as quickly as possible with our 

competitive spirit intact, and we think we can wind up a healthier 

and stronger entity. 

Finally, we will strive every day to provide the industry’s best 

service to our customers and to operate WorldCom in accord with 

the highest ethical standards. 

Thank you, Mr. Chairman, for your time. 

[The prepared statement of Mr. Sidgmore follows:]

PREPARED STATEMENT OF JOHN W. SIDGMORE, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, WORLDCOM

My name is John Sidgmore. I am the President and Chief Executive Officer of 

WorldCom, Inc. I am proud to be leading a team of 60,000 people who are working 

hard to support our 20 million-plus customers. 

I am here this morning to discuss the state of the telecommunications industry, 

including the events that led up to WorldCom’s recent filing under Chapter 11 of 

the Bankruptcy Code. WorldCom has obviously been through a difficult period recently, but we are determined to overcome our problems and to move forward. We 

are intensely focused on ensuring that all of our customers—consumer, business and 

government—continue to receive the highest quality service without disruption. At 

the same time, we are planning for the future. We are committed to emerging from 

this process a stronger company with its competitive spirit intact. 

Mr. Chairman, I’ve spent over twenty years in the information services and telecommunications industries. I’ve been honored to serve in several senior posts during 

that time, including a stint as Vice President at General Electric Information Services in the days before the Internet and as CEO of UUNET Technologies, which was 

the first commercial provider of Internet services. 

That 20-year span has marked a tumultuous time in the industry’s history, with 

many ups and downs. What we’re witnessing today, however, is unprecedented. 

Clearly, the entire industry is experiencing severe problems. While many competitive companies have experienced difficulties—many have gone out of business—it’s 

important to emphasize that competition is alive. I strongly believe that those companies that survive this bleak period will, as the result of vigorous competition, continue to bring product innovation and consumer savings to the marketplace. That 

will be true, however, only if federal and state regulators complete their implementation of the Telecommunications Act of 1996 and fully enforce this historic law. 

Introduction 

In April, when I agreed to take over as CEO of WorldCom, it was clear that both 

our industry and our company faced significant challenges. I knew then that, among 

other things, the company was struggling under the weight of $30 billion in debt. 

But I never imagined what else was in store for us. I could not have imagined that 

in June we would uncover and publicly disclose significant, past accounting irregularities. Nor could I have imagined that about one month later WorldCom would 

file for relief under Chapter 11. As I will explain, there was a direct link between 

these events. 

WorldCom announced on June 25, 2002 that the company misstated its earnings 

for 2001 and the first quarter of 2002. While the misdeeds we uncovered occurred 

before I became CEO, I want to apologize again on behalf of everyone at WorldCom. 

WorldCom’s new management team and our employees share the public’s outrage 

over these events. You have my commitment to continue to do everything possible 

65

to obtain the facts, to fully cooperate with investigators’ efforts to bring wrongdoers 

to justice, to develop safeguards to prevent such an event from recurring in the future, and to operate this company according to the highest commercial and ethical 

standards. Every effort will be made to ensure the long-term viability of this great 

company. 

Saving this company is what led to the decision to file a voluntary petition under 

Chapter 11 on July 21. We fought hard to avoid doing so, but our need to restate 

earnings virtually eliminated other debt restructuring options previously available 

to us. Of all the options we examined, none could accomplish our goal of restoring 

corporate health as effectively. In the end, we believe that this process, while painful, is the best way to help the most people. Most importantly, it enables us to maintain quality customer service without disruption and it provides the best alternative 

for preserving the maximum number of jobs. 

We have every intention of overcoming the challenges now facing us. We will operate our business normally while focusing on our business plan and getting our finances in order. We intend to emerge from Chapter 11 as soon as possible as a 

strong and healthy competitor. 

Telecommunications Industry: Competition Alive But at Risk 

Any analysis of the telecommunications industry today must begin with an acknowledgment of the significance of the 1996 Act, which created a sea change in 

the regulatory paradigm governing the telecommunications sector in this country. 

For the first time, the last-mile monopolies were opened to all forms of local competition—facilities-based, elements-based, and resale-based—and the competitive industry responded in kind. Hundreds of new competitors entered the marketplace 

and the capital markets financed their entry. 

Investment in the telecommunications sector was driven by two fundamental factors: vibrant new competition and expectations of burgeoning customer demand. 

Competitive local exchange carriers (CLECs) poured tens of billions of dollars into 

the deployment of new telecommunications facilities and services. It’s estimated 

that CLECs invested some $55 billion during the four years following the passage 

of the Act. While much of this money went into building thousands of miles of new 

fiber-based networks, CLECs also invested in network elements leased from the incumbents, or purchased retail services at wholesale rates. Moreover, the Bell companies and other incumbent local exchange carriers (ILECs) responded with significant 

new investment of their own—over $100 billion during that same time period. Thus, 

the Act helped spur investment by competitors and incumbents alike. 

As the 1990s wound down, however, the sector began to experience some significant problems. The market version of a ‘‘perfect storm’’—a slowing national economy, plummeting prices and excess network capacity—was brewing and became 

more real with each passing month. The bursting of the ‘‘dot-com’’ bubble made matters worse. Many of the ‘‘dot-com’’ companies were among the largest users of highcapacity data services. 

In sum, an unprecedented number of competitors were fighting for a diminishing 

number of customers and available revenue. Customer demand never materialized 

to the extent expected. Dozens of providers began to curtail service or go out of business. It was a case of fundamental, supply-and-demand economics. The downward 

spiral created by the ‘‘storm’’ remains an issue for the industry. 

Aside from pure economics, other factors also were at work. In particular, the incumbent Bell companies fought aggressively to thwart or retard implementation of 

the 1996 Act—a statute they had sought and supported. Whether filing court challenges to the very constitutionality of the Act, or slow-rolling the negotiation process 

for network interconnection, or refusing to pay CLECs for services rendered, the 

Bells did everything in their power to obstruct the development of competition. 

The economic ‘‘storm,’’ exacerbated by anticompetitive Bell activity, was further 

complicated by the incomplete or unsatisfactory implementation of the Act by some 

regulators. On the positive side, early Federal Communications Commission (FCC) 

decisions, such as the Local Competition Order and the first 271 decisions (regarding approval of Bell company entry into the long distance market), laid out a rational and well-crafted blueprint both for competitive entry into local markets, and for 

Bell company entry into long distance markets. Many states, such as New York, 

Texas, California, and Illinois, took the lead in implementing pro-competitive rules. 

Unfortunately, just as the ‘‘storm’’ began to hit, public policy progress began to 

slow, as the Bell companies fought back against these laudable reform efforts. 

Today, CLECs still lack some of the fundamental tools promised by the 1996 Act, 

and several proposals at the FCC—as well as legislation pending before this Committee—threaten to turn back the important progress achieved thus far. 

66

There is some good news: the competitive telecommunications sector, while 

wounded and bleeding, is far from dead. Amazingly enough, despite the unprecedented economic turmoil engulfing the industry:

• CLECs still managed to invest over $12 billion in 2001, bringing total competitive industry-wide capital investment to over $65 billion since passage of the 

Act.

• CLEC share of the local market continues to rise, slowly but steadily. According 

to the FCC’s latest figures—released just a week ago and based on end-of-year 

2001 numbers—while the ILECs control some 173 million switched access lines 

serving end user customers, CLECs now have almost 20 million lines, or 10.2 

percent of the total in service. This compares favorably to just under 15 million 

access lines, and 7.7 percent market share, at the end of 2000.

• Of those CLEC lines, about 30 percent are provisioned over the CLEC’s own 

last-mile facilities, 47 percent by means of unbundled network element (‘‘UNE’’) 

loops, including the UNE-Platform, leased from other carriers, and 22 percent 

by reselling the services of other carriers. Thus, CLECs continue to build out 

their networks, and sign up new customers, using all three market entry methods stipulated by Congress.

Another positive note: the FCC’s critical statutory role in fostering local competition also has been confirmed by the Supreme Court. First in 1999 and again earlier 

this year, the Court firmly endorsed the FCC’s pro-competitive authority under the 

Act. In particular, the May 2002 decision upholding the so-called ‘‘TELRIC’’ costing 

standard swept away much of the economic mythology being generated by the incumbents, and confirms that competition is best built on the framework of a forward-looking costing methodology. 

In addition, competitive companies continue to bring innovative products to market that benefit all customers. In April, WorldCom’s MCI unit launched The Neighborhood, a suite of products that offers residential consumers a ‘‘bundle’’ of services—local and long distance calling, plus features such as voice mail, Caller ID and 

call waiting—all for one flat monthly price: about $50 in most states. Consumer response to The Neighborhood has been amazing. It confirms the pent-up demand 

across the country for the same kinds of value and choices in the local market that 

they have enjoyed in the long distance and online spaces for many years. Now available in thirty-four states and the District of Columbia, The Neighborhood will be 

available in almost all states by the first quarter of next year. 

In WorldCom’s view, there is a light at the end of this tunnel; there will be a return to prosperity in this industry. Our view assumes that Congress does not undermine the pro-competition policies of the Act by adopting legislation that would effectively repeal them. It further assumes that the FCC accepts the overwhelming consensus of both consumers and competitors regarding ILEC ‘‘deregulation’’ proposals 

now pending before the Commission. The 1996 Act sets the right policy direction. 

It is critical that the FCC finish the job of implementing the Act and enforce the 

Act aggressively. If it does, the industry will once again flourish and consumers will 

continue to benefit. 

WorldCom: Overcoming Challenges and Moving Forward 

Again, Mr. Chairman, I am confident that if the visionary policies embodied in 

the Act are carried forward, the telecommunications marketplace of the future will 

be characterized by vigorous competition and even greater benefits for consumers. 

To fully appreciate the promise of the future, it’s often helpful to consider the experience of the past. WorldCom’s legacy—and that of its key operating units, MCI and 

UUNET—is unmatched. 

WorldCom’s Pro-Competition Legacy and Industry Leadership 

MCI and UUNET literally changed the face of an entire industry. MCI pioneered 

competition in the long distance industry, the first company to attack the old Bell 

System’s monopoly. UUNET was the first commercial provider of Internet services. 

Indeed, both companies played leading roles in the development of the Internet. No 

other company in the world has the legacy that we do in promoting competition. 

Unlike virtually every other major telecom firm, WorldCom was never a monopoly. Our company had to compete for every customer we have and today we have 

the privilege of serving over 20 million customers. A company with $30 billion in 

annual revenues and 60,000-plus employees, WorldCom is:

• The second largest long distance company in the U.S.;

• The largest competitive provider of local telephone services;

• The largest carrier of international voice traffic; and

67

• The world’s largest Internet services provider.

WorldCom clearly has been, and continues to be, an industry leader. We have 

been blessed with world-class employees whose great ideas and marketing savvy 

have produced innovative services and consumer savings. The Neighborhood is the 

latest innovation we’ve brought to the marketplace. Our competitors are scrambling 

to match us. And that really makes the point—when we innovate, all consumers 

benefit. Savings may be the ultimate measure of our success and our continuing 

value to the marketplace. Since MCI introduced competition to the old Bell System, 

residential, business and government users have saved many tens of billions of dollars. 

Millions of people have a real stake in WorldCom’s survival—our customers, our 

employees, our suppliers and our creditors. It is worth noting that WorldCom is a 

provider of network services for critical applications for the United States government. These applications include the provision of customer service to 80 million Social Security beneficiaries, air traffic control applications for the Federal Aviation 

Administration, network management for the Department of Defense, and critical 

data network services for the U.S. Postal Service. In addition, WorldCom provides 

long distance voice and data communications services for the House, the Senate, and 

the General Accounting Office. Our company provides those same kinds of services 

for virtually every government agency under its FTS2001 contract. In addition, 

WorldCom provides support for law enforcement and homeland security agencies, as 

well as agencies concerned with national security. 

In other words, WorldCom is a key component of our nation’s economy and communications infrastructure. Both commercial and national security interests rely 

upon WorldCom’s operations continuing without disruption. 

In that regard, I would like to commend FCC Chairman Michael Powell for his 

efforts to reassure a nervous marketplace. The FCC has a critical role to play in 

ensuring the continuing integrity of the nation’s communications network. 

WorldCom takes its own legal and regulatory responsibilities very seriously. I can 

assure this Committee that we will continue to work closely with the Commission 

to ensure that customers will not suffer adverse consequences as a result of our current financial status. 

Financial Crisis at WorldCom 

Despite all the good things WorldCom had going for it, when I became CEO in 

April, WorldCom was a very troubled company. The sluggish economy and a variety 

of industry issues had caused a steep decline in the company’s revenues, and the 

company was struggling to deal with its massive $30 billion debt load. The debt load 

alone required more than $2 billion a year in interest payments. 

Notwithstanding these financial challenges, I truly felt that WorldCom could get 

back on the right track through a series of aggressive moves designed to reshape 

the company and restructure our debt without the need for a Chapter 11 proceeding. 

On June 14, at the annual meeting of WorldCom’s shareholders, I set forth my blueprint for the future. 

As part of that plan, WorldCom would sell or eliminate unprofitable lines of business. To that end, we began the sale of WorldCom’s wireless resale service, largely 

by selling our customers to the underlying carrier providing the service. 

We also continued to bring expenses in line with revenue. For a number of years, 

WorldCom’s workforce had been increasing in anticipation of continued growth and 

we had, frankly, gotten far too big for the revenues that we were generating. Thus, 

we embarked on a plan to eliminate 17,000 from our workforce, including through 

attrition, the sale of non-core assets, and the discontinuation of contract services 

that were no longer required. 

Together, shutting down our wireless resale unit and reducing our employee base 

will save WorldCom about $1.8 billion per year. 

Even with those savings, however, WorldCom still needed to restructure its debt. 

Although not easy, we were beginning to have some success in accomplishing this 

as well. We negotiated a $1.5 billion accounts receivable securitization program with 

several of our lenders to replace a similar facility that was expiring. We were also 

engaged in productive negotiations with a consortium of banks on providing us with 

a new $5 billion credit facility that would have enabled us to operate without concern of bankruptcy for at least several more years while we got the rest of our financial house in order. 

Unfortunately, WorldCom’s world changed for the worse on June 25th. 

68

Disclosure of Accounting Irregularities and the Need to Restate Earnings 

When we disclosed the need to restate earnings for 2001 and the first quarter of 

2002 on June 25, we committed to deal with this matter openly, expeditiously and 

responsibly. As I will outline below, we have done so. 

Let me remind you at the outset, however, that WorldCom uncovered this problem 

internally. Our external auditor at that time was Arthur Andersen. In effect, we audited our external auditor and we found what they missed. 

WorldCom is being proactive. Our actions are guided by our commitment to restore public confidence in this great company and to operate WorldCom according 

to the highest standards of ethics and integrity. To that end, we have taken several 

specific actions:

• When this matter was brought to its attention, our Board of Directors moved 

swiftly and decisively. Its actions included terminating our Chief Financial Officer and promptly reporting the matter to the Securities and Exchange Commission (SEC) and to the public.

• We are cooperating fully with the various official investigations—by the SEC, 

the Department of Justice and the Congress. For example, on July 1, 2002, we 

filed a written statement with the SEC that included a summary of key events, 

known to us at that time, that led to our June 25th announcement. At the 

SEC’s request, a revised statement was filed on July 8. A copy of the revised 

statement is available on two websites: the SEC’s [ www.sec.gov/ ] and ours 

[ www.worldcom.com/ ]. It details how the accounting irregularities were discovered by our internal audit team, led by Ms. Cynthia Cooper. The kind of initiative demonstrated by our internal audit group is to be applauded and will continue to be encouraged.

• William McLucas, a former Chief of the Enforcement Division of the SEC, was 

retained to perform an independent investigation of the facts and circumstances 

underlying the transfers. He will investigate not only our past and current management team, but also our Board regarding any individual involvement. His 

report will identify the wrongdoers and, in addition, will enable us to put into 

place new or modified internal procedures to prevent any recurrence of this type 

of event.

• Coincident with our Chapter 11 filing, WorldCom announced the election of two 

new members to its Board of Directors: Nicholas deB. Katzenbach and Dennis 

R. Beresford. Mr. Katzenbach is a former Attorney General of the United 

States. Mr. Beresford has served as Chairman of the Financial Accounting 

Standards Board (FASB). Both were appointed to a Special Investigative Committee of the Board to conduct an independent review of the company’s accounting practices and preparation of financial statements. They will assume an oversight role with respect to Mr. McLucas’ investigation.

• If we are to be a model for corporate behavior going forward, we must be transparent and above reproach. Therefore, in our July 1 SEC statement, we clearly 

stated that we were examining whether additional earnings restatements might 

be required for periods going back to 1999 with respect to the accounting for 

reserves established by the company. We are committed to completing this analysis, with the assistance of our new external auditors, KPMG, at the earliest 

possible date and to announcing the results of that analysis promptly.

Many questions still remain. We won’t know the answers until the conclusion of 

the pending investigations. We will continue to cooperate fully with the various 

agencies and the Congress to answer those questions. 

Filing for Protection Under Chapter 11 of the U.S. Bankruptcy Code 

As noted earlier, WorldCom had successfully negotiated a new accounts receivable 

securitization program and was nearing accord on a new $5 billion dollar credit facility when we announced the accounting irregularity and the need to restate earnings. Because of the need to restate, WorldCom no longer had valid, audited financial statements. Within a matter of days, the banks withdrew the receivables program and ended negotiations on the new credit facility. Without audited financial 

statements, the public debt markets were closed to WorldCom. Our hand was 

forced—we had no choice but to file a Chapter 11 petition and seek Debtor-In-Possession (DIP) financing. 

On July 21, WorldCom filed a voluntary petition for reorganization under Chapter 

11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the 

Southern District of New York. Chapter 11 allows a company to continue operating 

in the ordinary course of business and to maximize recovery for the company’s 

69

stakeholders. WorldCom’s non-U.S. subsidiaries are not included in the filing and 

will also continue to operate normally. 

WorldCom also announced that we had obtained an agreement to arrange up to 

$2 billion in DIP financing. The company already has secured a commitment of $750 

million of this amount from Citibank, N.A., JP Morgan Chase Bank and General 

Electric Capital Corporation to supplement the company’s cash flow during the 

Chapter 11 proceeding. 

We struggled to avoid this outcome. Unfortunately, our need to restate earnings 

left us few options. In the end, we believe Chapter 11 is the best way to help the 

most people. The principal reasons for pursuing this option were:

• It allows us to continue our company’s high quality service and customer programs. We will work closely with our lenders and federal and state regulators 

to ensure that there will be no disruption in service to any of our consumer, 

business or government customers. We have already had significant feedback 

from customers stating their support for our efforts to move the company forward and their commitment to stay with us through this process.

• It provides the best alternative for preserving jobs for our employees.

• It allows us, post-filing, to pay all suppliers, vendors and employees in the normal course of business. We are a very large customer to most of our suppliers. 

This action allows them to keep our business. The nation’s economy will avoid 

a negative ‘‘ripple effect’’. We will not, however, be allowed to pay claims arising 

prior to filing without Bankruptcy Court approval.

• It provides our company with a systematic, legal framework to operate our business normally, while we focus our business plan and get our finances in order. 

It allows us to reconfigure our capital structure, reduce the unmanageable debt 

burden, improve cash flows, and deal with legal and financial issues in an organized manner—all of which are intended to make the company leaner and 

stronger, and to put it in a position to create future value for our stakeholders. 

Many companies having nationwide operations—including Continental, Texaco, 

Federated Department Stores, Southland Corporation—have emerged from 

Chapter 11 as stronger, fiercer competitors. 

WorldCom’s Future 

Our intention is that WorldCom emerge from Chapter 11 as quickly as possible. 

I strongly believe that WorldCom is most valuable as an intact enterprise—clearly 

an example of the whole being greater than the sum of its parts. I believe that a 

large number of our creditors recognize this as well. 

Unlike many companies entering Chapter 11, WorldCom has significant assets 

that will help it successfully emerge from the process: a significant customer base 

that is balanced between large enterprise customers and smaller mass-market consumers, a first-class global network that provides us with a superb platform with 

which to compete in the marketplace, and talented and dedicated employees. 

When we do emerge from Chapter 11, we plan to be a competitive force to be reckoned with in the marketplace. We intend to eliminate a substantial amount of our 

debt, dispose of unprofitable lines of business, and significantly lower our costs. 

WorldCom’s presence will continue to ensure competition in the rapidly consolidating telecom industry. No other company’s legacy matches ours in terms of promoting competition and delivering its benefits to consumers and businesses in both 

pricing and product innovation. WorldCom is one of the last hopes for America to 

realize the intended benefits of the 1996 Act. 

Conclusion 

In concluding, I urge this Committee and the Congress to stay the course in promoting competition. The telecom industry, as a whole, is struggling, but competition 

is alive. The Act provides the right policy direction; to ensure the future vitality of 

competition, the Act needs to be fully implemented and enforced. Reversing course 

via legislation or regulation would cause even more harm to the industry and to the 

economy. 

As for WorldCom specifically, our pro-competition legacy will continue. Mr. Chairman and Members of the Committee, we will work hard to regain your trust and 

that of the American people. We will work hard to rebuild the value of the company. 

We will continue to be straight about any problems we may discover and act aggressively to solve them. We will operate WorldCom according to the highest commercial 

and ethical standards. We will return your faith in us by continuing to make a significant difference in the marketplace—providing industry-leading telecom services 

and unsurpassed value to all of our customers.

70

The CHAIRMAN. Thank you, Mr. Sidgmore. 

Mr. Mohebbi? 

STATEMENT OF AFSHIN MOHEBBI, PRESIDENT AND CHIEF

OPERATING OFFICER, QWEST COMMUNICATIONS

INTERNATIONAL, INC. 

Mr. MOHEBBI. Mr. Chairman and Members of the Committee, my 

name is Afshin Mohebbi, and I am President and Chief Operating 

Officer of Qwest Communications International, Incorporated. I 

want to thank you for allowing me to appear today at your hearing 

on maintaining operations of communications facilities in the telecommunications industry. 

Permit me to tell you a bit about Qwest. Qwest is a local telephone company with 25 million customers. We provide local telephone service in a 14-state area throughout the West. We have 

56,000 employees and annual revenues of more $19 billion. About 

80 percent of our revenues and more than 90 percent of our profits 

come from our local phone services. We also provide data and longdistance services to businesses in major United States markets outside the 14-state local service area. 

In addition, Qwest has a state-of-the-art global fiber optic network that spans more than 175,000 miles. Qwest’s optical network 

is among the most advanced in the world. Qwest does business 

with more than 60 percent of the Fortune 1000 companies worldwide. 

I want to assure the Committee and Qwest’s customers that 

Qwest expects to be around for a long time and that the critical 

telecommunications services Qwest provides are not in jeopardy. 

We have multiple sources of revenue and a solid customer base. 

We’re the first company to blend the assets, products, and customers of a regional Bell operating company with that of a carrier 

of high-speed telecommunication services. As the industry changes 

and matures, we are in a position to be equipped to continue to 

grow. 

Because the Committee has inquired as to financial contingencies, I wish to assure the Committee that Qwest is fully prepared to ensure that customer service continues uninterrupted. In 

addition, Qwest has already dealt with the issue when telecommunications service providers have filed for bankruptcy, and 

we have successfully maintained the level of service and reliability 

that our customers expect from Qwest. 

In fact, over the past 2 years Qwest has invested billions of dollars that have resulted in significant improvements in customer 

service. A Qwest analysis of FCC service data shows Qwest is first 

in overall service quality among the 12 largest local service providers. Qwest recently announced that its first-quarter 2002 service 

performance was the best in 7 years in key areas of installation 

and maintenance. 

On Sunday, as the Committee is aware, Qwest announced that 

it expects to restate its financial statements for 2000 and 2001 to 

reflect adjustments in, among other things, revenue recognized 

from the sale of optical capacity assets, which are sometimes referred to as IRUs. Earlier this year, the company began an analysis 

of accounting treatment for IRUs. We have tentatively concluded 

71

that our accounting policies at the time were incorrectly applied in 

connection with certain transactions. 

In terms of Qwest’s preliminary conclusions, let me emphasize 

the following. First, in the accounting of these transactions, Qwest 

sought, in good faith, to comply with the Generally Accepted Accounting Principles (GAAP) and all applicable accounting guidelines in regular consultation with its outside auditors. Next, when 

it completes its analysis, Qwest expects to restate its financial 

statements for prior periods. The $591 million of revenue recognized with respect to the optical capacity asset sales identified in 

the Sunday press release represents 1.4 percent and 1.8 percent of 

total revenues in 2000 and 2001. 

We are proud of our company. As a company, we feel we are 

ready to address the continuing difficulties within our industry and 

to address the steps necessary to complete our analysis of the company’s accounting policies and practices. Our new chairman and 

CEO, Dick Notebaert, has said that increasing Qwest’s credibility 

with investors and the public in general is his top priority and that 

he is, quote, ‘‘confident that Qwest is moving in the right direction 

and we have the ability to perform for our customers, our employees, and our shareholders,’’ unquote. I could not agree more with 

Mr. Notebaert. 

Qwest’s voluntary and public disclosures about our accounting is 

an important step in the process of turning the company around. 

We’re also proud to have the support of our employees in this effort. We were gratified by the statement recently issued by the 

Communications Workers of America president, Morton Bahr, who 

said that Qwest has now the customer base, the highly skilled and 

dedicated workforce, and the leadership team to restore Qwest’s 

reputation and business success. It will not be easy, but we are intent on working hard to win back the trust of our employees and 

our investors and move this company forward while continuing to 

provide the very best telephone service possible to our customers. 

I will be glad to try and answer any questions that you may 

have. Thank you. 

[The prepared statement of Mr. Mohebbi follows:]

PREPARED STATEMENT OF AFSHIN MOHEBBI, PRESIDENT AND CHIEF OPERATING

OFFICER, QWEST COMMUNICATIONS INTERNATIONAL, INC. 

My name is Afshin Mohebbi and I am President and Chief Operating Officer of 

Qwest Communications International Inc. I want to thank you for allowing me to 

appear today at your hearing on maintaining operations of communications facilities 

in the telecommunications industry. 

Permit me to tell you a little about Qwest. Qwest is a local telephone company 

with 25 million customers. We provide local telephone service in a 14-state area 

throughout the West. We have 56 thousand employees and annual revenues of more 

than $19 billion. About 80 percent of our revenues and more than 90 percent of our 

profits come from our local phone service. We also provide data and long-distance 

services to businesses in major markets outside the 14-state local service area. 

In addition, Qwest has a state of the art global fiber optic network that spans 

more than 175,000 miles. Qwest’s optical network is among the most advanced in 

the world. More than 4.2 billion megabits of traffic travel across the network at any 

given time, along with web hosting centers that safeguard the critical data of banks, 

corporations, health care providers and government agencies among others. Qwest 

does business with more than 60 percent of the Fortune 1,000 companies. 

I want to assure the Committee, and Qwest’s customers, that Qwest expects to 

be around for a long time and that the critical telecommunications services Qwest 

provides are not in jeopardy. We have multiple sources of revenue and a solid cusVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00075 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
72

tomer base. We’re the first company to blend the assets, products, and customers 

of a regional bell operating company with that of a carrier of high-speed telecommunications services. As the industry changes and matures, we are in the position to be equipped to continue to grow. 

Because the Committee has inquired as to financial contingencies, I wish to assure the Committee that Qwest is fully prepared to ensure that service continues 

uninterrupted. In addition, Qwest has already dealt with the issue when telecommunications service providers have filed for bankruptcy, and we have successfully maintained the level of service and reliability that our customers expect from 

Qwest. 

In fact, over the past two years, Qwest has invested billions of dollars that have 

resulted in significant improvements in customer service. A Qwest analysis of FCC 

service data shows Qwest is first in overall service quality among the twelve largest 

local service providers. Qwest recently announced that its first quarter 2002 service 

performance was the best in seven years in key areas of installation and maintenance. 

On Sunday, as the Committee is aware, Qwest announced that it expects to restate its financial statements for 2000 and 2001 to reflect adjustments in, among 

other things, revenue recognized from the sale of optical capacity assets, which are 

sometimes referred to as IRUs. Earlier this year the company began an analysis of 

accounting treatment for IRUs (particularly sales to customers from which the company agreed to purchase optical capacity assets). We have tentatively concluded that 

our accounting policies at the time were incorrectly applied in connection with certain transactions. 

In terms of Qwest’s preliminary conclusions, let me emphasize the following: 

First, in accounting for these transactions, Qwest sought in good faith to comply 

with generally accepted accounting principles (GAAP) and all applicable accounting 

guidance, in regular consultation with its outside auditors. 

Next, when it completes its analyses, Qwest expects to restate its financial statements for prior periods. The $591 million of revenue recognized with respect to the 

optical capacity asset sales identified in the Sunday press release represented 1.4 

percent and 1.8 percent of total revenue in 2000 and 2001. 

We are proud of our company. As a company, we feel we are ready to address 

the continuing difficulties within our industry and to address the steps necessary 

to complete our analysis of the company’s accounting policies and practices. 

Our new CEO, Dick Notebaert, has said that ‘‘increasing Qwest’s credibility’’ with 

investors, and the public generally is his top priority—and that he is ‘‘confident that 

Qwest is moving in the right direction, and we have the ability to perform for our 

customers, employees, and shareholders.’’ I could not agree more. Qwest’s voluntary 

and public disclosures about our accounting is an important step in the process of 

turning the company around. 

We are also proud to have the support of our employees in this effort: we were 

gratified by the statement recently issued by CWA President Morton Bahr, who said 

that Qwest now has the ‘‘customer base, [a] highly skilled and dedicated workforce, 

and the leadership team . . . to restore Qwest’s reputation and business success.’’ 

It will not be easy, but we are intent on working hard to win back the trust of our 

employees and investors, and move this company forward while continuing to provide the very best telephone service possible to our customers. 

I will be glad to try and answer any questions you may have.

The CHAIRMAN. Well, Mr. Mohebbi, you talk about the Sunday 

news release. Of course, if we just look at the morning New York 

Times release, and that’s what’s disturbing everybody, because we 

see everyone having to restate their financial statements or otherwise declare for bankruptcy, and you find, on page C4 of the New 

York Times, Phillip F. Anschutz, board member, former chairman 

between 1999 and 2000, and the company—1.453 billion—one and 

a half billion bucks to take out of a company. 

I’ll ask each of you, What about stock options? I’m like Senator 

McCain. We haven’t really legislated stock options. That’s the big 

attraction to take the money and run rather than look out for the 

company, look out for the employees, look out for the customers, 

and everything else like that, when you can get away with one and 

a half billion in a 2-year period, you say, ‘‘Well, ta-ta and goodbye. 

73

Forget about Qwest. Forget about WorldCom or any—or communications.’’

Mr. Sidgmore, what about stock options? 

Mr. SIDGMORE. Well, my personal opinion is stock options are a 

very important part of the compensation program in many industries, telecommunications being one of them. But really all technology-based industries have used stock options as a central piece 

of their compensation programs for a long period of time. That——

The CHAIRMAN. But you’ve got a double accounting for them—

you don’t account them as an expense. 

Mr. SIDGMORE. Right, I’m not saying that we shouldn’t account 

for them as an expense. I’m just saying——

The CHAIRMAN. Do you think they should be counted for as an 

expense? 

Mr. SIDGMORE. I think there are arguments in both directions, 

but I——

The CHAIRMAN. Yeah, but I know about the arguments. What do 

you think? 

Mr. SIDGMORE. I think—I think they should be accounted for as 

an expense. 

The CHAIRMAN. The thing that puzzles—when did you come with 

WorldCom? I know MCI—I worked with Bill McGowan over the 

years. I remember when he got a farmer’s loan, an agricultural 

loan, down in downtown Georgetown here in the District 30-some 

years ago to start MCI and to give competition to AT&T. 

Mr. SIDGMORE. Right. 

The CHAIRMAN. Now, when did you join WorldCom/MCI? 

Mr. SIDGMORE. I was running a company called UUNET Technologies, it was actually the first Internet service provider, over in 

Virginia. And that was a company that went public in 1995, and 

then we sold it to a company called MFS in 1996. I became president of MFS. And then we sold that company to WorldCom in December 1996. So I joined WorldCom as chief operations officer in 

December of 1996. 

The CHAIRMAN. So you’ve been there 6 years and you couldn’t tell 

you were 3.5 to 4 billions dollars shy? 

Mr. SIDGMORE. No——

The CHAIRMAN. You didn’t know anything about this necessary 

restatement of——

Mr. SIDGMORE. In my own defense, I was the operations officer 

for 1997 and 1998, and I stepped down from that role in September 

of 1998. In 1999, I remained with the company, but my role basically was to do strategic acquisitions. For example, I was the one 

that worked on the Sprint acquisition, or the attempted Sprint acquisition. And for the last 3 years, really, I haven’t had a role other 

than to work on some strategic development in technology, but I 

have not had any role in operations. 

The CHAIRMAN. So this was all news to you when——

Mr. SIDGMORE. Yes, it was. 

The CHAIRMAN. I was made to understand that the reason you 

gave—well, excuse me, the company—WorldCom/MCI gave a $400 

million loan to Mr. Bernie Ebbers was because he had that many 

in stock options, and if he had exercised all the options, it would 

74

have ruined the financing of the company or ruined the market for 

the stock itself. What’s your comment? Is that the case? 

Mr. SIDGMORE. Well, that was the theory at the time. The compensation committee at that time apparently was concerned that if 

Mr. Ebbers had sold his stock, which he had to do to pay off some 

loans, apparently, that the stock would be injured and the company 

would be injured. And the compensation committee granted that 

loan. The rest of the board, which included me, ratified that after 

the fact. 

The CHAIRMAN. But stock options should never put a company in 

jeopardy to the tune of 400 million without the approval of the 

stockholders. 

Mr. SIDGMORE. I couldn’t agree more. I couldn’t agree more with 

that. 

The CHAIRMAN. But, unfortunately, we, at the congressional 

level, haven’t been able to get that amendment up either. We’ll 

keep trying. 

Let me yield to Senator Burns. 

Senator BURNS. Thank you, Mr. Chairman. 

I’m going to be very parochial here in my questions, and that’s 

to my good friend from Qwest. Being as I live out there and you 

were talking about investment in new technologies and things, 

well, Montana has been sort of about a half a step behind. Could 

you take a look at that up there and—we’ve got some old 56 

switches that need replacing and some of those kind of things. 

I want to—a problem that we have in Montana, so this is very 

parochial, and I’d like to just get your response to is—that I’m sure 

you’re aware. TouchAmerica is an extremely important organization to Montana, given that it’s headquartered in Butte, Montana, 

runs one of the largest fiber networks in the country. 

With this in mind, I’ve been following the recent suits and 

countersuits surrounding the billing dispute between Qwest and 

TouchAmerica very closely. This conflict has arisen from the sale 

of long-distance assets from Qwest to TouchAmerica as part of its 

FCC approval process to buy USWest in 1999. As I understand it, 

Qwest claims that TouchAmerica has not paid amounts Qwest says 

it’s due for Qwest’s billing and operational support services. 

TouchAmerica, on the other hand, alleges that Qwest has improperly billed TouchAmerica and failed to account for the revenues due 

TouchAmerica. 

So what else little argument we’ve got on the schoolyard, you 

might say. While I don’t judge the merits of the dispute, which are 

currently in arbitration, I am very concerned that, as it continues 

to drag out, it is imperiling the Montana high tech company that 

provides numerous jobs in my state. Do you anticipate this dispute 

can be solved? Is there any way we can get the lawyers out of the 

way and bring this to a close? 

Mr. MOHEBBI. Senator Burns, as you well stated, the dispute 

with TouchAmerica is a billing dispute. It is unfortunate that it 

has to drag this long. And there were a number of attempts made 

to try to settle it outside of the legal procedures. Certainly there 

has been continued willingness from Qwest, and the matter has 

gotten the utmost attention in our company. I have personally 

flown to Butte three times to try to deal with this situation, and 

75

we will continue to work in that area. TouchAmerica is a customer 

of ours, as well, and we are interested in its well-being and growth, 

and so we are hoping that we could work the issue. 

Senator BURNS. Well, I’d like to see it taken care of as soon as 

possible because it’s inhibiting some of the things that they want 

to do. And it’s a fairly important question to TouchAmerica. 

In the announcement of Qwest, you have a new CEO——

Mr. MOHEBBI. Chairman and CEO, yes. 

Senator BURNS.—and I’m very excited about that. I knew him 

when he was at Ameritech. He has taken some bold steps now that 

is going to—the courage to do that to get them back on the, let’s 

say, bed rock, so to speak, and do what you do best, and that is 

local service and the services through the local switches. So I’m 

very happy about that. 

Can you comment specifically on the IRUs and the swaps? Give 

us an idea on how they work. And I know that’s where, that’s been 

discovered by Qwest now as being one of those practices now that’s 

causing real problems. Could you give us an idea on how that 

worked? 

Mr. MOHEBBI. Yes, Senator. As part of the Qwest’s original company plan, we built a network for our own use, and we also built 

network assets to be sold to other communication companies who 

were interested in building a national and then international networks. The IRU, as a product or as an asset, is essentially the right 

of—the indefeasible rights of use that a particular company purchases along with its liabilities and opportunities and risks to be 

able to meet its requirements. So it is a sale of assets that involves 

assets that were created to be sold, and that’s what we did as we 

built the original Qwest, the long-haul network throughout the 

United States during the years 1996 through 2000. 

Senator BURNS. Well, now—ok, now, how can that be—how can 

that—you relate that to swapping? 

Mr. MOHEBBI. In terms of what has been called ‘‘swaps,’’ one of 

the things that we did was, once Qwest was done with building out 

its U.S. network, we were interested in building a global network 

because the business customers, which were the focus of our global 

expansion, required that you, as a service provider, carry their 

services on your own network throughout the world. So we looked 

at building our global network, again through buying these assets 

from other companies that had built assets throughout the world. 

And in some cases, when we bought assets from some of these companies, those companies were also building plans on a global basis, 

needed assets in the United States, for example, and purchased 

those assets from us. The timing of some of these transactions were 

close, and that’s what being looked at and called as ‘‘swaps.’’

Senator BURNS. I am—well, I thank you for coming today. 

And I thank the Chairman for not demanding this, the new head 

of Qwest, because he just got there, you know, Mr. Chairman, and 

I think we can see some changes there happening. So I appreciate 

that very much. 

The CHAIRMAN. Very good. 

Senator BURNS. But as far as building the global networks, you’d 

better talk to the guy on the right-hand end of the table—your 

76

right—and he can probably tell you about that. But I appreciate 

that, and I appreciate the testimony of all three of you. 

Mr. Chairman, I——

The CHAIRMAN. Senator Dorgan? 

Senator DORGAN. Mr. Chairman, thank you. Is it Mr. Legere? 

Mr. LEGERE. Legere. 

Senator DORGAN. Mr. Legere, I’m sorry. Mr. Legere, Global 

Crossing recently had to restate its earnings. There are questions 

about the way its accounting was handled. It’s under FCC investigation. And apparently it concedes that documents were shredded 

in several of Global Crossing’s offices. Is that the case? 

Mr. LEGERE. We have not restated earnings, because we do not 

have audited results for 2001, so we have not filed the 10(k) for 

2001 yet. 

We are under FCC investigation. We’ve been cooperating fully 

and looking forward to getting input and feedback from them, 

which will lead to us taking action. 

Senator DORGAN. Do you expect to be required to restate earnings? 

Mr. LEGERE. We don’t—we don’t know at this point in time. But, 

again, since we haven’t closed 2001 numbers, the outcome of 2001’s 

financials would be dictated by their input. 

Senator DORGAN. Mr. Legere, let me ask you about something 

else that’s controversial about your company and some others. 

Global Crossing effectively renounced its U.S. citizenship by reincorporating in Bermuda. You were a U.S. company. You decided 

that you wanted to renounce your U.S. citizenship and become a 

Bermuda company. It’s called an ‘‘inversion.’’ Can you tell me, are 

the members of the board of directors that were with the company 

and helped make that decision still predominantly the board of directors today? 

Mr. LEGERE. Senator, if I could just clarify.? 

Senator DORGAN. Yes. 

Mr. LEGERE. When Global Crossing was created, it was created 

as a global company. And at that time, it was incorporated, the 

holding company, in Bermuda. Second, though, we are a very complex global set of assets. And, for example, when we purchased the 

Frontier Corporation in the United States, that still is a U.S. company. It does pay taxes in the United States. 

So we have a holding company that was created in Bermuda, basically because of the fact that we were creating global assets, but 

we do have legal entities in most countries in the world, including 

many in the United States that are paying. So anything we bought 

in the U.S. stayed headquartered in the U.S. and does pay taxes 

here. 

Senator DORGAN. Yeah. Well, I won’t go further, because there 

are other questions. 

Let me just say that I think inversions that are occurring for the 

purpose of saving taxes are shameful. To be able to decide you 

should renounce your citizenship—we’re talking about a number of 

companies—Tyco, Stanley Tools and others—you know, we’re at 

war with terrorists, and we see a spectacle now of companies deciding that they want to become citizens of another country? I don’t 

understand the thinking process. When they get in trouble, do they 

77

want to call out the Bermuda navy, the Bermuda army, Bermuda 

marines? I don’t think so. They want all the benefits America has 

to offer them, except the responsibility to pay taxes. 

But I won’t go further, except to say that I think we need to—

this Congress needs to address inversions aggressively. The House 

of Representatives has begun to do that, and I hope we will do so 

in the Senate. 

Mr. Mohebbi, you heard my questions about Qwest. We have 24 

exchanges owned by Qwest in North Dakota. My preference is either they serve them or sell them. Qwest was engaged in 27 different countries but couldn’t put DSL on 20 exchanges in North 

Dakota, and I have a little heartburn about what happened. And 

I also—it’s also interesting to note that they couldn’t do it because 

it wasn’t worth the investment. But the compensation committee of 

Qwest, last year, met 7 times—compensation committee in the 

board of directors met 7 times at a—all during the period when the 

Qwest stock was falling 60-some percent, and it was meeting to 

give the CEO cash and bonuses and incentives. And then when 

they pushed him out the door, they gave him a $10 million severance package. Do you think that’s nuts? Sounds nuts to me. 

Mr. MOHEBBI. Senator Dorgan, I’d like to address the issue in 

terms of service in North Dakota, because——

Senator DORGAN. Please do. 

Mr. MOHEBBI.—in my direct responsibility, I have responsibility 

for that. And if we look at the overall, the number of exchanges 

that you actually mentioned have DSL are absolutely correct. 

There are 4. And we’d like them to be higher than that. One of the 

things that I think we need to work with our customers as well as 

the chambers of commerce and others in North Dakota is to try to 

encourage people to try to actually buy more DSL. I can tell you 

the take rate that we have in the four exchanges that we have installed DSL is about 7 percent——

Senator DORGAN. But, Mr. Mohebbi——

Mr. MOHEBBI.—which is low. 

Senator DORGAN.—excuse me for interrupting, but let me tell you 

this. Other representatives of the Bell systems have sat at that 

table and described their build-out of DSL at 50, 60, and 70 percent 

of their exchanges and their customers in their areas. Qwest decided not to do that, and the executives at Qwest were off busy 

working in China and Europe and not so interested in our exchanges, and they were also running off with a substantial amount 

of money as they got canned. And I was asking you the question 

whether you think it’s nuts to see the record of what has happened. 

Having said that, let me also say that the new CEO gives me 

some heart. I think he’s an extraordinarily well-qualified person. I 

feel good that he’s where he is. 

But do you not agree that what happened here with Qwest is 

just Byzantine and wrong? 

Mr. MOHEBBI. Senator, I’m not an expert, in terms of what’s the 

right compensation for the right individuals and how that compensation was derived. What I can tell you is, on the issues of service, we’re interested in making sure that all our customers in the 

14 States receive the rights of the services. 

78

Senator DORGAN. Well, without sounding arrogant, I’m just a 

flat-out expert in these matters. I think when somebody runs a 

company into the ground, the last thing you do is give them a $10 

million bonus. When somebody cooks the books, the last thing you 

do is give them incentive payments. 

And so, you know, I come from a really small town of 400 people. 

And it’s very simple. If pay is based on performance, when somebody’s cooking the books and running a company into the ground, 

you don’t give them big bonuses. That—I mean, that doesn’t—

that’s not rocket science. 

But, look, I want Qwest to succeed. They do business in Montana, North Dakota, and our part of the country. I want them to 

succeed. But I have great heartache about what went on, and great 

anger about what went on, as a matter of fact, with Qwest. 

One question, if I might, for Mr. Sidgmore. Mr. Sidgmore, I know 

that you have a substantial background in this industry, and I 

want you to succeed, but what you’re telling the Chairman is that, 

although you were affiliated with WorldCom, that you—and I suspect you would say many others at the top level—had no knowledge of what was happening with respect to the development of 

costs and revenues. And the evidence suggests, of course, that a 

substantial—in fact, announced by you—a substantial amount of 

costs and revenues were inappropriately applied and the earnings 

had to be restated as a result of it. 

So how does it work that that happens inside a corporation to 

the extent of billions of dollars, and yet you and others really don’t 

know anything about it? 

Mr. SIDGMORE. Well, first of all, let me just say it was the equivalent of a corporate disaster that we had to restate earnings and 

that others, you know, did not see that. But let me just explain to 

you how it possibly happens. 

A board of directors protects itself in a number of ways. You have 

an audit committee, which we had a very significant audit committee with very highly qualified people. We have an internal audit 

department that is independent of the financial organization that 

goes out and does checks frequently. And then on top of that, you 

hire a professional audit firm—in this case, Arthur Andersen. 

And in every one of those cases, the audit reports came back totally clean. And, in fact, even as recently as February, we had a 

major audit committee meeting with Arthur Andersen, and they 

specifically responded to questions about the exact transfers that 

occurred and said that the books were totally clean. So, you know, 

there possibly is no total defense for this, but that’s just an explanation. I mean, every step along the way, we had audits done, and 

the audits came back clean. Unfortunately, you really can’t very 

easily defend against a deliberate change to the books. And that’s 

really what happened. 

I could give you a much more lengthy explanation of the mechanics of how it happened, or how we think it happened, but that will 

come out in great detail after our investigation is over. 

Senator DORGAN. But normally in a corporation or other organizations, there’s a culture. If you’re skating way up to the line, everybody understands, ‘‘Boy, we’re aggressive. We’re finding ways—

we’re finding the route through the keyhole here,’’ and people have 

79

a sense of that, even though they may not know the details. You’re 

saying that there was no sense of that in the company? 

Mr. SIDGMORE. I don’t think there was, and I’ll—the only other 

thing I can tell you is our books are extraordinarily complex because of the number of acquisitions that have been made over the 

last 4 years, about 78. 

And so, I mean, I understand your point. I’m just saying that 

this is a very, very complex and difficult situation. I don’t think 

anyone thought that we were steering that close to the edge. 

The CHAIRMAN. Senator Allen? 

Senator ALLEN. Thank you, Mr. Chairman. 

I’d like to address my comments and questions to Mr. Sidgmore, 

who, first of all, I want to thank you for coming to this Committee 

hearing, and I also thank you for your efforts to bring WorldCom 

out of Chapter 11 bankruptcy as soon as possible. I encourage you, 

Mr. Sidgmore, to work with the FCC and the SEC and other Federal authorities—and I think you have been doing it, but I want 

to encourage you to do so. I will say that WorldCom has been a 

very good corporate citizen in the Commonwealth of Virginia, and 

I do encourage your efforts to try to restore that credibility. 

When you took over as CEO in April, WorldCom was carrying $30 billion in debt, you had a blueprint to come out to handle that. 

I note, on page 17 of your statement, where you mention that 

WorldCom has significant assets that will help it successfully 

emerge from the process, which is Chapter 11, a significant customer base—which I might add includes the U.S. Government—

and you have large-enterprise customers, small-market consumers, 

first class global network, which provides you all, with WorldCom 

with a superb platform with which to compete in the marketplace, 

and talented and dedicated employees. 

The employees mean a lot of me, and there was the—in my understanding, part of the plan was to eliminate 17,000 from your 

work force, about 1,300 of whom were in Virginia. Subsequent to 

the—or due to the restatement, and subsequent to the filing of 

Chapter 11, do you envision any additional layoffs in the future 

that you can share with us? 

Mr. SIDGMORE. Well, let me just say that there are none of any 

kind of significance. There are always people that changed in and 

out during the year, but there are none of any significance that are 

planned now. 

I might also add that that 17,000—by the way, this doesn’t 

change your point, but it just modifies it slightly—that 17,000 includes about—about half of those 17,000 were actually associated 

with a division which we have sold, so they weren’t really employees that got removed from the payroll. They were sold. 

Senator ALLEN. But you do not envision any, at this moment, reduction in positions. 

Mr. SIDGMORE. We have no plans at this time for that. 

Senator ALLEN. Now, as you know from your history, starting off 

with UUNET, and when I was Governor and we were working on 

the WorldCom deal, it was WorldCom UUNET before you merged 

with MCI right in late 1997, early 1998, the UUNET was the largest—not only was the first, but it’s the largest commercial Internet 

service provider in our country. With regards to the Internet backVerDate 0ct 09 2002 12:42 Feb 27, 2006 Jkt 092189 PO 00000 Frm 00083 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\92189.TXT JACK PsN: JACKF
80

bone facility that WorldCom maintains in Northern Virginia, I understand that it is one of only three major Internet hubs that 

WorldCom operates throughout the world. 

Now, I’d like to hear from you what precautions, what procedures 

have been taking place to ensure its sustainability and its service. 

And as WorldCom goes through this reorganization and restructuring, what plans do you have for that segment of the corporation, 

which is very, very important? 

Mr. SIDGMORE. OK. Well, this is probably not surprising to anyone that knows me, but, from my standpoint, the Internet backbone network that we run that is called UUNET is probably as 

central to our asset base as you possibly have. It’s as central to our 

future success as it could possibly be. People ask me all the time 

what segments of the business have we considered selling? And I 

can tell you that, you know, from my standpoint, the Internet backbone, which is the world’s largest, the long-distance business, both 

here in the United States and in Europe, those are the central core 

pieces of WorldCom and MCI. And I consider, in the long-distance 

network, by the way, both the consumer business and the long-distance business. 

We have no plans to change the structure, the concept, the technology or anything about the UUNET network. That is probably 

our No. 1 most valuable asset in most people’s minds today. 

Senator ALLEN. Do you see business or economic activity increasing? That is a good indicator. It’s almost like a railroad, to some 

extent, to see the usage——

Mr. SIDGMORE. Well, I mean——

Senator ALLEN.—of it. Is that increasing? Is it stable? 

Mr. SIDGMORE. The Internet business, I would say, is stable, and, 

in some cases, in some segments is growing slightly. It is still the 

fastest-growing piece of the telecommunications industry. It doesn’t 

grow quite like it used to, but it’s still the fastest-growing piece. 

Senator ALLEN. Can you share with us or tell us a little about 

some of the services that you do provide to the U.S. Government, 

currently? 

Mr. SIDGMORE. We provide a great many services to the U.S. 

Government, including the use of our Internet network. We provide 

long-distance services to many, many agencies, including the FAA 

and many others. We provide lots of different kinds of service to 

the Defense Department in various places, including places outside 

the United States. The Government business is significant to us. 

It’s over 8 percent of our business. And we plan—you know, we 

plan on being very aggressive about holding onto that business. 

I know there have been some rumors about some agencies being 

nervous about, you know, service disruption. And I want to reiterate again, we are not going to have any service disruptions as a 

result of this bankruptcy—to the Government or anyone. 

Senator ALLEN. That’s why I asked the question. 

Mr. SIDGMORE. Right. 

Senator ALLEN. Thank you, Mr. Sidgmore. I’m about out of time. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Brownback? 

81

Senator BROWNBACK. Thank you very much, Mr. Chairman, and 

thank you, gentlemen, for being here. 

Mr. Sidgmore, and the whole panel, obviously, there are a lot of 

people very mad, disappointed across the country, and they want 

to know how these things could possibly happen. And I want to 

focus in on those and then talk a little bit about a way that maybe 

we can get more market income taking place. 

Mr. Sidgmore, you’re primarily here because of a $3.8 billion accounting restatement, I guess you would say, where you took line 

access costs and capitalized them instead of expensing them. It 

seems to me, and just to a layman looking at this, that this is a 

big decision that a company would make—$3.8 billion, how are you 

going to treat that on the ledger? And that that’s not just something that mechanically gets caught in the grind at a fourth or fifth 

level down in a company, but somebody pretty high up in the system has to decide we’re going to go left or right with this $3.8 billion. This is a pretty clear decision. Where was that decision made, 

that $3.8 billion, whether it would be expensed or capitalized? 

Mr. SIDGMORE. Well, let me just say that, you know, this is the 

subject of a great many investigations, including our own independent investigation, which is not concluded, so I can’t give you 

a specific—you know, a specific set of names. But let me just say 

that that would have been a decision made at, you know, the highest levels of the company. 

I can tell you further that the way it happened is a very interesting scenario. We had line costs and a line cost budget that were 

very much in line with prior years as a percentage of our revenue. 

We also had capital expenditures that were very much in line with 

the plan. So it looked to the world, including the board and apparently to others, like Arthur Andersen, that there were no irregularities happening. What we didn’t know is that we weren’t actually 

spending the money on capital—you know, we weren’t spending the 

capital budget on hardware and communications equipment. We 

were actually capitalizing the line costs. And that’s really how, at 

the end of the day, the mechanics worked. 

But that decision would clearly have been made very specifically. 

This was not a mistake. This was a decision that was clearly made 

by people close to the top. No question about that. 

Senator BROWNBACK. And it would have had to bounce up 

through several layers of people asking this same question, ‘‘How 

do we treat this?’’ So there had to have been a number of people 

in that company that knew that this decision was going to be 

made. And how it would be made would have a significant impact 

on the financial disclosures at the bottom of the sheet. 

Mr. SIDGMORE. No question about the significant impact. You’re 

right about that. But it’s not necessarily true that there were multiple layers involved. It could have been one person very, very close 

to the top that had the direct access to making changes in the journal. 

Senator BROWNBACK. And he would be able, he or she would be 

able to say this is going to be treated as a capital——

Mr. SIDGMORE. That’s why I said it would have to be somebody 

very high up in the organization. 

82

Senator BROWNBACK. And then that would have gone and would 

have been cleared by Arthur Andersen and the audit committee of 

the board? 

Mr. SIDGMORE. Well, frankly——

Senator BROWNBACK. I mean, they would have seen, then, this 

decision was made and it was treated that way, at least those two 

groups, wouldn’t they? The audit committee and Arthur Andersen? 

Mr. SIDGMORE. You would think so. And, frankly, Arthur Andersen told us that they never caught it. In the check in the entire 

audit that we paid them $4 million for, they claim that they never 

saw it. And, frankly, it’s an outrage to our company that that happened. I mean, that should have been caught in an audit, in my 

judgment, and it wasn’t. 

Senator BROWNBACK. Well, it just strikes me as beyond belief it 

wouldn’t be caught. What about at the audit committee? 

Mr. SIDGMORE. Well, the audit committee apparently went 

through the same checks as Arthur Andersen, but obviously in 

much less detail. And I guess my only point to you is that if the 

auditor that you’re paying $4 or $5 million for exactly this purpose 

could not catch it, it was a little bit more difficult to catch than you 

might think on the surface. I mean, that’s the only thing I can say. 

But that doesn’t mean, I mean, we are quite upset that that was 

not caught by our audit. 

Senator BROWNBACK. It’s just astounding to me. Even when I 

read that in the paper—and then that’s not only impacted 

WorldCom. That impacts the entire marketplace, because everybody wants to know, well, what else has been misstated? 

Mr. SIDGMORE. Right. 

Senator BROWNBACK. Or what else have people been playing 

close to the line with? I hope companies now are setting the atmosphere that says we don’t play close to these accounting lines. We’re 

going to play very—we’re going to be very judicious on this, and 

we’re going to be very careful on these particular issues. 

You stated that you just hired a CFO. The issue of stock options 

is something that a number of people are very concerned about and 

questioning what we should be doing on this issue. Are you providing stock options to the new CFO that you’ve hired? 

Mr. SIDGMORE. We actually hired a new CFO and a chief restructuring officer at the same time, and we actually hired them from 

an agency, so they’re actually in those roles for a long period of 

time. But they will be provided by that consulting firm on a consulting basis. So they’re not technically employees of WorldCom, 

and they don’t have stock options. 

Senator BROWNBACK. Are you going to offer stock options in the 

future at WorldCom, to the people you bring in? 

Mr. SIDGMORE. Well, right now we don’t have stock options that 

people would be interested in, but——

[Laughter.] 

Mr. SIDGMORE.—in fact, we can provide those very inexpensively 

now. 

But hopefully, when we emerge from bankruptcy—and I believe 

we will emerge as a stronger entity—we will again wind up with 

a stock that people are interested in having, and we will probably 

use stock options as an incentive, as we always have. 

83

Senator BROWNBACK. Will you expense those? 

Mr. SIDGMORE. We believe that we will probably expense those. 

Senator BROWNBACK. Will you expense stock options at Global 

Crossing? 

Mr. LEGERE. The only question that I’m trying to deal with in 

this issue is questions of valuation and matching principles associated with the cost. But those being overcome, as long as it’s consistently applied, you know, we’ll abide by it. 

Senator BROWNBACK. Will Qwest? 

Mr. MOHEBBI. Senator, our board of directors has not made a decision on that particular issue. 

Senator BROWNBACK. I still want to make one other point, and 

it’s just on an issue that Chairman Powell had talked about, about 

the build-out to the last mile. We need to get broadband competition out there. The expense of doing that, Corning has estimated, 

would cost about $200 billion to rewire all access line with fiber optics. That last mile—$200 billion. I think we’re going to need to 

look at serious policy options if we’re going to try to incentivize the 

deployment of real broadband service out to the community, and 

particularly companies that are capitally challenged as much as 

the telecom industry is now. I think we’re going to have to really 

provide some incentive here to be able to do that. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Fitzgerald? 

STATEMENT OF HON. PETER G. FITZGERALD,

U.S. SENATOR FROM ILLINOIS 

Senator FITZGERALD. Thank you, Mr. Chairman. I’ve just been 

going back and forth between an Enron hearing over in the Governmental Affairs, and I’m back over here. And I—we’re getting—

over in the Governmental Affairs, we’re getting involved in the 

minute details of how Enron was engaged in fictitious transactions 

to artificially inflate their earnings. My suspicion all along has 

been that the motivation for Enron executives to do what they did 

was because they were getting very rich on their stock options. The 

top managers at Enron, the top 29 cashed in $1.1 billion worth of 

stock options. Most of them left the company and aren’t anywhere 

to be found right now. And everybody else was left holding the 

bag—the long-term shareholders, the employees who had their 

401(k) life savings invested in Enron stock—was left holding the 

bag. 

Now, I sit here and I see the three of you. Mr. Legere, from Global Crossing, the insiders at your company topped the insiders at 

Enron in cashing in stock in the last 3 years before the company 

was put in bankruptcy. Is it correct that insiders cashed in $1.3 billion worth of stock options—well, stock; I won’t say it was all in 

options—in the 3-years before Global Crossing filed for bankruptcy? 

Ms. LEGERE. Well, that—I mean, I don’t know the exact number, 

but it sounds in the right range. 

Senator FITZGERALD. Now, Mr. Winnick, as I understand it, the 

former chairman of the company, alone, realized $735 million in 

profits either from selling the stock that he had or from earnings 

realized by buying collars in April of 2001 to protect himself from 

84

a downfall in Global Crossing’s stock, and he now lives in a $95 

million home in Bel Air called Casa Encantada or some—‘‘enchanted house’’, or something like that. 

Are you doing anything—now that it’s come out that the company was artificially inflating their revenues to keep the stock 

price high, are you doing anything to go after the former executives 

who did that? They have a big pot of money out there, $1.3 billion 

in profits recognized. Are you pursuing Mr. Winnick for any of 

those potentially ill-gotten gains? 

Mr. LEGERE. First of all, at this point there has been no findings 

yet to the allegations against our company. And once the SEC finishes its work, you know, we’ll know the answer as to some of the 

accounting questions. They’re not—there are very complex accounting questions yet to be answered. 

We are in bankruptcy process, so the court, the creditors, and the 

banks have total jurisdiction to look over all the——

Senator FITZGERALD. Is the trustee in bankruptcy pursuing any 

ill-gotten gains by your——

Mr. LEGERE. All of——

Senator FITZGERALD.—previous executives? 

Mr. LEGERE.—all of the information associated with every financial transaction to insiders for the company is provided to the 

court. It’s my understanding they’re still reviewing the information. 

I would make one point, if I could, which is, at this point in time, 

my entire senior leadership team at Global Crossing, except for one 

individual, has never sold a single share of stock in the company, 

or an option, and the one individual has sold a very minor amount. 

So the team that’s focused on bringing this company forward has 

very clearly not been participating in this situation. 

Senator FITZGERALD. Are you aware of a Mr.—I think his 

name—is it Roy Olafson? 

Mr. LEGERE. Yes, I am. 

Senator FITZGERALD. He made allegations about a year ago. He 

was a senior vice president or a vice president of the company. He 

made allegations that the company was capitalizing recurring expenses, as happened at WorldCom, about a year ago. Now, I have 

articles here where Global Crossing was fighting Mr. Olafson in 

court and saying his allegations were without merit. Is that still 

your opinion, that Mr. Olafson’s allegation were without merit? 

Mr. LEGERE. Mr. Olafson’s allegations are taken very seriously. 

They happened to be, you know, the substance of the investigations 

by our special committee of our board, and they’re being taken very 

seriously. So we’re looking at everything he outlined. 

Senator FITZGERALD. Is there litigation between you and Mr. 

Olafson right now? 

Mr. LEGERE. I believe Mr. Olafson has filed a wrongful termination suit against Global Crossing, and it is pending. 

Senator FITZGERALD. And are you still fighting that? You are, 

then. 

Mr. LEGERE. Well, it’s a wrongful termination suit that’s not settled, so——

Senator FITZGERALD. Well, he’s saying he was fired because he 

was blowing the whistle on the improper accounting, and you’re 

still trying to uphold his termination and say it wasn’t wrongful. 

85

Mr. LEGERE. The case is pending. 

Senator FITZGERALD. Well, it’s pending because you’re fighting it, 

is that correct? 

Mr. LEGERE. We—at this point in time, there’s no closure. We 

don’t believe he was wrongfully terminated, so we are defending 

ourselves. 

Senator FITZGERALD. Mr. Mohebbi, from Qwest, I gather you 

aren’t on this list that appeared in the New York Times where insiders at Qwest in the last 3 years, they cashed out $500 million 

worth of their stock options, and now they’re gone. Are you going 

to go after any of these people? You just came out Sunday and said 

that you’re restating the earnings of the last few years, that they 

were overstating revenues, perhaps understating expenses, apparently to goose their earnings to keep—in my judgment, probably to 

keep the stock price high to keep getting rich. And they did get 

rich. Your former chairman, Mr. Nacchio, cashed in $226 million 

worth stock options. But he has that $226 million. The long-term 

investors have got nothing. They’ve gotten the shaft. They’ve been 

betrayed here. Are you going to do anything about it, or are you 

going to let it slide? 

Mr. MOHEBBI. Senator, on Sunday, what we said publicly was 

that we have an ongoing investigation, and there are a number of 

other agencies, government agencies, that are looking, obviously, at 

different pieces of the ongoings in Qwest. What I can tell you is 

that the new company, the management of the company, if there 

are any improprieties or if there are any—there is found any 

rules—laws to be broken, obviously we will be very proactive on 

that, and I’m sure the government agencies will be proactive on 

that. 

Senator FITZGERALD. Will you try to recover, for the company, 

any ill-gotten gains if you find that there are any? 

Mr. MOHEBBI. To the extent that the wrongdoing is identified 

and proven, we have no choice, Senator. 

Senator FITZGERALD. OK. Well, I’m glad—I’m glad to hear that. 

Now, Mr. Sidgmore, WorldCom. Ebbers got a loan from the company. How much was the loan? 

Mr. SIDGMORE. Well, it’s now about $400 million. 

Senator FITZGERALD. Are you trying to collect the loan? 

Mr. SIDGMORE. We are in the process of supporting all the investigations that are going on. And, as I mentioned before——

Senator FITZGERALD. Have you filed suit to collect the loan? 

Mr. SIDGMORE. No. 

Senator FITZGERALD. Is it being paid back? 

Mr. SIDGMORE. No. But let me just—let me just say that we’re 

waiting for the results of the investigation. And our position on all 

these matters is if——

Senator FITZGERALD. Is the loan in default? I’m not asking 

about——

Mr. SIDGMORE. It’s not in default. 

Senator FITZGERALD. It’s not in default, so he’s making payments 

on the loan. 

Mr. SIDGMORE. He starts making payments in January. 

Senator FITZGERALD. Oh, no payments are due until January. 

Mr. SIDGMORE. That’s right. It was a term note. 

86

Senator FITZGERALD. And there are no defaults now. Even a material deterioration in Mr. Ebbers’ financial condition doesn’t trigger a default in the——

Mr. SIDGMORE. Right now we do not believe he’s in default. OK? 

Let me just——

Senator FITZGERALD. Who is responsible for——

Mr. SIDGMORE. If I could just make one point on that, OK? We 

are of the opinion that we will cooperate with all the investigations, 

including our own. And if there are any improprieties found, we 

will go after them, to the full extent we can, not only directly, but 

we will support the Government in going after them. 

Senator FITZGERALD. If the loan is not timely paid by Mr. 

Ebbers——

Mr. SIDGMORE. We’ll go after it. 

Senator FITZGERALD.—will you sue him to collect the note? 

Mr. SIDGMORE. We’ll go after it. Yes, we will. 

Senator FITZGERALD. And you’ll exercise the full powers to 

get——

Mr. SIDGMORE. Yes, we will. 

Senator FITZGERALD.—a judgment against him, file the judgment 

against his house, take everything he has to get that money back 

for WorldCom. 

Mr. SIDGMORE. I guess at this point, I just want to, I don’t want 

to go through the details of it, but we will go after it, to the full 

extent we can. 

Senator FITZGERALD. Was there collateral for the note? Just the 

shares of WorldCom within——

Mr. SIDGMORE. No, there’s real estate, there are boat yards, 

there are all kinds of——

Senator FITZGERALD. You have mortgages on——

Mr. SIDGMORE. Yes, we do. 

Senator FITZGERALD.—real estate? 

Mr. SIDGMORE. Yes, we do. 

Senator FITZGERALD. So you can foreclose that real estate, then. 

Mr. SIDGMORE. Yeah. 

Senator FITZGERALD. And you won’t shy away from that if he is 

in default. 

Mr. SIDGMORE. No, we won’t. 

Senator FITZGERALD. I’d urge you to look to see whether he isn’t 

already in default just based on a material determination——

Mr. SIDGMORE. There are about 400 lawyers looking at that right 

now. 

[Laughter.] 

Senator FITZGERALD.—Thank you, Mr. Sidgmore. 

Mr. SIDGMORE. Thank you. 

The CHAIRMAN. Senator McCain. 

Senator MCCAIN. Thank you, Mr. Chairman. 

For all three of the witnesses, Mr. Winnick got $735 million in 

stock options; Mr. Nacchio, $300 million since the 1990s; Chairman 

Roberts, $22 million, at WorldCom. Aren’t these stock options, 

these huge compensations, aren’t they supposed to be based on performance of the corporation? Starting with you, Mr. Legere. 

Mr. LEGERE. Obviously stock options are inherently based on 

performance of the company, because they don’t become exercisable 

87

unless the company’s stock price at that point in time is greater 

than the option——

Senator MCCAIN. Do the other witnesses agree? Do you agree 

that——

Mr. SIDGMORE. Yes. 

Senator MCCAIN.—it’s supposed to be based on the performance 

of the——

Mr. SIDGMORE. Yes, absolutely. 

Senator MCCAIN. Then why wouldn’t you immediately ask for 

that money back? 

Mr. SIDGMORE. Well, I——

Senator MCCAIN. Because all three corporations are either in 

bankruptcy or, in the case of Qwest, having to restate earnings to 

a tremendous degree, and the stocks have tanked. Shouldn’t you 

ask for that money back and distribute it maybe to the stockholders or to the employees that have been laid off or the retirees 

whose pensions have been wiped out? 

Mr. LEGERE. I mean——

Senator MCCAIN. Did that ever cross your mind? 

Mr. SIDGMORE. Well, part of it depends on when the stock was 

sold. I mean, it is possible that you have—predecessor companies, 

for example, did extremely well. People had stock options based on 

this companies. They cashed in those stock options and moved on. 

Senator MCCAIN. I’m talking about your companies. I’m talking 

about your companies. Mr. Legere, shouldn’t Mr. Winnick be asked 

to give some of that $735 million back that he cashed in? 

Mr. LEGERE. Senator, I believe legally, at this point in time, the 

company has no rights to the money that Mr. Winnick took, unless 

he is seen to do something inappropriate. 

Your broader question really is one associated with the pain 

that’s been caused to so many people, which, you know, is the 

hardest part of everything that we’ve gone through. I don’t think 

that’s a——

Senator MCCAIN. A lot of——

Mr. LEGERE.—legal question. I think it’s a broader personal 

question that I can’t answer. 

Senator MCCAIN. A lot of Americans are saying, you know, 

maybe it’s legal. And if it’s legal, there’s something terribly wrong. 

Mr. Legere, do you think, can you explain why—I’m sure you 

probably can, but just out of curiosity, do you know why Mr. 

Winnick refused an invitation to testify here today? 

Mr. LEGERE. I don’t know why he wasn’t available, Senator, but 

I also, as we looked at the topic of the hearing today, with the over 

22 years of experience I have in telecom and the fact that I’m running the company full force right now, I think we believed that I’d 

be a good witness to come here and represent the business. 

Senator MCCAIN. Well, I would have asked him about, he and 

three other members of Global Crossing’s board starting a company 

called PCG Telecom that was a subsidiary of Mr. Winnick’s holding 

company, Pacific Capital Group. PCG Telecom signed a 25-year 

contract with Global Crossing to provide, quote, ‘‘advice on the development and marketing of the network.’’ In 1997, Mr. Winnick and three other executives split $7.2 million for arranging the financing of a portion of Global Crossing’s 

88

network. In March 1998, they split $2 million advance against future revenues. In June 1998, Global Crossing cancelled the contract 

and paid Mr. Winnick and the three other executives $135 million 

in stock as a, quote, ‘‘contract termination fee.’’ Were you aware of 

that? 

Mr. LEGERE. All of the intercompany arrangements of the company are part of the things that are being investigated by our special committee. My focus, since I came here in October, was getting 

this company turned around and saving what we have. And a lot 

of issues of the past are being looked at. Action needs to be taken. 

And right now we have no outcome to those investigations. 

Senator MCCAIN. But you didn’t know anything about that deal. 

Mr. LEGERE. I was not with the company at that point in time. 

I do know the details, because I have seen the filings and I’ve seen 

the questions. 

Senator MCCAIN. According to the L.A. Times, a company controlled by Gary Winnick is demanding $500,000 in overdue rent 

from Global Crossing. Is he still demanding that from you? 

Mr. LEGERE. I don’t know the status of it, but, as part of my 

turning around the company, I’ve very aggressively closed 227 real 

estate sites, including the ones owned by Mr. Winnick, and I used 

the bankruptcy court proceedings to do some of those. If he has 

filed some suit against those, it’s a, you know, business transaction, 

and I don’t know the status of it. 

Senator MCCAIN. Did Global Crossing rent office space from a 

company called North Crescent? Do you know anything about that? 

Mr. LEGERE. I believe North Crescent Holdings would be the 

holding company in the Beverly Hills office that I recently closed. 

Senator MCCAIN. But as far as you know, Mr. Winnick is still 

asking for $500,000 in overdue rent. 

Mr. LEGERE. If he’s asking, he’ll be asking the bankruptcy procedure. And if it’s his legal right to do so, he can push it forward. 

Senator MCCAIN. According to an article appearing in the Los 

Angeles Times, ‘‘Stacks of documents were destroyed at Global 

Crossing in the days before and as well as after the company filed 

for bankruptcy. A Global Crossing receptionist said she saw a secretary and a relative of Global Crossing’s vice president of finance 

leave a storage room containing a shredder at the company’s Madison, New Jersey, offices.’’

What’s your response to those allegations? 

Mr. LEGERE. Well, on the—on the whole information preservation 

question, in February of this year, when the SEC sent us requests 

for documents, we immediately, under my watch, executed a policy 

company-wide for full document retention. The item that you’re 

speaking of was part of a filing by a plaintiff’s attorney in our 

bankruptcy procedure several weeks ago. We interviewed the people. We found no merit to the allegations. 

But just to be clear, we did a full worldwide review of the processes, and we did come forward to all constituents and say we 

found one or two locations in the world where there were some documents being destroyed. They were non-critical information that 

was backed up, but yet there was some information being destroyed. We disclosed that. It had no relevance to the proceedings 

that had taken place. 

89

Senator MCCAIN. Mr. Sidgmore, it’s been reported that former WorldCom CEO Bernie Ebbers will receive $1.5 million per year for 

the rest of his life and the use of WorldCom’s corporate jets. Is that 

still an existing arrangement? 

Mr. SIDGMORE. That is—that is correct, as of now, and that will 

be looked at in the context of these investigations, as well. 

Senator MCCAIN. Mr. Mohebbi, press reports indicate that former Qwest CEO Joseph Nacchio sold over $300 million of Qwest stock 

since 1997. This is after the fact that, under his watch, Qwest 

shares tumbled from $65 a share to under $2 today. In addition, Mr. Nacchio will reportedly receive a $10 million 

severance package. Do you believe that Mr. Nacchio was aware of 

the reported accounting discrepancies at the time he was selling 

millions of dollars of Qwest stock? 

Mr. MOHEBBI. Senator McCain, obviously we have ongoing investigations in the company. I have no knowledge to tell you whether 

he did or did not know, at this time. 

Senator MCCAIN. You don’t—you don’t have any idea. 

Mr. MOHEBBI. I do not. 

Senator MCCAIN. Yesterday, Qwest announced it would restate 

its results for 2000 and 2001. According to your CFO, Qwest uncovered misstatements that led it to book approximately $874 million 

in revenue for 2000 and 2001 in lump sums up front, instead of 

over a period of time. 

In your testimony, you acknowledge that certain accounting practices were related to the sale of capacity. Can you explain why 

these practices weren’t discovered earlier? 

Mr. MOHEBBI. Senator, at the time that Qwest accounted for 

these transactions, we did so in good faith and in conjunction with 

our former auditor, in terms of the policies that were set for those 

particular transactions. Earlier this year, what we did was we 

started an internal analysis as a result of the increased attention 

that obviously was put around this area of these particular transactions, to review them, each and every one, in detail and make 

sure that we can see whether every part of our Qwest policies were 

followed for each of these transactions. 

What we announced on Sunday was that, at this point, we have 

found some of these transactions where our internal policies have 

not been followed. And we went public. We wanted to make sure 

that there was full disclosure on that. And what we have stated is 

that we are going to, throughout this process, make sure that everyone knows how we are making progress. 

Since the investigation and the process—the analysis is not completed, Senator, I can’t tell you what were the specific reasons for 

the process and policies not being followed in the case of a number 

of transactions. But we will find that out, and we will share that 

information widely. 

Senator MCCAIN. Is the board contemplating any action concerning Mr. Nacchio’s retirement package? 

Mr. MOHEBBI. Senator, as I was stating, if, during the analysis 

and the work that’s being done independently by the board-appointed Committee, as well as other agencies that are looking at 

it, if evidence of impropriety has been found, obviously then the 

company and I’m sure as well as other agencies will act on that. 

90

Senator MCCAIN. Wouldn’t you act on it, just on the basis of 

stock for the performance of the corporation itself? 

Mr. MOHEBBI. Senator, I believe we need to have specific evidence of wrongdoing for an action to be taken against companies 

or individuals. And the board of the company and the new management——

Senator MCCAIN. I thought a compensation package was given 

on the basis of performance of the CEO, not whether it’s illegal or 

not. 

Mr. MOHEBBI. Senator, to the best of my understanding, if a 

legal contract is signed with an individual, then there should be 

legal evidence if you want to——

Senator MCCAIN. I thank you. 

I thank you, Mr. Chairman. I thank the witnesses for being here 

today. 

The CHAIRMAN. The Committee thanks the witnesses for their 

appearance. The record will stay open for further questions. 

The Committee will be at ease, subject to the call. 

[Whereupon, at 1:15 p.m., the hearing was adjourned.] 

(91)

APPENDIX

PREPARED STATEMENT OF JOHN ROSE, PRESIDENT, ORGANIZATION FOR THE

PROMOTION AND ADVANCEMENT OF SMALL TELECOMMUNICATIONS COMPANIES

(OPASTCO) 

Mr. Chairman, I commend you for acting quickly to convene this morning’s hearing to examine the impact of recent financial failures in the telecommunications 

marketplace. It is not surprising that the focus of this hearing is to gather information from three of the largest telecommunications providers, WorldCom, Inc., Global 

Crossing Ltd., and Qwest Communications International, each of whom has faced 

significant financial difficulties in recent months. However, it is important for Members of this Committee to understand that ‘‘financial turmoil in the telecom marketplace’’ has far-reaching consequences for hundreds of small, rural Local Exchange 

Carriers (LECs) across the nation and the customers they serve in each of your 

states. 

In contrast to the average Regional Bell Operating Company (RBOC) that serves 

approximately 40 million access lines, the typical rural telephone company represented by OPASTCO serves approximately 6,500 access lines. Nationally, the population density in areas served by rural carriers is only about 13 persons per square 

mile. This compares to a national average population density of 105 persons per 

square mile in areas served by non-rural carriers. The ability of rural telephone 

companies to provide affordable and quality telephone service to communities such 

as Reynolds, Georgia; Circle, Montana; Walterboro, South Carolina; Burkes Garden, 

Virginia, and New Florence, Missouri relies in large part on revenue streams provided by toll providers such as WorldCom to support their high fixed network costs. 

As you know, the recent bankruptcy filing by WorldCom, Inc. has resulted in 

heightened uncertainty throughout the already challenged telecommunications industry. OPASTCO members believe that it is essential for federal policymakers to 

take steps to ensure that the business failure of WorldCom does not spread to other 

companies. More specifically, OPASTCO members are quite concerned with 

WorldCom’s ability to continue fulfilling its obligation to pay inter-and intrastate access charges to LECs for their initialization and completion of toll calls on the local 

network. We are also concerned with WorldCom’s continued ability to contribute 

their required share to the federally-mandated universal service fund (USF). 

OPASTCO members, who already face the operational challenges highlighted above, 

would find it increasingly difficult to make added investments in advanced services, 

such as broadband, were these portions of their revenues negatively impacted. 

Mr. Chairman, small, rural carriers rely much more heavily than other LECs on 

access charge and universal service payments. In fact, on average, access and USF 

payments collectively account for over two thirds of all revenue received by rural 

LECs.

The table shown below illustrates this point. 

Revenue Source Amount Received By Price-Cap

Regulated (Large) Carriers 

Amount Received By Rate of Return

Regulated (Small) Carriers 

Direct from Customers 

(Subscriber Line Charges) 

$6.00/Month (residential) 

$6.80/Month (multi-line business).

$6.00/Month (residential) 

$9.20/Month (multi-line business) 

Interstate Access Charge 

Payments from 

Interexchange Carriers 

0.55 cents per Minute (for 

RBOCs).

0.95 cents per Minute (for rural 

Price-Cap Carriers) 

2.1 cents per Minute 

Universal Service Fund 

(USF) Payments 0.50 cents per Line/Month $13.50 per Line/Month 

92

As these statistics demonstrate, were small, rural LECs to lose a significant portion of either or both of these revenue streams, access charges and/or local rates 

would need to be increased in order to continue to provide quality service. In turn, 

such increases could force many rural residents to drop off the network. Therefore 

it is crucial that these payments continue to be met, in order to avoid a broader 

catastrophe that would threaten the ability of rural Americans to remain connected. 

First, OPASTCO members believe that WorldCom should be required to reasonably guarantee that it will continue to meet both its access charge and universal 

service contribution commitments. With regards to its access charge payments, 

WorldCom has asked the U.S. Bankruptcy Court for the Southern District of New 

York (the Court) to classify its access obligations as ‘‘Utility Services Payments’’ 

with ‘‘administrative expense status.’’ It is our understanding that ‘‘administrative 

expense status’’ payments are assigned a lower repayment priority than the category of ‘‘Critical Vendor Payments.’’ Access charge payments are not just another 

cost of doing business for WorldCom. Access is a critical input in the provision of 

toll service; without it toll calls could not be initiated or completed. Therefore, any 

disruption of access payments would jeopardize both WorldCom’s efforts to continue 

its operations, as well as the reliability of our national telecommunications network. 

Second, OPASTCO members feel that it is essential that the Court and federal 

regulators demand that WorldCom specifically guarantee that it will continue to 

make its ongoing contributions to the USF. We note that within its bankruptcy petitions WorldCom pledges to make payment for all of the required ‘‘regulatory fees,’’ 

it incurred up to the July 21st filing of its bankruptcy petition. Although 

WorldCom’s bankruptcy petitions tangentially reference universal service contributions as one of these ‘‘pre-petition regulatory fees,’’ more direct guarantees from 

WorldCom would provide the marketplace with a greater degree of certainty with 

regards to this issue. Furthermore, it is still unclear as to whether additional provisions have been made for those regulatory fees incurred in the time since 

WorldCom’s petition was filed. 

Mr. Chairman, WorldCom’s payment of its universal service contribution simply 

cannot be treated in the same manner as other governmental fees that it may incur. 

Universal service programs ensure that Americans living in rural and high-cost 

areas receive affordable and comparable access to the same high-quality telecommunications services enjoyed by citizens living in more urban locations. Were 

WorldCom’s ongoing USF contributions reduced or disrupted in any way, the obligation on other contributing carriers would necessarily increase. Consequently, the 

universal service line-item charge placed on other carriers’ end-user bills would have 

to increase dramatically to make up the shortfall. 

The Commerce Committee has demonstrated its commitment to the ongoing stability of the federal universal service program, as was noted during the Committee’s 

June 19th hearing examining the future of the universal service program. Clearly, 

now is not the time to introduce any added stresses into the system. In our view, 

it is essential that Congress and the Federal Communications Commission ensure 

that the WorldCom crisis does not lead to a broader universal service crisis. Concrete assurances must be required of WorldCom vis-a ́-vis its current and future universal service contribution obligations. 

The current financial failures within the telecommunications industry are of great 

concern to many Americans. At this time, it is absolutely essential that Congress 

work collaboratively with the courts, key regulators, and other stakeholders within 

the telecommunications marketplace to contain the damage that industry financial 

breakdowns, such as the WorldCom bankruptcy, may have. Only by doing this can 

the stability and continued reliability of our nation’s telecommunications network be 

guaranteed for all American consumers.

Thank you.

Æ