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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
  THE INDEPENDENT TELECOMMUNICATIONS CONSUMER ENHANCEMENT ACT OF 2000

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

                                HEARING

                               before the

                  SUBCOMMITTEE ON TELECOMMUNICATIONS,
                     TRADE, AND CONSUMER PROTECTION

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                                   on

                               H.R. 3850

                               __________

                             JULY 20, 2000

                               __________

                           Serial No. 106-141

                               __________

            Printed for the use of the Committee on Commerce

                    U.S. GOVERNMENT PRINTING OFFICE
65-905CC                    WASHINGTON : 2000

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

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

                                 ______

   Subcommittee on Telecommunications, Trade, and Consumer Protection

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

MICHAEL G. OXLEY, Ohio,              EDWARD J. MARKEY, Massachusetts
  Vice Chairman                      RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio                BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California          ANNA G. ESHOO, California
NATHAN DEAL, Georgia                 ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma              ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming               BILL LUTHER, Minnesota
JAMES E. ROGAN, California           RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Cole, David, Vice President of Operations Support, CenturyTel    28
    Darby, Larry, Economist, Darby Associates....................    17
    Mattey, Carol, Deputy Chief, Common Carrier Bureau; 
      accompanied by James Bird, Senior Counsel, Office of 
      General Counsel, Federal Communications Commission.........    10
    Mueller, Jack, President, Cincinnati Telephone Company/
      Broadwing..................................................    23
    Sumpter, John, Vice President, Regulatory Affairs, Pac-West 
      Telecommunications, Inc....................................    32
Material submitted for the record by:
    Independent Telephone & Telecommunications Alliance, letter 
      dated August 24, 2000, enclosing material for the record...    54
    Mattey, Carol, Deputy Chief, Common Carrier Bureau, letter 
      dated September 14, 2000, enclosing response for the record    56

                                 (iii)

  THE INDEPENDENT TELECOMMUNICATIONS CONSUMER ENHANCEMENT ACT OF 2000

                              ----------                              

                        THURSDAY, JULY 20, 2000

              House of Representatives,    
                         Committee on Commerce,    
                    Subcommittee on Telecommunications,    
                            Trade, and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:15 p.m., in 
room 2322, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman), presiding.
    Members present: Representatives Tauzin, Oxley, Gillmor, 
Deal, Largent, Cubin, Shimkus, Markey, Gordon, Eshoo, Luther, 
and Sawyer.
    Staff present: Kelly Zerzan, majority counsel; Cliff 
Riccio, legislative analyst; and Andy Levin, minority counsel.
    Mr. Tauzin. The Chair apologizes. The meeting will come to 
order.
    Welcome to today's legislative hearing on H.R. 3850, the 
Independent Telecommunications Consumer Enhancement Act of 
2000, which has been introduced by my colleague, Congressman 
Cubin--Congresswoman Cubin, excuse me, 4 years ago.
    After our struggle to pass the Telcom Act, it is clear that 
our efforts have indeed paid off. We are truly in a new and 
changed telecom environment. The industry has seen an explosion 
of new entrants, new participants, and increased competition.
    In fact, we have some mid-sized carriers here today who 
will surely tell us that competition is so vibrant that many 
FCC regulations are no longer necessary to protect the 
consumer.
    I, as one, believe that some of the FCC regulations are too 
burdensome particularly for mid-sized carriers. For instance, I 
understand that mid-sized carriers must complete voluminous 
reports which cost them hundreds of thousands of dollars when 
the usefulness of such reports is easily debatable. A Paper 
Reduction Act here may be indeed a good measure.
    However, whether competition in the areas served by mid-
sized carriers is so robust as to warrant the reduction of FCC 
oversight, indeed we ought to talk about that and that is why 
we are here today.
    The central debate of this bill is an old one, and frankly 
one that has always been difficult to answer. At what point is 
the marketplace strong enough to replace the government 
regulator?
    I hope to hear some of the answers to that question today.
    I want to thank Representative Cubin for introducing the 
important issue to this subcommittee, and we indeed look 
forward to hearing the witnesses that have assembled today.
    Again, my apologies for starting a little late, Barbara, 
and to all of you who have gathered to be with us today.
    The Chair will yield to my friend from Ohio, Mr. Sawyer, 
for an opening statement.
    Mr. Sawyer. Thank you, Mr. Chairman.
    There is some water there for you, if you need it.
    Mr. Tauzin. Thank you, sir.
    Mr. Sawyer. I have a longer statement, but just let me 
summarize it by saying that it is rare that one size fits all, 
except maybe for Spandex.
    Mrs. Cubin. And even not then.
    Mr. Sawyer. I really do not have much first-hand 
experience, so having said that, it is currently being argued 
that some of our telephone companies are burdened by an ill-
fitting regulatory regime, and we are here today to talk about 
whether or not a more tailored regulatory treatment would be 
appropriate.
    I look forward to hearing everybody's comments on that 
question. I yield back.
    Mr. Markey. It is rare that one size really fits all. 
Except, of course, for Spandex. And certainly for 
telecommunications regulations one policy should not fit all. 
However, this is sometimes the case for local exchange 
telecommunications carriers. Companies with vast differences in 
number of customers and in size of revenues too often play by 
the same rules. FCC regulations that apply to the large 
Regional Bell Operating Companies sometimes must be followed by 
smaller mid-sized carriers. These regulations are 
disproportionately burdensome and often unnecessary for these 
carriers.
    For example, mid-sized carriers assert that the cost 
allocation manual [CAM] reporting requirements costs them up to 
$3 per customer while it costs Regional Bells just 4 cents per 
customer. Proponents of this legislation also point out the FCC 
rarely uses these reports from mid-sized carriers.
    H.R. 3850, the Independent Telecommunications Consumer 
Enhancement Act of 2000 addresses this problem by creating a 
separate class for incumbent local exchange carriers [ILEC] 
that have less than 2 percent of the Nation's subscriber lines, 
and by directing the FCC to adopt regulations that account for 
their limited resources. Although 2 percent carriers would 
still be subject to FCC regulations, the bill's intent is to 
ensure that any regulation must be reasonable for mid-sized 
carriers.
    In addition to modifying costly and unnecessary reporting 
requirements, H.R. 3850 would also allow 2 percent companies to 
integrate its telecommunications operations. As a result, these 
companies could offer additional services such as wireless or 
broadband without setting up separate subsidiaries. While large 
Regional Bells can afford the additional costs associated with 
creating a subsidiary, these costs can be prohibitive for 
smaller carriers. Lifting this burden should spur 2 percent 
companies to offer a full range of services, bringing 
additional competition to the ILEC market.
    Congress has already recognized the unique needs of 2 
percent carriers by requiring less burdensome interconnection 
requirements in the 1996 Telecom Act. More recently, the FCC 
eliminated rules which are disproportionately costly for these 
2 percent carriers. However, additional unnecessary regulations 
still remain. By removing these barriers, 2 percent carriers 
can use those resources to roll out additional services or 
invest in their infrastructure.
    Those who oppose lifting or modifying the regulations claim 
that this bill severely weakens the FCC's ability to protect 
consumers. I understand that the FCC is concerned that it lacks 
the resources to carry out some of the provisions of this bill. 
While I appreciate that the FCC may be troubled by some of the 
oversight issues, I believe that currently the mid-sized 
telephone companies are burdened by an ill-fitting regulatory 
regime and deserve tailored regulatory treatment.
    I look forward to vetting these issues with the FCC today 
and trying to find a balanced approach to ensuring fair 
competition.
    Mr. Tauzin. Thank you, sir.
    I will now yield to the author of the legislation for her 
statement, Congresswoman Cubin.
    Mrs. Cubin. Thank you, Mr. Chairman.
    I also thank you for holding this hearing. It really is 
important to rural areas like mine, especially.
    H.R. 3850 is legislation that will modify regulatory 
burdens on small and mid-sized telephone companies, allowing 
them to shift more of their resources to deploying advanced 
telecommunications services to consumers in all areas of the 
country.
    Small and mid-sized companies really are truly that. While 
the more than 1200 small and mid-sized companies serve less 
than 10 percent of the Nation's lines, they cover a much larger 
percentage of rural markets and they are located in or near 
most major markets in the country.
    Some of these telephone companies are mom and pop 
operations, typically serving rural areas of the country where 
most other carriers fear to tread, in high-cost places where it 
is much less profitable than in more populated areas.
    In 1996 this committee wrote, and the Congress passed, 
historic legislation in the form of the Telecommunications Act.
    Section 706 of the Act sent a clear message to the American 
people and to the Federal Communications Commission that the 
deployment of new telecommunications services in rural areas 
around the country must happen quickly and without delay.
    Unfortunately, the FCC has not made it any easier for small 
telephone companies to deploy advanced services in rural areas. 
In some cases they have actually made it more difficult.
    The reason is that the FCC, more often than not, uses a 
one-size-fits-all model in regulating all incumbent local 
exchange companies.
    This type of model may be fine for the big companies that 
have the ability to hire legions of attorneys and staff to 
interpret and ensure compliance with the regulations, but the 
small and mid-sized companies do not have the resources 
available to them to complete the paperwork requirements put 
forth in these outmoded and preponderous reports.
    These are the instructions, over 900 pages. These are just 
the instructions for filling out the CAM and ARMIS reports that 
are required annually.
    Now I want to show you another thing. You should have to 
carry that around. I didn't. Here are CAM and ARMIS reports 
required annually that have to be filed, and these are by very 
small and mid-sized companies. These things cost from $300,000 
to $500,000 to fill out and, in many cases, are not even 
reviewed; they are not even looked at.
    Now I do not want them to be totally useless. So what I am 
going to do is sit on it so that I can see you better and you 
can see me better and know I am the one here in charge. They 
have to be good for something.
    Now I would like to offer one of these--these are other 
reports. These are not CAM and ARMIS, but these are reports 
that will have to be filed anyway even if these are not, under 
my bill. Here they are. Mike, you can have one.
    Mr. Oxley. Thank you.
    Mrs. Cubin. Billy, you can have one. Everyone can have one.
    These reports, separately, the CAM and ARMIS again, they 
cost about $500,000 to compile and would equate to a small 
company installing a de-slam or other network infrastructure to 
provide highspeed Internet data access to customers in rural 
areas.
    Just to give you an example of how burdensome these are, I 
showed you. This is over 900 pages long, and those are the 
instructions for filling out the reports.
    More often than not, the FCC does not refer to, and in some 
cases simply ignores the data filed by the mid-sized companies.
    The bill, however, I want to make this very clear, does 
absolutely nothing to restrict the Commission's authority to 
request any of this or all of this at any time. The Commission 
absolutely retains that authority under my bill.
    Nevertheless, the FCC should be commended I believe because 
they have made efforts to bring some of these reporting 
requirements down to a reasonable level, and I want to make 
that very clear, that I acknowledge that and appreciate it.
    In fact, it is reported to me that the FCC may be issuing a 
notice of proposed rulemaking on the agency's reporting 
requirements for 2 percent companies sometime this fall.
    The problem, though, is that the agency's timeframe on 
issuing these proposed rules has changed like the Wyoming 
winds. I do not know how many of you have been to Wyoming, but 
they blow in a circle.
    It is time that those obligations are met. This legislation 
would solidify what the FCC has already promised to do for a 
long time.
    In closing, Mr. Chairman, I want to state for the record 
what this legislation does and what it does not do. The bill 
does not re-open the 1996 Act.
    It does not fully deregulate 2 percent carriers.
    And it does not impact regulations dealing with large local 
carriers.
    It would, however, be the first free-standing legislation 
that would modernize regulations of 2 percent carriers. It 
would accelerate competition in many small to mid-sized 
markets; accelerate the deployment of new advanced 
telecommunications services; and benefit many consumers by 
allowing 2 percent carriers to redirect their resources from 
regulatory burdens to network investment and new services.
    Mr. Chairman, I believe this legislation is critical for 
rural areas such as Wyoming where these small companies 
operate.
    Without this bill, these 2 percent companies will continue 
to be burdened with this one-size-fits-all regulatory approach 
that has kept them from providing rural areas with the services 
they need in order to have a share of the new economy.
    Again, Mr. Chairman, I truly thank you for having this 
hearing today, the other members for being here, and I look 
forward to hearing from the witnesses.
    Mr. Tauzin. I thank the gentlelady.
    The Chair recognizes the ranking minority member, my friend 
from Massachusetts, Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    There are a number of issues raised by legislative 
proposals before the committee, including whether there is 
sufficient competition in identified markets to warrant 
elimination of certain ratepayer protections, whether certain 
regulations have outlived their usefulness, whether provisions 
are targeted to affect truly small companies or rural markets; 
and whether elimination of reporting requirements will increase 
rates or cause universal service subsidies to become even more 
bloated.
    The FCC has already taken many steps to relieve regulatory 
burdens on so-called 2 percent companies and the FCC is poised 
to consider even more relief.
    In my view, removing regulations after markets have become 
fully competitive makes imminent sense, yet the bill before the 
committee not only removes arguably unnecessary regulatory 
requirements--which I would support--but also removes certain 
requirements that help to make smaller markets more 
competitive.
    In addition, the legislation contains a number of 
provisions that may have adverse implications for consumer 
rates.
    The legislation appears to eliminate the ability of the FCC 
to review interstate access rates for reasonableness once 
competition arrives in a 2-percent company's market.
    The problem here is that competition may arrive that, while 
providing competition in certain markets, may not provide 
competition for certain types of access rates such as 
terminating access charges.
    This could leave interconnecting companies with no means to 
challenge such rates, thus forcing them to charge higher rates 
elsewhere to compensate them.
    If rural Americans want to inhibit the growth of 
competition in their rural markets or put rural consumers at 
risk of rate increases, that is one thing, and that is their 
prerogative to advocate such positions and to take such risks.
    I believe we would do better by rural Americans to revise 
the legislation to keep in place those provisions that foster 
competition while focusing solely on those provisions that are 
unnecessary to the promotion of competition or to consumer 
protection.
    With respect to rates that affect urban consumers, however, 
I do not support putting urban consumers at the risk of 
increased subsidies simply because rural companies seek relief 
from competitive provisions and requirements.
    I support universal service. I do not want to see people in 
North Dakota, or Alaska, or Wyoming, or any rural community pay 
$240 a month for local phone service.
    I believe rural consumers should pay reasonable rates. I 
believe it is important for urban ratepayers to help out in 
this endeavor, which my family has been doing for my entire 
life in the city of Boston, helping out rural Americans.
    Mrs. Cubin. Thank you.
    Mr. Markey. And we like doing it. We like you people. You 
are good people.
    Mrs. Cubin. And we think the same of you.
    Mr. Tauzin. And the cows will come home when you call them. 
You know that.
    Mr. Markey. But I'm an Easterner. What do I know? What do I 
know about cows, you know?
    My father delivered the milk; we didn't milk it.
    That's an udder story. I believe it is important for urban 
ratepayers to help out in this endeavor.
    Mr. Tauzin. Keep milking it----
    Mr. Markey. I don't believe--keep milking it--I don't 
believe, however, it is fair to ask urban consumers to pay $24 
a month for phone service so that rural Americans can pay $16.
    Mrs. Cubin. I agree.
    Mr. Markey. That doesn't sound right--there you go. We're 
going to write the bill right now.
    And permit rural telephone companies to build moats around 
their phone networks which isolate them from competitive 
practices.
    I continue to believe that the current universal service 
system is in dire need to revamping because it is bloated to 
the tune of billions of dollars.
    Competition can help bring down subsidy costs and we should 
try to drive competition as far out into rural America as 
possibly we can, and I hope that would be our goal.
    Having said that, there are certain areas again where we 
can and should relieve regulatory burdens. I look forward to 
hearing from the FCC so that we can do more work, and I hope at 
some point we can hear from the State regulators and state 
consumer councils so that we can have their perspective as 
well.
    Thank you, Mr. Chairman.
    Mr. Tauzin. Thank you, Mr. Markey. I suspect 1 day Mrs. 
Cubin will cow you into an agreement.
    We will now hear from the vice chairman of the committee, 
Mr. Oxley, from Ohio.
    Mr. Oxley. Thank you, Mr. Chairman, and I am moo'vd by the 
generosity of the gentleman from Massachusetts.
    Mr. Tauzin. You are ``moo'vd'' by it?
    Mr. Oxley. Moo'vd, yes.
    We want to try to make this a pun-free zone at least for 
the next hour or so.
    Mr. Tauzin. I am un udder amazement over here.
    Mr. Oxley. There you go again.
    Let me welcome Mr. Jack Mueller, president of what used to 
be Cincinnati Bell and is now Cincinnati Telephone/Broadwing. 
We are glad to have you here.
    Mr. Mueller. Thank you.
    Mr. Oxley. I am a proud co-sponsor of this legislation with 
Mrs. Cubin. Clearly relief is necessary for many of these small 
and mid-sized companies.
    I am particularly interested in the testimony from the FCC 
and the Common Carrier Bureau because I will give credit to the 
FCC for taking some action in several areas in reducing 
auditing requirements for mid-sized carriers and the like, and 
was also pleased to have them indicate that they are preparing 
to recommend further regulatory reductions for mid-sized 
carriers.
    I know that the FCC does have some issues with this 
legislation, but that is really what a hearing is all about. 
But clearly from my discussions with some of my constituent 
companies and others throughout the country there is a crying 
need for some common sense regulatory relief here as it relates 
to the incredible paperwork that the gentlelady from Wyoming so 
graphically brought before us.
    For that reason I think it is very important that this 
hearing be held, and for that I thank the chairman and I yield 
back.
    Mr. Tauzin. The Chair thanks the gentleman.
    The Chair recognizes the gentleman from Tennessee, Mr. 
Borden--Gorden.
    Mr. Gordon. Thank you----
    Mr. Tauzin. Just another pun. You missed it.
    Mr. Gordon. [continuing] Mr. Chairman.
    Mr. Tauzin. Mr. Gordon.
    Mr. Gordon. All of us are worrying about the growing 
imbalance between the urban and rural America's access to 
advanced telecommunications services.
    My home State of Tennessee is a good example of the effects 
of the so-called Digital Divide. Tennessee currently ranks 43rd 
in households with Internet access.
    While broadband is coming to larger cities such as 
Nashville, it is not coming to the smaller cities and rural 
areas of middle Tennessee any time soon.
    In fact, households in rural areas are half as likely as 
those in urban areas to have Internet access. Mrs. Cubin and I 
have realized that most people have overlooked one of the chief 
assets we have in closing the Digital Divide. That is, the 
1200-plus independent communications companies across America.
    These are the small and mid-sized companies that have less 
than 2 percent of the Nation's access lines. Two percent 
companies are ideally positioned to close the Digital Divide 
because they already serve small cities and rural areas.
    They have a track record of providing Long Distance 
service, Highspeed Data, and other advanced services to these 
smaller markets. But they are being held back by this one-size-
fits-all FCC regulation.
    Small and mid-sized telephone companies spend a lot of 
resources dealing with ill-suited regulations that were 
originally written for the big Bell Companies.
    As Mrs. Cubin pointed out earlier, the FCC requires mid-
sized companies to file both ARMIS and CAM reports on an annual 
basis. Collecting this data costs mid-sized companies $300,000 
to $500,000 a report on the average, yet the FCC we understand 
rarely ever looks at this information.
    Two percent companies are also required to maintain 
Separate Affiliates for Long Distance and Wireless services. 
Ironically, the 1996 Act sunsets the Separate Affiliates 
provision for the Bell Companies 3 years after entry into the 
Long Distance market, while 2 percent companies who have always 
been able to offer Long Distance services are prohibited from 
integrating these services.
    Other complaints include petitions, waivers, and merger 
reviews that sometimes languish for years at the Commission 
without a decision because the focus is on the larger companies 
and the 271 proceedings.
    Ultimately these regulatory costs are passed on to 
customers. One company estimates it spends $25 per customer 
complying with Federal regulations alone. This time and money 
could better be spent on bringing the Digital Divide in our 
Nation to the rural areas.
    Reducing the regulatory burden placed on America's 
independent telephone companies will free up these small 
companies to spend more of their resources deploying advanced 
competitive services and less time filing paperwork in Federal 
regulations.
    H.R. 3850 represents a small, practical step Congress can 
take to close the Digital Divide in rural areas.
    Once again I want to state my understanding that the 
Commission is working on some of these issues, and I applaud 
their efforts, and hopefully this legislation was something of 
a prod that helped bring this forward.
    I look forward to hearing this panel's comments.
    Thank you.
    Mr. Tauzin. I thank my friend.
    The Chair will now yield to the gentlelady from California, 
Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman, for having this 
hearing, to the witnesses who are here, and certainly to the 
gentlewoman from Wyoming who is a good friend for her good work 
on this.
    The legislation we are considering today addresses a 
segment of the telecommunications industry that, because of its 
size, is hindered from making advances in service and 
technology.
    While the goal of the legislation is something that, the 
intent is something that I generally support, I think we need 
to take a close look at what it means if in fact it is enacted.
    I think that there seems to be a consensus that some 
regulations on carriers may place inequitable burdens on 
smaller carriers. If true, then a careful examination is 
appropriate both of the means this legislation takes to 
alleviate the burdens as well as the measures that are already 
underway at the FCC which may reach the same end without 
Congressional intervention.
    I certainly hope that happens. I know that two of my 
colleagues--maybe more--but two that I paid close attention to 
have already mentioned this.
    As always, I think that we need to be wary of unintended 
consequences. Do we re-regulate only to find that we have 
shifted the burdens elsewhere?
    I usually describe that as putting the punch in a pillow 
and thinking we put a dent in something and then something else 
pops up as a result of it.
    Does the elimination of some of the reporting requirements 
deprive the FCC, or the Congress for that matter, of 
information necessary to the evaluation of the Telecom Act's 
effectiveness?
    If we relax rate regulations for 2 percent carriers, will 
we be faced with me-too arguments from another segment of the 
industry in the very near future?
    As I am saying this out loud I am thinking, well, maybe 
that is what Members of Congress are supposed to do, be 
referees in all of this. But I still think it is important to 
pose the questions.
    Also, will mergers that would otherwise not have been 
approved be completed simply because they were not acted upon 
within the 45-day period established by the legislation?
    And on a more practical level, if we demand that the FCC 
act faster on merger applications involving these carriers, are 
we able or prepared to provide them with the resources and the 
manpower to do so?
    So I think that these are all important questions which I 
hope we are going to answer and begin to address today in this 
hearing.
    And I thank you again, Mr. Chairman, for having the hearing 
and for my good friend, Barbara Cubin, for bringing this 
forward.
    I yield back.
    Mr. Tauzin. I thank the gentlelady.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Mr. Chairman, thank you for holding this legislative hearing on 
H.R. 3850, the Independent Telecommunications Consumer Enhancement Act 
of 2000.
    As my colleagues well know, I have fought long and hard for 
competition. The cornerstone of the 1996 Act was to bringcompetition to 
local telephone markets. This Committee carefullydrafted those 
provisions to make certain that consumers would have the same choice 
and innovation in local services that they had in all other telecom 
markets.
    In order to foster competition, we decided to exercise some 
influence over the incumbent carriers to ensure that all Americans 
would have access to low rates and quality service. These efforts were, 
in fact, successful. I do not intend to support any action that 
reverses this course.
    However, while regulation is designed to replicate a competitive 
marketplace, regulation is still an imperfect surrogate for full-
fledged competition. As competition continues to grow in the provision 
of telephone service, the need for government intervention decreases.
    Whether competition is robust enough to discontinue regulation for 
certain carriers, in this case the 2% or mid-size carriers, is 
something we are here to learn. This legislation is a good starting 
point for this Committee to debate this important issue.
    I look forward to learning more about the bill before us today. As 
always, I remain interested in finding ways to benefit the consumer by 
encouraging strong and healthy competition.
    I thank today's witnesses in advance for their thoughtful testimony 
and I thank Mr. Tauzin for holding this hearing this morning. I yield 
back the balance of my time.

    Mr. Tauzin. The Chair is now pleased to welcome our first 
panel. By unanimous consent, all members' written statements 
are made a part of the record, as well as are the written 
statements of our panel, without objection.
    In saying that, let me remind you that we operate under the 
5-minute rule. We have little timers in front of you, and as we 
put them on we will ask you to watch them carefully. When the 
yellow comes on, try to wrap up for us.
    To do that, you probably have to summarize, not read to us. 
So if you can, summarize your points and we will get into Q&A 
as quickly as we can.
    Let me introduce the panel, first:
    Ms. Carol Mattey, the Deputy Chief, Common Carrier Bureau 
of the Federal Communications Commission. She is accompanied 
today by Mr. James Bird, the Senior Counsel of the Office of 
General Counsel. We want to welcome you both and thank you for 
coming.
    Next is Mr. Larry Darby, Economist and, by the way, Chinese 
chef extraordinare.
    And who also, coincidentally, married far above himself. 
Darby Associates, Communications Consultants.
    His wife is a darling--here in Washington, DC.
    Mr. Jack Mueller, the President of Cincinnati Telephone 
Company, who was introduced by my friend Mr. Oxley. Welcome, 
Mr. Mueller.
    Mr. Mueller. Thank you.
    Mr. Tauzin. Mr. David Cole, the Vice President of 
Operations Support for Century Tel, Monroe, Louisiana. 
Wonderful State, I might add.
    Mr. Cole. Thank you.
    Mr. Tauzin. Who also enjoys universal service support.
    And Mr. John Sumpter, the Vice President of Regulatory 
Affairs at Pac-West Telecommunications, Incorporated, of 
Stockton, California. Indeed a very renowned panel of experts 
who can tell us a little bit about whether all that paperwork 
is necessary and what is happening at the FCC to take it down.
    So we will start with the FCC and Ms. Carol Mattey. Your 5 
minutes are on. Welcome, Ms. Mattey.

  STATEMENTS OF CAROL E. MATTEY, DEPUTY CHIEF, COMMON CARRIER 
 BUREAU; ACCOMPANIED BY JAMES BIRD, SENIOR COUNSEL, OFFICE OF 
 GENERAL COUNSEL, FEDERAL COMMUNICATIONS COMMISSION; LARRY F. 
 DARBY, ECONOMIST, DARBY ASSOCIATES; JACK MUELLER, PRESIDENT, 
   CINCINNATI TELEPHONE COMPANY/BROADWING; DAVID COLE, VICE 
PRESIDENT OF OPERATIONS SUPPORT, CENTURYTEL; AND JOHN SUMPTER, 
         VICE PRESIDENT, REGULATORY AFFAIRS, PAC-WEST 
                    TELECOMMUNICATIONS, INC.

    Ms. Mattey. Good morning, Chairman Tauzin, and members of 
the subcommittee: Thank you for this opportunity to appear 
today to discuss H.R. 3850, the Independent Telecommunications 
Consumer Enhancement Act of 2000.
    This legislation is directed at reducing the burdens of 
regulation on those local exchange carriers with less than 2 
percent of subscriber lines, which includes all local companies 
in the country with the exception of the Regional Bell 
Companies and SPRINT.
    I am appearing today on behalf of the Common Carrier Bureau 
and, as noted, with me today is James Bird from the Office of 
General Counsel who can answer specific questions relating to 
the merger aspects of the bill.
    I would like to begin by expressing the Bureau's strong 
support for the overall goal of this legislation. The Bureau 
agrees that it is necessary to remain sensitive to the impact 
of regulation on smaller carriers and lighten those regulations 
where appropriate.
    With that in mind, the FCC has already taken significant 
steps to reduce regulatory burdens on the smaller carriers, and 
the FCC will be considering additional measures in the future.
    At the same time, the Bureau believes that the regulation 
of common carriers in some areas advances significant goals of 
the Communications Act.
    The Bureau believes that H.R. 3850 as drafted raises a 
number of questions that should be explored further to consider 
the possibility of unintended consequences.
    I would like to highlight several examples discussed more 
fully in my written testimony.
    In some areas it is critical that we gather information 
from all carriers and not just the RBOCs. For example, Section 
706 requires the FCC to consider whether advanced 
telecommunications capabilities are being deployed on a 
reasonable and timely basis.
    Smaller carriers are playing a large role in the deployment 
of broadband. Our ability to monitor what is happening across 
America and report to Congress on broadband deployment would be 
greatly hindered if the Commission were precluded from 
gathering the same information from all carriers.
    Likewise, there are certain goals of the Act, such as the 
protection of consumers, that should apply equally to all 
carriers. Section 281 of the draft legislation could be 
interpreted as requiring the FCC to reduce the obligations of 2 
percent carriers to comply with the Commission's Truth In 
Billing and Slamming Rules.
    The Bureau feels strongly that consumers in Golden Meadow, 
Louisiana, should receive bills that are easy to understand and 
should be protected against unauthorized changes in their 
provider just like consumers in New York or California.
    Mr. Tauzin. How do you know where Golden Meadow, Louisiana, 
is?
    Ms. Mattey. I don't know precisely, but I have to tell you 
my mother lives in Louisiana, so I will have to ask her where 
it is.
    Anyway--she lives in Shreveport--I also would like to point 
out----
    Mr. Tauzin. That's Yankee country compared----that's way up 
there.
    Ms. Mattey. Okay, okay. Well, whatever.
    I also would like to point out that certain of the timing 
aspects of the legislation may be problematic.
    For example, the requirement that decisions on mergers be 
made within 45 days or be deemed granted is hard to reconcile 
with Section 309(d)'s requirement that the Commission provide 
parties with a minimum of 30 days from the time of public 
notice of the application to file petitions to deny.
    The requirement that all petitions for reconsideration 
filed by 2 percent carriers be resolved in 90 days would be 
difficult to implement, particularly in light of the 
Administrative Procedures Act requirement that we seek comment 
and consider such comments thoroughly before acting on such 
petitions.
    Finally, it may be difficult for the Bureau to meet these 
statutory deadlines while meeting other statutory deadlines 
such as acting on Section 271 applications.
    To conclude, the Bureau supports the goal of reducing 
regulatory burdens for carriers with less than 2 percent of the 
Nation's subscriber lines, and we would like to work with you 
as you consider this legislation further.
    Thank you for this opportunity to testify. I would be happy 
to answer any questions you have.
    [The prepared statement of Carol E. Mattey follows:]
  Prepared Statement of Carol E. Mattey, Deputy Chief, Common Carrier 
               Bureau, Federal Communications Commission
    Good morning Chairman Tauzin, and members of the Subcommittee. 
Thank you for the opportunity to appear before you today to testify 
regarding H.R. 3850, the ``Independent Telecommunications Consumer 
Enhancement Act of 2000.'' This legislation is directed at reducing the 
burdens of regulation on those local exchange carriers with fewer than 
2% of the nation's subscriber lines, which includes all local companies 
in the country with the exception of the Regional Bell Operating 
companies and Sprint. I am appearing today on behalf of the Common 
Carrier Bureau (Bureau) of the Federal Communications Commission (FCC). 
With me today is James Bird, Senior Counsel in the Commission's Office 
of General Counsel.
    I would like to begin by expressing the Bureau's strong support for 
the overall goal of this legislation. The Bureau agrees that it is 
necessary to remain sensitive to the impact of regulation on smaller 
carriers and lighten such regulatory burdens where appropriate. With 
that in mind, the FCC has already taken significant steps to reduce 
regulatory burdens on smaller carriers in a number of areas, and the 
FCC will be considering additional measures in the future. At the same 
time, the Bureau believes that regulation of smaller carriers in some 
areas advances significant goals of the Communications Act (Act). The 
Bureau believes H.R. 3850, as drafted, raises a number of questions 
that should be explored further to consider the possibility of 
unintended consequences. The Bureau would like to work with you as you 
consider this legislation.
Actions the FCC Has Taken:
    Accounting and Reporting Requirements: The vast majority of 2% 
carriers--1300 carriers nationwide--are not subject to the FCC's 
Automated Reporting Management Information System (ARMIS) reporting or 
cost allocation manual (CAM) filing requirements today. Rather, these 
requirements currently apply to only those companies with more than 
$114 million in revenue, the so-called mid-size carriers. In several 
recent proceedings, the FCC has recognized that mid-sized carriers have 
different regulatory needs than their larger counterparts. For example 
in May of 1999, the FCC released ARMIS Reductions Report and Order, 
which eliminated several ARMIS filing requirements for mid-sized 
carriers. The FCC noted that staff analysis and usage of the data 
provided in the ARMIS tables had mostly been limited to the largest 
carriers because they have the greatest opportunities and incentives 
for shifting costs between services. Similarly, in the May 1999 
Accounting Reductions Report and Order, the FCC allowed mid-sized 
carriers to account at a reduced level of accounts and to submit a 
streamlined CAM. We also reduced their auditing requirement from once a 
year to once every two years.
    Numbering Administration Reporting: In the FCC's recently adopted 
Numbering Resource Optimization Order, the Commission adopted rules to 
more efficiently allocate and monitor the use of the nation's 
telecommunications numbering resources. After consideration of the 
burdens that such monitoring would place on small carriers, the FCC 
adopted rules that imposed a lesser reporting obligation on rural 
carriers. The FCC also gave states the authority to further reduce the 
burden on small carriers at their discretion.
    Truth in Billing: In it's Truth-in-Billing proceeding, the FCC 
adopted various rules to make telephone bills more understandable for 
consumers. In implementing those rules, the FCC has taken the needs of 
smaller carriers into account. For example, a number of smaller 
carriers requested, and received, additional time to come into 
compliance with the Commission's truth-in-billing requirements because 
they had computer programming concerns arising out of preparations for 
Y2K.
Regulatory Reductions Under Consideration:
    Accounting and Reporting Requirements: The FCC continues to work 
towards even more streamlined accounting requirements for all carriers. 
To that end, the Bureau has held public meetings in preparation for 
initiation of the second phase of its wholesale accounting reform 
proceeding. Representatives from mid-size companies were in attendance 
at all five meetings held in April and May of this year, and one of 
those meetings was specifically designated to address issues of concern 
to mid-size carriers. In the near future, the Bureau plans to recommend 
to the Commission that it start a rulemaking to consider more 
significant reductions in accounting requirements for mid-sized 
carriers. Moreover, the Bureau believes the Commission should consider 
raising the indexed revenue threshold so that fewer carriers would be 
subject to these requirements in the first place.
Potential Unintended Consequences
    In a number of areas, the Bureau has questions about the breadth 
and intent of the legislation as drafted.
    Section 281/Reporting to Congress: One provision in the bill, 
section 281, could potentially impact the FCC's ability to monitor the 
extent of broadband deployment in the United States. This year, the FCC 
launched a formal data collection program to gather standardized 
information from all providers of advanced telecommunications 
capability to enable the FCC to report to Congress on whether advanced 
telecommunications capability is being deployed on a reasonable and 
timely basis as required by section 706 of the Act. In particular, any 
carrier (whether wireline, wireless, cable, or satellite provider) with 
more than 250 broadband customers in a state is required to report such 
data to the FCC on a semi-annual basis. If section 281 of the 
legislation is read as requiring the FCC to adopt a less burdensome 
reporting requirement, or waive this requirement, for the 2% carriers--
the FCC only would receive information about the BOCs and Sprint, which 
would leave large gaps in knowledge about the extent of broadband 
deployment by wireline carriers. This is an example of an area where, 
because smaller carriers are playing a large role in the deployment of 
advanced telecommunications capability, it is important for the FCC to 
collect the same information from all carriers, both large and small. 
Such information is necessary for the FCC to make an accurate 
assessment for its report to Congress.
    Consumer Protection: The FCC promulgates rules that are directed at 
protecting consumers. These rules establish the minimum protections to 
which consumers are entitled. Most recently, the FCC has acted to 
prevent unauthorized changes in telephone carriers--known as slamming--
and to require that telephone bills be understandable. For example, the 
Commission's Truth-in-Billing rules require that carriers highlight 
changes in service or service providers on customer bills so that 
consumers can more easily see whether an unauthorized change has 
occurred. Section 281 of the legislation could be interpreted as 
requiring the FCC to lift such requirements for smaller carriers. 
Consumers in Golden Meadow, Louisiana should receive easy to understand 
bills, just like consumers in New York or Los Angeles. H.R. 3850, by 
virtue of how broadly it is drafted, may have the unintended 
consequences of limiting the protections to which the customers of the 
2% carriers are entitled.
    Universal Service: The proposed legislation raises two additional 
questions regarding the Commission's ability to satisfy its statutory 
duty to preserve and advance universal service. First, section 282's 
elimination of the ARMIS requirements for 2% carriers may affect the 
Commission's ability to collect sufficient cost data for its high-cost 
support mechanisms. Because ARMIS data filed by mid-size and larger 
carriers is used in the Commission's new high-cost support mechanism 
for non-rural carriers, the absence of data for a particular class of 
carriers could unintentionally affect the support amounts provided to 
all carriers.
    Second, section 283 would prohibit the Commission from requiring 2% 
carriers to have separate books of account for different operations. 
However, section 254(k) prohibits carriers from using non-competitive 
services to subsidize competitive services. It also directs the 
Commission to establish any necessary cost allocation rules, accounting 
safeguards, and guidelines to ensure that services included in the 
definition of universal service bear no more than a reasonable share of 
the joint and common costs of the facilities used to provide those 
services. We must make sure that the Commission still has the tools it 
needs to enforce section 254(k).
    Pricing Flexibility: While the goal of this legislation is clearly 
to encourage competition in areas served by 2% carriers, granting 
pricing flexibility based on the existence of a single competitor in 
that carrier's service territory--as required under section 287 of the 
legislation as drafted--may unintentionally have the opposite effect. 
It is important to consider that even 2% carriers may have market power 
within their service area. While these carriers provide service to only 
10% of the nation's subscriber lines, they often cover expansive 
geographical regions, particularly in western states.1 
Competitive entry in one part of a 2% carrier's service area, 
particularly by a reseller, may not be relevant to whether there is 
sufficient competition in the area to warrant pricing flexibility. If 
such carriers are entitled to pricing flexibility prior to the 
existence of competition, this could have the unintended effect of 
reducing the likelihood of competition ever arriving in much of their 
service area. In addition, a grant of pricing flexibility to rate-of-
return carriers without the implementation of protections comparable to 
those adopted by the FCC with regard to price cap carriers could be 
particularly problematic. Rate-of-return regulation would allow such 
carriers to raise rates on other customers sufficiently to maintain the 
authorized level of return while they lower prices for contract 
customers.
---------------------------------------------------------------------------
    \1\ We have attached a map that plots the territory served by 
incumbent local exchange carriers that own less than 2% of the U.S. 
access lines.
---------------------------------------------------------------------------
    Rate Regulation: As noted above, even 2% carriers have market power 
within their service areas. As drafted, the legislation states that the 
FCC would have no authority to regulate rates for interstate services 
of a 2% carrier after another carrier has engaged in facilities based 
entry within the 2% carrier's service area. This legislation could have 
the effect of making the rates of 2% carriers subject to even less 
regulation than the rates of long distance carriers and competitive 
local exchange carriers. Under FCC rules, all common carriers, 
including long distance carriers and competitive local exchange 
carriers, are still subject to sections 201-205 and 208, so complaints 
can be filed alleging that the rates charged by such carriers are 
unreasonable. An unintended consequence of the legislation as drafted 
could be to exempt the 2% carriers from this minimal oversight. Without 
such oversight, a 2% carrier could lower its retail rates sufficiently 
to compete vigorously with the encroaching carrier and make up a 
portion of the difference by raising its terminating access rates. If 
such rates are not governed by sections 201-205 and 208, this will 
leave the long distance carriers that pay those terminating access rate 
with no means to challenge the reasonableness of such rates. As only 
one local exchange carrier serves each line to which a call is 
terminated, the existence of facilities based competition in a 
particular service area does not provide competition to constrain 
terminating access rates.
    Mergers: The FCC reviews applications to transfer 
telecommunications licenses or authorizations associated with mergers 
under sections 214 and 310 of the Act and must determine whether the 
requested transfers serve the public interest. The Commission has 
identified four factors in its public interest analysis: Would the 
proposed transaction result in a violation of the Communications Act? 
Would it result in a violation of the Commission's rules? Would it 
substantially frustrate or impair the Commission's enforcement of the 
Communication's Act or interfere with the objectives of that Act? And 
whether the transaction promises to yield affirmative public interest 
benefits.
    Reviews of transfer applications are public proceedings, and the 
Communications Act and the Commission's regulations provide 30 days 
after public notice for the public to file comments and/or petitions to 
deny the applications, and the applicant is normally allowed a shorter 
time to reply. The Commission must consider any comments or petitions 
and issue a written decision addressing them. The Commission may not 
deny an application to transfer a license subject to section 310(d) 
without holding an evidentiary hearing.
    The proposed legislation has two provisions relating to mergers of 
2% carriers. First, it would add a new subsection (f) to section 310 of 
the Act to place a time limit of 45 days, from the date an application 
is submitted, for the Commission to act on transfer applications under 
section 310(d) related to mergers between 2% carriers or their 
affiliates. This provision raises several questions. Forty-five days is 
a short time, particularly since section 309(d) allows the public a 
minimum of 30 days from public notice to file petitions to deny 
applications under section 310, and the applicants are normally given 
at least 15 days to respond to such petitions. In addition, it takes 
several days to put an application on public notice. Thus, the forty-
five day period would likely expire even before the applicant had had a 
chance to respond to any petition to deny, much less provide time for 
the Commission to consider the issues raised by the parties and prepare 
a written decision. Furthermore, the FCC cannot deny applications under 
section 310 without holding an evidentiary hearing, which would take 
far longer than 45 days, yet the legislation provides that any 
application not acted on in 45 days will be deemed approved. Finally, 
it is not clear how a court would review an appeal of such a default 
approval--i.e., whether the legislation would in such cases effectively 
replace the FCC review with a more burdensome and lengthy court review.
    The second provision addressing mergers of 2% carriers is proposed 
section 285, which would remove any FCC authority ``to approve, 
disapprove, delay, condition, or modify the terms of any merger'' 
between 2% carriers or their affiliates if the resulting entity is 
still a 2% carrier, ``[e]xcept as required by section 310(f)'' This 
provision could be interpreted in several different ways and could have 
unintended consequences. For example, it might be interpreted to 
insulate from any review ``terms'' of a merger that violate either the 
Communications Act or FCC rules that are otherwise applicable. The 
proposed section 310(f) itself merely imposes a time limit, rather than 
a standard for review, and there is no reference to section 214, which 
may be at least as relevant to these mergers as section 310.
Implementation Difficulties
    Other timing requirements of the legislation as drafted may prove 
difficult to implement or have unintended consequences. The requirement 
that all petitions for reconsideration filed by 2% carriers be resolved 
in 90 days would be difficult to implement, particularly in light of 
the Administrative Procedures Act requirement that we seek comment and 
consider such comments thoroughly prior to resolution of such petitions 
in rulemaking dockets. Moreover, given current FCC staffing levels, it 
may be difficult to meet such a requirement while also meeting other 
statutory deadlines, such as acting on Bell Company section 271 
applications within 90 days. This is of particular concern, given that 
the Commission anticipates receiving additional section 271 
applications in the coming months.
Conclusion
    As I stated at the outset, the Bureau supports the goal of reducing 
regulatory burdens for carriers with less than 2% of the nation's 
subscriber lines. To this end, the FCC would like to offer to work with 
you as you consider this legislation.
    Thank you again for the opportunity to testify. The Bureau looks 
forward to working with the Subcommittee as it addresses this important 
issue. We would be happy to answer any questions you may have.
[GRAPHIC] [TIFF OMITTED] T5905.001

    Mr. Tauzin. Thank you very much, Ms. Mattey.
    Next, Mr. Larry Darby, an economist with Darby and 
Associates here in DC. Larry?

                   STATEMENT OF LARRY F. DARBY

    Mr. Darby. Thank you, Mr. Chairman, and members of the 
subcommittee, for hearing my views this afternoon.
    My complete testimony addresses the consumer benefits of 
beginning seriously to reform or eliminate some of the tens of 
thousands of rules accumulated during the precompetitive era in 
telephony and how H.R. 3850 begins to advance that cause.
    I want to commend you, Mr. Chairman, and the subcommittee, 
for your leadership in considering the role of less regulation 
not more as a means of improving consumer welfare in this 
country.
    The ``d'' word, ``deregulation,'' is controversial. It 
evokes more words than thoughts, more fear than faith, and more 
speculation than analysis.
    The mere suggestion that government should forebear 
extending, and in fact should reduce its presence in governing 
incumbent telephone companies is seen as revolutionary. Too 
soon. Like drinking wine before its time.
    I have a sense of deja vu this afternoon about this 
hearing, having testified here nearly 25 years ago to promote 
another heretical notion. the ``c'' word, ``competition.''
    There were naysayers then as now. It will never work. 
Service will decline. Rates will go up. Innovation will have 
come to a halt. Network will be harmed. Chaos. The full 
catastrophe.
    But events have converted those naysayers, those 
disbelievers, as they will eventually transform opponents of 
the ``d'' word, deregulation.
    Deregulation, or unregulation, or regulatory reform, all 
suggest pulling back in some measure part of the government's 
enormous presence in these dynamic markets.
    By whatever name, deregulation, whatever, it means opening 
up markets and promoting competition, and it is the inevitable 
result of steps we have already taken. Both technological 
trends and economic change support the presumption that market 
forces are increasingly adequate and that government can and 
should step aside and out of the way.
    There is no denying the value to consumers of regulation 
generally. I fully support those, and in fact participated in 
putting a lot of these rules in place over the years. No 
question about it.
    But many regulations have clearly outlived their 
usefulness. Many do not address any particular market failure. 
Others should be calibrated more carefully to current 
conditions. Most importantly, none of these are costless.
    These are recurring themes in my prepared testimony. 
Regulation is not free and the cost to consumers who bear them 
are too important to ignore.
    My statement catalogues a variety of different costs we 
have to pay to get the benefits of regulation. First, the 
direct cost to taxpayers which have grown substantially, 
ironically enough, during this period of deregulation and 
competition.
    Then there is the substantial cost of compliance, which 
Mrs. Cubin has been referring to. And I emphasize, while these 
are incurred in the first instance by private firms, they are 
shifted ultimately to consumers.
    My testimony documents a number of hidden, less visible 
invisible costs such as the cost of delay, the cost of 
uncertainty, regulatory risk that adds to investment cost and 
discourages investment in both rural and urban areas, hidden 
cost of inefficiency foregone, and slowed innovation, and very 
importantly the cost of reduced competition resulting from 
constraints on market conduct of incumbent firms.
    The costs of complying with regulations are particularly 
burdensome to medium- and small-sized carriers. We should look 
I think for ways to apply the time-tested market principles and 
objectives to government regulation.
    Much is made of the need for efficient markets, but there 
is lamentably little discussion of efficient regulation.
    Regulation should be able to pass, I think, a reasonable 
cost/benefit test. A private firm that routinely made decisions 
or continued past practices whose costs exceeded their benefits 
would go belly up, and rightfully so. But there is no such 
built-in restraint on bad government regulation.
    H.R. 3850 begins to address some of these problems. I have 
to add, I am certainly impressed by the questions that have 
already been posed by members of the panel because those go to 
the very heart of the need for cost/benefit regulation.
    H.R. 3850 is consistent with the principles I have spelled 
out. My statement contains a fuller discussion of these points, 
and I would be happy to try to answer your questions.
    Thank you, Mr. Chairman.
    [The prepared statement of Larry F. Darby follows:]
         Prepared Statement of Larry F. Darby, Darby Associates
    Thank you very much Mr. Chairman and members of the Subcommittee. I 
am happy to share with you my views on the importance of beginning to 
eliminate some of the thick, multiple layers of regulation that now 
unnecessarily constrain markets for telecommunications services and, 
more specifically, about how H.R. 3850 advances that cause.
    I want to commend the leadership of the committee for launching 
this initiative and taking the necessary next step in letting markets, 
not government, be the arbiter of managerial decisions.
    The Telecom Act of 1996 had four main goals: increased competition, 
enhanced universal service mechanisms, increased innovation and 
deregulation. Of these, deregulation has been accorded the least 
attention by the Federal Communications Commission. This lack of 
progress is notable, given the fact that members of Congress who passed 
the Telecommunications Act of 1996, the Administration, FCC 
Commissioners and senior staff all speak frequently and favorably of 
deregulation as an important and discrete goal of national 
telecommunications policy.
    This contrast between intent and desire on the one hand and 
progress on the other makes clear that it is time to recharge and 
reinvigorate the deregulatory process. H.R. 3850 is good start in that 
direction.
        deregulation is the logical result of competitive entry
    My statement is in two parts. The first goes to the importance and 
processes of deregulation, while the second addresses the specifics of 
HR 3850 in those contexts.
    The ``D'' word, deregulation, has come to be quite controversial. 
It generally evokes more words than thought; more fear than faith; and, 
more conjecture than analysis. The mere suggestion of peeling back 
regulatory control of incumbent telephone companies is regarded by some 
as revolutionary; wrongheaded; and too soon, like drinking wine before 
its time.
    But, while preparing my statement, I had a sense of deja vu. Almost 
twenty five years ago I testified before this subcommittee to defend 
and promote another heretical notion. Then, it was the ``C'' word--
competition. Then as now, there were naysayers. Rates will go up; 
innovation and service quality will go down; economies of scale will be 
sacrificed; the public switched network will suffer technical damage; 
and on and on. Aunt Minnie will be irreparably harmed and in 
unimaginable and unspeakable ways, railed the critics.
    However, events have converted the disbelievers, as they will in 
the future transform many of today's opponents of deregulation. It is 
time to begin to peel away the unneeded outer layers of the regulatory 
onion, much as was done in the early years by the Interstate Commerce 
Commission, the Civil Aeronautics Board and the Federal Power 
Commission.
    Deregulation should and will not come at once. Regulation--the 
accumulation of rules--has been an evolutionary process. So it will be 
with deregulation and unregulation, as rules are modified and stripped 
away, one by one, line by line. Deregulation is a process of selective 
relaxation, modification and elimination of rules imposed at another 
time for other, sometimes forgotten, reasons.
    H.R. 3850 does not totally deregulate services of incumbent 
telephone companies. Indeed, given the scope of that sector, this bill 
is a pretty modest undertaking. It applies only to a small subset of 
smaller carriers and to only a handful of rules.
    Selective reform of existing rules for incumbents is the logical 
next step after opening markets to competition. The question is not 
whether the enormous inventory of rules and regulations should be 
reduced, but when. I believe now is the time to begin that process and 
H.R. 3850 does so.
                the benefits of regulation are not free
    I am eager to recognize the considerable historical contributions 
of regulation to consumer welfare, but there can be no serious 
objection to my conclusion that many regulations are unnecessary and 
lead to higher cost, long delay and increased uncertainty, while 
reducing both the opportunity and incentives for investment. The result 
is to deny consumers new services now and tomorrow. For consumers, 
regulation today is a mixed bag.
    FCC orders tend to be dominated by reference to the putative 
benefits of regulation and how they serve a very general notion of the 
``public interest'' by their intervention in markets. But there is 
substantial literature demonstrating that regulations are not costless.
    The cost of regulation takes several forms, each of which has been 
the object of considerable research over the years. The Landis Report, 
a study of regulatory processes undertaken on behalf of President-elect 
John F. Kennedy almost forty years ago, detailed the administrative 
burdens and costs of regulatory processes imposed in both the public 
and private sectors. Its main conclusions were corroborated two decades 
later by the Ash Commission initiated by the Nixon Administration. Both 
documented what has now become unanimously accepted: administrative 
regulation, like that imposed by the FCC, can if misapplied result in 
delay, uncertainty, unnecessarily complex and extensive rules, wasteful 
use of scarce resources and other costs. Regulatory benefits must be 
measured against these costs.
    In addition to the administrative costs of regulation, economists 
have catalogued a long list of economic costs attributable to common 
carrier regulation. Dozens of books and hundreds of articles are 
devoted to measuring the drain on our economic potential of various 
forms of regulation and specific rules--disincentive effects, 
inducements to waste, costs of misallocation and inefficiencies, 
failure to innovate and others.
    I cannot in the time allowed do even rough justice to the task of 
characterizing fully this diverse literature. My intent is more 
modest--to call the Committee's attention to it and to report my 
conclusions from it.
                the costs of regulation are not trivial
    The costs of availing ourselves of the benefits of regulation are 
not trivial. However, it has been difficult to estimate accurately the 
size and distribution of the burden of regulatory costs. For many of 
the same reasons that regulatory benefits are vaguely named and seldom 
quantified, analysts have struggled to quantify the costs of regulation 
by state and federal agencies; of different regulatory schemes; and, of 
specific regulations.
    The problem common to measuring both regulatory costs and benefits 
is the difficulty of specifying what would exist or materialize in the 
absence of particular regulations. A growing body of theoretical and 
comparative empirical studies of markets ``before and after'' or ``with 
and without'' regulation have turned up significant costs from several 
sources.
    Agency costs. Regulation requires regulators whose support requires 
significant government funding. For the telecommunications sector these 
costs have grown dramatically at both the state and federal levels 
during the period of increased competition, reliance on market forces 
and deregulation. Fewer rules mean less monitoring, administration and 
enforcement.
    Direct costs of compliance. Filing reports, keeping accounts, 
conducting studies and analyses, representing ones interests in 
regulatory proceedings and otherwise complying with the requirements 
set out in thousands of rules is an expensive undertaking. I have just 
reviewed a study suggesting regulatory compliance costs growing nearly 
twenty percent a year and summing, in the most recent study year, to 
about sixteen percent of total costs or two months of customer billings 
per year. This rural carrier estimated that the recurring costs of 
regulatory compliance come to almost $25.00 per customer line per year. 
Another carrier estimated the cost of complying with one FCC rule (the 
FCC's ARMIS reporting requirements, which are addressed by H.R. 3850 
and discussed below) at about $2.00 per access line.
    These legal, accounting, operations, administrative and other costs 
are generally passed through and born directly by consumers. To the 
limited extent that they may in the first instance be borne by 
shareholders, they are ultimately shifted to users in the form of 
higher capital costs. These costs represent deadweight losses, unless 
there is some specific, identifiable public benefit associated with the 
specific regulatory activity from which they are derived.
    The resources applied by the companies directly are complemented by 
a vast regulatory apparatus of lawyers, consultants, accountants, 
economists and other professionals in the private sector. On balance, 
since their respective efforts are largely mutually offsetting, they 
create little demonstrable value for consumers.
    Costs of delay. The costs of regulatory lag and delay are well 
documented in the regulatory economics literature, even though it is 
difficult to get a firm estimate of the overall cost. Due process takes 
time. Time is money and benefits delayed are benefits lost. 
Practitioners in gaming regulatory processes get paid by the clock, so 
there is generally little incentive to get things done quickly.
    Costs of uncertainty and added risk. These factors increase capital 
costs. They are ultimately borne by consumers--whether directly through 
higher rates or indirectly through higher prices for the goods and 
services they buy from business users. Investors understand markets 
better than they understand regulatory processes. Most reports by 
securities analysts have long sections describing risks associated with 
different regulatory action and inaction.
    Costs of inefficiency and resource misallocation. Regulation leads 
to several kinds of static and dynamic inefficiencies. Regulation may 
lead to high cost carriers winning business at the expense of lower 
cost carriers; or use of inputs in the wrong proportions; or rates that 
are purposefully set at levels that do not reflect costs. Several 
studies have documented the resource waste from inefficiencies 
occasioned by regulation.
    Costs of foregone innovation. Regulation can and does stall 
innovation--innovation in the introduction of new services; innovation 
in the introduction of new rate making schemes; and, innovation in the 
introduction of new technologies and production methods. The delay in 
the introduction of cellular services is often cited, but there are 
others as well.
    Costs of reduced competition. Regulation of incumbent carriers is 
frequently designed to constrain their conduct in competitive markets 
to guard against predatory behavior. However, a byproduct of meeting 
that goal is to suppress competition that would otherwise serve 
consumers' needs. It is difficult to calibrate regulations to prevent 
only ``undesirable'' competition and the unavoidable result is that 
otherwise healthy market rivalry is sacrificed in pursuit of that goal.
    regulatory costs are especially burdensome for smaller carriers
    Much of the current regulatory scheme applied to medium-sized 
carriers (MSCs) was formulated and imposed in an earlier technological 
era and in market environments wherein the expected costs and benefits 
of regulation vis-a-vis market forces were much different. Both costs 
and benefits of regulation are changing with changes in the speed of 
technology development, the evolution of user needs and with the 
proliferation of computers and digital networks. The growth of actual 
and potential competition is also instrumental in intensifying the need 
to reevaluate how well existing regulations fit the new circumstances.
    In addition to being subject to regulations designed for different 
technological and market circumstances, many of the regulations being 
applied to MSCs were designed primarily for applications to the largest 
local exchange companies. The regulations are premised implicitly on 
the presumption that one regulatory scheme fits all carriers, 
irrespective of size, market position and particularized requirements--
all without regard to the value of customizing regulations to conform 
more closely to diverse market circumstances and user needs.
    As discussed earlier, the additional resource requirements for 
regulated companies are substantial. Since the total burden of the 
costs of regulatory schemes is sometimes invariant with respect to firm 
size, customers of smaller firms are disproportionately burdened. Like 
any fixed fee imposed uniformly across the board, these costs impose 
relatively greater burdens on economically smaller entities. The 
overhead cost of regulation must be spread across a smaller number of 
customers, thereby leading to higher burden per customer. The FCC has 
long recognized this fact and has tailored and pared back its 
regulatory programs for very smallest regulated firms.
    The current ``one regulation, one burden for all'' has the 
characteristics of a ``poll-type'' tax that imposes the same burden on 
all and without regard to ability to pay. An important example of this 
kind of cost is the administrative burden associated with the Cost 
Allocation Manual (CAM), a matter to which I will return.
           congress should insist on ``efficient'' regulation
    The effectiveness of market competition depends on the efficiency 
of regulation. Inefficient regulation spawns inefficient market 
processes and together they lead to waste and resource misallocation.
    It is widely recognized that inefficient firms and market practices 
undermine the public interest and diminish economic welfare. Less 
recognized is the fact that inefficient regulatory agencies, programs 
and practices have the same destructive effects.
    Unnecessary and unproductive regulations are increasingly corrosive 
and indefensible in the evolving competitive marketplace. In the quiet 
world of rate base, rate of return, regulated monopoly where market 
competition was the rare exception, the costs of regulation could be 
hidden and passed along to users with negligible market consequence. 
However, in an increasingly technology driven, competitive market 
environment, distortions borne of unnecessary, costly regulations will 
have serious impacts on resource allocation and tend to undermine the 
very legitimacy of market processes.
    The very same arguments adduced and widely accepted in favor of not 
extending legacy telephone regulations to the Internet, or to cable 
companies, or wireless companies or to new technologies more generally, 
also apply forcefully in the case for making regulation of medium sized 
telephone companies more efficient.
    By adding additional expenses for compliance, regulations hamper 
the ability of firms to become the lowest cost provider in the 
marketplace and may assist less efficient firms to win the business. 
This outcome is especially likely if regulations slow the ability of 
firms to respond in the marketplace to rivals' initiatives.
    Unlike in the old days of cost plus regulation of protected 
monopolies, the costs of regulation cannot be hidden and assumed to 
have no allocative or efficiency consequences. Nor are we free to 
assume, without investigation and analysis that they are trivial and 
with negligible consequences. These costs influence the structure of 
penalties and rewards and thereby influence a wide range of management 
decisions--from pricing, to new service introduction and old service 
improvement, to product and process innovation, to the most fundamental 
decision of all, whether to invest in innovation and network 
modernization.
    The time has passed, if it ever was, for the Commission simply to 
assume--without investigation or analysis--that it and the regulations 
it promulgates are completely benign forces in the marketplace. The 
facts suggest otherwise. Regulations matter and they matter a lot.
         regulations should pass a reasonable cost benefit test
    The pursuit of efficient rules will necessitate that they should be 
subjected prospectively and from time to time retrospectively to a 
systematic review of their costs and benefits in the context of 
dynamically changing technological and market environments. Section 10 
(a) of the Telecom Act of 1996 contains language indicating that 
stripping away old rules or declining to extend new ones--regulatory 
forbearance--is appropriate if a particular provision or regulation is 
inconsistent with the public interest. The proper test of ``consistency 
with the public interest'' is a more systematic analysis of the costs 
and benefits occasioned by individual regulations.
    There is no basis in the Act or in common sense for the Commission 
to impose regulatory costs without creating corresponding and 
substantially greater public benefits. The presumption has been (should 
be) that markets work and that Commission interference and regulations 
must be justified. Cutting back unneeded, unnecessary and unproductive 
regulations is just as much in the public interest as are rules that 
compensate for market imperfections and which generate benefits in 
excess of their costs.
     Regulation is inefficient to the extent that the rules occasion 
costs in excess of benefits. Inefficient regulation is just as damaging 
to the public interest as insufficiently competitive markets. Efficient 
regulations should not impose unnecessary costs. The intrusion of 
efficient regulations into private decision making processes should be 
no more than required to effect specific, identifiable regulatory 
benefits.
                   h.r. 3850 is a limited first step
    H.R. 3850 will help accelerate the process of ``unregulation'' by 
eliminating or reducing for medium-sized carriers selected rules 
designed for general applicability that manifest on the margin more 
costs than benefits for consumers and the public interest. It 
selectively targets regulations for which social costs exceed social 
benefits and which are particularly burdensome for smaller carriers. It 
will reduce regulatory cost burdens, thereby freeing resources for 
meeting consumer needs rather than the convenience of regulators. H.R. 
3850 will also reduce delay and uncertainty, thereby reducing capital 
costs and increasing the propensity to invest in the sector.
    The specific provisions of H.R. 3850 are consistent with the need 
for and principles of deregulation I have spelled out above. Time has 
not permitted me to do the kind of analysis of costs and benefits of 
the provisions that I would have liked, but I can spell out some 
general impressions of the bill's main provisions.
    Section 281 would require the Commission to take notice of the 
relatively greater burden of its regulations on smaller carriers and to 
tailor them accordingly. Implementation of that section would lead to 
greater care and more analysis by the Commission of the specific costs 
and benefits of applying regulations designed at other times, for other 
purposes and other carriers. The result would be a more efficient 
regulatory regime going forward. The need for and process of tailoring 
new regulations to reflect their relative cost burden might usefully be 
applied as well during the process of reviewing the applicability of 
current regulations--a matter that is addressed in other parts of H.R. 
3850.
    Section 282 would exempt subject carriers from filing cost 
allocation manuals and those reports required under ARMIS--the 
Automated Reporting and Management Information System. Those reports 
are particularly extensive and costly to prepare and maintain. They are 
especially burdensome for smaller carriers.
    Section 283 would allow MSCs to take full advantages of the 
economies of integrating operations and other market activities. Doing 
so would eliminate the wasteful duplication of staff and activities now 
required by the Commission's separate affiliate requirements. 
Separation sacrifices synergies and cost savings, thereby denying their 
value to consumers. ``Convergence''--the implosion of different 
technologies and markets--is the name given to one of the dominant 
supply side trends brought about by technological and market change. 
Concurrently, there is increasing evidence of heightened consumer 
demand for ``one stop shopping''. Unnecessary corporate separation 
requirements thwart both of those trends. It is important to note in 
this context that the Commission has several times in the past found 
the public interest adequately served by using other means than 
structural separation.
    Section 284 would allow MSCs to ``unbundle'' regulatory 
requirements and to free themselves from the ``all or nothing'' options 
respecting participation in tariff pools and the form of earnings 
restrictions applied to them. The economics of pooling, in the case of 
the National Exchange Carrier Association (NECA) Pools, are driven in 
large part by size and size-related costs. Larger operations find 
advantage in filing their own tariffs, while smaller ones save costs 
and prefer to pool and average costs with other small entities. Section 
284 would allow MSCs with multiple operating companies to ``optimize'' 
their regulatory structure to conform to the pooling economics of their 
larger and smaller operating entities.
    A similar situation exists with respect to the choice, by carriers, 
of the form of earnings control--price caps versus traditional rate of 
return regulation. Some MSCs find that the economics favor having some 
affiliates under one scheme and others under the alternative. However, 
existing rules require all or nothing choices, thereby preventing MSCs 
from mixing their regulatory regimes to match the underlying economic 
differences among different operating companies. The requirement to 
choose a single company-wide form of earnings constraint dictates that 
some operating companies will be under the wrong regulatory scheme. The 
result is that the advantages of tailoring regulation to individual 
circumstances--the basis of the Commission's dual regulatory approach--
are denied to some MSC customers . Section 284 would eliminate that 
anomaly.
    Section 286 would reduce the delay in the introduction of new 
services. New service introduction, along with rate reductions, is the 
principal means whereby the benefits of new technology and market 
competition are conveyed to consumers. Delay in either simply defers 
realization of consumer benefits. Frequently the source of delay in 
approving the roll out of new service favored by users is concern 
expressed by competitors or other special interests.
    Section 287 mirrors 286 by extending flexibility and reduction of 
delay from service introduction to rate reductions. One of the 
artifacts of the old monopoly, pre-competition, regulatory regime is 
concern that rates might be too low. While it may be theoretically 
possible that rate reductions hurt consumers, the occasion for that in 
the real world is increasingly rare. By allowing rate deaveraging, 
Section 287 would bring rates more into line with costs and allow 
consumers to benefit from competition initiated not only by entrants 
but also incumbents. Section 287 (b) specifically provides for far more 
pricing discretion in response to entry by a large local exchange 
carrier--in particular one that is located adjacently and may be 
tempted to pick off large, high margin customers of the MSC.
    Sections 5 and 6 require the Commission to speed up their review 
processes for both merger reviews and for MSC petitions for 
reconsideration or waiver. These sections address a serious problem of 
regulatory delay and, absent some very special circumstances, the 
Commission should have little trouble in complying with them. Such 
delays are particularly burdensome to managers, since they defer 
consideration of other options. Many firms prefer a negative decision 
to no decision or one subject to unknown delay, since any decision 
allows them to proceed with other options and courses of action.
                         summary and conclusion
    The case for accelerating regulatory reform of incumbent 
telecommunications carriers is compelling. Unregulation--peeling away 
layers of rules accumulated at other times and under different techno-
economic conditions--offers the promise of increasing consumer welfare. 
By freeing carriers from unnecessary restrictions, government can 
reduce direct costs, increase rate competition and speed the 
introduction of new services. All will be to the advantage of end 
users. It will create value for consumers if regulations--new and 
continued--are rationalized more carefully on the basis of marginal 
costs and benefits to users. There is no doubt that many legacy 
regulations no longer serve the public interest.
    H.R. 3850 is a good first step in the process. The Congress has 
already found a specific public interest in tailoring regulations 
carefully for medium sized carriers and wrote that preference into the 
1996 Act as Section 10 (a). H.R. 3850 provides additional guidance to 
the Commission in that direction. The specific provisions of H.R. 3850 
are designed to pare back regulations that appear to occasion more 
costs than benefit.

    Mr. Tauzin. Thank you very much, Larry. Poetic for an 
economist at times. Thank you very much, sir.
    Mr. Jack Mueller, President of Cincinnati Telephone 
Company/Broadwing. What's the slash all about?
    Mr. Mueller. Broadwing is the parent company, that's all, 
since Cincinnati Bell Telephone Company is a subsidiary of 
Broadwing.
    Mr. Tauzin. Welcome, sir.

                    STATEMENT OF JACK MUELLER

    Mr. Mueller. Thank you.
    Good afternoon, Mr. Chairman, and members of the 
subcommittee:
    Thank you for allowing me to present my company's 
perspective on H.R. 3850. Before discussing the reasons why 
Cincinnati Bell supports this legislation, I will provide some 
background on Cincinnati Bell.
    Cincinnati Bell serves the greater Cincinnati marketplace 
providing local exchange services for some 1.1 million access 
lines, as shown on chart No. 1.
    [Chart shown.]
    Cincinnati Bell is one of the oldest telephone companies. 
Although once part of the Bell System, it has never been owned 
by nor affiliated with a Regional Bell Operating Company.
    Since 1873, Cincinnati Bell has had a reputation for 
providing innovative high-quality service. Most recently, 
Cincinnati Bell has been in the forefront in bringing advanced 
services to its customers.
    A DSL service is currently available to 75 percent of our 
customers. The provision of innovative service has been crucial 
to maintaining customer satisfaction, the cornerstone of our 
business.
    Although Cincinnati Bell is extremely proud of its heritage 
and reputation, it must move beyond its traditional boundaries 
to remain a player in the competitive market mandated by the 
1996 Act.
    The first important step in this expansion occurred last 
year when Cincinnati Bell Telephone's holding company acquired 
IXC Communications.
    IXC's state-of-the-art fiber network and Cincinnati Bell's 
operational expertise created a powerhouse in the Internet-
backbone marketplace.
    The new company, Broadwing, is an integrated communications 
provider, or ICP, that delivers voice, data, wireless, and 
Internet services nationwide.
    [Chart shown.]
    The next chart shows the current Broadwing companies and 
its fiber network. Although Cincinnati Bell and Broadwing are 
proud of what we have accomplished in the past 9 months, we 
cannot stop here.
    Unfortunately, Broadwing is disadvantaged relative to other 
ICPs because of restrictions placed on its telephone company.
    I believe that the time is right to lift the restrictions 
that hinder Cincinnati Bell and other mid-sized companies in 
their quest to provide alternatives to consumers throughout the 
country.
    H.R. 3850 is a step in this direction. As the mid-sized 
carriers open their traditional markets, there is no need for 
the FCC to oversee our every move.
    In short, the 1996 Act is working. Cincinnati Bell has 
complied with all of the market opening provisions in Section 
251.
    [Chart shown.]
    As the next chart shows, the Cincinnati marketplace is one 
of vibrant competition.
    [Chart shown.]
    And as the final chart shows, SBC and Verizon will have 
entered the market by the end of next year. Yet, despite 
mounting competition from huge companies, mid-sized companies 
are still subject to the regulatory paradigm that existed prior 
to competition.
    At the same time, competitors enter our market with little 
regulatory oversight. It is time for the regulatory structure 
to better reflect market realities for the mid-sized companies.
    While I am not suggesting what the regulatory regime should 
be for other ILECs, I believe that the public interest demands 
that the mid-sized companies be considered separately.
    The provisions of H.R. 3850 specifically address the fact 
that one-size-fits-all regulation of incumbent telephone 
companies does not meet the needs of today's marketplace.
    H.R. 3850 proposes a regulatory framework for 2 percent 
companies founded on the principles of choice, fairness, and 
independence.
    So in closing let me sum up:
    First, H.R. 3850 will enhance consumer choice by 
eliminating unnecessary costs to our businesses so that we can 
move more easily--so that we can more easily invest in the 
latest technologies and bring advanced services to more 
Americans.
    It also promotes consumer choice by providing 2 percent 
companies with greater flexibility and through the introduction 
of new services.
    H.R. 3850 will allow mid-sized companies to offer new 
services in the same fashion as their competitors. In order to 
successfully compete, we must be as fast, if not faster, in 
bringing new products and services to our customers.
    Second, with regard to fairness, H.R. 3850 will provide 
additional pricing flexibility for 2 percent companies by 
allowing for the de-averaging of interstate access rates and 
the ability to enter into contractual arrangements with 
customers for specific needs.
    Furthermore, it will provide full pricing deregulation on 
interstate services when a large incumbent local exchange 
carrier enters our service area.
    In providing this flexibility, H.R. 3850 provides an 
opportunity for policymakers to access how do regulatory 
initiatives foster increased competition.
    Finally, H.R. 3850 seeks to promote independence, an 
increasingly rare attribute in an environment where continuing 
consolidation of the industry has decreased the number of 
competitors.
    While there is no doubt that each company's success is its 
own responsibility, today's inappropriate one-size-fits-all 
regulation tilts the competitive landscape against 2 percent 
companies.
    H.R. 3850 promotes independent telephone companies by 
providing an appropriate level of regulatory oversight while 
eliminating unnecessary, costly, and time consuming regulatory 
burdens that impede innovation and ultimately our success.
    H.R. 3850 doesn't give the 2 percent companies special 
treatment. It simply rectifies regulatory inequities by 
creating an appropriate level of regulation for 2 percent 
carriers.
    The regulatory flexibility found in H.R. 3850 would allow 
us to invest in the latest technologies, pursue out-of-
territory opportunities, and provide consumers with an 
outstanding choice of telecommunications services.
    Thank you.
    [The prepared statement of Jack Mueller follows:]
    Prepared Statement of Jack Mueller, President, Cincinnati Bell 
                               Telephone
    Good afternoon Mr. Chairman and members of the Subcommittee. My 
name is Jack Mueller, and I am President of Cincinnati Bell Telephone. 
Thank you very much for allowing me to present my company's perspective 
on the importance of HR 3850 and the reasons this legislation is 
significant to our nation's telecommunications consumers.
    My perspective on HR 3850 is not from the point of view of a 
regulatory specialist but rather as one charged with managing the 
operational aspects of a mid-size local exchange telephone company. 
Before discussing the specific reasons why Cincinnati Bell supports 
this legislation, I believe it would be helpful to provide some brief 
background on Cincinnati Bell.
    Cincinnati Bell Telephone serves the Cincinnati, Ohio marketplace, 
providing local exchange services for some 1.1 million access lines in 
southwestern Ohio, northern Kentucky, and southeastern Indiana. Founded 
in 1873, Cincinnati Bell is one of the oldest independent telephone 
companies in the nation. As the ``Bell'' in the name suggests, 
Cincinnati Bell was once part of the Bell System. After divestiture, 
however, AT&T sold its minority interest in the company and, along with 
the Southern New England Telephone Company (SNET), Cincinnati Bell 
became one of the two independent companies that emerged from the AT&T 
breakup. After SNET's acquisition by SBC, Cincinnati Bell became the 
sole remaining independent company of the former Bell System. Most 
importantly, Cincinnati Bell has never been owned by nor affiliated 
with a Regional Bell Operating Company.
    Throughout its 127 years Cincinnati Bell has had a reputation for 
providing innovative, high quality service. For example, Cincinnati 
Bell was the first Bell company to become 100% dial in 1952 and the 
first company in the nation to deploy SONET rings in 1992. More 
recently, Cincinnati Bell has been in the forefront in bringing 
advanced services to its customers via its extensive ADSL network. 
Under the product name of ZoomTown.com, this service is available to 
75% of our customers--the highest level of ADSL availability anywhere 
in the United States. The provision of innovative, high quality service 
has been crucial to maintaining customer satisfaction that is the 
cornerstone of our business. Most recently Cincinnati Bell's reputation 
in this area is supported by its rank as one of the top three 
telecommunications companies in the country in customer satisfaction 
according to J. D. Power and Associates.
    Although Cincinnati Bell is extremely proud of its heritage and 
reputation for quality and innovative services in the Cincinnati 
market, it can no longer be content to serve a single market. To be a 
player in the competitive telecommunications marketplace encouraged by 
the '96 Act and to provide the services consumers demand, Cincinnati 
Bell must move beyond its traditional boundaries. The first important 
step in this expansion occurred last year when Cincinnati Bell 
Telephone's holding company, Cincinnati Bell, Inc., acquired IXC 
Communications, Inc. IXC's state-of-the-art fiber network, combined 
with the operational expertise and customer-oriented focus of 
Cincinnati Bell, created a powerhouse in the Internet backbone 
marketplace. The new company, Broadwing Inc., is an integrated 
communications provider (ICP) that delivers voice, data, wireless and 
Internet services nationwide and is now considered a major Internet 
backbone provider.
    Although Cincinnati Bell and Broadwing are proud of what we have 
accomplished in the past nine months, we cannot stop here. But to 
realize our full potential, we must be able to compete on the same 
terms as our competitors. Unfortunately, Broadwing is disadvantaged 
because of the restrictions placed on Cincinnati Bell Telephone. Unlike 
Broadwing, other ICPs operate relatively free of burdensome regulatory 
constraints in their provision of local, long distance, and advanced 
services. I believe that the time is right to lift the restrictions 
that unnecessarily hinder Cincinnati Bell and other mid-size companies 
in their quest to provide competitive alternatives to consumers 
throughout the country. We are not asking for special treatment, only 
equal treatment. As we open our traditional markets, there is no need 
for the FCC to oversee our every move.
    As Adam Smith said more than 200 years ago, ``Every man, as long as 
he does not violate the laws of justice, is left perfectly free to 
pursue his own interest his own way, and to bring his industry and 
capital into competition with those of any other man or order of men.'' 
I believe Cincinnati Bell and the telecommunications environment in 
Cincinnati embody Mr. Smith's beliefs and the vision for competition 
that Congress intended in the Telecommunications Act of 1996.
    Cincinnati Bell Telephone currently has interconnection agreements 
with 44 different companies and is actively competing with 9 full-
service telecommunications providers, 4 resellers, and 6 wireless 
companies. By the end of the year another 13 full-service providers 
will be operational in Cincinnati.
    Competitors are collocated in 35 of Cincinnati Bell's 56 Central 
Offices. Interim pricing for unbundled network elements as well as 
permanent resale discounts are in place. I would also like to add that 
the Cincinnati market was included in the initial implementation of 
local number portability, which the company successfully rolled out on 
schedule. In short, Cincinnati Bell has complied with all of the 
market-opening provisions in section 251 of the '96 Act.
    Today, competitors in our marketplace include such well-known 
companies as AT&T, Worldcom, Time Warner, Intermedia Communications, 
and Global Crossing.
    The future holds even more major competitors for the Cincinnati 
marketplace. By the end of next year Cincinnati Bell Telephone will be 
facing competition from the two largest local telephone companies in 
the United States--SBC and Verizon. Both of these companies are 
required to compete in Cincinnati for business and residential 
customers as a condition to the approval of their respective mergers. 
It is worth noting, too, that each company already has a major presence 
in the Cincinnati wireless market, a market in which each has proven to 
be a formidable competitor. While many of Cincinnati Bell's competitors 
are much larger, SBC and Verizon each have over 50 times more access 
lines than Cincinnati Bell.
    As you can see, the '96 Act is working. The Cincinnati marketplace 
is one of vibrant competition for telecommunications services.
    Yet, in spite of the mounting competitive entry from huge 
telecommunications companies, mid-size companies are still subject to 
the regulatory paradigm that existed prior to competition. In fact, 
since the passage of the '96 Act, the FCC has imposed regulatory 
requirements on mid-size telephone companies that did not previously 
exist. At the same time, our competitors--some of the largest 
telecommunications providers in the world--enter our market with little 
regulatory oversight. It is time for the regulatory structure to 
reflect market realities for the mid-size companies. While I do not in 
any way want to suggest what the regulatory regime should be for other 
ILECs, I do believe that in today's telecommunications marketplace the 
public interest demands that the mid-size companies be considered 
separately.
    The provisions of HR 3850 specifically address the fact that ``one-
size-fits-all'' regulation of incumbent telephone companies does not 
meet the needs of today's telecommunications marketplace. HR 3850 
proposes a regulatory framework for two-percent companies founded on 
the principles of choice, fairness, and independence.
    First, with regard to choice, HR 3850 will assist mid-size 
companies in eliminating unnecessary costs to our businesses so that we 
can more easily invest in the latest technologies and bring advanced 
services to more Americans. By investing in our networks and rolling 
out new services, we will enhance consumer choice in the marketplace.
    This legislation also promotes consumer choice by providing two-
percent companies with greater flexibility in the introduction of new 
services. HR 3850 will allow companies like Cincinnati Bell to offer 
new services in the same fashion as our competitors so that consumers 
reap the benefits of innovation more quickly. In order to successfully 
compete we must be as fast, if not faster, and more innovative in 
bringing products and services to customers. In providing this 
flexibility, HR 3850 provides an excellent opportunity for public 
policy makers to assess how deregulatory initiatives foster increased 
competition and consumer benefits.
    Second, with regard to fairness, HR 3850 will provide additional 
pricing flexibility for two-percent companies by allowing for the 
deaveraging of interstate access rates, the ability to enter into 
contractual arrangements with customers for specific needs, and one-day 
approval of tariffs just like our competitors. Furthermore, HR 3850 
will provide full pricing deregulation on interstate services when a 
large incumbent local exchange carrier enters our service area.
    Finally, HR 3850 seeks to promote independence, an increasingly 
rare attribute in an environment in which continuing consolidation of 
the industry has decreased the number of competitors. I believe that 
the interests of our nation are better served in a telecommunications 
market where multiple telecommunications providers are fighting every 
day for the privilege of serving customers.
    In an industry that is moving at light speed, mid-size telephone 
companies like Cincinnati Bell must be able to move quickly to continue 
to provide reliable service. While there is no doubt that each 
company's success or failure in the marketplace is its own 
responsibility, today's overreaching regulation tilts the competitive 
landscape against two-percent companies and in favor of the large 
players entering our markets. HR 3850 promotes independent telephone 
companies by providing an appropriate level of regulatory oversight 
while eliminating unnecessary, costly and time-consuming regulatory 
burdens that impede innovation and ultimately our success in the 
marketplace.
    HR 3850 doesn't give the two-percent companies special treatment. 
It simply rectifies regulatory inequities by creating an appropriate 
level of regulation for two-percent carriers. The regulatory 
flexibility found in HR 3850 would allow us to invest in the latest 
technologies, pursue out of territory opportunities and provide 
consumers with an outstanding choice of telecommunications services.
    Again, thank you for the opportunity to appear before you today. I 
will be happy to answer any questions you may have.

    Mr. Tauzin. Thank you very much, Mr. Mueller.
    Next is a man who I know knows where Golden Meadow is, Mr. 
David Cole, Vice President of Operations Support, CenturyTel of 
Monroe, Louisiana. Also, by the way, way up north, the home of 
Delta Airlines.
    Mr. Cole.

                     STATEMENT OF DAVID COLE

    Mr. Cole. Yes. Thank you.
    Good afternoon, Mr. Chairman, members of the committee:
    Thank you for your interest in the issues that we are 
discussing today, and thank you also for inviting CenturyTel to 
participate in this process.
    My name is David Cole and I am Senior Vice President of 
Operations Support for CenturyTel headquartered in Monroe, 
Louisiana.
    CenturyTel is a leading provider of integrated 
telecommunications services in primarily rural and smaller 
metropolitan markets.
    We serve small markets throughout Louisiana, Ohio, 
Mississippi, Tennessee, Wisconsin, Minnesota, and Texas. We 
also serve Pinedale, Big Piney, Larson, and Medicine Bow in 
Wyoming, and we are especially appreciative of the leadership 
of Mrs. Cubin, Mr. Pickering, Mr. Gordon, and Mr. Barrett in 
introducing H.R. 3850.
    Many of our markets may be rural and small but our 
customers demand and they deserve the highest quality 
telecommunications services available.
    I am proud to say that CenturyTel has made this commitment 
to serve these markets by working to provide the same variety 
of high quality services that area available here in 
Washington.
    We have already deployed broadband digital subscriber line 
service in Ohio, Wisconsin, Texas, Montana, and the State of 
Washington, and we plan to spend about $20 million more to make 
DSL service available to over 40 percent of our access lines by 
the end of this year.
    I would like to spend just a few minutes today on some of 
the provisions of this legislation that are most important to 
CenturyTel. the merger review, price cap, and pooling waiver 
provisions.
    Last summer, CenturyTel by itself and in partnership with 
Spectra Communications Group and Telephone USA of Wisconsin 
signed agreements with GTE to purchase approximately 460,000 
access lines in the States of Arkansas, Missouri, and 
Wisconsin.
    These are exchanges that GTE decided they no longer wanted 
to serve and that closely complemented CenturyTel's existing 
operations.
    Once we are able to begin serving these exchanges, we plan 
to spend millions of dollars upgrading the facilities in these 
states and launching new services, including dialup and 
broadband Internet access, but also including some very common 
services that these customers currently do not have.
    These new services include the offering in these 
communities for the first time in many cases of voice mail, 
call waiting, caller ID, and other services that you and I have 
enjoyed for many years.
    Today as we speak three of the four acquisitions we have 
filed at the FCC this past spring are still pending FCC 
approval. One of these transactions will actually create the 
Nation's first African American-owned local exchange carrier 
operating in the State of Missouri.
    These past few months have been expensive ones for 
CenturyTel. We have assembled a team of well over 100 employees 
to make these transactions a reality.
    Both companies are ready to close, and all State approvals 
have been received. However, we and our future customers still 
wait.
    In order to complete these transactions we must also seek 
and obtain Commission approval for a set of rule waivers, 
including waivers of the price cap, common line pooling, and a 
study area of boundary rules.
    These waivers are routinely granted to all applicants 
because they raise no substantial policy for legal issues. 
Although routine, this process normally takes a number of 
months to complete and the FCC has no established deadlines 
within which to complete this review.
    Therefore, we have been unable to close on any of these 
transactions largely because of regulatory delays. Rapid 
approval of transactions such as this--and there will be more 
of them if the RBOCs further divest rural properties, are in 
the best interest of consumers.
    Also, apart from the transactional context the Commission's 
rules prohibiting CenturyTel to elect price cap regulation for 
individual operating companies are outdated and deny the 
benefits of price caps to hundreds of thousands of mid-sized 
carriers customers.
    Although price cap regulations will not work for all of 
CenturyTel's companies, it would make sense for some. However, 
the Commission's current rules prevent us from implementing 
price caps in this manner.
    In conclusion, Mr. Chairman, members of the committee, I 
urge you to press forward with the regulatory and FCC reform 
efforts reflected in the legislation before you today. These 
changes we would make are essential to permit carriers like 
CenturyTel to compete in today's new world of 
telecommunications and to deploy DSL Internet access and other 
advanced communications services to our customers.
    I would like to thank you again for the opportunity to 
appear before you today and look forward to responding to your 
questions.
    [The prepared statement of David Cole follows:]
 Prepared Statement of David Cole, Senior Vice President of Operations 
                       Support, CenturyTel, Inc.
    Good morning, Mr. Chairman and members of the Committee. Thank you 
for your interest in the issues we are discussing today and thank you 
for inviting us to participate.
    My name is David Cole. I am Senior Vice President of Operations 
Support for CenturyTel, headquartered in Monroe, Louisiana. CenturyTel 
is a leading provider of integrated telecommunications services in 
mostly rural and small metropolitan markets. Our employees provide 
wireline, wireless, long distance, Internet, security and data services 
to more than 2 million customers in 20 states throughout the country.
                              introduction
    Our markets include many small markets throughout Louisiana, Ohio, 
Mississippi, Tennessee, Wisconsin, Minnesota and Texas. We also serve 
Pinedale, Big Piney, Farson and Medicine Bow, Wyoming and are 
especially appreciative of the leadership of Ms. Cubin, Mr. Pickering, 
Mr. Gordon and Mr. Barrett in introducing HR. 3850.
    All of CenturyTel's telephone operations are ``rural telephone 
companies'' as defined by the Telecommunications Act of 1996. Most of 
our service areas are extremely rural in nature, being characterized by 
relatively low customer densities and difficult geographic 
environments. Thus, CenturyTel is well acquainted with the problems and 
challenges of building, maintaining and enhancing advanced 
telecommunication services in small towns throughout America. We 
specialize in providing top-notch service in these very markets.
    Many of our markets may be rural and small, but our customers 
demand and deserve the highest quality telecommunications services 
available. I am proud to say that CenturyTel has made the commitment to 
serve these markets by providing the same variety of high-quality 
services that are available to you here in downtown Washington.
    We have already deployed broadband digital subscriber line service 
in Ohio, Wisconsin, Texas, Montana, and Washington state, and we plan 
to spend about $20 million more to deploy DSL services to over 40 
percent of our markets this year. For us, this rollout doesn't just 
make good business sense, it also reflects our commitment to serve our 
markets with the most advanced and highest quality services available 
today. These services ensure that our rural residential consumers have 
high-speed access to the Internet. In addition, we make sure that the 
few businesses we do serve can have access to the 21st Century 
communications products they need to grow and flourish in the 
information economy.
                         the need for h.r. 3850
    Which brings us to why we are here today. As much as we are 
currently doing to deploy broadband and launch competitive ventures, 
like other mid sized carriers, we are experiencing what I would term, 
``regulatory drag'' working within today's framework of outdated and 
duplicative FCC regulatory requirements. One of the fundamental goals 
of the 1996 Act was to stimulate investment and innovation. Another 
goal was to deregulate. The question that we should be asking is not 
whether new services should be deployed, but how quickly they will be 
deployed to all Americans, regardless of where they live. There is a 
direct correlation between speed of deployment and deregulation of the 
type contained in H.R. 3850--one that demonstrates that regulation is 
not always in the best interests of our customers.
    We believe the FCC should adopt reasonable interpretations of the 
Communications Act that avoid prescriptive restraints on companies 
willing to make the commitment to serve rural markets. HR. 3850 
provides the proper legislative vehicle to remove archaic regulatory 
rules designed for the largest telephone companies when they were 
operating in a legally-sanctioned monopoly environment.
    Today, Congress has an opportunity to remove those regulatory 
barriers by passing legislation that allows midsize and smaller 
carriers to focus on those things that are most important to their 
customers: investing in infrastructure to deliver new and improved 
services; and launching new out-of-region competitive ventures; rather 
than spending customer dollars to comply with duplicative and outdated 
FCC rules.
    In considering this legislation, I would ask that you examine the 
simple facts.

 Rural markets depend on modern telecommunications services for 
        economic development.
 The cost to provide services to these markets is high with 
        little interest shown by larger carriers to provide services 
        there.
 Midsize and smaller companies, such as CenturyTel, have the 
        experience to serve these markets, and are willing to make the 
        investment necessary to do so.
 There is no gain in consumer benefits, competition, or 
        innovation associated with the regulatory burdens that H.R.3850 
        would lift.
 Critical investment dollars should be directed toward 
        deploying infrastructure and introducing new services, rather 
        than toward regulatory compliance.
    I want to spend just a few minutes on some of the provisions of 
this legislation that are most important to CenturyTel--merger review; 
and price cap and pooling waivers.
    Merger Review: Sixty percent of CenturyTel's growth has taken place 
within the last four years through acquisition of telephone access 
lines. Many of these lines have been, and will continue to be, acquired 
from Bell operating companies and the former GTE. Last summer, 
CenturyTel, by itself and in partnership with Spectra Communications 
Group and Telephone USA of Wisconsin, signed agreements with GTE to 
purchase approximately 460,000 lines from GTE in Arkansas, Missouri and 
Wisconsin. These are exchanges that GTE no longer wants to serve, and 
that closely complement CenturyTel's existing operations.
    Once we are able to begin serving these exchanges, they will be 
among the highest-priority areas in which we plan to launch DSL-based 
broadband Internet access services. We have hired 900 new employees to 
respond quickly to customer needs in these states. We plan to spend 
literally millions of dollars upgrading the facilities in these states 
and launching new services, including dial-up and broadband Internet 
access, but also including some very common services that these 
customers currently cannot access. These new services include the 
offering in these communities--for the first time, in many cases--of 
voice mail, call waiting, caller ID, and other services that you and I 
have enjoyed for years.
    Today as we speak, three of the four acquisitions we filed at the 
FCC this past spring involving more than two hundred twenty thousand 
access lines are still waiting for FCC approval. One of these 
transactions will create the nation's first African-American-owned 
local exchange carrier, and it will operate in Missouri.
    These past few months have been expensive ones. To date, we have 
assembled a team of well over 100 employees to make these transactions 
a reality. Both companies are ready to close, all state approvals have 
been made; however, we and our future customers still wait.
    In 1996, CenturyTel reached agreement to acquire and merge its 
operations with Pacific Telecom, Inc. (PTI), a midsize local exchange 
carrier that served about 600,000 lines, primarily on the west coast, 
and that did not overlap with CenturyTel's local exchange operations. 
Our combined operations comprised a total of just six-tenths of one 
percent of the local telephone lines in the country, gave us a cellular 
business smaller than those of nine other carriers, and made us the 
twenty-sixth largest broadband PCS carrier in the country. 
Nevertheless, the Commission applied the same type of competitive 
analysis it has repeatedly applied to the large headline-grabbing Bell 
operating company mergers. This despite the fact that, even from the 
outset, there was no serious contention that our merger would be 
blocked or that it posed any anti-competitive effects whatsoever. The 
Department of Justice showed no concern with our Hart-Scott-Rodino 
filings. State regulators uniformly approved the deal. Most tellingly, 
in response to the FCC's Public Notice seeking comment on the 
transaction, no party opposed, or even commented upon, the transaction.
    But more importantly, the FCC's review delayed the launch of our 
service to customers that we wanted and were ready to serve. Since we 
closed that merger in 1997, penetration of enhanced and information 
services has grown dramatically, as our technical and marketing 
expertise has brought additional value to the former PTI customers.
    In today's digital economy, the FCC needs to make its decisions 
quickly when reviewing mergers, in order to allow companies that are 
poised to enter the market and improve service to do so. While the FCC 
should have an opportunity to pass on the public interest benefits of 
wireless license transfers, it should do so quickly, and with the 
minimum delay necessary to make an informed decision on the 
qualifications of the purchaser.
    Price cap and pooling waivers: In order to complete these 
transactions, we must seek and obtain Commission approval for a set of 
rule waivers, including waivers of the price cap, common line pooling, 
and study area boundary rules. These waivers are routinely granted to 
all applicants because they raise no substantial policy or legal 
issues. Although routine, the process takes an absolute minimum of six 
months to complete, and the FCC has no established deadlines within 
which to complete its review.
    The FCC's concerns that carriers could use the price cap system in 
this context to manipulate rates are unfounded. When a carrier changes 
the type of regulation under which it is regulated, the FCC must 
approve the company's tariff. At that time, the Commission must 
determine whether the rates are just and reasonable, and may 
investigate rates that it believes are not. Similarly, the National 
Exchange Carriers Association (NECA) common line pool serves to even 
out interstate access charges that non price cap carriers across the 
country charge to long distance carriers. Especially in light of 
allegations that some long distance carriers may be reducing or 
eliminating service in areas where access charges are too high, the 
Commission should be embracing the NECA pool as a useful tool to 
preserve consumer choice.
    Nevertheless, we have been unable to close on any of these 
transactions, largely because of regulatory delays at the Commission. 
Rapid approval of transactions like this--and there will be more of 
them as the RBOCs divest of their properties--are in the best interest 
of consumers.
    Apart from the transactional context, the Commission's rules 
prohibiting carriers to elect price cap regulation for individual 
operating companies are outdated and deny the benefits of price caps to 
hundreds of thousands of midsize carrier customers nationwide. The 
benefits of price cap regulation are well-understood by carriers, 
economists, and the Commission alike. Price caps replicate the 
efficiency incentives of a competitive market, and ratchet rates 
progressively downward.
    Although price caps regulation won't work for all of our companies, 
it would make sense for some. Nevertheless, the Commission's rules 
prevent us from experimenting with price caps in this manner, and 
forbid us from leaving the price cap system if we guess wrong, all 
based on outdated hypotheses about what might happen if we were allowed 
to convert individual companies from rate-of-return regulation to price 
caps. Contrary to these regulatory fears, no cost shifting between 
rate-of-return and price cap affiliates would occur because, as 
separate affiliates, such action would be readily detectable. In 
addition, any carrier attempt to ``game the system'' using these rules 
would quickly backfire. Actual or threatened competition makes such 
activity too risky--a carrier that tried to manipulate its rates in 
that way would lose customers to a competitor.
    Far from serving the public interest, these rules deny us 
regulatory flexibility that could benefit us as a carrier, long-
distance carriers to whom we provide access services, and our business 
and residential customers alike. If we had the type of flexibility that 
H.R. 3850 would grant, we could bring the benefits of price caps to 
many of our customers.
                               conclusion
    In sum, Mr. Chairman and members of the Committee, I urge you to 
press forward with the regulatory and FCC reform efforts reflected in 
the legislation before you today. The changes it would make are 
essential to permit carriers like CenturyTel to compete in today's new 
world of telecommunications, both to grow outside of our traditional 
local exchange regions, and to deploy DSL Internet access and other 
advanced communications services to our customers.
    Mr. Chairman, I am not going to pretend that reducing regulation 
alone is enough to ensure rapid deployment of fast Internet access to 
all parts of this country or all of my companies' rural customers. It 
isn't enough. Our companies have a lot of work to do to deploy new 
facilities and roll out new DSL and other broadband services. In 
addition, universal service mechanisms will have to play an important 
role in providing broadband access to all Americans. Congress, too, 
should promptly consider proposals to provide tax incentives for 
broadband investment in low density, high cost rural markets. Rural and 
suburban companies desperately need the regulatory certainty and 
financial stability that we do not have now. This legislation is an 
important piece of the puzzle for my company, though, and I urge you to 
move it forward.
     Thank you for the opportunity to appear before you today, and I 
look forward to responding to your questions.

    Mr. Tauzin. Mr. Cole, thank you very much. We have time for 
one final presentation and then we will have to take a break. 
We have two 15-minute votes on the floor, so we will hear from 
our last witness and then we will all break and go vote and 
come back in about a half hour.
    Last will be Mr. John Sumpter, Vice President Regulatory 
Affairs of Pac-West Telecom in Stockton, California.
    Mr. Sumpter.

                    STATEMENT OF JOHN SUMPTER

    Mr. Sumpter. Thank you, Mr. Chairman, and members of the 
committee, I appreciate very much this opportunity to speak to 
you today on this issue.
    Pac-West is a small, competitive, local-exchange carrier 
created in effect by the Telecommunications Act of 1996, and we 
are very grateful for the opportunity you have given us to 
compete.
    We are in Stockton, California, which is the heart of 
California's great agricultural area. We serve a lot of rural 
communities.
    Our business plan was sort of the reverse of a lot of CLECs 
where we started in rural and agricultural areas and then 
spread our services into the more urban areas of California.
    I am also a member of the Operating Board of ALTS, the 
Association for Local Telecommunications Services, which 
represent CLECs, about 100 of them.
    ALTS does not represent IXCs, large IXCs. It does not 
represent any RBOCs. All of the companies of ALTS would not 
exist without the Telecommunications Act.
    ALTS's primary mission, and a significant issue of 
importance to Pac-West, is to open the local telecommunications 
market to competition.
    We support the Telecommunications Act of 1996 and we 
support the efforts of the Federal Communications Commission 
and State officials to implement that Act.
    The most important means of creating the competitive local 
market that Congress envisioned is to ensure that the Incumbent 
Local Exchange Carriers, or ILECs, interconnect with the new 
entrants and make available to competitors the critical 
components of their network on a wholesale basis.
    In other words, our principal focus is to make sure that 
the ILECs provide the wholesale components that will allow us 
to build new technologically advanced networks.
    We are less concerned with the regulation of retail rates. 
Our view is that competition, once it is established, will keep 
retail rates low and affordable without the need for detailed 
rate regulation.
    However, market forces will only restrain rates and spawn 
new services if competitive providers can interconnect and get 
access to essential unbundled network elements of the monopoly 
telephone company networks on a wholesale basis.
    We are concerned about some of the provisions of H.R. 3850 
that might weaken the prospects for local telephone 
competition.
    On the other hand, we have no disagreements with other 
provisions of the bill that have little or no effect on 
competition such as those that streamline and remove 
unnecessary and burdensome regulatory requirements.
    Our views on this bill are colored by our experience in the 
marketplace. Many CLECs are working hard to bring competition 
to suburban and rural markets. We are confident that 
competitors and small and mid-sized ILECs alike are striving to 
provide broadband services to rural consumers as quickly as 
possible.
    However, many CLECs have had a difficult time entering the 
markets served by small and mid-sized ILECs. Many CLECs are not 
able to obtain authority to offer service in areas served by 
the small and mid-sized carriers.
    The Telecommunications Act of 1996 already permits ILECs 
with less than 2 percent of the Nation's access lines to avoid 
many of the unbundling and pro-competitive requirements that 
currently apply to the larger ILECs.
    There is no reason for Congress or Federal or State 
regulators to deny consumers served by mid-sized or small 
telephone companies the benefits of competitive choice.
    The record is clear. Competition produces lower prices, 
higher quality services, faster Internet access services, and 
greater customer responsiveness.
    Rural consumers deserve to receive these benefits as much, 
if not more, than urban consumers.
    Remarkably, the legislation under consideration today may 
make it even more difficult to compete in these markets. This 
is because the bill would remove some of the enforcement power 
of the FCC and State regulators to enforce the procompetitive 
provisions of the law.
    For instance, Section 4 of the bill directs the FCC to 
adopt separate, less burdensome rules for ILECs with less than 
2 percent of the Nation's access lines.
    This provision would apply to all the pro-competitive 
provisions of Section 251[a][b] and [c] of the Communications 
Act.
    Thus, this provision would likely reduce the 
interconnection and unbundling obligations for small and mid-
sized ILECs.
    Finally, we are somewhat concerned about the strict time 
deadlines suggested by the legislation on the FCC's merger 
review. Perhaps a longer time would be more appropriate.
    While we do not oppose the provisions that deal with cost 
allocation manuals and the like, the committee should consider 
accompanying these regulatory initiatives with provisions 
designed to improve their prospects for competition.
    Thank you.
    [The prepared statement of John Sumpter follows:]
  Prepared Statement of John Sumpter, Vice President--Regulatory, Pac-
                          West Telecomm, Inc.
    Mr. Chairman, members of the Committee, my name is John Sumpter. I 
am the Vice-President--Regulatory for Pac-West Telecomm, Inc. a 
competitive local exchange carrier (CLEC) operating primarily in the 
Western part of the U.S. Pac-West provides local telephone service to 
business and residential subscribers. Pac-West also provides services 
to Internet service providers (ISPs). While most of Pac-West's business 
is located in Northern California, Pac-West plans to operate in 10 
states in the Western U.S. by the end of 2000.
    I am also a Member of the Operating Board of the Association for 
Local Telecommunications Services, known as ALTS. ALTS is the leading 
trade association representing facilities-based competitors for local 
telecommunications services. ALTS represents approximately 100 CLECs, 
most of whom were founded and started to build competing local 
telephone networks after the passage of the 1996 Telecommunications 
Act. (ALTS does NOT represent either the Bell Operating Companies or 
the major long distance companies.) In short, ALTS represents exactly 
the kind of entrepreneurial new companies that Congress sought to 
foster when it passed the 1996 Telecom Act. Our companies would not 
exist today if Congress had not passed that Act, and for that we are 
enormously thankful to you, Mr. Chairman and all the Members of this 
Committee.
    Mr. Chairman, you have asked me to testify concerning H.R. 3850, 
the ``Independent Telecommunications Consumer Enhancement Act of 
2000.'' I have several specific comments to make concerning the 
provisions of this legislation. Before doing so, I would like to 
summarize my principal message:
    ALTS' primary mission, and the issue that is of greatest importance 
to Pac-West, is to open the local telephone market to competition. We 
support the Telecommunications Act of 1996 and we support the efforts 
of the Federal Communications Commission (FCC) and state officials to 
implement that Act. The most important means of creating the 
competitive local market that Congress envisioned is to ensure that the 
incumbent local exchange carriers (ILECs) interconnect with the new 
entrants and make available to competitors the critical components of 
their network on a wholesale basis. In other words, our principal focus 
is to make sure the ILECs provide the wholesale components that will 
allow us to build new technologically-advanced networks.
    We are less concerned with the regulation of retail rates. Our view 
is that competition, once fully enabled and vibrant, will keep retail 
rates low and affordable without the need for detailed rate regulation. 
However, market forces will only restrain rates and spawn new services 
if competitive providers can interconnect with and get access to the 
essential unbundled network elements of the monopoly telephone company 
networks on a wholesale basis at cost-based rates.
    We are concerned about some provisions of H.R. 3850 that might 
weaken the prospects for local telephone competition. On the other 
hand, we have no disagreement with other provisions of the bill that 
have little to no effect on competition, such as those that streamline 
and remove unnecessary and burdensome regulatory requirements on 
carriers.
    Our views on this bill are colored by our experience in the 
marketplace. Many CLECs are working hard to bring competition to 
suburban and rural markets. We are confident that competitors and small 
and mid-sized ILECs alike are striving to provide broadband services to 
rural consumers as quickly as possible. However, many CLECs have had a 
difficult time entering the markets served by small and mid-size ILECs. 
Many CLECs are not able to obtain authority to offer service in areas 
served by these small and mid-sized carriers. Even when authorized, 
CLECs do not have access to the universal service subsidies that are 
made available to the ILECs. Moreover, the CLECs often encounter the 
same difficulties obtaining unbundled loops and collocation from small 
and mid-sized ILECs that CLECs encounter with the Regional Bell 
Operating Companies and GTE. The result is that consumers in areas 
served by these small and mid-sized carriers are not able to benefit 
from the growth of competition as quickly as consumers in urban areas.
    The Telecommunications Act of 1996 already permits ILECs with less 
than 2% of the nation's access lines to avoid many of the unbundling 
and pro-competitive requirements that currently apply to larger ILECs. 
(As a footnote, it appears that the decision of the 8th Circuit Court 
of Appeals earlier this week may make it even easier for small and mid-
sized ILECs to obtain the exemptions from the pro-competition 
provisions of the 1996 Act.) This is unfortunate. Whether or not the 
ILEC is large or small, and whether or not it serves a large or small 
geographic area, every ILEC that possesses a monopoly over local 
telephone service should be required to open its network to 
competition. There is no reason for Congress or federal or state 
regulators to deny consumers served by mid-size or small telephone 
companies the benefits of competitive choice. The record is clear--
competition produces lower prices, higher quality services, faster 
Internet access services, and greater customer responsiveness. Rural 
consumers deserve to receive these benefits as much if not more than 
urban consumers.
    Remarkably, the legislation under consideration today may make it 
even MORE DIFFICULT to compete in these markets. This is because the 
bill would remove some of the enforcement power of the FCC and state 
regulators to enforce the pro-competitive provisions of the law. For 
instance, section 4 of the bill directs the FCC to adopt separate, less 
burdensome rules for ILECs with less than 2% of the nation's access 
lines. This provision would apply to all the pro-competitive provisions 
of sections 251(a), (b), and (c) of the Communications Act. Thus, this 
provision would likely reduce the interconnection and unbundling 
obligations for small and mid-size ILECs.
    Furthermore, the bill proposes a new section 287 of the 
Communications Act that would grant the small and mid-sized ILECs 
pricing flexibility, and pricing deregulation, when the ILEC self-
certifies that another carrier has entered the geographic area on 
either a facilities-based or resale basis. In other words, as soon as a 
competitor serves a single customer, the ILEC would be able to have 
pricing flexibility, or pricing deregulation (if the new entrant is 
another ILEC). This pricing relief could cause substantial harm to 
competition and consumers. This provision would permit a carrier with 
99.99% of the market to raise prices to captive customers, and to drive 
competitors out of the market by lowering prices below costs to the 
customers targeted by a competitor.
    The FCC already has the authority to implement pricing flexibility 
under section 10 of the Communications Act when it is in the public 
interest. If Congress wishes to change this standard for determining 
when a market is sufficiently competitive to justify such pricing 
flexibility, we would be glad to work with Congress to change that 
standard. However, the standard set by this bill (the provision of 
competitive service to a single consumer) would allow pricing 
flexibility well before competitive pressures are sufficient to 
restrain prices.
    Finally, we are somewhat concerned about the strict time deadlines 
suggested by the legislation on the FCC's merger review authority and 
for petitions for waiver or for reconsideration. We support time 
deadlines on FCC rulings; the Commission should not be permitted to 
string out its review process for months on end. Nevertheless, the 
bill's time deadlines (45 days for mergers, 90 days for petitions for 
waiver or reconsideration) may be too difficult to meet. If the FCC 
does not meet the deadline, the merger or petition is automatically 
approved. If the FCC meets the deadline, it is likely to be forced into 
a hasty decision that may not be well-reasoned and may not survive 
judicial review. We suggest that the Committee consider extending these 
time deadlines to 180 days maximum.
    ALTS and Pac-West are not as concerned about other provisions of 
the legislation, such as those removing the filing of cost allocation 
manuals and the provisions allowing the small carriers to choose price 
cap regulation. These provisions affect the FCC's ability to monitor 
the rates charged by the ILECs. If there are other means of protecting 
consumers from rate increases that are less burdensome to the small and 
mid-sized ILECs, then the FCC and state regulators should be permitted 
to rely upon these other measures.
    While we do not oppose these provisions, the Committee should 
consider accompanying these deregulatory initiatives with provisions 
designed to improve the prospects for competition. In other words, if 
Congress seeks to reduce the regulation of retail rates charged by 
small and mid-sized ILECs, Congress should also consider measures to 
stimulate greater competition in these markets so that consumers served 
by these carriers will also receive the lower prices and greater 
service innovation that competition can produce.
    I thank the Committee for the opportunity to testify today.

    Mr. Tauzin. Thank you, Mr. Sumpter.
    We will take about a half-an-hour break. We have got----
    Mrs. Cubin. Mr. Chairman, if I might?
    Mr. Tauzin. Yes.
    Mrs. Cubin. I have another bill that I have to Chair the 
hearing on to start at 1:30, so I was wondering if we could 
make the 15-minute vote and then vote quickly and come back and 
I could do my questioning and then----
    Mr. Tauzin. You will be up first, Mrs. Cubin.
    Mrs. Cubin. I cannot have two bills at the same time 
without me there.
    Mr. Tauzin. I know, it's tough around here.
    Mrs. Cubin. You're right.
    Mr. Tauzin. Why not?
    We have about 10 minutes left to go on this vote, and the 
other vote will start--we will get back here in about 20 
minutes let's say.
    And if I am not back here before you are, Mrs. Cubin, start 
it up.
    Mrs. Cubin. I will. Thank you.
    Mr. Tauzin. All right. The committee stands in recess.
    [Brief recess.]
    Mr. Tauzin. The meeting will please come back to order.
    When we left, the witnesses had completed their statements 
and the Chair will now recognize himself and other members--
well, let me recognize the gentlelady from Wyoming, first, 
since she is here.
    Mrs. Cubin. Mr. Chairman, that would be fine if you go 
right ahead.
    Mr. Tauzin. Well not at all. I know you have other things 
to do, and I want to accommodate you, Barbara, so you are up 
first.
    Mrs. Cubin. Thank you.
    First of all, I do appreciate the testimony from all of the 
witnesses here today. There are a few points I want to make 
based on not only the witnesses testimony but also on some of 
the reservations that members expressed about the bill.
    First of all I want to make it absolutely clear that there 
is nothing in this bill that prevents the Commission from 
getting any information any time that they need.
    You know there are a lot of times when I think it is a 
disadvantage to me because I am not a lawyer, and so political 
process gets kind of tied up with procedure and those kinds of 
things, but I am a chemist and so I have a background in 
statistics as well.
    I happen to know that the information that is garnered from 
some of these 2 percenters in the information that they submit 
in CAM and ARMIS reports, and the others, is so statistically 
insignificant that it would have to be thrown out when policy 
decisions are made.
    So I think that is one important point to make. But that is 
all aside because you can get the information, the Commission 
can get the information if they need it. They just don't 
necessarily need to require it in such a comprehensive and 
costly form.
    Another point that I wanted to make was about the pricing 
flexibility that the 2 percenters would be able to adjust their 
fares in 1 day. Well 90 percent of the providers can do that 
now.
    So why remove that? Why not the 2 percenters?
    Another thing is mergers. I realize that the mergers and 
the time it takes, that that is a difficult point. I am not 
saying that necessarily 45 days is the right number of days, 
but what I am saying is these people have a right to get a 
decision made.
    Most of the time these mergers--in fact, I think all the 
time that I am aware of--these mergers are one 2 percent 
company merging with another 2 percent company resulting in 
another 2 percent company.
    So the information is not complicated. It is not detailed. 
To my knowledge, the FCC has never denied one. So I just think 
that 45 days is not an unreasonable amount of time to get this 
done.
    There are a lot of other regulatory problems that we could 
have identified, but we identified these reports, the problem 
with mergers, and the pricing flexibility and the deregulation 
when in fact there is competition in place where an investment 
has been made, and so they are not going anywhere. The 
competition is there; will remain there; why not let the 2 
percenters do what the other CLECs can do.
    So with that, I would like to start my questioning with 
Carol Mattey. I certainly do want you to know that I appreciate 
the work that you have done to move these issues forward, and 
we will be glad to work with you to try to get this done.
    I absolutely think the legislation needs to be here, 
though, because I think people are not necessarily like me in 
temperament but they are like me in, you do the things that are 
aggravating you the most.
    So I think that we have to do this so that we can get this 
accomplished. I know you intend to do it, but it is the time 
that is a problem with me.
    In your testimony regarding Section 281 of the bill you 
mention that the FCC will not be able to receive data from the 
2 percent carriers such as broadband deployment reports.
    I must say that that never was the intention of the bill. I 
am afraid that your statement kind of missed the mark in that 
area. It was not ever intended to keep information from you for 
regulating or receiving the information that you need to do 
your job, and especially when it comes to broadband deployment.
    But this bill is about your trying to think of ways that 
smaller companies can provide you with the information that you 
really need in a more appropriate and less burdensome manner 
given their relative size.
    In fact, I have information that indicates that CAM costs 
for RBOCs are about four cents per customer, and for 2 
percenters $3 per customer. Those are the kinds of things I 
would like you to be looking at.
    So these are just suggestions. Couldn't you get more 
general information from 2 percenters and more detailed 
information from the larger companies which serve 92 percent of 
the customers?
    It seems to me that that would be a good base of 
information. Or, couldn't you require 2 percent carriers to 
report annually while the larger carriers could report semi-
annually?
    Or why not give smaller carriers a longer time to submit 
their information?
    I just think we need to be creative on ways to lessen their 
regulatory burden. Do you see a problem with any of those 
suggestions?
    Ms. Mattey. We certainly are open to thinking through and 
discussing further all of those suggestions.
    I want to clarify for the benefit of the committee that not 
all companies file the CAM filings that you referred to. 
Presently there are over 1200 carriers that fit the category of 
2 percent carriers.
    Today, under the current regulations, only 8 of those 1200 
carriers actually file the CAM report that you showed the 
committee.
    So I would share your concern if all 1200 of them were 
filing that big report, but as it is today, the Commission 
already has recognized that, what I would call the really small 
companies, which are the bulk of the 1200, do not need to file 
that sort of report.
    And as I alluded to in my testimony, the Bureau is 
preparing to recommend to the Commission that we do a 
rulemaking. In fact, the Bureau believes, the Common Carrier 
Bureau, believes that the CAM reports do not need to be filed 
any longer and we would be recommending that the 2 percent 
companies file a certification that they are in compliance with 
our cost allocation rules.
    So that is an example of an area where we hope to be moving 
forward in a very constructive way.
    With respect to the financial reports that----
    Mrs. Cubin. Could I ask you a question about that first?
    Ms. Mattey. Sure.
    Mrs. Cubin. That is great news. Can you give me an idea of 
when that will be?
    Ms. Mattey. Well I can tell you when the Bureau hopes to 
make the recommendation, but obviously when the Commission 
adopts it is subject to the Commission. But we are hoping to be 
making the recommendation in the early fall.
    Mrs. Cubin. That is great. So my response would be that I 
would really like the legislation to stay in place maybe to 
help boost that process along.
    Ms. Mattey. And I must confess, with respect to eliminating 
the CAM filing, if you were to enact that particular provision, 
it would mean we would not need to do the rulemaking, and that 
takes time and resources as well.
    So I do not object to that.
    Mrs. Cubin. Good.
    Ms. Mattey. I mean if you addressed the elimination of the 
CAM filing. But the one thing I would suggest that you think 
about is at least having some sort of provision that there be a 
certification that the cost allocation rules are being complied 
with.
    So that is just one suggestion.
    Mrs. Cubin. Good.
    Ms. Mattey. With respect to the financial reports, you 
showed the committee the big fat reports in that folder. Those 
financial reports are not filed by all 1200 companies. 
Approximately 55 out of the 1200 currently file those financial 
reports, and the remainder do not file those financial reports.
    And again as part of the rulemaking that the Bureau is 
preparing, we would like to recommend to the Commission that we 
eliminate those financial report filings and instead have 
basically a one-page summary financial report because we think 
there is some baseline information that the Commission needs in 
order to have an assessment of what carriers across America are 
doing, but we do not need as much information.
    So again, if you would consider that sort of tailoring just 
to have some sort of one-page summary or something, that would 
be something that we are very open to talking about.
    Mr. Tauzin. We are making a lot of progress here, Barbara.
    Mrs. Cubin. Really. Those are exactly the kind of things 
that we hope to achieve.
    Ms. Mattey. Yes. I mean we have been actively thinking 
about this, and I know you hope that the legislation is 
spurring us to think about it, but indeed we were actually 
thinking----
    Mrs. Cubin. You have already been doing it.
    Ms. Mattey. [continuing] about it. This is something that 
we had started working on early this year. And so the 
legislation and our thought process is sort of moving along in 
a parallel timeframe.
    Mrs. Cubin. Well I really do appreciate that and would like 
to offer any assistance that you might need from this end. I 
would really like to do that.
    Let me--I cannot go through all these questions, but I 
would like to submit them not just to Ms. Mattey but to the 
other members of the witness panel today, too.
    In your testimony, and it was mentioned otherwise too, that 
the 45-day deadline, that you had a problem with that. I wanted 
to note that even Mr. Sumpter favors the concept of a merger 
review deadline.
    Apart from the actual number of days, I have a more basic 
question. Is it warranted, do you think, to set a shorter 
deadline for action on the simpler mergers between smaller 
companies?
    Ms. Mattey. That is Mr. Bird's question.
    Mr. Bird. I will take that question.
    I think very often mergers between the smaller companies 
will take a shorter period of time.
    Mrs. Cubin. Shorter? Help me with that. Because some of 
these have been pending a year, months, years, so just help me 
with what you mean by ``shorter.''
    Mr. Bird. I do not know that any 2 percenters have taken 
that long. There really have not been that many mergers among 
the 2 percenters.
    The one that was referred to in Mr. Cole's testimony around 
1996 came out at an unfortunate time in some ways. It was right 
after the Commission had addressed the very large merger of 
Bell Atlantic/Nynex.
    It was a brand-new concept and a lot of the structure for 
analysis that was in the Bell Atlantic/Nynex opinion was 
applied in this context where it comes to the basic conclusion 
that the competitive concerns were not really there. And 
because that was the first case, there was a much more 
extensive analysis.
    I think if you look at the more recent cases, last year the 
Al-Tel/Alliance Merger, the competitive analysis was three 
pages and basically found that there were no major problems.
    Mrs. Cubin. And how long did that take for the company to 
receive that?
    Mr. Bird. It was submitted in January and the decision was 
adopted in June. But the major period of time on that one was 
not spent on those Bell Atlantic/Nynex issues. I think there 
were waiver issues that were involved.
    And that is one thing that I wanted to mention with respect 
to the mergers. The mergers often involve questions of waiver 
of one or another of the Commission's rules and, depending on 
which rule it is and how much experience there has been with 
the waiver of the rule and what the circumstances are, those 
can take a fair amount of time to decide.
    That is where I think we try to decide these cases, and the 
Commission has taken steps to speed up its review.
    Mr. Tauzin. What is the average time right now?
    Mr. Bird. The average time for?
    Mr. Tauzin. To handle one of these reviews.
    Mrs. Cubin. To review a merger.
    Mr. Bird. Well it depends on the size of the merger. We 
have made a commitment to reach a conclusion in even the most 
complex mergers within 180 days of the time that it goes out 
for public notice.
    Mr. Tauzin. Barbara, if you would yield again, Mr. Sumpter, 
didn't you recommend 180 days in your statement?
    Mr. Sumpter. Yes, Mr. Chairman.
    Mr. Tauzin. And you are saying you can do it in 180 days, 
even the most complex?
    Mr. Bird. We have made the commitment to attempt to do the 
most complex ones within 180 days from the time that they go 
out on public notice. And we qualified that with only two 
qualifications.
    One is there are certain things that are within our control 
in terms of these merger applications, things that the 
Commission can do and should do within the time period that it 
sets for itself.
    There are other things that are not completely within our 
control that occur with some frequency in merger applications. 
One of those is if we do not get sufficient information from 
the applicants on one point or another.
    Mr. Tauzin. Barbara, if you would yield again----
    Mrs. Cubin. Sure.
    Mr. Tauzin. [continuing] One of the problems, we have got a 
bill moving that deals with that, and one of the problems we 
have found in examining this issue is that as long as that is a 
subjective question as to whether or not you have got enough 
information, that the time never tolls. You never start ringing 
it.
    The problem of setting any kind of time limit is defining 
when it starts. But if you can decide it never starts because 
you never go out on public notice because you keep asking for 
more information, the applicant doesn't know what you want when 
he first files, the legislation and time limits are 
meaningless.
    So I suppose what I would like to ask you, if you don't 
mind, Barbara, is the bill we have offered, the Barrett-
Pickering bill, basically says that the time starts the moment 
the applicant gives you all the information that you say up 
front you need in a merger application.
    And once you have that information, if he knows what it is 
and does not give it to you, that is a different matter, but if 
you tell him what is required at the get-go and he supplies it, 
the timing begins to run.
    Would you accept such a provision?
    Mr. Bird. This is for the more general--these questions 
frequently do not happen too much with the 2 percenters, but I 
think that would go a long way to addressing the concern we had 
that an applicant may come to us with an incomplete 
application.
    Mr. Tauzin. Yes.
    Mr. Bird. We think it is very important that applicants 
know exactly what is expected of them, and in the guidelines 
that we have put forth on our web page we suggest that the 
applicants get in touch with us before they file the 
application, and we have done this with a number of people, so 
they know what is required and we can get that together, and 
things move rapidly at that point.
    Mrs. Cubin. That has not been a problem that I have heard 
about, of knowing what to submit, but certainly we need to know 
when the clock starts ticking and when it should end.
    But just to follow up on this a little bit, Mr. Darby, I 
just have one more question after this one, but you discussed 
in your testimony the cost of uncertainty.
    Like my bill, H.R. 4019 that this subcommittee has already 
marked up, H.R. 3850 proposes deadline for merger reviews as we 
have said already.
    I have always believed that we need more certainty in that 
time. So could you tell us what are the costs to 2 percent 
carriers of merger review without deadline of any kind?
    What kind of not only inconveniences and delays in being 
able to offer more advanced services, but what are those direct 
costs to you?
    Mr. Darby. Sure. I would be happy to. Thank you.
    It is important to understand that mergers or acquisitions 
have a sound economic basis to the stockholders who are engaged 
in it. Otherwise, they would not be considering it.
    So what happens is, if there is a proposed merger the 
benefits of that merger are delayed. Okay? So in the first 
instance there is a cost of delay. But there is in a sense a 
discriminatory cost of delay because not all merger applicants, 
not all merger candidates, have to go through these kinds of 
processes.
    That is to say, there are alternatives for an unregulated 
company to merge with another, or acquire another unregulated 
company.
    So if I am looking as a potential acquirer of let's say 
resources that will give me access to a particular market and I 
look at a cable company, a wireless company, a satellite 
company, or another company that is not subject to these 
regulations, that is an incentive to me to avoid doing deals 
with these kinds of people.
    So there is a discriminatory piece to it, and there is also 
a delay piece to it. The Bureau's response is we need more 
time, and I sympathize with that. These are very difficult 
issues many of time. But I think what is missing from that is 
that this is--and this is a point in my testimony--this is not 
a free good. Okay?
    That taking more time while at the margin may create 
benefits for the regulatory process, it also brings about these 
kinds of costs.
    Mrs. Cubin. Thank you, Mr. Chairman.
    Mr. Tauzin. I thank the gentlelady.
    The Chair recognizes the gentlelady from California, Ms. 
Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman.
    I would like to direct my question to Mr. Mueller and to 
Mr. Cole, and then to Ms. Mattey from the FCC.
    You heard some of the questions that I raised in my opening 
statement, and let me direct myself toward this part of the 
bill.
    The bill would remove the separate subsidiary requirement 
for long distance and other non-regulated activities.
    Now we know that this requirement is intended to protect 
ratepayers and competitors from cross-subsidization. But at the 
same time, the bill removes the requirement for the companies 
to file what is known as the CAM, the Cost Allocation Manual, 
with the FCC.
    Now these filings are also intended to protect against 
cross-subsidization. I understand that requiring both of these 
protections could be considered overkill. I understand that 
one.
    But how do you justify eliminating both of them? And how 
can we be sure that ratepayers will be protected against the 
cross-subsidization if neither of these mechanisms are in 
place?
    Mr. Mueller. I will be happy to go first.
    Ms. Eshoo. Sure.
    Mr. Mueller. Thank you for the question. I appreciate the 
opportunity to respond.
    First of all, let me just give you some----
    Ms. Eshoo. Now do you really mean that?
    Mr. Mueller. Yes, I do.
    Ms. Eshoo. We always say things like that, and then. . .
    Mr. Mueller. Let me just give you an example that I think 
might help the committee understand the situation in 
Cincinnati.
    I am president of the Telephone Company. Some of the things 
that I do not have under my direct control are wireless, long 
distance, two subsidiaries that we have to have separate 
subsidiary requirements. And so they are separated 
subsidiaries.
    Because we have those separated subsidiaries, we have 
general managers for those businesses. We have additional 
costs. We have the costs of creating separate books and all of 
those kinds of things which are passed on to consumers and 
businesses in our market.
    There is really no need for that kind of separate 
subsidiary requirement when you have a company that is our 
size.
    Your second point was about well what if we take away these 
kinds of requirements and you do not have to file any cost 
allocation materials?
    The reason--let me put it this way. At the FCC we file a 
lot of cost material for our states. We break that cost 
material down between the States of Ohio and Kentucky.
    We provide that information to the FCC, and honestly we do 
not know whether or not that material is even used for any 
purpose other than filing what you saw.
    We also file similar materials----
    Ms. Eshoo. They can tell us that. But if you remove both--I 
mean I acknowledge that if you have both of them on it may be 
overkill, but how are we guaranteed?
    I mean how do we know?
    Mr. Mueller. We also file similar materials at the State 
level, and the states review our businesses on an ongoing 
basis. The Public Utilities Commission of Ohio, Public Service 
Commission of Kentucky, and there are, I would say, some 
onerous, some not onerous restrictions upon us in the states. 
And that is true across the country, and many states are 
different in terms of how they regulate the companies within 
those states.
    So I do not want anyone to get the impression that because 
this bill is passed in its current form that regulation goes 
away. That is clearly not the case at all.
    We clearly would still be a regulated organization, and all 
2 percent companies would be.
    Ms. Eshoo. But the bill lifts both. And so my question--I 
mean you are telling me what you do.
    Mr. Mueller. Um-hmm.
    Ms. Eshoo. But I am asking you, given that the bill says 
both are gone, how do we know that ratepayers are protected 
against the cross-subsidization?
    Mr. Mueller. Congresswoman Cubin also responded to that, I 
believe, by saying that the FCC still has the authority to ask 
at any particular point in time to any of the companies for 
this information.
    It just would take away the requirement that we provide 
this information on an annualized basis.
    Ms. Eshoo. But if they ask and you give the information, do 
they have the hands to do anything? Well maybe we can get Mr. 
Cole to answer, and then maybe the views of the FCC.
    I appreciate your response.
    Mr. Cole. I would like to talk a little bit, and I believe 
very much for me that the issues are on point. Ours is even a 
more complicated situation in that we have 20 states and the 
allocation process is extremely burdensome, but it is a very 
complicated process for us.
    But again I believe this legislation does not alter any of 
the cost allocation requirements that we as companies are 
required to follow as far as allocating our costs. So it does 
not change anything as to how we do business or how we allocate 
costs among regulated and non-regulated businesses, whether 
they be separate entities or not.
    It only says that we would not be able to--or would not be 
required to produce this annual CAM and ARMIS filings that are 
very extensive.
    We would still be required----
    Ms. Eshoo. Let me ask the question another way.
    Mr. Cole. I'm sorry.
    Ms. Eshoo. How is the ratepayer guaranteed that these 
protections that you are referring to by intent anyway will be 
honored?
    Mr. Cole. I think one, I believe from the FCC staff, one of 
their recommendations, which as far as filing just an annual 
statement that we are complying with cost allocations requires 
us to submit to the FCC that we are following these rules and 
adhere to those.
    The other is, there is also State regulatory review of 
those same allocation methods as they have questions. And 
again, if there are any questions from the FCC or other bodies 
for us to sit down and show how we are following those 
processes, we would be doing that at that time.
    This is really just saying it is doing away with the filing 
requirement, not that any of the rules of what we have to 
follow change as far as the ongoing business practices and how 
we account for costs.
    And I do believe that the requirement for an annual 
certification that we are following those rules would be a much 
less burdensome----
    Ms. Eshoo. I think I am running out of time, but I 
appreciate your answer.
    Mr. Chairman, can Ms. Mattey--I will not say anything 
else--can she respond?
    Mr. Tauzin. Of course. Absolutely. Ms. Mattey?
    Ms. Mattey. Well one thing, obviously I agree with the 
gentlemen that it would be important that it be clear that even 
though a carrier would not file a report detailing how it 
complies with the FCC's cost allocation rules, there should be 
no misunderstanding that there would still be an obligation to 
comply with those cost allocation rules. That is critical to 
make sure that ratepayers, that the consumers are not bearing 
the costs of competitive ventures or other ventures.
    So I think that is a very important thing that we need to 
keep in mind.
    Ms. Eshoo. With the permission of the Chair, how would the 
FCC know that they are complying, then? Is that enough for you?
    Ms. Mattey. Well----
    Ms. Eshoo. I mean somewhere, somehow, everyone is saying 
that with what they would still have to do, be required to do, 
so that there is a protection, so that the ratepayer is 
protected, my question still is after all of what you have 
said----
    Ms. Mattey. Well it certainly would be more difficult----
    Ms. Eshoo. [continuing] would they be----
    Ms. Mattey. [continuing] for us to figure out whether there 
is a need for any kind of enforcement action, because if you 
eliminated both the separate affiliate requirement and the cost 
allocation manual filing requirement simultaneously, it would 
leave us with a lot less information on which to make any kind 
of informed judgment.
    You know, these are things we would need to think through 
if this legislation proceeds, what the ramifications would be.
    Ms. Eshoo. Thank you, Mr. Chairman.
    Mr. Tauzin. I thank the gentlelady.
    The gentleman from Illinois is recognized, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Ms. Mattey, the many different issues we have addressed 
through this subcommittee, especially with the FCC, always has 
to do with the time of rendering some type of ruling. I know I 
have written--I think Senator McCain got in trouble during the 
campaign for writing letters asking for an expedited, or at 
least a timeframe by which filers would get a response.
    Mr. Tauzin. If the gentleman would yield, I remember when 
he got criticized for that. I invited the press to come check 
my files. I had probably a hundred times more letters than him. 
But go ahead.
    Mr. Shimkus. And I have not been here nearly as long, but I 
know I have a few myself. And the issue has never been--the 
issue I think in all those letters has never been to encourage 
the FCC or move the FCC in moving in a particular direction; it 
has always been with the intent of the FCC to make a decision.
    Because I think our panelists here understand that time is 
money, and that they are looking for in the terms of another 
hearing I had this morning, some legal certainty by which to 
make business decisions whether to expand into a market or 
whether to not.
    I think in my fourth year here that has just been a 
constant crescendo from this committee to the FCC. So in 
reference to this bill and its timeframe, that is the premise 
by which legislative language has been put in there. It is not 
just with the 2 percenters; it is with everything we deal with 
in addressing the FCC.
    So if we are going to--so I do not know how a bill would 
move out of this committee without some type of timeframe in 
there. So the question would be. If there is going to be a time 
line, or some definitive fish-or-cut-bait make a decision 
timeframe, what should that be?
    Ms. Mattey. Well I think that the time line really needs to 
depend on the circumstances. For instance, petitions for 
reconsideration in rulemaking proceedings, even though they may 
be filed by a small company, may raise broad policy issues that 
apply equally to the larger companies.
    And if you have a short timeframe that the Commission must 
act on that for the small companies----
    Mr. Shimkus. Can you define ``short'' and ``long''?
    Ms. Mattey. Well I will tell you I think in general 90 days 
for Commission action on petitions for reconsideration of 
rulemakings is too short, because rulemakings by definition 
have to be adopted by the full Commission.
    Mr. Shimkus. And what is too long?
    Ms. Mattey. Well again it depends on the circumstances. I 
agree with the gentleman from ALTS that something more on the 
order of 180 days would be a more reasonable timeframe, but 
again it depends on the circumstances because there is a 
difference between actions that we can do at the Bureau level 
and actions that can be done by the full Commission, and with 
the full Commission things just take longer.
    But also I just was trying to make the point that issues 
that may raise broader policy issues take longer because you 
have to think about the interrelationships of those issues and 
how they impact on other carriers.
    Mr. Shimkus. Thank you.
    My point in hearing the answer is, you can define a time 
that is too short but you cannot define a time that is too 
long. You can define a time, that 90 days if not enough time 
for us to do it, but you cannot give me a time that this is in 
excess of what we need to get it done.
    Ms. Mattey. Oh, I'm sorry. I misunderstood your question.
    Mr. Shimkus. No, but----
    Ms. Mattey. I thought you were asking what a reasonable 
time was. I'm sorry I misunderstood.
    Mr. Shimkus. Well in essence I was, and I did not get an 
answer.
    Ms. Mattey. I thought I said that I agreed with the 
gentleman from ALTS that 180 days----
    Mr. Shimkus. Okay, on the record 180 days would be----
    Ms. Mattey. I said that would be----
    Mr. Shimkus. Could I have Mr. Darby? Could you respond?
    Mr. Darby. Sure. Let me just talk about 180 days, and I 
certainly appreciate the concern from a regulatory point of 
view that you want to get the policy right.
    But getting the policy right to the extent it takes time 
might very well keep a lot of good things from happening in the 
private sector.
    As a former banker, if I were looking at a property I 
wanted to acquire and I knew I could prove synergies for my 
shareholders, and the shareholders of the companies, and it 
would create value and growth for the consumers going forward, 
the prospect of spending 180 days to get an uncertain review 
would certainly be a turnoff.
    I think that is what we are hearing. And again I am 
sympathetic to the notion that to get the policy right you need 
more time, but maybe you could do it with a little less time 
and take some chances with the policy and let some good things 
happen in the private sector.
    After all, this is not the same as the telephone sector was 
20 years ago. We hear a lot about Internet time and the pact at 
which these deals are made, and the pace at which these 
evaluations are made.
    A hundred and eighty days, with all due respect to your 
need to get it right, is just far too long.
    Mr. Shimkus. And I do have some 2 percenters in my 
District, and they really do an invaluable service. They have 
provided, and they are trying to reach out in other areas, but 
I know of Alaska Telephone has had a decision pending for over 
2 years, and it is still pending.
    Could you comment on that?
    Ms. Mattey. Well I am sorry I am not familiar with that and 
cannot respond without more details on that, but----
    Mr. Shimkus. Could you----
    Ms. Mattey. [continuing] I would just----
    Mr. Shimkus. Ma'am--Mr. Chairman, if I could ask for the 
FCC to give us a response on Alaska Telephone and why the----
    Mr. Tauzin. The gentleman is suggesting you do it in 
writing.
    Mr. Shimkus. In writing, so that we can get a further 
clarification.
    Ms. Mattey. I would be happy to provide something in 
writing if perhaps you could give us a little more detail. 
Alaska, involving what?
    Mr. Tauzin. How much time do you need? Do you need 180 
days?
    Ms. Mattey. No. But we would be happy to follow up on that.
    Mr. Shimkus. Thank you.
    Ms. Mattey. And also, just one thing I wanted just to 
clarify for everyone. In rulemaking proceedings we are subject 
to the Administrative Procedures Act requirements that we seek 
public comment.
    In those sorts of situations, we normally provide 30 days 
for comment, and at least a minimum of 15 days for parties to 
file reply comments. So in a normal situation that takes 45 
days just to get the record of what people think of what we are 
proposing to do.
    And then, you know, again if something is going before the 
full Commission, normally our Commissioners expect a minimum of 
a couple of weeks before they will vote on something. And so if 
that takes, you know, just for the sake of argument, 30 days, 
again those two things together take up 75 days.
    And then the remainder of the time obviously the Bureau is 
working on preparing a recommendation and revising that and 
responding to the parties.
    Mr. Shimkus. And I am not belaboring the point, it is just 
something that really has irked myself and I think many members 
of this committee for a long time.
    I do not think it is directed at an administrative--I just 
think it is directed at a bureaucracy, and hopefully we would 
be as vigilant should the Administrations change and there is 
Republicans in there, and if they are slow and will not commit 
to timely processing, I would probably say that this committee 
would be as vigilant on trying to get some legal certainty on 
time in response to some of these filings.
    And with that, Mr. Chairman, I yield back.
    Mr. Tauzin. I thank the gentleman.
    The Chair recognizes the gentleman from Tennessee, Mr. 
Gordon.
    Mr. Gordon. Thank you, Mr. Chairman.
    Let me just follow up quickly on that.
    Ms. Mattey, is there a relationship between adequate 
staffing, adequate funding, and timely response?
    Ms. Mattey. Yes, I think there is. And I can say, just 
based on my own experience in the Bureau, our staffing levels 
are not adequate to move things along in the timeframes that 
are contemplated by this bill.
    We have a number of matters that--I assure you I would 
dearly love to be able to complete them and finish them as 
quickly as we could, and we just do not----
    Mr. Gordon. For those folks that want things to move more 
promptly, if they would vote for additional funding do you 
think that might be one way to help this out?
    Ms. Mattey. That would be.
    Mr. Gordon. Okay. Now let me ask also another question.
    In your statement you said that H.R. 3850 could be 
interpreted to say that the FCC would not have the authority to 
regulate the 2 percent companies in slamming and truth-in-
billing.
    Would you be more specific about what section you are 
referring to?
    Ms. Mattey. Section 4 of the bill, which would add a new 
Section 281, requires the Commission to adopt less burdensome 
requirements for the 2 percent carriers.
    The bill also would allow the 2 percent carriers to seek a 
waiver of any regulations.
    And our concern about that would be that a 2-percent 
carrier would seek a waiver of the requirements that it comply 
with our truth-in-billing rules and our slamming rules. And as 
I read the bill, the Commission could not enforce those rules 
pending action on the waiver petition, and the legislation 
mandates that we adopt less burdensome requirements.
    Mr. Gordon. Just because they petition does not mean--I 
mean I think no one would suggest that you should relieve them 
of slamming and truth-in-billing. I mean they could petition 
for relief for anything, I assume.
    Ms. Mattey. Right. I was----
    Mr. Gordon. I mean even without this bill, they could still 
petition for that?
    Ms. Mattey. Of course. Of course.
    Mr. Gordon. So how are things different?
    Ms. Mattey. Well again I was just focusing on the language 
that says the Commission ``shall adopt less burdensome 
regulations''. So as I read that language, it does not allow 
the Commission to apply the same slamming rules and the same 
truth-in-billing rules to the 2 percent carriers.
    Mr. Gordon. So should we say ``reasonable''? Do you need 
report language? Would report language--I mean, I think that is 
very much of a stretch, but----
    Ms. Mattey. Well if I am misreading it, then I feel more 
comfortable.
    Mr. Gordon. If there was report language, or the authors 
were to say to you that is not what is supposed to be included 
within the less regulation, then that should clear up that 
matter?
    Ms. Mattey. Yes. That would be helpful I think.
    Mr. Gordon. Let me just I guess ask Mr. Mueller, do you 
read it that way? And what would be your response to the 
question of whether or not 2 percent companies should be 
relieved of slamming or truth-in-billing requirements?
    Mr. Mueller. First of all, thank you. I do not read it that 
way. And certainly that, as a president of a company, that 
would absolutely not be our intent.
    I am not interested in being reduced from the regulatory 
requirement surrounding slamming, nor truth-in-billing. Truth-
in-billing has some onerous requirements on us, but we are 
complying with those and plan to continue to do so, as well as 
continue to comply with the slamming requirements.
    Mr. Gordon. So I think we can find a consensus that that 
clearly was not the intent of the legislation and, if 
necessary, can have that more specifically, or in report 
language so that that should no longer be a concern of the FCC.
    Thank you.
    Mr. Tauzin. I thank the gentleman.
    The Chair would recognize himself. First of all, let me 
assure you, Ms. Mattey, that in my very humble opinion if the 
Commission were enforcing the 14-point checklist instead of 
1014-point checklist on 271s you might have enough staffing and 
money and time to do your other work. But that is a personal 
opinion.
    In regards to the issue before us, however, the law defines 
the 2 percent company, does it not?
    Ms. Mattey. In Section 251, or the draft legislation?
    Mr. Tauzin. The current law.
    Ms. Mattey. The current law, my understanding is 251 has a 
suspension from 251 requirements for companies 2 percent or 
less, yes.
    Mr. Tauzin. So the current law recognizes that there is 
something magical about a 2-percent thing. Does it say anything 
about companies that are really 2 percent? Or sort of 2 
percent? Or kind of 2 percent? Or does it address all the 
companies under 2 percent?
    Ms. Mattey. My understanding is the current law refers to 
all 2 percent companies.
    Mr. Tauzin. That's what I thought. I don't think it makes a 
distinction. But the Commission does. The Commission to its 
rulemaking, at least up to this date, has distinguished between 
some 2 percent companies and others.
    You testified today that certain numbers of 2 percent 
companies have to comply with some rules, and certain numbers 
do not. And certain numbers have to comply with other rules, 
and certain do not. But the law basically says that there is a 
class of companies called 2 percent companies that Congress 
obviously intended to be treated differently than the larger 
ILECs.
    Is that right?
    Ms. Mattey. Well the particular requirements that we have 
been discussing today were all adopted by the Commission prior 
to the passage of the law.
    I agree with you that 251 does create a category of 2 
percent carriers. It is not clear to me whether the law 
mandated that we go back and re-examine all of our existing 
regulatory framework to conform it to that particular----
    Mr. Tauzin. Well it----
    Ms. Mattey. [continuing] which relates specifically to 
local competition.
    Mr. Tauzin. If you follow Reid Hunt's argument that the 
1996 Act created the capacity of the Commission to create its 
own legislative intent, I assume that is true. But there is a 
clear legislative intent in defining a 2-percent company as 
something that is deserving of less regulatory burdens than 
companies that obviously have a larger share of the marketplace 
and therefore should be regulated more deeply as monopolies.
    I mean isn't that obvious?
    Ms. Mattey. I agree with you.
    Mr. Tauzin. That is why you are moving in that direction 
now, and that is why I think you have consented to some of the 
changes Mrs. Cubin is recommending in her legislation. I am 
glad to see that.
    I just wanted to make the point that I think we are a slow 
getting there, but I think we need to get there as rapidly as 
we can.
    Isn't the real reason why the Commission is considering 
doing that, and the reason for the Cubin bill, illustrated in 
those charts that Mr. Mueller held up earlier, the arrival of 
incredible and significant competition to the 2 percent 
companies?
    Ms. Mattey. I am afraid I don't understand the question. 
Could you please----
    Mr. Tauzin. Let me try again.
    Isn't the whole notion of the ``d'' word, deregulation, 
less filing requirements? Less regulatory costs being imposed 
upon the 2 percent companies? Either your decision to change 
your rules in regards to what is required to be filed, or Mrs. 
Cubin's bill, either one? Isn't the genesis of that notion 
really in the fact that the 2 percent companies are, No. 1, 
small, smaller than the large companies by definition? And, No. 
2, they are being subjected to much greater competition in 
their local markets than they ever were before?
    Ms. Mattey. I agree with you that as competition is 
unfolding in particular markets that the Commission should be 
thinking about, and the Bureau is thinking about, ways to 
deregulate.
    Mr. Tauzin. Yes. And see, here is the big problem I think. 
We are not only going to be faced with 2 percent companies, but 
eventually with the whole telephone industry. The big problem 
is that competitors arriving who don't have all of these 
regulatory burdens--and the 1996 Act anticipated that; it 
really begged for that. It asked the cable companies to 
consider getting into telephones, and it helped create CLECs, 
and it helped really establish the capacity of companies that 
were not normally engaged in voice communication to get into 
it, just as it told the telephone companies it is okay for you 
to get into other things like video and data and whatever you 
want to get into.
    As companies do that, we still have bureaus that regulate 
these companies as though they were only doing what they used 
to do. And if you fit in that category, you are fitting into 
this heavy shelf regulation.
    If you don't, you can be delivering the same services to 
the same customers in the same market now, but if you come in 
by virtue of having been another company you're not subject to 
those.
    I think Mr. Darby put his finger on it. As we transition 
into that world, what an enormous disadvantage these 2 percent 
companies are going to be in.
    Because, No. 1, this is a costly process for them to have 
to go through.
    No. 2, as Mr. Darby points out, it creates a prejudicial 
economic situation for them.
    And No. 3, it really damages them in terms of their ability 
to sustain themselves in a merged market, merged functional 
communications delivery system and marketplace.
    I guess what I am saying in a nutshell is, don't you agree 
with us that we have got a lot of work to do, both the 
Commission and those of us in Congress who try to write 
definitions for 2 percent companies and give them meaning, to 
literally find the right formula over the right amount of time 
as competition is evident in the marketplace, to really create 
some more level playing field for all of the players?
    And don't we really have to think about the whole 
regulatory structure at the FCC which was designed for a world 
where everybody was doing something functionally different and 
now they are all doing the same thing?
    We are getting down to that. You needn't respond. I'm 
asking rhetorical questions.
    But I think----
    Ms. Mattey. This is my first time here. I have to learn 
what to do.
    Mr. Tauzin. Unfortunately it's not my first time here. We 
have been through this a lot over the years. But I really think 
we are at a period of time when we are going to have to think 
out of the box on this because the marketplace is changing so 
rapidly.
    The gentlelady from California asked you a question, and 
asked all of you a question, how do we know these companies 
will comply with cost allocation?
    Well No. 1, if they certify they are and they aren't, you 
can always check them. You can audit them just like the IRS 
can. If they're not, you can rap them pretty good. And you have 
a habit of doing that when companies are out of compliance with 
you, and you should.
    No. 2, there is a marketplace out there. If Mr. Mueller's 
companies starts subsidizing his other operations and raises 
the price dramatically on his services, I suspect that 
marketplace is going to react.
    I mean the only reason we are here talking about 
deregulating 2 percent companies is because that marketplace is 
emerging. It is a competitive, vibrant marketplace in which he 
not only faces local competitors but now the big ILECs are 
coming in and challenging him.
    And they are still going to be subject to all your 
regulations and your rules. And if he raises his prices in 
order to subsidize his other activities, I don't have any doubt 
what his customers are going to do. I know what they do in my 
home town. They go find another store.
    That is the beauty of what we are getting into. We are 
getting into the place and time when there are going to be a 
lot of stores in town. And when there are a lot of stores in 
town, there is less to do for you and I, because we don't have 
to regulate prices and terms and conditions and cost 
allocations and interconnections and all the things that we 
have to do today in order to somehow transition from a monopoly 
marketplace to that vibrant, merged, consolidated and diverse 
and at the same time incredibly mixed multimedia communications 
marketplaces we are seeing developed.
    So I guess what I am trying to say is that I think you are 
making some steps in exactly the right direction. I wish they 
would come sooner. And frankly I think we need to put some time 
limits and some definitions of when the time limit starts on 
these things.
    I am never more frustrated with the FCC than when someone 
in this country of ours comes to me and tells me I can't get an 
answer. I'm just hanging out there. I'm hanging out there.
    And, by the way, while I'm hanging out there, people show 
up and tell me if I hire them they can unstick me; they can get 
me processed. And sometimes it's not lawyers asking to be 
hired, it's just people who claim they have influence with you. 
I'm not saying they do. I'm not saying they don't. I hope they 
don't. But when you hang people out there, you create all the 
uncertainties.
    You create all the problems. You create the financing 
problems. And you create all this vulnerability for these 
people. I think it is in our interest, all of our interests, 
for the integrity of the Commission and the integrity of the 
process for us to have time limits that are real; that start at 
a given time and end at a given time; and if you have got a 
reason to disapprove somebody, you say so.
    And then no one can come to me and complain that I got hung 
out to dry and I got subject to all of this other stuff that 
sometimes happens that I know none of you, none of us, would 
approve of.
    So it is a real passion with a lot of us here on this panel 
to try to do something about that, and we are asking your help 
in thinking it through and finding a way.
    The transitions are always tough. Transitions to monopolies 
to competitive marketplace are always tough. And we are going 
to make some mistakes as well as you are going to make some 
mistakes along the way.
    So we need some failsafe mechanisms. But we need to plod 
ahead. As Mr. Darby said, we've got to quit thinking in the 
1930's. Competition is here. When competition comes, and when 
it comes evidently, and when it comes in buckets, we need to be 
quick enough and smart enough to deregulate and then stand back 
and let the beauty of the marketplace work always with the 
capacity to step in if somebody gets too big and plays 
unfairly.
    That is my soapbox.
    Let me ask my friend from Tennessee if he has any closing 
remarks.
    Mr. Gordon. Just quickly. Again I want to thank the panel 
for being here today. I think we better understand this issue 
because of your testimony.
    Ms. Mattey, I want to also thank you and the FCC for moving 
forward on these issues. We hope that you will continue to do 
that.
    Clearly, as the chairman related, frustration is limbo. 
Normally when you contact an agency or someone, it is a very 
important issue to you. You know, you've got lots on your 
table, but it is something very important to them and they are 
thinking about it every day.
    So every day that they don't hear something about it, it is 
a problem. I have had the same experiences just trying to get 
information from the committee.
    I do think that a lot of it is not adequate funding, and I 
think that it is not really responsible of us on the one hand 
to give you a lot more responsibility, ask for a lot more, but 
then try to cut your funds in retaliation.
    You know, you have got to do a better job of showing us how 
the funds can get results. Because I think things do need to 
move promptly.
    Also just let me thank you for your testimony today. You 
said this was your first time. Part of the problems the FCC has 
here is many of the surrogates that come simply haven't been 
prepared and haven't done a good job.
    I have come here oftentimes--not oftentimes, but on 
occasions willing to support the FCC and their own folks can't 
explain it. Hopefully you are a model of what we will see in 
the future.
    So thank you.
    Mr. Tauzin. That was pretty sweet of you.
    Let me echo that. I really appreciate you coming. It's the 
first time for testimony from Ms. Mattey. Thank you for your 
contribution. You have been very forthcoming.
    And, frankly, I think you and Mrs. Cubin made some real 
progress here today in terms of helping us fashion a bill that 
will work and one that will meet your concerns. I hope we get 
closer as we go along, and I thank you for that.
    Ms. Mattey. You're welcome.
    Mr. Tauzin. I thank your counsel for assisting you, as 
well.
    And I want to thank the other members of the panel. You 
have added to our understanding of these issues.
    What I would suggest is we keep the record open for 30 
days. We generally do that. Let me ask if you can, in the next 
10 days, respond to Mr. Shimkus's questions about the status of 
the filing----
    Ms. Mattey. Can the 10 days start when he tells me which 
matter he's talking about?
    Mr. Tauzin. I think you can gather that information rather 
quickly and just let him know what the status of that filing is 
and why it is being held, if it is over a year, why and what's 
going on there.
    The last thing I always request of our witnesses, if you 
have any additional information, or if you want to comment 
about something you have heard today that you disagree with, or 
if you think we have said something you disagree with and you 
want to add some testimony in the record, a good time to do it 
is over the next 30 days. You are welcome to do that.
    Let me finally say that I think we are going to make an 
effort, a really big effort, next year to do more than just 
process reform. We are going to talk about structural reforms 
at the FCC as well to see if we can't create structures, as 
well as processes, that work better in these transitional 
marketplaces and eventually will work better in a much more 
deregulated open marketplace.
    And if we do that, if we do it properly, I think we are 
going to solve a lot of the resource and the time problem of 
the FCC. I frankly think you are spending a lot of time doing 
things that were probably required of you a long time ago that 
are not really required any more. And if you weren't doing 
those, there could be time to do the things that are more 
critical as we try to objectively and professionally think our 
way through this period of transition.
    I would like to help put you in that position where you 
have the time and resources to really do it right. And so we 
will focus on that. And if you have any thoughts from your 
Bureau as to what we might do to make it a more efficient 
operation where you're not having to do things you shouldn't 
have to spend your time doing, please let me know.
    I have often been very critical of the FCC as the ranking 
minority member Mr. Dingell has been. It is not a personal 
thing. I hope you understand that. Not at all. The folks I know 
and work with at the FCC all tend to be extraordinary people 
who work very hard for this government and for our country.
    We differ on a lot of the policies, and that ought to be 
the way it is. That's the way we get it right sooner or later.
    So thank you for that, and thank you for understanding 
that. And thank you all for your testimony today. The hearing 
stands adjourned.
    [Whereupon, at 3:25 p.m., the subcommittee was adjourned, 
subject to the call of the Chair.]
    [Additional material submitted for the record follows:]

        Independent Telephone & Telecommunications Alliance
                                                    August 24, 2000
The Honorable Anna G. Eshoo
United States House of Representatives
205 Cannon House Office Building
Washington, D.C. 20515

Re: H.R..3850: The Independent Telecommunications Consumer Enhancement 
Act of 2000

    Dear Rep. Eshoo: ITTA and its member companies appreciate your 
interest in the issues raised by H.R. 3850, the Independent 
Telecommunications Consumer Enhancement Act of 2000, during the hearing 
held by the Subcommittee on Telecommunications, Trade, and Consumer 
Protection on July 20, 2000.
    During the hearing you asked about the impact of granting two 
percent companies relief from CAM (Cost Allocation Manual) and ARMIS 
(Automated Reporting Management Information System) filing requirements 
and separate affiliate requirements. Specifically, you inquired as to 
whether the bill's elimination of CAM and ARMIS reporting burdens, in 
addition to its elimination of separate affiliate requirements, would 
diminish current levels of consumer protection against possible cost 
misallocation by two percent carriers.
    There are several reasons why the passage of H.R. 3850 would not 
expose consumers to any increased risk of cost misallocation or 
improper cross-subsidization:
1. Passage of H.R. 3850 would not alter existing Commission 
        prohibitions against cost misallocation or cross-subsidization.
    Cost misallocations of this type are currently prohibited--and will 
continue to be prohibited were H.R. 3850 enacted into law--both by 
existing federal statute and Commission rules. Such misallocations 
would result in cross-subsidization of competitive services by 
regulated, local exchange services, a practice specifically forbidden 
under section 254(k) of the Communications Act of 1934, as amended. In 
addition, the Commission currently has strict and detailed cost 
allocation rules that govern the allocation of costs between local 
exchange and other services. These regulations, contained in Part 64 of 
the Commission's rules, 47 C.F.R. Part 64, will be left unchanged by 
the passage of H.R. 3850 and will continue to apply to two percent 
companies as well as larger companies.
    Section 64.901 of the Commission's rules, 47 C.F.R. Sec. 64.901, 
currently requires carriers to allocate costs between local exchange 
and other activities according to principles of cost causation that are 
both favorable to local exchange ratepayers and strictly enforced by 
the Commission. Among other requirements, Section 64.901 requires local 
exchange carriers: (1) to charge tariffed rates for services provided 
to a nonregulated activity, and credit the appropriate regulated 
revenue accounts for the tariffed value of the services provided; (2) 
directly assign costs to either regulated or unregulated accounts 
whenever possible; (3) allocate outside plant and central office 
equipment investments to regulated and nonregulated activities based on 
relative usage during the year among the preceding three years when 
nonregulated usage,was greatest; and (4) allocate common costs 
according to detailed principles.
    These detailed statutory and administrative requirements would 
remain unchanged by H.R. 3850. Two percent companies would still have 
to track and allocate their costs according to the rules. The 
Commission would still have full access to this information whenever 
and however it desired to enforce its rules. H.R. 3850 would only 
eliminate costly and unnecessary annualized reporting requirements that 
consume resources that two percent carriers could be using to deploy 
new services to their customers and launch out-of-region competitive 
ventures. H.R. 3850 would shift the current regime of cumbersome 
prophylactic regulation to an enforcement approach, consistent with the 
FCC's own plan to reinvent itself for the 21st' century.
2. Passage of H.R. 3850 would not alter the Commission's existing 
        enforcement powers against cost misallocation and cross-
        subsidization.
    Nor does the bill reduce in any way existing federal and state 
authority to police and enforce the legal prohibitions against cross-
subsidization. Federal officials will continue to have ample authority 
to investigate suspected wrongdoing. Section 218 of the Communications 
Act, as amended, 47 U.S.C. Sec. 218, gives the Commission sweeping 
authority to require from carriers ``full and complete information'' 
that it deems necessary to carry out its mission. This provision, and 
its grant of such broad investigative power, would remain unchanged 
after the enactment of H.R. 3850. The Commission would still be free to 
investigate any carrier and to require the carrier to provide any and 
all necessary information, including information identical to that 
required by the current ARMIS and CAM requirements.
    Moreover, federal enforcement in this field is not exclusive: Both 
the Communications Act and Part 36 of the Commission's rules provide 
for concurrent authority at the state level to enforce these cost 
allocation rules--authority that also would not be affected by granting 
the relief H.R. 3850 proposes in these areas.
3. Both the Commission and Congress have recognized that imposing CAM/
        ARMIS and separate affiliate requirements on two percent 
        carriers is not essential to ensuring consumer protection.
    The Commission itself has largely not relied on CAM/ARMIS and 
separate affiliate requirements to regulate two percent carriers. For 
example, until relatively recently, the Commission only required large 
carriers to structurally separate their service offerings. The 
Commission only extended these requirements to two percent companies in 
two orders released in 1997 as part of an effort to formulate a ``one-
size-fits-all'' policy. No examples of abuse by two percent companies 
were cited either in the Commission's orders or its underlying records.
    When Congress addressed the issue of structural separation 
requirements in the Telecommunications Act of 1996, it saw no 
compelling need for imposing these requirements on two percent 
carriers. Congress effectively drew a size-based distinction similar to 
that being proposed in H.R. 3850. Section 272 of the Act requires 
structural separation for interLATA and certain other activities of 
Bell Operating Companies but neither Section 272 nor any other portion 
of the 1996 Act imposes such obligations on smaller carriers. Moreover, 
Section 272 contains a provision that sunsets the requirement three 
years after a BOC first begins providing enters into long distance 
service (Section 272(f)(1)). Ironically, no such mandatory sunset 
exists in the Commission's rules as applied to two percent carriers.
    Likewise, the Commission appears to treat two percent companies' 
CAM and ARMIS reports as non-essential regulatory tools. The majority 
of two-percent companies are not currently covered by the requirement 
to file CAM and ARMIS reports and there is no indication that any of 
these carriers engage in questionable behavior that would be detected 
through CAM and ARMIS reporting. Conversely, the Commission has rarely 
made any significant use of the CAM and ARMIS information it does 
collect on two percent companies.
    In conclusion, H.R. 3850's proposed elimination of CAM and ARMIS 
reporting requirements, and separate affiliate requirements for two 
percent companies would not change the Commission's substantive 
prohibitions against cost misallocation, nor would it alter state and 
federal officials' authority to enforce those rules. Instead, it would 
allow regulators to move away from burdensome regulatory requirements 
and allow them the discretion to target their enforcement efforts 
whenever and however they chose. Ultimately, this would benefit 
consumers by allowing companies to redirect their resources to network 
investments and new competitive initiatives.
    Thank you again for your interest in the issues raised by H.R. 
3850. I hope the foregoing is responsive to the concerns you raised at 
the subcommittee's hearing. Please contact me if you have further 
questions or if you wish to discuss this letter in greater detail.
            Very truly yours,
                                           David W. Zesiger
                                                 Executive Director
cc: The Honorable Tom Bliley
   The Honorable John D. Dingell
   The Honorable W. J. (``Billy'') Tauzin
   The Honorable Edward J. Markey
   The Honorable Barbara Cubin
   The Honorable Bart Gordon
   The Honorable Charles (``Chip'') Pickering
   The Honorable Tom Barrett
                                 ______
                                 
                          Federal Communications Commission
                                                 September 14, 2000
The Honorable John M. Shimkus
U.S. House of Representatives
513 Cannon House Office Building
Washington, D.C. 20515
    Dear Congressman Shimkus: During the July 20, 2000 hearing on the 
Independent Telecommunications Consumer Enhancement Act of 2000, a 
question was raised concerning why the Commission had not addressed a 
1998 waiver request from the Anchorage Telephone Utility (ATU) for 
pricing flexibility in the Anchorage market. In that petition, ATU 
requests a waiver of two sections of the Commission's rules to permit 
it to offer volume and term discounts for the local switching and 
transport interconnection charge. The appropriate degree of competitive 
response in the form of additional pricing flexibility is a complex and 
significant issue for the development of competition in the exchange 
and exchange access market. When ATU filed its petition, the Commission 
was considering broad pricing flexibility issues for price cap 
incumbent local exchange carriers (LECs), and no incumbent LEC was 
authorized to offer volume and term discounts on services for which ATU 
sought a waiver.
    In August 1999, the Commission adopted rules setting pricing 
flexibility guidelines for price cap LECs that included volume and term 
discounts for local switching services upon a showing of a specified 
degree of competition in a given metropolitan statistical area. The 
Commission has not addressed volume and term discounts in connection 
with the transport interconnection charge.
    In addition to the pricing flexibility proceeding, the Commission 
has addressed other major access pricing issues. Most significantly, 
the Commission adopted with minor changes a proposal from the Coalition 
for Affordable Local and Long-distance Service that involved a major 
restructuring of the access charges assessed by incumbent price cap 
LECs. This was a lengthy, complex, and resource intensive proceeding. 
The order adopting the revised rules was released on May 31, 2000.
    In February 2000, ATU filed additional data showing the development 
of increased competition in the Anchorage market that addressed the 
competitive market conditions market in light of the requirements 
established for price cap LECs. The Commission staff has been analyzing 
the record in light of this updated data, and I anticipate that the 
Common Carrier Bureau will make a recommendation to the Commission on 
ATU's waiver request by the end of this fiscal year.
            Sincerely,
                                            Carol E. Mattey
                                Deputy Chief, Common Carrier Bureau
cc: The Honorable W.J. ``Billy'' Tauzin
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