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[Senate Hearing 106-1139]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 106-1139
 
       S. 2902, BROADBAND INTERNET REGULATORY RELIEF ACT OF 2000
=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 26, 2000

                               __________

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

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_____________________________________________________________________________
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                  Mark Buse, Republican Staff Director
               Ann Choiniere, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 26, 2000....................................     1
Statement of Senator Breaux......................................    43
Statement of Senator Brownback...................................     1
Statement of Senator Dorgan......................................    42
Statement of Senator Gorton......................................    40
Statement of Senator Rockefeller.................................    39

                               Witnesses

Ashdown, Sue, Co-owner, XMission, and Executive Director, 
  American Internet Service Providers Association................    50
    Prepared statement...........................................    53
Bryan, John Shelby, Chairman and Chief Executive Officer, ICG 
  Communications, Inc............................................     7
    Prepared statement...........................................     9
Duesterberg, Thomas J., Ph.D., President and Chief Executive 
  Officer, Manufacturers Alliance/MAPI Inc.......................    54
    Prepared statement...........................................    57
Ellis, James D., Senior Executive Vice President and General 
  Counsel, SBC Telecommunications, Inc...........................    16
    Prepared statement...........................................    18
Glassman, James K., Resident Fellow, American Enterprise 
  Institute, and Host, Techcentralstation.com....................    60
     Prepared statement..........................................    68
Haynes, Arne L., President and Chief Executive Officer, The 
  Rainier Group..................................................    21
     Prepared statement..........................................    23
Kennard, William E., Chairman, Federal Communications Commission, 
  prepared statement.............................................     2
Pitsch, Peter, Communications Policy Director, Intel Corporation, 
  on behalf of the Information Technology Industry Council (ITI).    70
    Prepared statement...........................................    72
Strumingher, Eric, Managing Director, Paine Webber Incorporated..    74
    Prepared statement...........................................    76
Taylor, Robert, President and Chief Executive Officer, Focal 
  Communications, and Chairman, Association for Local 
  Telecommunications Services....................................    24
    Prepared statement...........................................    27

       S. 2902, BROADBAND INTERNET REGULATORY RELIEF ACT OF 2000

                              ----------                              

                        WEDNESDAY, JULY 26, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:37 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Sam Brownback, 
presiding.

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

    Senator Brownback. The Committee will come to order.
    The Committee today will hear testimony on S. 2902, the 
Broadband Internet Regulatory Relief Act of 2000. The 
legislation would eliminate unnecessary regulations that 
currently inhibit the deployment of broadband services in rural 
and other areas. I welcome all of you to the hearing. I look 
forward to the testimony.
    Broadband services have the potential to dramatically 
change the way we communicate, learn, obtain medical treatment, 
shop, and entertain ourselves. As much change as the Internet 
itself has wrought in our society, having high-speed access to 
the Web increases the types of applications that can be 
provided over the Internet.
    But before they can be realized, we need to ensure that all 
Americans, whether they live in urban or rural areas, whether 
they live in flat or mountainous areas, or whether they live on 
the coast or on the Great Plains, have access to broadband 
services. That is what the hearing is about.
    The problem is that, while broadband services are being 
deployed at an increasingly rapid pace, they are not being 
deployed in rural and other high-cost, low-profit areas. A 
recent study conducted by NTIA and the RUS found that: 
``Deployment in urban and rural areas is not proceeding at a 
comparable pace. The major cable and DSL providers are both 
concentrating on serving metropolitan urban areas with high 
population densities. Residents in rural areas will generally 
be the last to receive the service.''
    In addition, a recent Sanford Bernstein-McKenzie study 
found that: ``Many of the cable upgrades to date appear to be 
targeted at the most attractive neighborhoods, i.e., high 
density and high household incomes.''
    According to one survey, more than 73 percent of cities 
with populations of 500,000 to 1 million have cable modem and/
or DSL service, but less than 5 percent--less than 5 percent--
of towns of 5,000 to 10,000 have cable modem service, and less 
than 2 percent of such towns have DSL service. All the cities 
surveyed that had populations greater than one million had both 
cable modem and DSL service, while less than \2/10\ of 1 
percent of towns of less than 1,000 people had either cable 
modem or DSL service.
    The NTIA-RUS study found a plausible explanation for this 
disparity: ``The costs of high speed cable data deployment and 
operation in rural areas are high and, because the subscriber 
base in rural areas is more dispersed than in more densely 
populated areas, there is less economic incentive to connect 
rural areas.''
    Some members of the competitive community argue that 
competition will drive broadband deployment into rural areas. 
That is simply not the case. As the NTIA-RUS study found: 
``There is little evidence to date that competition among wire-
based and terrestrial wireless-based systems has promoted near-
term deployment of advanced services in rural areas outside of 
towns.''
    In addition, the Sanford study previously mentioned found 
that: ``Wireless will not be a factor in the residential 
broadband market until at least 2002.'' The Bernstein-McKenzie 
report further stated that fixed wireless ``will primarily 
address residential customers and markets in areas where 
advantageous climates and topographies permit filling in holes 
that cable and DSL find less economical to serve.''
    Competition will therefore not drive broadband deployment 
in rural areas. The economics of broadband deployment in rural 
areas simply do not facilitate the type of competition that we 
currently are witnessing in urban and densely populated 
suburban areas. As a result, Congress needs to provide an 
incentive to companies to deploy broadband services in rural 
areas.
    Different people have looked at this and said there are 
different ways we could go. Some Senators have proposed 
subsidies to facilitate deployment. Others have proposed tax 
incentives. But before we explore either of these avenues, 
Congress needs to take a look at how we regulate companies when 
they provide broadband services. By eliminating unnecessary 
regulations, we can provide the proper incentives for companies 
to make broadband as ubiquitous as the telephone.
    As even FCC Chairman Bill Kennard has acknowledged, 
broadband is a nascent market, in which no company or 
particular technology is dominant.
    [The prepared statement of Chairman Kennard follows:]

      Prepared Statement of William E. Kennard, Chairman, Federal 
                       Communications Commission
    Thank you Mr. Chairman and Members of the Committee. I appreciate 
the opportunity to submit written testimony to the Committee this 
morning.
    I would like to state at the outset that I agree wholeheartedly 
with the objective of speeding deployment of broadband services to all 
Americans, regardless of where they live. Nobody should be left behind 
in the broadband revolution.
    Despite the old saying, however, sometimes you do have to look a 
gift horse in the mouth, particularly if it is a Trojan Horse. I am 
afraid that is what this legislation is. It appears to be a gift horse 
to competition, but it is really just the opposite. It would slow down 
the delivery of broadband services to rural areas by impeding the 
growth of competition.
    The genius of the Telecommunications Act of 1996 (1996 Act) is the 
delicate balance it strikes between regulation and deregulation to 
achieve competition in all forms of communications, and to deploy the 
fruits of that competition to all of the American people. The process 
has worked well, and consumers are better off as a result.
    I am sure that increased competition is the well-meant intention of 
the proposed legislation. Inadvertently, however, I believe this 
legislation will not only upset the balance struck by the 1996 Act, it 
actually would reverse the progress attained by the 1996 Act. In an 
effort to move us forward, this bill mistakenly moves us backward.
The 1996 Act Is A Model For the World
    Recently, the European Commission (EC) issued a bold package of 
proposed legislation and directives aimed at bringing the Internet 
revolution to Europe. It is no coincidence that the EC's initiative 
looks like a close cousin of our Telecommunications Act of 1996. The 
European Commissioners have concluded that in order to chart a course 
towards American-style Internet growth they must build a vessel not 
unlike the 1996 Act. This course includes such staple items included in 
our Act as local loop unbundling and collocation.
    We are setting the example for the rest of the world. Changing 
course midstream by diminishing the incumbent carriers' obligations to 
open the local markets to competition would not only be detrimental to 
American consumers, but would also put at risk the leadership role the 
United States has played in the global telecommunications market.
A Fabric
    The 1996 Act is a fabric, with the thread of each part connected to 
every other part. Unravel one thread, and you risk unraveling the 
entire fabric.
    As I tell regulators from other nations, you cannot cherry-pick the 
1996 Act. In this age of convergence, no network is an island, and the 
conduit and content of each is entwined with every other.
    My message to you today is simple: the Telecommunications Act of 
1996 is working. Because of years of litigation, competition did not 
take hold as quickly as some had hoped. The fact, however, that it is 
now working is undeniable. Local markets are being opened, broadband 
services are being deployed, and competition, including broadband 
competition, is taking root.
    Now that implementation is fully underway it would be tragic to 
change directions. That is my concern with the bill before you. It 
proposes to exempt an incumbent local exchange carrier (ILEC) from the 
Section 251(c) unbundling and resale requirements, with respect to 
advanced services, if 80 percent of the local loops in a given service 
area are ``DSL-capable'' within 3 years or 100 percent are ``DSL-
capable'' within 5 years. But, without unbundling and resale, 
competitors seeking to provide broadband services would be frozen out 
and rural consumers would soon be forced to pay higher rates. This is 
not a step I can endorse.
    I would also note that the issues surrounding inter-carrier 
compensation for ISP-bound traffic are before the Commission in a 
formal rulemaking proceeding. We have compiled a record, the analysis 
is currently under way, and we expect to resolve the issues 
expeditiously. Therefore, I respectfully request that the issue of 
reciprocal compensation continue to reside, in the first instance, with 
the Commission. I will keep you apprised of our progress in this 
proceeding.
Rapid Growth of Broadband Deployment
    As local markets are opened, broadband deployment is both 
stimulated and accelerated. Specifically, it is the opening of those 
local markets that is driving broadband deployment and innovation. This 
is true because nondiscriminatory access to the ``last mile'' and the 
ability to collocate--both components of the competitive checklist--are 
critical inputs for the provision of DSL service.
    The Commission's faithful implementation of the Act has resulted in 
an explosion of broadband deployment. As of the beginning of the year 
2000, we estimate there were 2.8 million actual subscribers to 
broadband, high-speed telecommunications services at speeds of at least 
200 kbps in one direction. About 2 million of those lines were serving 
residential subscribers.
    The DSL business is growing so fast that the BOCs are struggling to 
keep up with demand. The Wall Street Journal reported that SBC is 
installing about 3,500 DSL lines each day. At the end of the first 
quarter of 2000 there were approximately 800,000 DSL lines in service 
in the United States. About 75 percent of those lines are provided by 
incumbent LECs and 25 percent by competitive carriers.
    These trends show no sign of slowing down. Analysts project that 
deployment of DSL will increase by 300 to 500 percent over the next 
year. Analysts also estimate that subscribership to cable broadband 
services will at least double by the end of this year, and by the end 
of 2005 could reach as many as 20 million subscribers. LECs and cable 
operators are predicted to invest over 25 billion dollars in 
infrastructure improvements over the next four years to bring broadband 
services to their customers.
    The market-opening 1996 Act sparked infrastructure investment in 
telecommunications facilities by incumbent LECs as well as competing 
carriers. For example:

   Incumbent LEC investment in infrastructure was flat or 
        declining until the passage of the 1996 Act;

   After the 1996 Act, incumbent LEC investment jumped 
        approximately 20 percent;

   Aggregate industry investment subsequent to passage of the 
        Act, including both incumbent LECs and competing carriers, 
        nearly doubled, increasing from 30 billion dollars to 60 
        billion dollars.

    These statistics do not paint a picture of incumbent companies 
deterred by legal requirements from deploying new services to 
consumers.
    The vision of the Act and the vision shared by the FCC--that 
consumers will have a choice of providers offering a choice of pipes 
into the home or workplace--is being realized. It is being realized 
through the opening of markets required by Congress in the 1996 Act. 
The rapid growth of broadband services is tangible proof that the 
market-opening requirements of the Act are working.
Competition Drives Broadband Delivery to All Areas
    The opening of local markets drives competition, innovation, and 
produces a breadth of offerings. Although DSL technology has been 
available for years, it was not until the passage of the Act that 
competitive providers--called data LECs or DLECs--specializing in DSL 
deployment were born and began offering DSL service to consumers. 
Competitors need to collocate their equipment in BOC central offices 
and require conditioned local loops before they can even offer 
facilities-based DSL services. Then, to be competitive, DLECs require 
timely and cost-based loops and collocation. Once the DLECs had access 
to the inputs necessary to offer their DSL products to consumers, the 
threat of such competition spurred the BOCs to develop their own DSL 
products. Competition from the incumbent monopolies, in turn, is 
spurring the DLECs to develop even more new and innovative broadband 
products, services, packages, and prices. It is precisely this sort of 
competitive cycle that will accelerate the availability of broadband 
technology for all Americans.
    Of course, competition among technologies as well as providers is 
also driving this investment. Wireless technologies--both terrestrial 
and satellite--are also on the scene. High-speed Internet service via 
satellite is available today virtually everywhere in the United States, 
including rural areas. Analysts project that wireless technologies will 
have 6 to 12 percent of the broadband market by 2004. Analysts also 
project that DSL will overtake cable as the overall leading technology 
for delivery of broadband services as early as 2002, with cable 
retaining its dominance amongst residential and small business 
customers until 2004, when cable and DSL will have equal market shares.
    For the first time in history consumers are able to choose their 
local service provider and take advantage of increased competition for 
their long distance calls as a strong new competitor enters the market. 
The rewards do not end there. Competitive markets are also bringing 
consumers new choices in technology for the 21st Century.
    Changing the rules of the game at this juncture would also undercut 
the substantial infrastructure investment being made by competitive 
telecommunications providers. For example, competing carriers have 
invested 30 billion dollars in new networks since the passage of the 
Act and are now investing over 1 billion dollars every month in their 
networks. In 1999, competing carriers are estimated to have spent over 
15 billion dollars on overall capital expenditures, up from about 9 
billion the year before. Investors will cut off the spigot when 
competitors are forced to try to compete with monopoly incumbent 
providers without full and fair access to the BOC's bottleneck 
facilities.
    The simple reason why rural customers, and other customers in un-
served and under-served areas, are not yet being served as robustly as 
we would like is not caused by legal impediments. Rather it is largely 
about simple economics. Providing customers with sophisticated services 
in areas of low density is an expensive undertaking. As such, the 
Commission has consistently acted to remove barriers to infrastructure 
investment and promote competition in broadband. For example, the 
Commission has:

   Convened a Federal-State Joint Conference to provide a forum 
        for dialogue between the Commission, the states, and local and 
        regional entities regarding the deployment of advanced 
        telecommunications capability;

   Strengthened our collocation rules to encourage facilities-
        based advanced services by competitors;

   Encouraged the resale and unbundling of advanced services, 
        but clarified that xDSL services are not subject to the resale 
        discount when sold in bulk to ISPs;

   Encouraged the competitive delivery of xDSL services through 
        line sharing;

   Ensured non-discriminatory access to facilities through 
        separate affiliate conditions in the SBC/Ameritech and Bell 
        Atlantic/GTE mergers;

   Established a comprehensive reporting requirement for 
        providers of broadband services in order to seek greater 
        insight into the development of broadband markets within 
        particular geographic areas;

   Completed a successful auction of LMDS licenses that can be 
        used for the provision of advanced services, and established a 
        filing window for applicants to apply for authority to provide 
        two-way MDS services.

    In addition, to the extent that there may be instances where a LATA 
boundary is standing in the way of consumers getting broadband services 
from BOCs, the Commission has set up a LATA boundary modification 
process. For example:

   A BOC that provides advanced services to customers within a 
        state may demonstrate that it cannot obtain an interLATA 
        provider to connect its in-state network to the Internet and 
        request a LATA modification to allow it to connect its network 
        to the nearest out-of-state Network Access Point;

   A BOC could also request a LATA boundary modification to 
        allow it to serve a particular customer, such as a hospital or 
        university, where the customer cannot obtain an interLATA 
        connection for its network; or

   A BOC may also demonstrate that it would not be able to 
        deploy xDSL service to a LATA within a multi-LATA state unless 
        the BOC is allowed to aggregate traffic from one LATA to 
        another, or may be the advanced services provider of last 
        resort for residential customers within a particular state. The 
        BOC may then argue that it is uneconomical to deploy advanced 
        services to such customers without a LATA boundary 
        modification.

    Notably, we have not received any requests for LATA modification 
since adopting this procedure in February 2000, and have received no 
requests to refile prior petitions. The Commission has stated its 
commitment to reviewing, in an expeditious manner, all LATA boundary 
modification requests that would provide consumers with advanced 
services.
Conclusion
    In conclusion, the 1996 Act is working. Passage of the proposed 
legislation at this critical juncture would disrupt the Act's delicate 
balance between regulation and deregulation, postpone the benefits of 
competition to consumers by creating uncertainty and litigation, 
curtail the flow of investment into new markets, and inhibit the Act's 
goal of fostering broadband deployment. For all of these reasons, I 
urge you let the Act continue to work.

    Senator Brownback. If no company or technology is dominant, 
then no carrier should be regulated like a dominant carrier 
when it offers broadband services. The rules imposed on 
incumbents by section 251(c) of the Act should continue to 
apply to telephony and the old parts of the telephone network, 
but when it comes to new broadband services and new pieces of 
the network the incumbent local exchange carriers, the ILECs, 
should be subject to no more regulation than any other company.
    The current disparity in regulatory treatment is most 
striking with respect to cable companies, which have a 
comparable customer base as ILECs, yet are almost completely 
unregulated with respect to high speed cable modem service. 
According to the Bernstein-McKenzie study again: ``Under the 
status quo, cable has thus enjoyed a benefit, namely freedom 
from regulation, relative to the telcos on high speed 
services.''
    Regulatory parity would provide the ILECs with the same 
economic incentive to invest in new services, technology, and 
equipment as any other broadband provider. ILECs could 
aggressively deploy new equipment and offer new services 
without enabling their competitors to borrow the ILECs' 
facilities. ILECs would recover their costs as quickly as the 
market permitted.
    The Broadband Internet Regulatory Relief Act would address 
these issues. Primarily what it would do is require the large 
ILECs to provide advanced services to 80 percent of their 
serviceable customers within 3 years and to 100 percent of such 
customers within 5 years. ILECs would no longer be subject to 
stricter regulatory requirements that do not currently apply to 
cable companies or CLECs for the provision of advanced 
services. There is a number of other provisions in the bill 
which we will talk about here from panel members today.
    Very few companies would ever enter a new market by serving 
less profitable areas first. But with the right incentives, the 
ILECs could be poised to enter the broadband market in rural 
areas now and prevent thousands of rural communities from being 
denied high speed access to Internet. The Broadband Internet 
Regulatory Relief Act provides such incentives and I hope that 
my colleagues will give it their consideration.
    I would note before we go to the panel that Senate Bill 
2902 does not in any way, shape, or form prevent the payment of 
any compensation to competitive carriers for their cost of 
transporting traffic to the Internet. While the legislation 
precludes the application of reciprocal compensation to 
Internet-bound telecommunications traffic, S. 2902 does not 
prevent the FCC from crafting a new formula for compensating 
CLECs for handling such traffic on their networks, and I would 
hope that our witnesses, to the extent that they have stated 
otherwise, would correct their testimony in their oral remarks.
    With that, we have a number of panelists here to testify on 
two panels on this very important topic of how we get broadband 
high speed Internet access out to rural areas and broadly 
dispersed across this country. On panel one we have: Mr. John 
Shelby Bryan, Chairman and CEO of ICG Communications; we have 
Mr. James Ellis, Senior Executive Vice President and General 
Counsel of SBC Telecommunications; Mr. Arne Haynes, Skip 
Haynes, broadband, The Rainier Group; and Mr. Robert Taylor, 
President and CEO of Focal Communications.
    All cell phones will be turned off during the hearing if 
you could, or put them on stun if you would, instead of on the 
other route, if possible.
    We will run the clock on--let us put it on a 5 minute 
interval to give you some idea of where you are. We will take 
your full written testimony into the record if you would like 
to submit it as such. But I would appreciate your directing 
your attention as to how can we address this topic of getting 
the broadband high speed Internet access out to the broader 
dispersed areas, the rural areas across our country that are 
being left out in this current expansion.
    So with that, Mr. Bryan, if you would be willing to 
testify.

 STATEMENT OF JOHN SHELBY BRYAN, CHAIRMAN AND CHIEF EXECUTIVE 
               OFFICER, ICG COMMUNICATIONS, INC.

    Mr. Bryan. Good morning. Thank you for the opportunity to 
appear before you today and discuss the implications of the 
proposed broadband and reciprocal compensation legislation for 
national telecom policy. I am Jay Shelby Bryan, Chairman and 
Chief Executive Officer of ICG Communications, Inc., and I am 
here also on behalf of COMTEL and ICG is a member of ALTS.
    ICG is the largest independent facilities-based CLEC, 
meaning that it is not affiliated with any cable company, long 
distance provider, or, importantly for today's hearing, any 
Internet service provider, ISP.
    I begin with one point on which I believe everyone in this 
room can agree: competition in the local telecommunications 
market yields numerous customer benefits, including 
technological innovation, lower prices, and improved quality. 
Congress brought these very benefits to customers by passing 
the 1996 Telecommunications Act. My experience has been that 
the act embodies a great vision that has just begun to be 
realized.
    In many ways, ICG's story is just what Congress intended by 
the act. We are deploying brand new technologies to provide 
innovative services. We are building out an extensive 
nationwide telecommunications network using fiber optics and 
packet switching facilities, and we are deploying broadband 
services at a high rate. In addition to all types and sizes of 
business customers, we also play an important role serving the 
ISP market. In fact, we are handling 10 percent of nationwide 
ISP traffic and carry 30 percent of ISP traffic in California 
alone.
    ICG cannot effectuate the pro-competitive goals of the act 
by itself. We are joined by over 375 CLECs in the United 
States, including 333 facilities-based CLECs, employing over 
70,000 people. The capital that we raise has been spent 
deploying over 820 voice switches and 1400 data switches, 10.4 
million access lines, and over 4 million miles of fiber.
    These figures represent no small feat by new competitors 
who have benefited from almost every provision of the act. I 
think it is fair to say that there would be no DSL if it were 
not for CLECs. Virtually the entire Internet backbone network 
is being provided by competitors. Data CLECs supply over 
100,000 of the 500,000 total DSL lines in service, a market 
share of 20 percent.
    More importantly, CLECs instigated the ILECs to deploy DSL 
themselves, to the benefit of all consumers. SBC says it will 
make DSL service available to 77 million customers by the year 
2002. Would this have happened without the act, without 
competition? I think not.
    In that context, what about the proposed bill? 
Unfortunately, it would put telecommunications competition in 
reverse and would severely handicap competitors at the very 
moment they are beginning to see profitability on the horizon. 
The central premise of the bill is that the incumbents should 
not have to unbundle or permit competitors to interconnect with 
their advanced telecommunications network. It is improbable 
that ILECs would build a new advanced network that does not 
depend significantly on the existing network which was built 
with captured ratepayer dollars.
    Moreover, to fence off new network from competitors is bad 
policy. Do we tell the clever innovator in San Jose with an 
idea that he cannot connect to Bell's new packet switches to 
complete calls to his customers, even though it may create a 
tenfold savings to the ultimate customer? Are we going to wall 
off networks that are used to provide advanced services, 
leaving only the old network accessible to innovators and 
competitors? Such a result makes no sense.
    The reciprocal compensation provisions of the proposed 
legislation would cause serious harm to local competition and, 
perhaps worse, significant harm to the Internet. How did the 
dial-up access market develop? Senator Brownback, you were 
referring to the fact that there is limited service in the 
rural areas. Well, 3 or 4 years ago the ISPs wanting customers 
to reach them were not also being adequately served by the 
ILECs. Their failure created an opportunity for my company. We 
did a good job in serving the market and won customers. We 
saved the ILECs from deploying billions of dollars in capital 
and helped prevent customers from moving off the telephone 
network to other providers like cable telephone companies.
    In spite of the technical and legal complexities, the crux 
of this issue is simple. While the ILECs want to collect lots 
of money for the services they provide to CLECs, the ILECs find 
it inconceivable that they must pay CLECs for the same 
services. In the simplest terms, CLECs must get paid somehow 
for the costs they incur.
    But let us remember what competitors have had to go through 
to get this business. Before we can provide service to ISPs, we 
have to spend at least $10 million for a single circuit switch 
so people can connect to the Internet. Then we have to deploy 
fiber or trunking to the Bellco central office and in turn we 
have to deploy connection to the ISPs. Then we must market the 
ISPs and sell them our service.
    Only after we have made this significant capital investment 
and these expenses do we earn the right to terminate ILEC 
customer traffic on our network. While ILECs and CLECs may 
disagree and litigate about what those costs are, no one 
actually denies there are costs.
    So how should CLECs get paid for these costs? CLECs cannot 
charge ISPs access charges, as they would a long distance 
carrier. The FCC has appropriately prohibited the use of that 
compensation mechanism. What are the other options? The ILECs 
suggest that the CLECs should bear the burden of these costs 
themselves. This is not possible. CLECs are constantly seeking 
capital from the debt and equity markets to build network 
infrastructures. If CLECs face uncompensated costs, they will 
be forced to think carefully about serving ISPs, to the 
detriment of all users of the Internet.
    Could CLECs just get the money from ISPs' customers, as the 
ILECs suggest? We have a grave concern that raising the cost of 
using the Internet by passing additional costs on to the ISPs 
will have a dampening effect and the exciting growth in the 
Internet services. Second, we would worry about the negative 
impact on the many small but innovative ISPs who may not be 
able to compete against the ILEC-owned ISPs.
    Alternatively, if we are not compensated for our network, 
we would have to evaluate whether it made sense to serve that 
market. ISPs could be left to search for network capacity, 
capacity they may not find in the marketplace. Without 
competition in the fastest-growing segment of the 
telecommunications market, Internet access, and insufficient 
capacity on the incumbents' network, where could they go? 
Nowhere, and the development of the Internet would stop dead in 
its tracks.
    The way I see it, when ILECs pay CLECs for costs of 
services the CLECs provide, which costs the ILECs actually 
avoid, what harm could possibly result? Simply because ILECs 
pay money, even a significant amount of money, to the CLECs 
does not in and of itself mean something is wrong with the Act.
    If this is such a problem for the ILECs, they can avoid it 
by deploying their own network. Instead of coming to Congress 
seeking legislation that protects them from competition, they 
can do what we did: build out a network, invest billions of 
dollars. And if the ILECs want to get rid of reciprocal 
compensation so badly, do it the way the Act intended, the old-
fashioned way, by competing in the marketplace for Internet 
access.
    If Congress truly is committed to promoting competition, 
innovation and consumer choice in telecommunications throughout 
the nation, you should not amend the Act as Senator Brownback 
proposes. Instead, Congress must allow the marketplace to 
continue to develop, with competitors and incumbents competing 
on fair and just terms.
    Due to the competition that currently exists in the 
broadband marketplace, it is only a matter of time before all 
Americans have the ability to receive broadband access. No 
changes in the Act are needed to accomplish this goal. ICG 
urges you to continue to support competition in the 
telecommunications marketplace and its resulting benefit to 
consumers.
    Thank you for the opportunity to testify here today. I 
would be glad to answer any questions.
    [The prepared statement of Mr. Bryan follows:]

 Prepared Statement of John Shelby Bryan, Chairman and Chief Executive 
                   Officer, ICG Communications, Inc.
I. Introduction and Summary
    Good morning. Thank you for the opportunity to appear before you 
today to talk about telecommunications policy and the reciprocal 
compensation and broadband legislation the Committee is considering. I 
am J. Shelby Bryan, Chairman and Chief Executive Officer for ICG 
Communications, Inc.
    Based in Englewood, Colorado, ICG Communications is the country's 
largest, independent, facilities-based competitive local exchange 
carrier (CLEC). ICG is not affiliated with any cable company, long 
distance provider, or--importantly for today's hearing--any Internet 
service provider (ISP). ICG operates a nationwide communications 
network that provides integrated telecommunications services to over 
700 cities. ICG primarily serves small to medium sized businesses, 
interexchange carriers (IXCs), and ISPs. ICG is an industry leader, 
furnishing services to more than 500 ISP customers, and providing 
Internet access for approximately 10 percent of the nation's dial-up 
Internet traffic. In fact, in 1999 approximately 30 percent of all 
Internet traffic in California traveled over ICG's network.
    When I look at the Commerce Committee's roster, I see a number of 
Senators in whose state ICG operates. ICG has a significant presence in 
Texas and several states in the Southeast, including Georgia and 
Tennessee, and is expanding its service offerings to new markets, 
including Phoenix, Boston, Seattle, Las Vegas, and Portland, Oregon.
    I look forward to speaking with all of you today in an effort to 
resolve the important reciprocal compensation and broadband deployment 
issues before us.
A. LICG Opposes Senator Brownback's Proposal Because It Would Hurt New 
        Competitors in the Telecommunications Marketplace
    The reciprocal compensation and broadband provisions in Senator 
Brownback's bill would block CLECs' ability to compete effectively in 
the telecommunications marketplace. First, the reciprocal compensation 
provisions would prohibit CLECs' from recovering the very real costs of 
terminating ISP calls on their networks, thereby threatening CLECs' 
competitive position and even their viability. As incumbent local 
exchange carriers (ILECs) have said repeatedly, termination costs are 
real and, in accordance with longstanding cost recovery principles, 
should be paid by the entity causing the costs--in this case the ILEC. 
CLECs, which are just beginning to see profitability, cannot bear these 
ILEC-imposed costs themselves. Instead, CLECs likely would have to pass 
along price increases to ISPs, who in turn are likely to increase their 
monthly Internet access fees to consumers by as much as six dollars (in 
addition to monthly fees of approximately $10 to $30 per month). CLECs 
may choose to exit the ISP market because it no longer would be cost 
effective to serve ISPs. A dwindling number of CLEC competitors would 
diminish the quality and choices all customers now enjoy. ILECs would 
be allowed to leverage their monopoly position into the ISP market.
    Federal legislation to end reciprocal compensation is a drastic 
move, especially in a context in which most regulatory bodies already 
have grappled with the issue. The states, represented by the National 
Association of Regulatory Utilities Commissioners (NARUC), have told 
Congress that this issue should be resolved by the state public 
utilities commissions. Indeed, 38 state commissions have already 
resolved the issue--33 in favor of reciprocal compensation for ISP 
calls. The Federal Communications Commission (FCC) has told Congress 
that the issue is complex and should be considered in the context of 
the myriad other intercarrier compensation mechanisms currently in 
place. Federal and state courts have considered and are continuing to 
decide the issue; seven Federal District Courts and three Federal 
Appellate Courts have ruled in the CLECs' favor.
    Perhaps most importantly, the marketplace already is working to 
resolve the issue. Most contracts (known as interconnection agreements 
under the Telecommunications Act of 1996 (Act)), had 3-year terms and 
are beginning to expire. During implementation of the Act, ILECs 
negotiated relatively high reciprocal compensation rates, assuming most 
of the payments would flow from CLECs to ILECs. But now, as the 
original contracts are being renegotiated, ILECs are bargaining for 
lower rates. Some new contracts have rates as low as 10 percent of the 
rates under the old contracts. Given that reciprocal compensation rates 
are falling, and that the states are using their authority under the 
Act to resolve conflicts when they arise, Congress need not change the 
law with regard to reciprocal compensation.
    As to the broadband provisions of the bill, they are equally 
unnecessary as the Act and the market ultimately are working to bring 
technology and competition to consumers everywhere. The bill's 
broadband provisions eliminate some of the Act's local market opening 
requirements as they apply to packet-switched or advanced services. 
These requirements have allowed the CLEC industry to provide 
competitive alternatives, particularly in the broadband marketplace. 
This success has come despite a dizzying array of ILEC--and especially 
Regional Bell Operating Company (RBOC)--stall tactics, baseless 
lawsuits, and anti-competitive business practices that pre-date the Act 
but have worsened since the Act's inception. By eviscerating these 
requirements for packet-switched and advanced services, Senator 
Brownback's bill would limit CLECs' ability to offer broadband services 
via a packet-based system with many negative results. Competition for 
broadband services would be impeded, ILECs could re-dominate the 
market, and the very consumer benefits the Act sought to bring about 
through competition (e.g. lower prices, high quality services, and 
increased technological innovation) could be lost. Further, given that 
the CLEC industry is the driving force behind national broadband 
deployment, and that Senator Brownback's proposal would impede CLECs' 
ability to deploy broadband networks, the bill actually would have 
severely adverse unintended consequences.
II. LThe 1996 Telecommunications Act's Local Market Opening Provisions 
        Have Allowed CLECs to Drive Broadband Deployment, Despite 
        Continued Anti-Competitive ILEC Actions
    The Act was designed to open the local telecommunications market to 
competition and create the consumer benefits that can only come through 
competition. The Act accomplishes this through a number of means, 
including interconnection, unbundling, and resale provisions. The Act 
allows CLECs to utilize, to a limited degree, and at cost-based rates, 
the network that ILECs constructed using captive ratepayer money 
acquired during the ILECs' monopolistic reign.
    Following the Act's passage in 1996, CLECs were not immediately 
able to take advantage of the Act's market opening provisions. Despite 
the fact that the Act is a series of compromises to which the ILECs 
undeniably agreed, ILECs reverted to a variety of stall tactics, 
baseless lawsuits (fought at both the federal and state levels) and 
anti-competitive business practices to prevent full implementation of 
the Act's market opening provisions.
    As a result of these ILEC actions, local competition has been 
seriously impeded. Nevertheless, the last few years have seen the rise 
of the CLEC industry and, with it, a dramatic increase in competition 
in the telecommunications market. As of the end of 1999, there were 
over 375 CLECs in the United States, including 333 facilities-based 
CLECs, employing over 70,000 people. These companies have deployed over 
820 voice switches and 1,400 data switches, 10.4 million access lines, 
and over 4 million miles of fiber. In 1996, the combined CLEC market 
capitalization was $3.1 billion. Today, that number is $85 billion. 
Further, both institutional and private sources are investing record 
amounts in CLECs at all stages of the capital formation cycle. By 
undermining fundamental provisions in the Act, Senator Brownback's bill 
jeopardizes CLECs and the competitive benefits they have brought to the 
market.
A. LThe Reciprocal Compensation Provisions of Senator Brownback's Bill 
        Would Harm Competition, Consumers and the Development of the 
        Internet
1. LReciprocal Compensation Pays For Real Costs and Repealing ILECs' 
        Obligations to Pay These Costs Will Result in Great Harm to 
        Competition
    At the outset, it bears emphasizing that reciprocal compensation 
pays for real costs--it is not a suspect revenue source, but rather a 
legitimate, regulator-sanctioned method for recovering these real costs 
when two local carriers handle a call. A reciprocal compensation system 
initially was adopted at the insistence of the Bell companies, when the 
traffic was imbalanced in their favor. Now that there is an imbalance 
in the favor of competitors, the Bell companies have attacked the 
system as somehow illegitimate.
    The costs of terminating calls to ISPs are the same as the costs of 
terminating any local call; the transport from the hand-off point (or 
``point of interconnection'') to the terminating switch, plus the 
switching and delivery of the call to the called number. From a cost 
point of view it is irrelevant whether the call is terminated to a 
residence, a business, or an ISP. All calls appear as local calls that 
are terminated to a local customer--and ISPs are simply local customers 
of a local exchange carrier. Since 1983, the FCC has enforced a policy 
that allows ISPs to purchase local service rather than access service 
and, as a result, when consumers access ISPs, they dial a local number 
and do not pay toll charges.
    Congress, the FCC, the states, and the industry all have recognized 
that termination costs are real and should be compensated. Congress has 
found that reciprocal compensation is ``integral to a competing 
provider seeking to offer local telephone services over its own 
facilities.'' \1\ Congress provided under the Act that each local 
exchange carrier or ``LEC'' (whether the incumbent or a new competitor) 
is required to pay the other for these costs.\2\ The FCC has found that 
``carriers incur costs in terminating traffic that are not de minimis, 
and consequently bill-and-keep [the absence of reciprocal compensation] 
arrangements that lack any provisions for compensation do not provide 
for recovery of costs.'' \3\ Thirty-three of 38 states that have 
considered the issue have held that dialing a local number to reach 
your ISP should be treated like a local call eligible for reciprocal 
compensation. No federal court which has reviewed this issue has 
decided against payment of reciprocal compensation. Even the incumbents 
have recognized that a terminating carrier incurs real costs that 
should be compensated.\4\
---------------------------------------------------------------------------
    \1\ H.R. Rep. No. 104-104, pt.1, at 72 (1995).
    \2\ 47 U.S.C. 251(b)(5).
    \3\ See First Report and Order, Implementation of the 
Telecommunications Act of 1996, 11 FCC Rcd 15499, para. 1112 (1996), 
modified on recon., 11 FCC Rcd 13042 (1996).
    \4\ See, e.g., Implementation of the Local Competition Provisions 
in the Telecommunications Act of 1996, Reply Comments of Bell Atlantic 
at 20 (May 30, 1996) (``The most blatant example of a plea for a 
government handout comes from those parties who urge the Commission to 
adopt a reciprocal compensation price of zero, which they 
euphemistically refer to as `bill and keep.' A more appropriate name, 
however, would be ``bilk and keep'' since it will bilk the LECs' 
customers out of their money. . . . [A] regulatorily mandated price of 
zero--by any name--would violate the Act, the Constitution, and sound 
economic principles.'').
---------------------------------------------------------------------------
    Forcing CLECs to incur uncompensated costs by eliminating 
reciprocal compensation for ISP traffic will weaken the CLECs' 
competitive position. CLECs have begun to prosper in the local market, 
due in large part to the pro-competitive provisions of the Act, and 
Congress should not act to threaten this progress. CLECs have been more 
successful than ILECs in attracting ISP customers because CLECs provide 
state-of-the-art fiber-based infrastructure, better rates, and services 
(such as collocation) that are more tailored to ISPs' demands. ISPs are 
particularly telecommunications-intensive businesses, given that the 
Internet depends on telecommunications for its very existence. 
Therefore, ISPs have enormous needs for high volume, high capacity, and 
high quality services. The ILECs have failed to address adequately the 
high growth Internet access market and, in doing so, have lost out to 
the CLECs. Because of this success by competitors, the ILECs seek to 
strangle competition by making it economically impossible for CLECs to 
serve ISPs. This motivation is even more clear when one considers that 
every ILEC also is an ISP.
    Let me give you one example of the power of competition in the 
local telephone market. In June, a part owner of a small family-run ISP 
from the rural town of Mt. Shasta, California spoke at a Congressional 
briefing about his experience receiving service from a CLEC. He 
recounted the following. First, he found that switching from the ILEC 
to a CLEC enabled his company, SnowCrest, Inc., to collocate its 
equipment at the CLECs premises, providing enhanced quality and greater 
efficiency. SnowCrest also purchased local points of presence (POPs) 
from the CLEC to enable SnowCrest's customers to reach the Internet 
without incurring toll charges by dialing a local telephone number. The 
ILEC did not provide these services. SnowCrest reported that it took 
the ILEC 30 days to fulfill an order for new lines and one to three 
weeks to repair any problems resulting from improper installation. 
Orders placed to a CLEC took only seven to 10 days to fulfill and 
repairs on improper installations were made in one day. This story is 
but one example of how competition has brought benefits to consumers 
and has spurred the development of the Internet.
    If CLECs are forced to incur uncompensated costs, they inevitably 
will respond in one of several ways. First, CLECs could simply bear the 
costs. As a result, CLECs would become less viable local exchange 
competitors than ILECs, who will not bear such uncompensated costs. 
Second, CLECs may be forced to pass along price increases to ISPs, in 
which case those ISPs likely will increase their monthly Internet 
access prices to consumers. It is estimated that eliminating reciprocal 
compensation for ISP calls could cause Internet prices for consumers to 
rise by more than six dollars per month in addition to monthly fees 
that range from $10 to $30. Congress has made it a matter of national 
policy to close the ``digital divide'' and has manifested its intention 
that access charges not be levied on the Internet. Congress clearly 
recognizes the importance of maintaining reasonable Internet access 
prices. An increase of more than six dollars per month for an average 
consumer could have a wide impact. Right now, 129 million Americans 
have access to the Internet--over 125 million of whom use a local 
telephone connection to gain that access. At a time when ubiquitous 
access to the Internet is a national priority, Congress should not pass 
legislation that would make the Internet more expensive for American 
consumers.
    A third CLEC response to the burden of uncompensated costs would be 
for CLECs to decline to serve the ISP market. Fewer CLECs serving ISPs 
naturally would result in fewer choices for ISPs. This outcome is 
especially disturbing since the ILECs also are ISPs, which motivates 
them to stifle the availability of quality services to their competitor 
ISPs. Ultimately, ISPs could be left to rely solely on the ILEC for 
service in a monopoly environment, the very situation the Act sought to 
correct by encouraging the development of local competition.
    Finally, changing the reciprocal compensation mechanism now, once 
the CLECs have begun effectively to serve this market, will have 
serious effects on CLECs' continuing ability to raise capital. If 
Congress changes the competitive landscape, investors surely will 
become hesitant to fund CLECs. Because local services (wired or 
wireless) are extremely capital intensive, CLECs must regularly seek 
additional capital from both debt and equity markets, and they rely on 
a predictable regulatory framework to reassure investors. Forcing 
uncompensated costs on the competitive industry will endanger 
investment in the short term and in the long term will send a negative 
signal to capital markets about the stability and the future prospects 
of CLECs. Further, if CLECs become less viable in the market, raising 
capital to expand into broader telecommunications markets, including 
residential and business services, will become increasingly difficult. 
CLECs would be crippled in their efforts to build the very facilities 
that are needed to bring about Congress' pro-competitive vision when it 
passed the Act.
2. Congress Should Defer to the States, the FCC, and the Marketplace
    Congress should allow the states and the FCC to resolve reciprocal 
compensation issues. The legislation unreasonably usurps state 
regulatory authority and prevents regulators from ensuring that CLECs 
are compensated for their costs. The state public utilities commissions 
(PUCs), guided by the Act, have significant experience determining 
rates for a number of components of an interconnection agreement, of 
which reciprocal compensation is just one. States also have authority 
under the Act to resolve disputes arising from interconnection 
negotiations and to set rates for interconnection. The majority of the 
states have exercised the authority given to them by the Act to 
consider and resolve reciprocal compensation issues and have completed 
their proceedings. Given the history of the PUCs in resolving 
reciprocal compensation issues, there is no reason to isolate 
reciprocal compensation now and remove it from the states' authority.
    The states, represented by NARUC, testified before the House of 
Representatives on June 22, 2000. NARUC told the House 
Telecommunications Subcommittee that

        The reciprocal compensation issue is best addressed through the 
        existing statutory and regulatory framework in the Act. Under 
        the Act, incumbent and competitive carriers are required to 
        negotiate reciprocal compensation payments. If these 
        negotiations break down, state commissions are given the 
        responsibility to arbitrate any disputes.\5\
---------------------------------------------------------------------------
    \5\ Hearing of the U.S. House of Representatives Committee on 
Commerce, Subcommittee on Telecommunications, Trade, and Consumer 
Protection, Regarding ``H.R. 4445, to exempt from reciprocal 
compensation requirements telecommunications traffic to the Internet'' 
(``House Reciprocal Compensation Hearing'') Written Testimony of The 
Honorable Joan Smith, Commissioner, Oregon Public Utilities Commission 
and Chair, NARUC Telecommunications Committee at 4.

    CLEC claims about the detrimental effects of legislation to 
eliminate reciprocal compensation for ISP calls have been seconded by 
NARUC. NARUC testified that such legislation would raise ISPs' costs, 
in turn raising prices for access to the Internet for most consumers. 
Further, CLECs are required by law to transport and terminate all 
calls; thus, preventing CLECs from recovering the associated costs may 
constitute a ``taking'' of their property without compensation. 
According to NARUC, ``it changes the Act so that a business is required 
to provide a service for free to its competitors.'' \6\ The states have 
determined that CLECs should be compensated for their costs and 
Congress should not usurp the states' authority to do so.
---------------------------------------------------------------------------
    \6\ Id. at 3.
---------------------------------------------------------------------------
    States play a key reciprocal compensation role. In fact, the states 
have a critical role in regulating other aspects of how, and if, CLECs 
can operate. One of the more spurious arguments against reciprocal 
compensation for ISP traffic is that there are ``sham'' CLECs that 
operate only to receive reciprocal compensation payments for their ISP 
affiliates. The states have--and always have had--the authority to 
determine which competitors will be authorized to compete in their 
state and under what terms and conditions. If ISPs were to attempt to 
become CLECs for purposes of collecting reciprocal compensation only--
with no intention of providing local service--they would be hard 
pressed to pass muster with the states. The states have the authority 
to require competitors to provide local service to non-ISP customers or 
to impose other requirements on behalf of the public interest. If there 
were, in fact, ``sham'' CLECs, states are well equipped to discipline 
them.
    The FCC currently is considering intercarrier compensation, and 
opened a rulemaking on June 23, 2000, to solicit comment on a 
reciprocal compensation case recently remanded by the U.S. Court of 
Appeals for the D.C. Circuit. Larry Strickling, the FCC's Common 
Carrier Bureau Chief, testified before the House Telecommunications 
Subcommittee that resolution of the issue is complex and must 
necessarily be made in the broader context of all intercarrier 
compensation mechanisms.\7\ Mr. Strickling cautioned the Subcommittee 
against singling out ISP calls and setting up a separate regime. He 
further testified that state commissions and state courts are well-
equipped to dispose of any cases of fraud by an ISP. The FCC's 
testimony reinforces the fact that the resolution of reciprocal 
compensation issues is a complex task that should not be dealt with 
through legislation that dramatically restructures intercarrier 
compensation for just one segment of the telecommunications market. 
Against this backdrop, the House Commerce Committee has given the FCC 
until September 30, 2000, to act, and Members of the Senate also have 
urged the FCC to act by that time. The FCC has stated its intention to 
meet that deadline.
---------------------------------------------------------------------------
    \7\ House Reciprocal Compensation Hearing, Testimony of Lawrence 
Strickling, Chief, Common Carrier Bureau, Federal Communications 
Commission, Federal News Service Transcript.
---------------------------------------------------------------------------
    Not only have regulatory bodies successfully tackled reciprocal 
compensation, but the market also is working to set reciprocal 
compensation rates at the appropriate level. The original 
interconnection agreements that govern the payment of reciprocal 
compensation are in the process of being renegotiated. As new contracts 
are negotiated, ILECs are asking for lower reciprocal compensation 
rates. Some new contracts have rates as low as 10 percent of the rates 
in the original interconnection agreements. As the competitive market 
continues to develop, rates naturally will reach the appropriate level 
that reflects costs, as would happen in a free market. Given time, the 
market will resolve the issue on its own.
    In the past, ILECs have recognized that a truly competitive market 
will operate to regulate the level of reciprocal compensation rates. 
During the implementation of the Act, when ILECs argued that they must 
be compensated for the use of their networks by competitors, those 
competitors worried that incumbents--believing that they would be the 
recipients of the bulk of the payments--would set reciprocal 
compensation rates unreasonably high. To assuage the FCC, Bell Atlantic 
argued:

        If these rates are set too high, the result will be that new 
        entrants, who are in a much better position to selectively 
        market their services, will sign up customers whose calls are 
        predominantly inbound, such as credit card authorization 
        centers and Internet access providers. The LEC would find 
        itself writing large monthly checks to the new entrant. By the 
        same token, setting rates too low will merely encourage new 
        entrants to sign up customers whose calls are predominantly 
        outbound, such as telephone solicitors.\8\
---------------------------------------------------------------------------
    \8\ Reply Comments of Bell Atlantic, supra note 4, at 21.

    Ultimately, the incumbents negotiated relatively high rates, 
thinking they would collect more than they paid, but instead they ended 
up paying more than they collect and asking Congress for relief. It 
bears noting that in cases in which the ILECs have stood to gain from 
reciprocal compensation, they have argued not only for high rates, but 
also have defended imbalances in traffic when that imbalance is 
financially in their favor. In the wireless context, for example, most 
wireless customers use their phones to dial wireline customers, but do 
not receive very many calls from the wireline network. ILECs terminate 
about four times as many calls from wireless networks as wireless 
providers terminate from the wireline network. Despite this dramatic 
imbalance in traffic, ILECs have argued that the ratio of traffic is 
immaterial, and that only the costs imposed on the terminating carrier 
should be considered.\9\ The ILECs' current statements that reciprocal 
compensation should not be paid when traffic is imbalanced should be 
viewed in the context of their arguments to the contrary when they are 
the beneficiaries. In reality, these payments are based on real costs 
and their rates should be negotiated by the parties in the market. 
Where, as here, market forces are at play, Congress need not intervene.
---------------------------------------------------------------------------
    \9\ See, e.g., Letter by Michael K. Kellogg to FCC Chairman William 
Kennard enclosing report by Professor Richard A. Epstein, Matter of 
Interconnection Between Local Exchange Carriers and Commercial Mobile 
Radio Service Providers, CC Docket No. 95-185, 15-16 (May 16, 1996) 
(Bell Atlantic and SBC Communications recognized in 1996 that 85 
percent of all wireless calls originate via wireless telephones and are 
terminated on the ILEC network. Bell Atlantic and SBC nonetheless 
argued that ILECs should be compensated for the costs of terminating 
wireless calls.).
---------------------------------------------------------------------------
    Congress has stated its intention to foster the growth of the 
Internet by creating an environment where no additional costs are 
imposed on Internet access. Congress also has manifested its commitment 
to creating a competitive telecommunications market through its passage 
of the Act by an overwhelming margin. Given the important objectives 
embodied in the Act, Congress should not pass legislation that 
threatens the growth of the Internet, the prices Americans pay for 
Internet access, and the viability of competition for local 
telecommunications services.
B. LThe 1996 Telecommunications Act's Market Opening Requirements Are 
        Working to Stimulate Broadband Deployment
1. CLECs Are Driving Broadband Deployment
    The competitive telecommunications industry currently is deploying 
broadband service at a staggering pace and CLECs are among the industry 
leaders in the provision and deployment of Digital Subscriber Line 
(DSL) service. Recent figures indicate that CLECs supply over 100,000 
DSL lines, and the CLEC market share of DSL lines at the end of 1999 
was approximately 20 percent. As a result, CLECs now are able to offer 
DSL broadband service to roughly 25 percent of the addressable market 
in the country, a number that will grow as the competitive industry 
continues to deploy broadband networks.
    This push by competitive carriers to deploy broadband service has 
created a tremendous amount of competition within the broadband 
marketplace, and has resulted in the proliferation of advanced service 
offerings by both competitive and incumbent carriers, aggressive 
broadband service deployment schedules, and the significant benefit to 
consumers of high-speed Internet access at rates that are declining 
remarkably quickly. For example, SBC recently announced that it will 
slash rates and waive installation fees for its residential DSL 
service. Through its ``Project Pronto'' initiative, the company says it 
will provide DSL service to 77 million customers by 2002. Further, the 
RBOCs all have announced a significant acceleration of their broadband 
deployment schedules to counter CLEC deployment. Just as the Act 
intended, the incumbents are being forced to respond to competition 
initiated by CLECs.
    Other industry segments also contribute to the rapid increase in 
broadband deployment. For example, cable companies, terrestrial and 
satellite wireless telecommunications providers, fixed and mobile 
wireless companies and other new entrants, including electric 
utilities, now offer broadband services. Currently, approximately 2 
million U.S. customers access the Internet through cable modems with 
7,000 new cable modem customers being added every day. The spread of 
broadband services has even reached rural communities and previously 
underserved areas. Many rural telecommunications companies, both 
private and cooperatives, are upgrading their systems to provide 
broadband services. Thus, rewriting the Act to increase the deployment 
of broadband services in rural areas is unnecessary.
2. LThe Bill's Broadband Provisions Would Limit CLECs' Ability to 
        Compete in the Broadband Marketplace, and Ultimately Would 
        Impede Broadband Deployment
    Senator Brownback's bill would undermine the Act's local 
competition provisions. First, Senator Brownback's bill would remove an 
ILECs interconnection, unbundling, and collocation requirements for 
packet-based networks, and remove its resale requirements with regard 
to the provision of advanced services, provided that the ILEC meets 
certain build out requirements. Further, the bill would remove ILEC 
interconnection and unbundling requirements for optical fiber used to 
provide residential telecommunications service where the fiber is 
capable (or will be capable through an electronics upgrade) of 
providing high-speed data, VHS-quality video, and telephone exchange 
service, again dependent on build out requirements. The impact of these 
provisions on CLECs' ability to offer broadband services would be 
devastating. Denied access to ILECs' networks, CLECs would suffer. 
Competition in telecommunications cannot happen without the 
interconnection of competing providers' networks on fair terms and 
conditions and at reasonable rates. Without interconnection, no 
competitor could raise funds to deploy broadband services.
    Second, if the FCC finds that an ILEC operates in an exchange in 
which a competitor also provides advanced services, the FCC must grant 
that ILEC unconditional pricing flexibility. The bill does not require 
actual competition to be present for ILECs to attain this pricing 
flexibility. Instead, as noted, the mere presence of a single 
competitive provider, regardless of the actual extent of competition in 
that exchange, will trigger pricing flexibility. As a result of this 
provision, in areas where an ILEC faces competition only from a single, 
small competitor, the ILEC would be able to lower its prices for 
advanced services to anti-competitive levels that the competitive 
provider could never match. In this way, the ILECs would assert their 
market power to restore their monopoly.
    Third, ILECs that use remote terminals \10\ to supply advanced 
services must provide competitors access to subloop network elements 
used for advanced services (such as a Digital Subscriber Line Access 
Multiplexer (DSLAM)) but would not be required to provide collocation 
at the terminals. The inability to collocate would force CLECs desiring 
to offer broadband services through a remote terminal to use the ILECs 
DSLAM located in the remote terminal. CLECs that use an ILECs DSLAM are 
locked into the service and technology the ILEC offers through that 
DSLAM. Thus, the CLEC would be prevented from offering the very 
innovative, technologically advanced services that the Act sought to 
promote, and consumers would be stuck with whatever service the ILEC 
decided to offer. The inability of competitors to collocate at ILEC 
owned remote terminals would, as a practical matter, seriously hamper 
CLECs' ability to offer DSL and other services.
---------------------------------------------------------------------------
    \10\ Remote terminals are the gray or green metal boxes incumbents 
install near consumers' homes to aggregate traffic from several 
customers.
---------------------------------------------------------------------------
    Fourth, pursuant to Senator Brownback's bill, ILECs would not be 
subject to the Act's network elements unbundling requirements unless 
the elements in question ``are to be used predominantly to provide 
telephone exchange service,'' and telephone exchange service may not 
encompass broadband services. Although the language is not precise, 
this provision seems to limit CLECs' ability to buy network elements on 
an unbundled basis depending on what type of service is provided using 
those elements. As a result, data CLECs and traditional CLECs offering 
data services would not be able to purchase unbundled network elements 
necessary to offer broadband service, again severely limiting 
consumers' choices.
    The bill does preserve CLECs' ability to gain access to ILECs' 
local copper loops. The value of this guarantee, however, is 
questionable. First, the bill implies that the Act was not meant to 
address packet-based and other advanced service networks. In actuality, 
Congress did intend for the Act to encompass packet-based networks. FCC 
Chairman William Kennard recently supported this view when he said that 
``There was discussion of the Internet at that time [i.e. during 
consideration of the Act].'' \11\ Packet network technologies have been 
available and deployed for at least a decade. Further, 
telecommunications services are quickly migrating to a predominantly 
packet-based architecture that offers increased quality of service and 
cost efficiencies. Under Senator Brownback's proposal, the CLEC 
industry would be relegated to using the older, less efficient copper 
based network when using ILEC unbundled network elements. Obviously, 
this result creates a distinct, unjustified, competitive advantage for 
the ILECs over their CLEC competitors.
---------------------------------------------------------------------------
    \11\ House Judiciary Committee Hearing on Legislation Dealing with 
the Internet, Statement of William Kennard, Chairman, Federal 
Communications Commission, Federal News Service Transcript.
---------------------------------------------------------------------------
IV. Conclusion
    If Congress is truly committed to promoting competition, 
innovation, and consumer choice in telecommunications throughout the 
nation, it should not amend the Act as Senator Brownback proposes. 
Instead, Congress must allow the marketplace to continue to develop as 
it has, with incumbents and competitors interconnecting their networks, 
passing traffic back and forth, and competing on fair and just terms.
     I wholeheartedly agree with the goal of providing broadband 
services to every American. There is, however, a right way to go about 
doing this, and a wrong way. Targeted, specific solutions, such as the 
FCC's Advanced Services Order \12\ allowing limited LATA modifications 
to support the deployment of advanced services to rural and underserved 
areas, is representative of the right way. Wholesale gutting of the 
Act, causing certain crippling of the competitive local 
telecommunications industry, is the wrong way.
---------------------------------------------------------------------------
    \12\ Deployment of Wireline Services Offering Advanced 
Telecommunications Capability, CC Docket No. 98-147, Fourth Report and 
Order (adopted January 28, 2000, and released February 11, 2000).
---------------------------------------------------------------------------
    Congress instead should permit the market to resolve this issue. 
Decision making bodies with expertise and experience, such as the FCC 
and the states, will guide this process. In the end, consumers will 
continue to access the Internet at affordable prices.
    ICG urges you to continue your longstanding commitment to 
competition in the telecommunications marketplace, and its resulting 
benefits to consumers, and oppose the Brownback bill. Thank you for the 
opportunity to testify here today.

    Senator Brownback. I appreciate your testimony. I will look 
forward to asking you the question of how do I get my rural 
areas served. If you would, Mr. Ellis.

         STATEMENT OF JAMES D. ELLIS, SENIOR EXECUTIVE 
            VICE PRESIDENT AND GENERAL COUNSEL, SBC 
                    TELECOMMUNICATIONS, INC.

    Mr. Ellis. Good morning, Mr. Chairman. I am Jim Ellis, 
General Counsel of SBC Communications. Thank you for the 
opportunity this morning to share my company's views on this 
important legislation.
    SBC in analyzing legislation that affects our business 
really follows two broad principles: First, competitive markets 
should be free from government regulation of the rates, terms, 
and conditions for the services that are offered in those 
competitive markets. Second, where for some public policy 
reasons regulation is imposed, it should be imposed on all 
service providers equally, symmetrically, for the services they 
all offer in those markets. I am pleased to say the legislation 
that is before us is going in the right direction with respect 
to both those principles.
    I am not going to take a lot of time talking about the 
history of advanced services or even current market conditions. 
But there are a couple points that I think are of fundamental 
importance in evaluating this legislation. The first one has to 
do with what people refer to as a bottleneck: Is there a 
bottleneck for advanced services? Many people talk in terms of 
the justification for asymmetrical regulation, regulation of 
the telephone company, is based on the contention that there is 
a bottleneck.
    Well, I submit there is no such bottleneck for advanced 
services. If we look at the residence market today, cable 
modem, as we all know, is a direct competitor for the xDSL 
services provided by the telephone company and others. The 
provision of cable modem services and xDSL services are 
provided independently. They do not use our networks and we do 
not use their networks--completely independent. In addition to 
cable modem and xDSL, we know that we have wireless 
alternatives, terrestrial and satellite are coming on. They do 
not depend on us. They are provided completely independent of 
the telephone company operation.
    To the business market there are even more alternatives. 
AT&T and the long distance companies provide direct access to 
their customers without resort to telephone company facilities. 
The point is there is no bottleneck as it relates to telephone 
company control of facilities necessary for advanced services.
    A second point: We do not even have a leadership, let alone 
a dominant, position with respect to advanced services. If 
there is any evidence of absence of a bottleneck, it is simply 
that we have in the marketplace four or five customers of the 
cable modem people for every one we have for DSL. There is no 
bottleneck. We do not have a dominant market position.
    Despite that, what we have is asymmetric regulation, 
regulation that directly handicaps SBC and the 
telecommunications telephone companies' ability to deploy 
advanced services and serve the advanced services market at the 
same time that asymmetric regulation protects our competitors 
from full competition and deprives the public of the benefits 
of a fully competitive marketplace.
    Let me give a specific example of what that means. The 
regulation of the cable modem people is virtually nonexistent. 
They do not have common carrier obligations, they do not have 
to interconnect their facilities, they do not have to permit 
resale. They do not have to--and this maybe in the future will 
be the most fundamental point--they do not have to provide open 
access. They can dictate the ISP they want to use, the terms 
and conditions. They can subsidize, they can bundle, and so on.
    The telephone company does not have that capability. It is 
burdened and the public is denied the benefits of a fully 
competitive marketplace. It does not have to be this way. I 
would encourage the Committee to look at the experience in the 
wireless industry. In 1983 there were two providers. Today we 
have five or more in every market, five or more facility-based 
competitors. That happened with almost no regulation in that 
industry--competitive prices, alternative new services. That 
can be a model for advanced services as opposed to asymmetric 
regulation.
    Now, with respect to reciprocal comp, we fully support the 
bill. Reciprocal comp was intended, designed to compensate the 
terminating carrier for its costs, if they were otherwise not 
recovered, for completing a local call. That is not what is 
happening. The reciprocal compensation today is not paid for 
completing a local call when it goes to the Internet, the World 
Wide Web. Second, it has no relationship to the costs of 
completing them.
    I will give a specific example in my own case why it is not 
a sustainable system. My daughter was in law school several 
years ago and she came to me at Christmas, and I said: What do 
you want for Christmas? She said: I would like a second line. I 
said: Well, that is not bad; that is about $15 in Texas; that 
is reasonable. I said: Why do you want it? She said: Well, I 
want to leave my computer on, hooked up to the Internet, so I 
can get e-mail all the time. I said OK.
    So I got her the second line. Southwestern Bell collected 
$15 or so from me for that second line. I then find out that if 
her Internet service provider is behind a CLEC--ICG, Focal, or 
one of the others--and she does exactly what she said, at that 
time we would have paid that CLEC $450 for a customer from whom 
we collected $15. Now, that is not sustainable.
    My company will spend something like $750 million. Ninety-
some percent will be in the area of reciprocal compensation. It 
is money that could be spent to deploy broadband faster to the 
very communities that Senator Brownback is talking about. We 
are a company that is committed to spend $6 billion to bring 
broadband to 80 percent of our market. I wish it could be 100, 
I wish it could. I wish we could take that $750 million and 
deploy it to that other 20 percent, many of which involve rural 
communities.
    I would ask the Committee to consider these points and I 
would be happy to answer questions.
    [The prepared statement of Mr. Ellis follows:]

 Prepared statement of James D. Ellis, Senior Executive Vice President 
           and General Counsel, SBC Telecommunications, Inc.
    My name is Jim Ellis. I am the Senior Executive Vice President and 
General Counsel of SBC Communications Inc.
    There are two fundamental principles that should guide Congress in 
its analysis of telecommunications legislation. First, competitive 
markets should be free from governmental regulation. Second, if there 
is some public policy reason for regulating a market, all service 
providers in that market should be subject to the same regulatory 
requirements.
    In respect to the market for high-speed broadband Internet access 
and advanced services, there are certain undisputed facts. This is a 
new market offering new services, in which no service provider 
possessed a ``head-start.'' It is a market in which new entrants will 
provide the same high-speed Internet access and offer the same advanced 
services to the same residential and business customers. It is also a 
market in which the cable industry is unregulated and is ahead of every 
new entrant in deploying the necessary technology to provide these 
services. This regulatory disparity has significant market impacts and 
imposes a competitive disadvantage upon the incumbent local exchange 
carriers (ILECs), such as additional costs, inefficiencies in the 
deployment of new technologies, and the inability to package content.
    In addition, ILECs are inappropriately being required to pay 
reciprocal compensation on Internet traffic. The reciprocal 
compensation provision of the Telecommunications Act of 1996 ('96 Act) 
was designed to compensate local carriers for the costs of terminating 
local exchange calls originated by other local carriers' customers. 
Calls originating in a local exchange and terminating on the Internet 
are not local exchange calls. The current application of reciprocal 
compensation, whereby ILECs are forced to compensate competitive local 
exchange carriers (CLECs) for calls to Internet service providers are 
not related to the costs of terminating local calls. They are simply a 
subsidy of the CLEC industry.
    I want to compliment Senator Brownback for his leadership in 
crafting this legislation. S. 2902 is a step in the right direction 
toward fulfilling SBC's fundamental principles in the market for high-
speed broadband Internet access and advanced services.
Background
    Historically, the only telecommunications pathway or wire to nearly 
every home and business in this country was the local copper loop. The 
local copper loop is part of the circuit-switched network owned and 
operated by local exchange telephone companies that, until recently, 
was capable of transmitting only narrow-band voice, and slow speed 
switched data services. The local exchange telephone companies are 
subject to pervasive regulation of the rates, terms and conditions 
under which they offer services at both the state and federal level. 
Historically, this regulation was based upon the fact that these 
companies operated pursuant to a legally franchised monopoly, and the 
local loop was considered a ``bottleneck.''
    Approximately 25 years ago, cable service began to emerge as an 
alternative to broadcast television service. It is provided through 
antennas located at the cable provider's head-end that receive 
programming from satellites, which is then transmitted over coaxial 
cable to homes and businesses. Coaxial cable is different from the 
ILECs' local copper loops, in that it is capable of transmitting 
broadband video and high-speed data services. Thus, the cable industry 
provides an alternative telecommunications pathway or second wire to 
the home.
    In the past 15 years, additional telecommunications pathways to 
homes and businesses rapidly developed through various wireless 
technologies--digital satellite service, cellular and PCS service, and 
fixed wireless. We also began to see a convergence of these 
technologies, whereby the telephone, cable and wireless industries 
explored ways in which they each could provide customers a package that 
would include all of these services.
    Most recently, the Internet--an interconnected network or web of 
computer data bases operating upon packet-switched technologies and IP 
protocols--evolved and made possible a new form of high-speed data 
communications and ``advanced services.'' When the `96 Act was being 
debated in Congress, the Internet and advanced services were still in 
their infancy. The precise nature in which these advanced services 
would be provided to the public was still uncertain. Congress sought to 
address this new telecommunications phenomenon and the promising new 
advanced services it had to offer through passage of Section 706 of the 
`96 Act. Section 706 established a new national telecommunications 
policy to ``encourage the deployment on a reasonable and timely basis 
of advanced telecommunications capability to all Americans.'' 
Specifically, Congress directed the FCC and state commissions to pursue 
this objective by ``utilizing price cap regulation, regulatory 
forbearance, measures that promote competition in the local 
telecommunications market, or other regulatory methods that remove 
barriers to infrastructure investment.'' In the case of the ILECs' 
provision of high-speed broadband Internet access and advanced 
services, such regulatory forbearance has not been forthcoming.
Advanced Services Market
    The market for the delivery of advanced services is different from 
the market for narrow-band services.\1\ Broadband services support 
speeds of 200 kbps and greater, and are typically 10 to 100 times 
faster than narrow-band dial-up or ISDN telephone lines. High-speed 
broadband services are also used much more than narrow-band services, 
because users of such services spend many hours ``on-line'' in a single 
session. They will tie-up telephone company facilities for longer than 
typical voice calls, and hence cost much more to provide.
---------------------------------------------------------------------------
    \1\ See K. Werbach, FCC Office of Plans and Policy, Digital 
Tornado: The Internet and Telecommunications Policy at 73-75, OPP 
Working Paper No. 29 (March 1997).
---------------------------------------------------------------------------
    The business market for high-speed broadband services is also 
separate and distinct from the consumer market for the same services, 
which consists of small business and residential customers.\2\ 
Virtually all business customers have access to high-speed broadband 
service that is typically provided over T-1 lines that are not 
available to the residential customers, and business customers have 
many competitive alternatives for obtaining that high-speed broadband 
access.\3\
---------------------------------------------------------------------------
    \2\ In the Matter of Inquiry Concerning the Deployment of Advanced 
Telecommunications Capability to All Americans in a Reasonable and 
Timely Fashion, and Possible Steps to Accelerate Such Deployment 
Pursuant to Section 706 of the Telecommunications Act of 1996, Report, 
CC Docket No. 98-146 at para. 28 (released February 2, 1999).
    \3\ Id. at para. 26.
---------------------------------------------------------------------------
Cable Modem versus xDSL Service
    The two industries with wires that pass the majority of homes and 
businesses in this country--cable and telephone--have been in a race to 
develop the technologies to provide their customers with high-speed 
broadband access to the Internet and to the new advanced services.
    The cable industry developed cable modem service to work with their 
broadband coaxial cable, and has been rapidly deploying its cable modem 
technology. The ILECs were at a competitive disadvantage in this race, 
because their narrow-band local copper loops were not equipped to 
provide broadband services. The ILECs had to develop a new technology--
Digital Subscriber Line or xDSL service--that would enable their 
narrow-band local copper loops to carry high-speed broadband advanced 
services.
    The ILECs are now scrambling to deploy Asymmetrical Digital 
Subscriber Line (ADSL) service as a competitive alternative to cable 
modem service. But, the cable industry is far ahead of the ILECs in the 
actual provisioning of advanced services to consumers. At the end of 
the first quarter of 2000, there were approximately 2.5 million 
residential broadband subscribers in the United States, of which 1.9 
million or 77% were cable modem subscribers and only 21% were xDSL 
subscribers.
Asymmetric Regulation
    Against this background, the rules and regulations that apply to 
the provision of advanced services by the cable industry and ILECs are 
entirely different.
    The cable industry is essentially unregulated in the provision of 
cable modem service. Under Title VI of the Communications Act, the 
cable industry is not required to interconnect with its competitors, 
unbundle its facilities and make them available to competitors, or 
resell its services. Furthermore, the cable industry is not subject to 
the same open or equal access requirements as the telephone industry in 
that it is not currently required to give its customers a choice in the 
selection of an Internet service provider.
    This unparalleled ability of the cable industry to control both the 
means of access to the Internet and the content that is delivered to 
the customer provides it with an unparalleled advantage in the 
marketplace, when compared to the ILECs which are trying to play catch-
up with cable modem service. For example, AT&T/TCI/Media One and Time 
Warner alone control vast holdings in the access and content market. 
AT&T/TCI/Media One is the largest cable provider and provides cable 
modem service to almost 30% of all cable modem customers. Time Warner 
provides cable modem service directly to approximately 21% of all cable 
modem customers, and indirectly to an additional 17% of cable modem 
customers through its ownership of Road Runner. Time Warner and its 
content affiliates own 4 of the top 15 video programming services, and 
the largest premium TV network. Time Warner also operates Warner 
Brothers, one of the largest movie and television studios. AT&T and its 
content affiliates have ownership interests in 4 of the top 15 video 
programming services. Together, the Time Warner and AT&T consortia thus 
own 8 of the top 15 video programming services, including 4 of the top 
5. In addition, it is no secret that AT&T has been trying to negotiate 
a joint venture with Time Warner, and that Time Warner and AOL, the 
largest Internet service provider, are planning to merge. This creates 
a situation where the cable industry could well develop a dominant 
position in the provision of certain forms of high speed Internet 
access and advanced services.
    The ILECs, on the other hand, remain pervasively regulated today. 
Under Title II of the Communications Act, the ILECs are subject to 
common carrier regulation in their provision of advanced services. The 
ILECs are obliged to assist their competitors in offering competing 
xDSL services through the interconnection, unbundling, and collocation 
requirements of Section 251(a) and (c) of the `96 Act. In the case of 
SBC's advanced services affiliates, which are regulated as non-dominant 
telecommunications carriers, there is an interconnection obligation 
under Section 251(a) and a resale obligation under Section 251(b).
Reciprocal Compensation
    Section 251(b)(5) of the `96 Act provides that each local exchange 
carrier has a duty to compensate other local exchange carriers for the 
costs of transporting and terminating calls originated by their 
customers. However, as a result of a patchwork of regulatory and court 
decisions interpreting Section 251(b), the ILECs have paid enormous 
sums of money for traffic terminating on the Internet.
    Some CLECs have ``gamed'' the system by signing up Internet service 
providers, and claiming that calls to the Internet consist of two 
calls. The CLECs argue that the ``first'' call is from the ILEC 
customer and to the CLEC location within the local exchange, with a 
``second'' call originating at the CLEC location and terminating on the 
Internet. The CLECs have largely been successful in convincing some 
regulators and courts that reciprocal compensation should be paid on 
the ``first'' call.
    The problem with this scenario is that reciprocal compensation 
payments are calculated on a minute-of-use basis. This means that when 
a customer logs on to his/her computer to access the Internet, the CLEC 
is paid reciprocal compensation for every minute the customer is ``on 
line.'' Since the average Internet call results in the customer being 
``on line'' for 30 minutes or 10 times as long as the average local 
call, the compensation being paid by the ILECs to the CLECs amounts to 
billions of dollars a year. In Texas alone, 92% of the minutes-of-use 
delivered by Southwestern Bell to the CLECs is bound for the Internet, 
with the number dropping to only 80% in SBC's region as a whole. 
Moreover, there is nothing reciprocal about this arrangement, because 
the Internet service provider served by the CLEC never calls 
Southwestern Bell's customer. The economics of this arrangement are 
simply not sustainable.
    More importantly, it sends the wrong signals to the marketplace. 
The receipt of reciprocal compensation for Internet-bound traffic has 
become a new line of business for CLECs, thus creating an incentive for 
them to sign-up Internet service providers and to avoid residential 
customers. That is because, if a CLEC signs up large numbers of new 
residential customers two things will happen. First, the CLEC loses the 
reciprocal compensation revenues it had been receiving from calls those 
residential customers made to Internet service providers served by the 
CLEC. Second, if these new residential customers in turn call customers 
of the ILECs and/or Internet service providers served by other CLECs, 
the CLEC will have to pay reciprocal compensation to the ILECs and 
those other CLECs.
    Thus, the current application of the reciprocal compensation 
obligation is nothing more than a transfer of wealth from the ILECs to 
the CLECs with no corresponding public benefit. Congress should clarify 
that reciprocal compensation is only available for the transport and 
termination of local telephone exchange service, and thereby create the 
proper incentive for CLECs to invest in facilities-based local 
competition.
    In conclusion, SBC will support any legislative initiative that 
eliminates the current disparity in regulation that exists between the 
cable and telephone industries in the market for the provision of high-
speed broadband Internet access and advanced services, or provides 
symmetrical regulation of that market. In addition, SBC supports 
elimination of the loophole that currently exists in the application of 
reciprocal compensation. We look forward to working with the Committee 
and the Congress to achieve these objectives.

    Senator Brownback. Thank you very much, Mr. Ellis.
    Mr. Haynes, thank you for joining the Committee today.

  STATEMENT OF ARNE L. HAYNES, PRESIDENT AND CHIEF EXECUTIVE 
                   OFFICER, THE RAINIER GROUP

    Mr. Haynes. Thank you, Mr. Chairman, Senator Rockefeller. 
My name is Skip Haynes. I am the President of the Rainier 
Group. We are an incumbent local exchange carrier in the 
foothills of Mount Rainier some 16 miles from Seattle in 
Washington State. We have been in the business since 1910. My 
great-grandfather won it in a pinochle game in 1912 and I am a 
fourth generation manager, and my son just joined the company 
to run our interactive media operation.
    Senator Brownback. The family still plays pinochle?
    Mr. Haynes. We gave it up; it is too dangerous.
    In my written testimony I have given you some idea of how 
small we are, but we have less than 4,000 incumbent phone 
company access lines that we serve. We have approximately a 
thousand cable TV customers that--we have started a cable TV 
company after the act was passed in 1996. We compete with AT&T, 
the former TCI. We also have 400 facilities-based CLEC 
customers. We are an Internet service provider and we provide 
long distance.
    We are very much a startup operation. We have two other 
operations going. We will soon be competing with Pacific Bell 
in Central California and with Bell South in Florida. Again, we 
compete with AT&T, Qwest, the former U.S. West properties, a 
myriad of IXC's, and Internet service providers. We have 50 
employees. Again, we are very small. We are triple our size 
since the Act passed in 1996. So we are aggressive and excited 
about the new opportunities competition brings.
    What we like about the bill, Senator Brownback, is its 
relief from regulation, and we support relief from regulation 
in every form, both Federal and State. We believe and we know 
from experience that regulation impedes competition and that 
regulatory costs are obscene, and anything we can do to reduce 
those, including the participation they would like to have in 
our competitive markets, is important.
    Senator Rockefeller. Do you feel that way about the FAA 
also?
    Mr. Haynes. No, sir, but they are doing a different 
service, Senator Rockefeller. That is a public safety thing in 
my opinion.
    Senator Rockefeller. Thank you.
    Senator Brownback. Please proceed with the testimony.
    Mr. Haynes. Thank you, Senator Brownback.
    There is no digital divide in our Washington State 
operations. We provide cable modem services now. We are rolling 
out DSL services and we have conditioned our plant to serve 100 
percent of our customers. That means the end of the Scott 
Turner Road as well as downtown Eatonville with its 1600 
customers. That is the world headquarters, by the way.
    I am either very bright for starting 10 years ago to 
develop a data network or I am really stupid for having 
invested shareholder money in something that we may be forced 
to give away to competitors. I believe the Brownback bill will 
allow us to continue to expand our operations. Without the 
deregulatory aspects of the Brownback bill, we think our 
operations in Washington could be severely curtailed.
    Simply stated, a competitor using our facilities at 
ridiculously low costs can price their services below ours. 
Few, if any, of our costs go away at that juncture. Residual 
customers will have to pick up the difference. This is like 
Robin Hood stealing from the poor and giving it to the rich.
    I started our data-focused expansion 10 years ago when I 
rejoined the company. I never dreamed that regulators would be 
so unfair and so unreasonable. If the current regulatory 
climate persists, I may not be able to continue to invest 
shareholder money in our incumbent LEC beyond the minimum 
required to provide plain old telephone service.
    Meanwhile our competitor, little old AT&T, has little or no 
regulation or requirement to unbundle their digital facilities. 
Subsequent to the Ninth Circuit decision, why should my 
advanced services be subject to regulation and not theirs?
    The Brownback bill has something I am a little more 
schizophrenic about. That is reciprocal compensation. Our first 
CLEC does not have a reciprocal comp component. I do not 
receive it or do not pay it. Our newest one will. We could make 
a lot of money with reciprocal compensation, but a business 
plan that is built on windfall profits makes no sense to me, 
and ultimately justice will prevail and I believe your 
provisions are correct, Senator Brownback. This is an 
unreasonable loophole and needs to be eliminated.
    One part of the bill that I would recommend some 
enhancement, please, is preemption of State regulation in the 
same manner as you are recommending for Federal. State 
regulators get many of their misguided notions from the FCC. It 
is also true, based on my experience, that the rules applied to 
the large companies trickle down to the small companies. 
Furthermore, the State regulators are drooling to fill the gap 
where any Federal regulation will go away. So, frankly, the 
States are more of a concern to us and we request that whatever 
language is required in this bill to make State and Federal 
regulation comparable would be very helpful.
    I just want to say one more thing. Any one of our employees 
can better serve our customers than anyone in regulation. So 
let market forces work, and I believe the Brownback bill will 
help.
    Thank you very much.
    [The prepared statement of Mr. Haynes follows:]

  Prepared Statement of Arne L. Haynes, President and Chief Executive 
                       Officer, The Rainier Group
    Mr. Chairman, Members of Committee, thank you. I support the 
Brownback bill.
    My name is Arne L. Haynes. I am President and CEO of The Rainier 
Group. We have served telephone customers in the foothills of Mount 
Rainier (Washington) since 1910. My Great grandfather Pete won the 
Company in a pinochle game in 1912. I am the fourth generation manager 
and my son just joined the Company to lead our Interactive Media 
effort.
    Our operations include:

   Mashell Telecom 3800 access line

   Rainier Connect:

    --400 facilities based CLEC customers

    --1000 cable television customers

    --1000 Internet customers

    --2600 long distance customers

   MercedNet:

    --Merced, California fixed wireless and CLEC

    --Ocala, Florida fixed wireless and CLEC

    --Merced Interactive Media--web content

    We compete with AT&T, Qwest (US West), a myriad of other IXCs and 
Internet Service Providers. We will soon compete with Pacific Bell and 
Bell South. We have 50 employees, triple our size since the 96 Act. We 
need relief from regulation! (Federal and State)

   We were strictly an ILEC prior to The Act.

   Regulation impedes our growth.

   Regulatory costs are obscene.

    There is no ``Digital Divide'' in our Washington State operation. 
We provide cable modem service and will roll out DSL to 100% of our 
service area in the next 90 days.
    I am either very bright for developing a data ready network or 
stupid for investing millions of shareholder dollars in plant that I 
must give to ``competitors'' at below cost rates.
    I believe The Brownback bill will allow us to continue to expand 
our operations. Without the deregulatory aspects of the bill, we fear 
that our Washington operations will be severely harmed and expansion 
curtailed.
    Simply stated, a competitor using our facilities at ridiculously 
low costs, can price their services below ours. Few, if any, of our 
costs go away. Residual customers will have to pay much higher rates. 
This is Robin Hood stealing from the poor to give to the rich!
    I started our data focused expansion at the same time I rejoined 
the Company. I never dreamed that regulators would become so unfair and 
unreasonable. If the current regulatory climate persists I may not be 
able to continue to invest shareholder money in our ILEC beyond the 
minimum required to meet plain old telephone service (POTS) 
obligations.
    Meanwhile, our competitor, little old AT&T, has little or no 
regulation or requirement to unbundle their digital facilities. 
Subsequent to the 9th Circuit Court decision, why should my advanced 
services be subject to regulation and not theirs?
    The Brownback bill has one other aspect that I am more 
schizophrenic about. Our first CLEC operation does not have a 
Reciprocal Compensation element. Our newest one will. We could make a 
lot of money with Reciprocal Compensation.
    However, Reciprocal Compensation is unsustainable. When business 
plans require windfall profits for success justice will ultimately 
prevail. This bill justifiably eliminates an unfair and unreasonable 
loophole in existing regulation.
    The elimination of regulation included in this bill will allow me 
to better see the future opportunities to expand our services in our 
Washington operations. Today, the uncertainty and unreasonableness of 
regulation makes further investment considerably more risky. It took 
our Company ten years to build a data ready network. Regulatory errors 
could destroy that in months.
    One aspect of the bill that needs enhancement is the pre-emption of 
State regulators in the same manner as federal.
    State regulators get many of their misguided notions from the FCC. 
Further, they are drooling to fill any vacuums created by less Federal 
regulation. Frankly, they are a bigger threat to our companies than the 
FCC. Any one of my employees knows better how to meet our customers' 
needs than anyone in regulation.
    Please let market forces work by passing the Brownback bill with 
the requested State regulatory pre-emptions.
    Thank you.

    Senator Brownback. Thank you, Mr. Haynes, for joining us 
today. Mr. Taylor, thank you for being with us.

        STATEMENT OF ROBERT TAYLOR, PRESIDENT AND CHIEF 
           EXECUTIVE OFFICER, FOCAL COMMUNICATIONS, 
              AND CHAIRMAN, ASSOCIATION FOR LOCAL 
                  TELECOMMUNICATIONS SERVICES

    Mr. Taylor. Thank you, Mr. Chairman and Members of the 
Committee. My name is Robert Taylor. I am the CEO of Focal 
Communications, as well as the Chairman of the Association for 
Local Telecommunications Services, also known as ALTS. ALTS 
represents approximately 100 facilities-based CLECs across the 
United States, including wire line companies that offer both 
circuit-switched, packet-switched, and wireless connectivity to 
circuit-switched and Internet-based networks, as well as DSL 
companies that provide many of the broadband services we are 
talking about today.
    Focal itself is a facility-based carrier offering services 
in 19 markets across the United States, with plans to enter 24 
by the end of next year.
    I certainly welcome the opportunity to appear here today on 
behalf of these competitive carriers and to explain why S. 2902 
is in our minds anticompetitive and unnecessary. Certainly if 
any Congressional action is needed, it is action that will 
provide for stronger enforcement of the Act. I think as you 
have heard from the other three panelists here, a lot has been 
done in the last four years. We have accomplished a lot. 
Companies like SBC have rolled out DSL to millions of their 
potential customers.
    We are seeing it happen in both big cities as well as in 
rural markets. Some ALTS members serve rural markets. Companies 
like McLeod USA are providing broadband services in Iowa and 
other rural States today.
    The Act certainly is and was the most important piece of 
telecom legislation since the original Communications Act of 
1934, and you the members of this committee should take great 
pride in what you have accomplished. Since the act was passed, 
over $30 billion of new capital has been raised and put in the 
ground to provide new broadband services to customers across 
this country. The competitive bricks and mortars have meant 
lower prices, better services, and the revenues of the 
competitive telecom industry have exploded from less than a 
billion dollars before the act to almost $6.5 billion in 1999, 
and CLECs now employ over 70,000 people across the United 
States. Clearly, a fabulous success.
    ALTS and its member companies believe that there is really 
no need for new legislation, that competition is happening, we 
are beginning to see the results of it, the numbers are very 
measurable, and the successes are growing every day.
    For example, in one recent Wall Street report SBC was 
listed as offering DSL services to 14.5 million customers as of 
June 30th of this year. That is up from 12.8 million customers 
at the end of the first quarter. In three months they added two 
million potential subscribers to their network. That is a 
pretty fast rollout of high speed broadband technology and I 
think companies like SBC should be commended because they are 
fulfilling the mandate of the Telecom Act.
    All of this deployment is occurring without any changes. We 
are all as a competitive industry, both the RBOCs, the small 
incumbents, and the competitive carriers, building network as 
fast as we possibly can. You can go knock on the door of Lucent 
or Cisco or Nortel and look in their warehouses; there is not 
technology sitting on the shelves. Every bit of chips and fiber 
and switches being made today is being put in the ground by one 
of the companies represented here today. We are building and 
working on the mandate that you gave us in 1996 as fast as we 
possibly can. It simply cannot go any faster.
    Now let me turn to the specific concerns. First, we think 
the legislation attempts to establish a different regulatory 
regime based upon the technology deployed. This is going to 
create some significant problems between the have's and the 
have-not's simply defined by the technology that they use. S. 
2902 would limit the provisions of the 1996 Act as it was 
designed to open competition not only in the circuit-switched 
arena, but in all aspects, because when we look at DSL service 
today, while there are many different providers, all of the 
facilities, all of the access to the customer, is controlled by 
the Bell operating company. So there still is a bottleneck out 
there that needs regulatory oversight.
    The distinction based upon service or technology would 
virtually ensure the monopoly control, Bell's continuing 
monopoly control, not over older services but over all of the 
new services. Redefining the pieces of the network that they 
use today and calling it broadband simply changes their ability 
and their need to open it up to new competitors, represented by 
ALTS.
    Second, the legislation removes State and Federal 
regulatory oversight for almost all of the services provided by 
the local incumbent exchange carrier, even though that carrier 
today is still virtually a monopoly. In most markets the 
incumbent still has over 95 percent of the customers in the 
market. Competition is beginning. It is not there yet. When we 
look at the CLEC industry as a whole, I think as of the end of 
last year, there was only one CLEC out there today that was 
profitable. This is a long-term business. It takes long-term 
investments and it is going to take a while for this to be a 
profitable business. But we think the investments are there, 
the opportunity is there, and it is a sound business to be in.
    Third, the bill would prohibit any payment of compensation 
related to the transportation and termination of calls to the 
Internet service providers as it is defined today in reciprocal 
comp. Reciprocal compensation was not the CLECs' design. The 
rates were not set by the CLECs. The rates were set by the Bell 
operating companies. The CLECs had asked for zero. The payments 
that are being made today would have been zero if the plans 
that the CLECs had proposed four years ago would have been put 
in place.
    But, given that, the rates have fallen dramatically from 
where they were at a penny a minute at the creation of the act 
to now in some States one-tenth of a cent a minute. So the 
rates for reciprocal compensation have fallen dramatically and 
these are contractual relationships, and the process is 
working.
    Fourth, the legislation would not require one dime of new 
investment in broadband facilities. Certainly it changes some 
of the rules on which people operate, but it does not force 
them to do more. Clearly, if that is the goal of the bill, it 
does not accomplish that in our minds.
    To keep the exemption for packet-switched services, the 
bill requires that an incumbent carrier demonstrates after 
three years that it can reach 80 percent of the customers using 
an industry-approved standard and existing loop facilities. The 
same is true of the five-year test.
    But not all customers are served by incumbents. Moreover, 
those customers can be served using existing technology. It is 
the existing technology that we need access to, because we will 
deliver the service using the existing technology and the 
incumbents are doing it and between the two of us we will get 
there.
    Finally, the legislation is not needed to speed the 
deployment of advanced services. As demonstrated in the press 
releases of many of the RBOCs themselves, they are deploying 
DSL services as fast as they can. There is no new need for 
incentives from a legislative standpoint to get that to go any 
faster. In fact, as we talk to the manufacturers, there is not 
the availability from a manufacturing standpoint to build more 
chips and to build more technology.
    The limiting factor is not the regulatory impediments. It 
is the suppliers, it is the labor market, it is the fact that 
you guys have created a really good economy. That is the 
challenge that is out there today. Deployment is occurring 
under the existing laws in large measure due to competitors 
like ICG, Focal, and other ALTS members. The message from this 
rapid deployment is crystal clear: No change is needed in the 
Act. Congress should stay the course and market forces will 
provide the results that you guys are looking for.
    Thank you very much and I appreciate my opportunity to 
speak here and will certainly answer any questions.
    [The prepared statement of Mr. Taylor follows:]

  Prepared Statement of Robert Taylor, President and Chief Executive 
  Officer, Focal Communications, and Chairman, Association for Local 
                      Telecommunications Services
    Thank you Mr. Chairman and Members of the Committee. My name is 
Robert Taylor and I am the CEO of Focal Communications and the Chairman 
of the Association for Local Telecommunications Services, more commonly 
known as ALTS. Focal is a facilities based competitive local exchange 
carrier (CLEC) doing business in nineteen major markets across the 
nation, with plans to be in twenty-four markets by the end of the year. 
We were founded in 1996, and are a direct result of the enactment of 
the Telecommunications Act of 1996 (the '96 Act).
    ALTS represents approximately 100 facilities-based CLECs. These 
include wireline companies like Focal which offer both circuit and 
packet switched services, wireless companies that offer both circuit 
and packet switched services, and data CLECs, which specialize in 
packet-switched data and Internet services. I welcome the opportunity 
to appear here today on behalf of the facilities-based local 
competitors to explain why S. 2902 is anti-competitive and unnecessary, 
and to show why the carefully crafted market opening provisions of the 
'96 Act will continue to foster local competition and broadband 
deployment without any amendment.
    The '96 Act was the most important piece of telecommunications 
legislation passed by Congress since the original 1934 Communications 
Act, and members of this Committee should take great pride in what they 
have accomplished. Thanks to the '96 Act, the competitive local 
telecommunications industry has raised the capital to build over 30 
billion dollars worth of new local infrastructure, the competitive 
``bricks and mortar'' that mean lower prices and new choices for local 
telephone consumers.\1\ Local revenues for CLECs have exploded from 
less than one billion dollars in 1996 to more than 6.3 billion dollars 
in 1999, access lines have climbed from approximately one million in 
1996 to over 10 million in 1999,\2\ and CLEC employees now exceed 
70,000.\3\ Of course, the competitive industry would prefer to move 
even faster, but it is manifest that the '96 Act has jump-started 
competition in local telecommunications markets.
---------------------------------------------------------------------------
    \1\ The State of Competition in the U.S. Local Telecommunications 
Marketplace, ALTS Annual Report, February 2000, Graphic F.
    \2\ Id. at Graphics I and J.
    \3\ Id. at Graphic F.
---------------------------------------------------------------------------
    ALTS and its member companies believe that there is no need for new 
legislation to change the '96 Act. Competition for local services is 
already happening, and the incumbent local exchange carriers, and in 
particular the Regional Bell Operating Companies (RBOCs), are rolling 
out new competitive services at an amazing rate. For example, in one 
recent financial report, SBC Corporation was listed as offering high 
speed Digital Subscriber Line (DSL) service to 14.7 million customers 
as of June 30, 2000, up from 12.8 million on March 31, 2000. Two 
million new customers with the opportunity to purchase DSL in the space 
of three months is definitely not a slow roll-out of service. The same 
report states that SBC has installed DSL equipment in 75% of the 1,300 
central offices in which they plan to offer DSL service.\4\ All without 
any change in the '96 Act.
---------------------------------------------------------------------------
    \4\ Bear Stearns Investment Opinion, as published by First Call 
Research Notes, 7/21/2000.
---------------------------------------------------------------------------
    In fact, the best way to speed the roll-out of DSL and other high-
speed Internet services is for Congress to demand better enforcement of 
the '96 Act. The biggest impediment to even faster competitive 
deployment of high speed Internet access is the incumbent carriers 
themselves. They have repeatedly attempted to slow down, or avoid 
entirely, the implementation of the market-opening requirements of the 
'96 Act. Better enforcement would speed the interconnection of networks 
and the offering of new services, which will mean more choices and 
lower prices to consumers.
    Many of the legislative proposals pending before Congress, 
including S. 2902 as introduced and as shown in various staff drafts, 
will slow broadband deployment. By removing essential elements of the 
'96 Act, these legislative proposals will make it more difficult for 
competitors to be able to access all but the most lucrative business 
markets. This in turn reduces the competitive pressure that has 
prompted the RBOCs and other incumbents to offer DSL services at all.
    With that background, let me turn to the subject of today's 
hearing--S. 2902, the Broadband Internet Regulatory Relief Act of 2000. 
Focal and ALTS are opposed to S. 2902 because it would seriously 
undermine the key local market entry provisions that Congress so 
carefully crafted in the '96 Act. If this bill were enacted, 30 billion 
dollars in new investment and 70,000 new jobs, not to mention greater 
choice for consumers, would be put at serious risk due to the near 
monopoly this legislation would permit to be re-established.
Summary of ALTS' and Focal's Opposition to S. 2902
    S. 2902 would eliminate many of the core market opening 
requirements of the '96 Act. ALTS and Focal strongly oppose S. 2902 for 
the following reasons:
    First, the legislation attempts to establish different regulatory 
regimes based on the technology used to deploy a telecommunications 
service, under the mistaken belief that packet switching is a new 
technology and that the incumbent carriers cannot use their existing 
monopoly to gain a market advantage in this ``new'' service. Nothing 
could be further from the truth. This approach would relegate the key 
pro-competitive provisions of the '96 Act to older circuit switched 
technology and would seriously undermine competition using new 
technologies. This approach was firmly and properly rejected by 
Congress in the '96 Act.
    Second, the legislation would remove Federal and State regulatory 
oversight of almost all services provided by the incumbent local 
exchange carrier, even though that carrier still has a virtual 
monopoly. In most markets, the incumbent carrier still serves over 95 
percent of the customers in the local market. This approach fails to 
recognize the tremendous market advantage that the incumbent gains from 
being able to invest in new services while maintaining a captive 
revenue stream from its huge customer base. That base is not the result 
of competition; it is a direct and ongoing legacy of the government 
granted monopoly on local communications service that was eliminated by 
the '96 Act. Congress recognized that the incumbents have a huge market 
advantage, and as a result forced the incumbents to provide 
interconnection and unbundled access to their monopoly networks.
    Third, the bill would prohibit the payment of any compensation to 
competitive carriers for their costs of transporting and terminating 
calls to an Internet service provider. These costs are real. In 
addition to being unconstitutional, this provision of the bill would 
result in decreased choices for Internet service providers and 
increased costs to consumers for Internet access service.
    Fourth, the legislation would not require one dime of new 
investment in broadband facilities by the incumbent local exchange 
carriers. As drafted, the bill provides extensive regulatory relief on 
the date of enactment, without any advanced services being required to 
be provided whatsoever. In order to keep that relief in perpetuity, the 
bill requires that an incumbent carrier demonstrate after three years 
that it can provide advanced services to 80 percent of the customers it 
can reach with such service ``using an industry approved standard and 
existing loop facilities.'' The same is true in the five year test. In 
both cases, even if the incumbent makes no new investment, the test is 
limited to 80 percent and 100 percent, respectively, not of all 
customers served by the incumbent, but rather of those customers it can 
reach using ``existing'' facilities and technology. In fact, the July 
18 draft explicitly recognizes that many customers will not be able to 
be reached with ``advanced services,'' so the regulatory relief is 
expanded to include slower, 10 year old ISDN technology.
    Fifth, this legislation is not needed to speed the deployment of 
advanced services. As demonstrated by the press releases of the RBOCs 
themselves, they are already deploying new DSL services as fast as they 
can. The primary limiting factor for them is not any regulatory 
impediment; instead it is the tight labor market for trained 
technicians and their own failure to respond to customer demands. This 
deployment is occurring under existing law, in large measure to meet 
competition from providers like Focal and the cable modem services now 
being offered by cable companies. The message from this rapid 
deployment is clear--no change is needed in the '96 Act. If Congress 
stays the course market forces will provide the result this legislation 
purports to seek.
1. LS. 2902 Repeals Many of the Key Market Opening Provisions of the 
        '96 Act
A. LThe legislation creates different regulatory regimes based on a 
        confusing and unworkable hierarchy of circuit-switched, packet-
        based, packet-switched, advanced services, and fiber optic 
        technology.
    The '96 Act had two key sets of provisions designed to open up the 
local telecommunications market to competition. One set is embodied in 
sections 251 and 252,\5\ which require each incumbent local exchange 
carrier (i.e., those that had a monopoly on local service when the Act 
was passed) to negotiate agreements with competitors that permit the 
competitor to 1) interconnect its network with the incumbent's network; 
2) purchase pieces of the incumbent's network needed to provide service 
(these pieces are called unbundled network elements or UNEs, and 
include loops, switching, and transport between exchanges); 3) resell 
the incumbent's service at wholesale prices; and 4) collocate equipment 
needed to interconnect or access unbundled network elements.
---------------------------------------------------------------------------
    \5\ 47 U.S.C. 251 and 47 U.S.C. 252. References to sections in this 
testimony refer, unless otherwise noted, to sections of the 
Communications Act of 1934 (codified at 47 U.S.C. 151 et seq.). Most of 
the provisions enacted in the Telecommunications Act of 1996 (Pub. L. 
104-104), for example sections 251, 252, and 271 referred to in this 
testimony, were amendments to the underlying Communications Act.
---------------------------------------------------------------------------
    The second set of key provisions are found in section 271,\6\ which 
was designed to act as an incentive to encourage the largest of the 
local monopolies--the RBOCs--to cooperate with competitors and comply 
with the section 251 requirements. The ``carrot'' was entry into the 
long distance market, which the RBOCs were prohibited by the courts 
from entering prior to the '96 Act. In the '96 Act Congress agreed to 
remove the court restriction, and to permit entry into the long 
distance market, as soon as the Federal Communications Commission (FCC) 
determined that the RBOC faced real competitors and had met a 
``competitive checklist'' that demonstrates compliance with the market 
opening requirements of section 251.
---------------------------------------------------------------------------
    \6\ 47 U.S.C. 271.
---------------------------------------------------------------------------
    S. 2902 effectively repeals many of the requirements of section 251 
with respect to packet-switched network technology, and in doing so 
significantly undermines the incentive for compliance provided in 
section 271 by removing packet-switched technology from the competitive 
checklist. Packet-switched networks have been used in the industry 
since the 1980s, and packet switching is the technology being most 
widely deployed by incumbents and competitors alike today. There is 
nothing new or innovative about this technology--it is at the heart of 
all major Internet backbones and local networks. Furthermore, the RBOCs 
having been using DSL technology to provision standard T-1 service for 
over a decade.
    The proposed legislation creates four different--and ultimately 
unworkable--standards that would be applied to different provisions of 
section 251. Under S. 2902's proposed new section 652(a)(1), the 
incumbent local exchange carrier would be freed from any requirement to 
negotiate with competitors or permit them to interconnect their 
networks with any ``packet-based functionality'' of the incumbent's 
network.
    This exemption would be very difficult to implement in the real 
world. For example, Focal presently provides state-of-the-art circuit 
switched services to our customers. Essential to providing these 
services is a packet-based network largely operated by the incumbents 
called Signaling System 7 (SS-7), which provides call set-up, 
monitoring, and termination. If incumbents no longer have to 
interconnect their SS-7 network with Focal's network, the quality of 
circuit switched services would be seriously compromised.
    In addition, many circuit switched networks use packet-switched 
networks for calls over longer distances. ATM packet networks in 
particular are designed to carry all forms of traffic, including 
circuit switched voice. Today many circuit switched calls are in fact 
carried part of the way to their destination on packet-switched 
networks, further illustrating how difficult it will be for the FCC and 
the courts to interpret this exemption.
    Next new section 262(a)(2) would permit the incumbent to refuse to 
provide UNEs, the essential piece parts of the network, if a UNE 
``consists of or is created by a packet-switched or successor 
technology.'' This standard could be argued amongst engineers for a 
considerable time, and you can be certain it will take years for the 
FCC and courts to determine what it means. As mentioned above, the SS-7 
signaling network is a packet-switched network, and is presently a UNE 
required to be provided under the FCC's rules implementing section 
251.\7\
---------------------------------------------------------------------------
    \7\ 47 C.F.R. 51.319.
---------------------------------------------------------------------------
    Likewise, DSL service is clearly a ``packet-switched'' technology. 
Under new section 262(a)(2) and 262(a)(4) it is not clear exactly how 
DSL service will be able to be provided. In addition to packet-switched 
UNEs, CLECs also need to collocate equipment, like DSL access 
multiplexers, also called DSLAMs, in incumbent central offices or 
remote terminals in order to use existing copper loops to provide DSL 
services. For example, ``line sharing,'' which data CLECs use to 
provide high speed Internet access to consumers over the same line that 
the incumbent provides voice service, would no longer be possible under 
this language. This gives the data affiliate of an incumbent a 
tremendous competitive advantage, since they can provide DSL service 
over the same line that an incumbent uses for voice, while CLECs must 
have the customer purchase an additional line, for an additional fee, 
in order to provide their DSL service.
    Regardless of where the line is ultimately drawn, it is clear to me 
what the intent is. That is that competitors only get access to the 
monopoly network if they stick to the older, slower circuit-switched 
technology that is not capable of providing the high speed, broadband 
Internet access that business and residential consumers are demanding.
    In the case of resale, new section 262(a)(3) proposes that 
``advanced services'' be exempt from the wholesale rate obligation that 
Congress decreed for incumbent carriers. ``Advanced services'' are 
defined as ``any service that consists of, or includes, the offering of 
a capability to transmit information using a packet-switched or 
successor technology'' at speeds of 200 kilobits per second or more in 
both directions. This definition includes all but the slowest of 
packet-switched technologies, and is yet a third formulation of a 
standard based on a specific technological criteria. Without the option 
of resale as a means to expand their market presence, this legislation 
removes a tool that Congress provided in the '96 Act for competitors to 
test markets and offer service in areas where they may plan to deploy 
facilities, but have not yet had the time or resources to do so.
    Finally, S. 2902 applies a fourth standard in new section 262(a)(5) 
when fiber optic wire is used. If an incumbent chooses to deploy fiber 
into its network to increase its own cost efficiency or expand its 
capacity, it gets an automatic exemption from the interconnection and 
UNE requirements of section 251 for the area served by that fiber optic 
wire--regardless of whether that wire is used for circuit-switched or 
packet-switched service.
    This confusing and unworkable set of standards is precisely what 
Congress did not do when it enacted the '96 Act. Congress decided to be 
``technologically neutral''--which is the right thing to do. This 
technological neutrality is evident in the language of the statute. The 
'96 Act adopted the Senate definition of ``telecommunications,'' which 
the statement of managers accompanying the final legislation described 
as meaning ``the transmission . . . of information of the user's 
choosing, including voice, data, image, graphics, and video . . .'' \8\ 
Further, a ``telecommunications service'' is the offering of 
telecommunications to the public for a fee, ``regardless of the 
facilities used.'' \9\
---------------------------------------------------------------------------
    \8\ Senate Report 104-230, p. 114 (1996).
    \9\ 47 U.S.C. 153(46).
---------------------------------------------------------------------------
    If Congress had intended to draw the type of distinction among 
technologies proposed in S. 2902, they would have done so. But they did 
not. Instead they took the opposite approach. In section 251 itself 
they included two standards--the ``necessary'' and ``impair'' standards 
which were discussed at length by the Supreme Court--for the FCC to use 
in determining when a particular technology or facility need not be 
made available to competitors under section 251.\10\ In section 254, 
regarding universal service, the Congress directed the Commission to 
establish an ``evolving level of telecommunications services'' to be 
given universal service support based in part on how widely used those 
services are in the public networks.\11\ And in section 706, which this 
Committee has had several hearings on, they again made clear their 
preference for technological neutrality.\12\ Nothing has changed in the 
four years since the '96 Act was adopted to suggest that such a radical 
change in approach is needed. To the contrary, the ever increasing 
levels of broadband deployment make it clear Congress got it right the 
first time.
---------------------------------------------------------------------------
    \10\ 47 U.S.C. 251(d)(2).
    \11\ 47 U.S.C. 254(c)(1).
    \12\ Section 706 of the Telecommunications Act of 1996, codified at 
47 U.S.C. 157 note.
---------------------------------------------------------------------------
B. LCompetitors would only get access under section 251 to older 
        circuit switched technology, which is being phased out as 
        networks shift to IP packet-switching.
    One of the most important provisions of the '96 Act is the 
requirement that incumbent local exchange carriers provide access to 
UNEs, such as loops, switching, and transport needed to provide 
service. In order to compete effectively with the incumbents, CLECs 
need to be able to deploy the latest and most efficient technologies 
that consumers are demanding. It is difficult enough to compete with an 
entrenched monopolist even if the competitor has superior technology--
if Congress limits the technology that competitors can use to compete 
with the incumbent, the task becomes nearly impossible.
    Congress understood this need back in 1996 when it required access 
to UNEs on a technologically neutral basis. Congress believed that 
requiring this access was an important key to ensuring that the local 
markets would eventually become competitive. If CLECs are able to 
access UNEs from the incumbents, they can then combine the UNEs in the 
most efficient manner in order to provide high quality 
telecommunications service to consumers.
    By exempting packet-switched technology from section 251, Congress 
would relegate CLECs to only one of the two prevailing 
telecommunications technologies, which will severely undermine 
competition in the local markets. While CLECs would be able to continue 
to provide fierce competition in the voice market, they would be 
limited in their ability to continue to expand into data and high speed 
Internet access that consumers are demanding. Without access to UNEs 
competitors would have to raise even more capital than they have to 
date, in order to further expand their networks in order to provide 
packet-switched services. Basically, Congress would be slowing the pace 
of competition for data and Internet services--it would be limited to 
those areas where CLECs have their own independent networks, which are 
primarily in the business districts of large metropolitan areas.
    At the same time, the incumbents do not face the same difficulties 
gaining access to capital. Because the incumbents already have a 
network in place, which was built through years of monopoly funded 
revenue, they already have the basic infrastructure needed to provide 
service. In addition, they have a captive customer base from which to 
obtain revenues to finance the purchase, installation, and advertising 
of new packet-switched services.
    Congress recognized the unlevel playing field faced by competitors 
in the local market. The '96 Act required incumbents to provide UNEs so 
that competitors could compete without having to build an entire 
network first. At that time, Congress rightly concluded that 
competitors would deploy their own facilities as soon as it was 
financially possible to do so, in order to increase their revenues and 
the quality of their services. It took the incumbents decades to build 
out their networks with the benefit of a guaranteed monopoly. While 
technology has improved, it is ludicrous to think that competitors 
could obtain the capital, capture a dominant market share, or deploy 
the resources needed to overbuild the existing networks completely.
C. LCompetitors would not even be able to obtain local loops for packet 
        switched services like DSL.
    One tragic consequence if this bill is passed would be the very 
detrimental impact it would have on DSL services--one of the success 
stories of the '96 Act. DSL is a high-speed Internet access service 
that allows telephone customers to obtain Internet access at speeds 
that are 20 to 100 times faster than a typical dialup modem. S. 2902 
would deny CLECs the ability to provide DSL service by removing the 
requirements that incumbent local exchange carriers permit the purchase 
of the high frequency portion of a loop used to provide packet based 
data services (a practice called ``line sharing'').
    Although DSL technology has been available for a number of years, 
the incumbents had failed to bring the technology to the market. It was 
not until the passage of the '96 Act that data CLECs, which are often 
called DLECs, were born. The DLECs saw the '96 Act as an opportunity to 
fill a missing void in the market--and their vision was sound. The 
entry of the DLECs (and the fierce competitive pressure) inspired the 
incumbents to begin offering DSL services as well. Today, the top eight 
providers of DSL services (including incumbents and competitors) 
provide service to over 750,000 customers and the numbers are growing 
exponentially. Because of the appeal of the service and its rapid 
deployment, over half of U.S. households are now capable of receiving 
DSL services.
    This service may never have been brought to the marketplace if it 
wasn't for the vision and key market opening provisions of the '96 Act. 
In order to provide DSL services, the DLECs need to collocate their 
equipment in the incumbent carrier's central offices and the need to 
obtain conditioned local loops. The '96 Act required incumbents to 
provide both of these necessary items to the DLECs. Without these 
requirements, DLECs would never have been able to begin offering DSL 
services, and such technology would most likely still be sitting on the 
incumbents' shelves.
    New section 262(a)(4) would completely take the wind out of the 
DLECs' sails. Because DSL is a packet-switched service, the proposed 
bill would not require incumbents to continue to provide collocation 
for the equipment needed to use the local loops to provide DSL service. 
While the bill does continue to require that competitors get access to 
copper loops, without both collocation and local loops, DLECs can't 
provide DSL. This would be a particularly tragic result since DLECs 
pioneered the service and currently have about 25% of the market. This 
is an area in which the '96 Act genuinely spawned innovation and 
competition, and this legislation would turn the clock backward on the 
progress DLECs have made.
D. LCompetitors would be forced to duplicate much of the local network 
        in each area before they could offer service to a single 
        customer.
    It is not surprising that most CLECs would not find it appealing to 
offer service to customers solely through the use of older circuit-
switched technology. Because new section 262(a)(2) would exempt the 
incumbent carriers from having to provide UNEs for packet-switched 
networks, the only other choice would be for the CLECs to build the 
networks themselves.
    This is precisely a result that the '96 Act sought to avoid. 
Congress recognized in 1996 that there are a number of reasons to 
require incumbents to provide competitors with access to its networks. 
Most important, is that these networks already exist. Although CLECs do 
build networks, because they are able to rely on UNEs they do not have 
to build networks as extensive as those of the incumbents before being 
able to offer service. The incumbents were able to build ubiquitous 
local networks with revenue streams generated by their monopoly 
service. Since the networks already exist, it would be inefficient and 
unnecessary to require every CLEC to build extensive networks that 
would essentially duplicate the incumbents' network. Further, it would 
raise the cost of service to consumers, who have already paid once (at 
monopoly rates) to have a ubiquitous telecommunications network built.
    Under S. 2902, any CLEC desiring a network based on packet-switched 
technology would have no choice but to build its own network from 
scratch. Not only is this an inefficient result, it is also 
prohibitively expensive. Far more than the 30 billion dollars already 
raised by the competitive industry, and many more years or decades, 
would be required before most Americans would have a competitive 
choice. By way of analogy, the approach suggested by S. 2902 would be 
as if Congress told new airline competitors they can have access to the 
existing airports and terminals, but only if they use propeller planes. 
If they want to use jets, then they get access to the runways but not 
the taxiways or terminals. Those the competitors would have to build 
themselves before they could offer any jet service at any airport. The 
impact of this proposed legislation would likely be to take us back to 
the day where all we had was a monopoly local phone company.
E. LBy limiting the market opening requirements to circuit switched 
        networks, the legislation alters the ``competitive checklist'' 
        in section 271 and significantly lowers the bar for RBOC entry 
        into long distance.
    The '96 Act created a delicate balance in enacting section 251 and 
section 271. Section 251 set forth all of the market opening 
requirements, the ``stick'' so to speak. Section 271 proposed the 
``carrot''--that if the RBOCs complied with section 251 and is 
genuinely open to competition in its local market, it would be able to 
enter the interLATA market--from which it had been barred since 1984. 
Therefore, sections 251 and 271 are intricately intertwined. It is 
impossible to change one without impacting the other. In this instance, 
the proposed exemptions from section 251 will allow RBOC entry into 
long distance prior to the implementation of real competition in the 
local exchange market.
    It is true that the opening of the local markets have been slower 
than competitors would have liked. Much of that is due to the 
resistance of the incumbents in opening their markets to competition. 
Rather than embrace the opportunity for genuine competition in the 
local exchange markets, the RBOCs in particular have thwarted 
competition at every opportunity.
    Notwithstanding such resistance, CLECs have begun to prevail and 
make a genuine dent in the local markets. One analyst estimates that 
CLECs will serve about 20 percent of the local lines (approximately 3 
million lines) in New York by the end of this year. That is a 
substantial increase from the 7 percent of local lines that CLECs 
served in New York at the end of 1999 (approximately 1 million lines). 
Not by coincidence, New York is also the first state for which the FCC 
found that an RBOC met the requirements of the section 271 competitive 
checklist. The ``carrot'' worked--competitors have access to the ILECs 
network to compete in New York, and the RBOC now has permission to 
compete in long distance.
    Not all parts of the country are progressing as well as New York. 
If this proposed legislation is implemented, progress throughout the 
country is sure to be halted. Without the carrot, there is no incentive 
for an RBOC to comply with the market opening requirements, which is 
why the RBOCs are so eager to see S. 2902 adopted.
2. LS. 2902 Provides Immediate Regulatory Relief Despite the Fact that 
        Incumbent Local Exchange Carriers Still Have a Monopoly
    New section 262(c) would provide relief from any ``common carrier'' 
regulation by the FCC or any State of an incumbent local exchange 
carrier's provision of ``advanced services.'' This means that all of an 
incumbent carrier's new investment, and a significant portion of its 
existing network, would be freed from any regulatory oversight. In 
effect, for all packet-switched services over 200 kilobits per second 
both Federal and State laws governing telecommunications would cease to 
apply to incumbent local exchange carriers. While no State commission 
is testifying at this hearing, it seems likely that the States would 
have serious reservations about this blanket Federal preemption of 
their jurisdiction over local telecommunications services.
    Absent some common carrier oversight, incumbent carriers would be 
free to decide whom to serve, at what price to serve, and 
discrimination of almost any type would be perfectly legal. They could 
also decide to cease or restrict the provision of services to certain 
ISPs or consumers, and there would be nothing the Federal or State 
authorities could do about it.
    Ironically, the CLECs and long distance companies that do not have 
the vast majority of the local customers would still be subject to 
State and Federal common carrier requirements, including offering non-
discriminatory service to ISPs. The incumbent carriers sought very 
similar relief during the deliberations on the '96 Act, and Congress 
wisely rejected their request. Nothing has changed in the intervening 
four years that would justify revisiting that decision.
A. LRBOCs and GTE get regulatory relief as soon as a competitor offers 
        advanced services in each market.
    Once again S. 2902 chooses to apply different standards to the same 
problem. In the case of the RBOCs, GTE, and a few other large carriers, 
new section 262(c) would grant unbridled freedom on a piece by piece 
basis. As proposed, whenever a CLEC begins offering ``advanced 
services'' in a particular telephone exchange area to just one 
customer, the incumbent is granted relief from all State and Federal 
common carrier regulation in that exchange area. Once free of the 
common carrier obligations to interconnect on just and reasonable terms 
and not to unreasonably discriminate, requirements that still apply to 
the CLEC, there is little doubt that the incumbent will be able to 
dominate the local market for advanced services, just as they do today 
for circuit switched voice services.
B. LAll other ILECs get immediate relief from common carrier regulation 
        and the market opening requirements of the '96 Act as soon as 
        the legislation is enacted.
    In the case of the over 1,000 incumbent local exchange carriers 
throughout the country who each control less than 2 percent of the 
nation's total telecommunications access lines, S. 2902 doesn't wait 
until a competitor arrives on the field. Instead, section 3(c) of S. 
2902 would grant these ``less than 2 percent'' carriers immediate 
relief from all State and Federal common carrier regulation. This 
legislative relief would ensure that consumers in the markets served by 
these smaller incumbent carriers never get a choice of provider.
    In both cases, should an incumbent fail to provide loops to 
competitors seeking to offer circuit switched services, new section 
262(c) provides that a CLEC may petition to have the incumbent's 
exemption removed if they fail to provide collocation for circuit 
switched services or access to local loops. However, the burden of 
proof falls on the CLEC to show that the incumbent has not been 
cooperative, and the infractions must be proved by ``clear and 
convincing evidence,'' a judicial threshold that is difficult to meet 
in the best of circumstances, much less when a competitor may lack the 
financial and legal resources available to an incumbent monopolist.
    In contrast, if an incumbent should ever have its exemption revoked 
under the ``clear and convincing evidence standard,'' that incumbent is 
free to petition a State to have the exemption reinstated. In this case 
the burden is on the State to show why the exemption should not be 
reinstated, and if the State fails to act within 90 days, the exemption 
is automatically restored. Why the legislation chooses to impose a much 
easier standard on reinstating the exemption than on removing is not 
clear, but if adopted it would certainly indicate a strong bias on the 
part of Congress against competitive providers.
3. Compensation for ISP Traffic is Prohibited.
    Section 3(a) of S. 2902 would amend section 251(b) to prohibit the 
payment of any compensation between carriers for the completion of a 
call from a consumer to an Internet Service Provider (ISP). Inter-
carrier compensation is necessary in competitive local markets because 
the carrier serving an end user making a local call may be different 
from the carrier serving the called party. Since terminating carriers 
receive no additional revenue from end users, the '96 Act requires 
``reciprocal compensation'' to be paid when two different carriers 
complete a local call. The originating carrier, who collects a fee from 
the consumer, must compensate the terminating carrier for their 
variable costs in completing the call.
    Reciprocal compensation applies any time one carrier originates a 
call and another carrier terminates a call. The arrangement applies to 
cellular calls as well as local calls. In a cellular environment, the 
cellular company compensates the incumbent local exchange carrier for 
its costs of terminating the call. The same regime currently applies to 
calls to the Internet. If the call is originated by an incumbent 
carrier's customer and terminates on a CLEC network to an ISP, the 
incumbent compensates the CLEC. The same would apply in reverse if a 
CLEC customer called an ISP served by the incumbent, hence the term 
``reciprocal'' compensation. It is not the volume of traffic that is 
reciprocal, it is the obligation to pay each other the same rate for 
terminating calls on each other's networks.
    By prohibiting the payment of any compensation to competitive 
carriers for their costs of transporting and terminating calls to an 
ISP, S. 2902 mandates the use of a ``bill and keep'' arrangement that 
was considered, but not adopted, by Congress in the '96 Act and by the 
FCC in implementing the '96 Act. This legislation is anti-competitive, 
unnecessary, and would have very troubling consequences on competition 
in the local markets.
A. LProhibiting recovery of costs for terminating calls to the Internet 
        is anticompetitive and possibly unconstitutional.
    As the RBOCs and the FCC have recognized, ``carriers incur costs in 
terminating traffic that are not de minimis, and consequently bill-and-
keep arrangements that lack any provisions for compensation do not 
provide for recovery of costs.'' \13\
---------------------------------------------------------------------------
    \13\ Local Competition Order, CC Docket No. 96-98, August 8, 1996, 
para. 1112.
---------------------------------------------------------------------------
    In addition, because there are real costs involved in terminating 
this traffic, prohibiting recovery of those costs would likely violate 
the Fifth Amendment's prohibition against the ``taking'' of private 
property. The RBOCs made this argument to the FCC when the '96 Act was 
being implemented. If bill and keep is unconstitutional in regards to 
the RBOCs, which enjoy many other regulated sources of revenue, it 
applies with even greater force for CLECs, which have no embedded 
monopoly markets or other revenue streams to fall back upon.
B. LEliminating reciprocal compensation would harm Internet consumers 
        and the marketplace in general.
    As I stated above, CLECs incur costs of carrying calls to ISPs. If 
CLECs cannot receive payment for carrying these calls from the 
incumbent carrier, the CLEC will have to seek payment from someone 
else, most likely the ISP itself. The ISPs may have to flow through 
this cost increase to their consumers. Cost-based reciprocal 
compensation ranges around $3-$6 a month for an average household using 
the Internet, who pay an average of about $17 a month. Flowing those 
costs through to end-users would thus mean an 18%-35% increase in the 
monthly cost of access to the Internet via CLECs.
    Another alternative is that, if CLECs cannot be paid for providing 
this service to ISPs, CLECs may simply exit the market altogether. ISPs 
would be forced to return to receiving service from the incumbent 
telephone company, effectively remonopolizing the local market.
    As this Committee is well aware, the Internet has become a huge 
engine of economic growth in America. Passage of legislation that 
either forces ISPs back to the monopoly providers, or else increases 
the cost of Internet access for millions of Americans by 18% to 35% is 
terrible public policy, pure and simple.
C. LIt was the RBOCs, not the CLECs who supported high reciprocal 
        compensation rates three years ago.
    The FCC initially proposed that the rates for reciprocal 
compensation should fall in the range of $0.002 to $0.004 per minute of 
usage. However, the RBOCs succeeded in obtaining a stay of the FCC's 
Local Competition Order in the fall of 1996. This enabled the RBOCs to 
demand much higher reciprocal compensation rates--around $0.008/MOU to 
.0009/MOU--believing they would terminate more traffic than they would 
send to the CLECs. The CLECs had to obtain signed agreements from the 
RBOCs quickly in order to start requesting unbundled elements, 
interconnection, and the other facilities that they needed from the 
RBOCs to begin their businesses. Consequently CLECs had no choice 
except to accept the high rates demanded by the RBOCs rather than risk 
delay by litigating the issue.
D. LThe CLECs have a greater number of ISP customers because they have 
        out-competed the RBOCs in the marketplace.
    As the CLECs began to offer service three years ago, the ISPs were 
among the first customers to recognize the benefits of the CLECs' new 
technologies. ISPs have determined that the CLECs provide better 
overall value--the combination of price and service. ISPs have 
consistently ranked the CLECs ahead of the RBOCs on their most 
important service parameters and have continued to award CLECs with 
most of the growth in ISP lines. Indeed, a CLEC like Focal has been so 
successful at meeting these needs in comparison to Ameritech that about 
one-third of the dial-up traffic to ISPs in Chicago is carried by 
Focal.
    However, I would like to point out that the RBOCs obviously have 
the financial and technical resources to provide the same services to 
ISPs that CLECs provide--but have chosen not to do so. Nothing stops 
Ameritech from meeting or beating Focal's ISP services, and ending the 
traffic imbalance.
E. Reciprocal compensation rates are rapidly declining
    Any issues regarding high reciprocal compensation rates are quickly 
disappearing. Several recent state arbitrations have reduced reciprocal 
compensation rates by at least 50%. Negotiated settlements reveal the 
same trend. While the rates contained in settlements are obviously 
driven by the needs of the particular carriers involved and do not 
necessarily reflect economic cost, several CLECs have recently 
announced settlement agreements with RBOCs that reduce their reciprocal 
compensation rates substantially, sometimes to 10% of the former rate 
level.
F. LAny legislation would be premature and would undermine work that 
        the FCC has undertaken.
    The FCC is currently working through the issues raised by the D.C. 
Circuit Court's remand of the FCC's 1999 order regarding reciprocal 
compensation for calls to ISPs. Members of Congress requested the FCC 
to address these issues by September 30, 2000. The FCC last week 
accepted industry comments and I have no reason to believe that the FCC 
will not address these issues by September 30, 2000.
4. LNo New Investment is Required to Meet the Build-Out Requirements of 
        S. 2902
    New section 262(b) purports to establish a ``build-out'' 
requirement for incumbent carrier deployment of ``advanced services.'' 
In order to keep the exemption granted by the bill from the market-
opening requirements of section 251, an incumbent local exchange 
carrier must ``make available advanced service'' to 80 percent of its 
telephone exchange customers within three years, and be able to offer 
100 percent of those customers such services within 30 days of a 
request after five years. However, language in the requirement ensures 
that it actually has little practical effect. This is the case because 
both the three and five year tests are limited to serving customers 
``where such services can be provided using an industry-approved 
standard and existing local loop facilities.'' In other words, the 
incumbent need offer advanced services to 80 and 100 percent of those 
customers within a specified distance of the central office, for 
example the 18,000 foot limit generally cited by the industry as the 
applicable limit for ADSL service. Those outside that distance, who are 
generally the customers in the less densely populated rural areas, 
aren't included in the test and the incumbent is not required to serve 
them. Depending on the exchange in question, 100 percent of an 
incumbent's telephone exchange customers could actually mean something 
much closer to 30 or 40 percent.
    The legislation itself recognizes this fact explicitly, and takes 
steps to ensure that even this low threshold is no bar to continuing 
the exemption from having to comply with the pro-competitive provisions 
of the '96 Act. In those areas ``where advanced service cannot be 
provided using an industry-approved standard and existing loop 
facilities'' new section 262(b)(2) simply lowers the standard to the 
128 kilobits per second provided using ISDN technology. The message 
here is clear for rural areas--the most advanced service consumers 
there can hope to see from the incumbent carrier 10 years after the '96 
Act was adopted will be ISDN--a service that was long ago rejected in 
the commercial market as too slow and too expensive.
5. LThe Incumbent Local Exchange Carriers Are Already Deploying 
        Broadband Services Without Any Change in the '96 Act.
    The provisions in the '96 Act providing access for competitors to 
the incumbent carriers' networks for both circuit switched and packet-
switched services, as well as the restriction on the RBOC provision of 
interLATA service, are not impeding the RBOCs' deployment of high-speed 
Internet access. All of the RBOCs are in the midst of very aggressive 
roll-outs of DSL service. This is in response to competition from the 
CLECs, DLECs, and cable companies, and is being accomplished without 
any change to the '96 Act. At the end of the first quarter of 2000 
there were approximately 800,000 DSL lines in service in the United 
States. Approximately 75 percent of those lines are provided by 
incumbent carriers. Press releases issued by the RBOCs confirm this 
deployment, and their intention to continue this roll-out as fast as 
they can.
    It is interesting to note that the most rural of all the RBOCs, 
USWest, has been particularly aggressive in deploying DSL services. 
USWest recently issued a press release announcing its intention to 
offer DSL to 30 new markets, almost doubling the cities with its 
``MegaBit Services'' in its region. USWest provides DSL service to over 
150,000 customers and is able to provide DSL service to nearly 60% of 
the population in the company's 14-state region.
    The newly merged Verizon Communications, recently announced that it 
was cutting the price of its most popular Infospeed DSL package by 20 
percent--from $49.95 to $39.95 per month. Preliminary second quarter 
results reveal that Verizon has 221,000 DSL subscribers, 47 percent 
more than at the end of the first quarter. One of its subsidiaries, 
Bell Atlantic-New York has announced that it is ``investing close to $2 
billion a year in [its] statewide network so that it can support 
exciting new technologies like DSL.''
    As mentioned earlier, financial reports for SBC show that they went 
from having 12.8 million DSL capable lines at the end of the first 
quarter of this year to 14.7 million DSL capable lines by the end of 
the second quarter. Also at the end of the second quarter, SBC reported 
399,000 total DSL lines in service, for a net gain of 198,000 DSL 
customers in that quarter. Finally, SBC reports that it has already 
made 75 percent of its central offices DSL capable.
    Late last year, BellSouth announced the successful completion of 
its deployment of its Internet service to 30 cities throughout the 
Southeast. The service is currently available to 7 million telephone 
lines that meet the technical specifications and plans call for a total 
of 11.5 million lines to be capable of delivering the service by the 
end of this year.
    Therefore, contrary to any RBOC claims, it does not appear that 
they need regulatory or policy changes to deploy DSL services; what 
they need is more competition, which Congress should not diminish with 
this legislation.

    Senator Brownback. Thank you, Mr. Taylor.
    We will run the clock on questions, if I could, for Members 
since newer Members have attended and keep this at 5 minutes 
each for questions if we could. So we could turn that on.
    I wanted first to congratulate all of you and anybody 
associated with telecommunications in the room for the 
aggressive competition that is generally happening in 
telecommunications. That was what was envisioned in the Act and 
much of that is taking place.
    The one problem and the whole focal point of the hearing is 
that we are not getting it in an area that I care deeply about, 
which is the rural areas across our country. We have 
historically as a nation decided as a part of public policy 
that we will not leave rural areas behind. Whether it is on 
rural electrification, rural telephony, any of these things, we 
have decided, while there may not be as much economic activity 
because of the density of population or whatever other issues, 
we are not going to leave them behind.
    Yet, on the high speed data transmission, Internet access, 
they are being left behind. I wish that more of your testimony 
had been directed at that. But I would direct this 
particularly, if I could, to either Mr. Taylor or Mr. Bryan on 
this question. If you disagree with this statistic, then I 
would like to hear your number, because this one is so bad for 
rural areas.
    According to one survey, more than 73 percent of cities 
with population of 500,000 to 1 million have cable modem and/or 
DSL service, but less than 5 percent of towns of 5,000 to 
10,000 have cable modem service and less than 2 percent have 
DSL service. Those are the numbers that we have. That is what 
the bill is aimed at trying to get at.
    Now, could either of you tell me how we could get those 
areas covered, then?
    Mr. Bryan. Let me just respond----
    Senator Brownback. And if you would direct it on that 
question, I would appreciate it.
    Mr. Bryan. I share your concern and I think one of the real 
ironies is people who live in rural areas probably in many 
instances require broadband more than maybe inner city 
dwellers. A lot of small businesses are run out of farms. They 
need this facility. It is not just an entertainment vehicle. It 
is actually access to a portal that is going to help their 
business. So I think you are right to be concerned about this.
    I think very few people in this room would have had those 
concerns that you now have about broadband access to rural 
areas 4 years ago. It has only been the activity of the 
competitors and the innovators that have now raised this to the 
level of concern. You are concerned about it, we are all 
concerned about it, because we now realize there is an 
opportunity for people in the rural areas that no one would 
have considered had the innovators and competitors not gotten 
busy and emphasized the benefits and made these benefits 
available.
    Now, those of us who are competitors have only been at this 
for 4 years and, as you know, 271 relief has only been given 
just recently, i.e., the ILECs have not been cooperating to let 
us compete in this marketplace.
    Senator Brownback. In rural areas?
    Mr. Bryan. Throughout the country.
    Senator Brownback. You have been able to compete in the 
urban and suburban ones.
    Mr. Bryan. With great difficulty. Hence the reason and the 
delay in getting 271 relief. I would say that any person in the 
competitive telephone industry--I am sure you have heard it in 
the past--has complained bitterly that at every step of the way 
it has been difficult for us to deal with the incumbents.
    That is now changing, but for the first 3 years of our 
existence we have found it difficult to provide service in the 
cities----
    Senator Brownback. Mr. Bryan, if you could focus. We have 
got a limited period of time. Why are you not in rural areas?
    Mr. Bryan. Well, as we have started this activity 4 years 
ago, we are obviously going to the markets which are going to 
be initially more fertile. We have not had the benefit of being 
a monopoly for 100 years, but certainly it is not our plan to 
bypass the rural areas. My company actually has a nationwide 
network that is both in rural and in urban areas. But it is 
clear that the bulk of our business in the first 2 years is in 
the more densely populated areas.
    We will certainly radiate out of that area into more rural 
areas over time, but we have only been in this business for a 
brief time period.
    Mr. Taylor. Mr. Chairman, if I could add. Since the passage 
of the act there has been a lot of new companies that have been 
formed specifically to go after rural areas, companies like New 
Edge Networks, Jado, DSLNet, and TriVergent, all ALTS members.
    In addition, having lived outside of Cedar Rapids in a 
small rural town, there are places where competition in 
broadband networks is being brought to rural areas. Of the 153 
independent telephone companies in Iowa, all of them have 
fiber. Every high school and junior college in Iowa has 
broadband connectivity to it today.
    Senator Brownback. But Mr. Taylor, do you disagree with 
these numbers that I read of the percentages?
    Mr. Taylor. I cannot disagree with those numbers, but the 
problem is, if you simply take a look at a McLeod USA 
securities document, the amount of litigation that they have 
with US West, now Qwest, trying to get into rural markets is 
significant. Companies want to get into rural markets. It is 
difficult to do that.
    If more enforcement of the original Act was done, we could 
get in there faster. There are some companies that are 
beginning to do it, but it is difficult to do it in Chicago and 
New York and Washington, D.C.
    Senator Brownback. Thank you, Mr. Taylor.
    Mr. Ellis, how does the lack of regulation of broadband 
services offered by cable companies make such services more 
competitive than DSL services offered by your company?
    Mr. Ellis. Senator, I will be pleased to answer that. I 
would like to just make a comment, if I could, on the answers 
that were just given, because I think the experience of both 
these companies makes a point on reciprocal compensation. It is 
not a question of these companies not serving rural customers. 
These companies serve primarily and perhaps almost exclusively 
businesses. They do not serve residential customers in urban 
cities, and one of the reasons they do not is because of 
reciprocal compensation and the way it works.
    They would be disadvantaged. Every time they retain or 
obtain a residential customer, instead of being able to collect 
reciprocal compensation from the ILECs or the telephone 
company, they end up having to pay it. They are discouraged. 
They are disincented on the urban residential customers, let 
alone going out to rural areas. That is a fundamental problem.
    Now, in terms of how the rules, the asymmetric regulation, 
affect us, it is the typical set of having to live with and 
operate with a regulatory regime when you are competing with 
people like cable modem that have no regulation. We are 
regulated pervasively where they are not. So every decision we 
make has to be in light of that, that we stand at a competitive 
disadvantage, whether it be in terms of our prices, bundling, 
packaging, we talked about the 271 issue, their ability to 
leverage content, their ability to pick and choose what they 
want to put on, what access they want to give.
    All of those things put us at a tremendous disadvantage, as 
does the fact we are going to pay, as I said, $750 million or 
thereabouts in reciprocal compensation, moneys that could help 
us go from the 80 percent of our customers that we will serve 
with broadband to closer to 100 percent, to cover those rural 
areas.
    We want to be there. We are the only company that has made 
that kind of commitment. But the asymmetric regulation has no 
place in a competitive market, and that is what we suffer from. 
There is no bottleneck. These people have the same options to 
get to the customer that the cable people do, that we do, that 
the wireless people do, and the satellite people. But yet we 
suffer from, and our customers and the public suffers from, 
asymmetric regulation.
    Senator Brownback. Senator Rockefeller.

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman.
    I always like to start out by pointing out that I never had 
a single constituent or got a single letter, a single e-mail, 
had a single conversation or a single phone call in which 
anybody asked me or anybody that I know around here to 
deregulate the telecommunications industry. So we did you an 
enormous favor. It was not asked for by our constituents. It 
was asked for by the telecommunications companies of America.
    We did that and in return we extracted e-rate and some 
other things, which some people in here supported and others 
did not. But it passed overwhelmingly and it is probably the 
future of the nation.
    That is why I also disagree with you, Mr. Haynes, when you 
differentiate between the FAA as being public safety and this 
kind of regulation. I think there is a big comparison between 
broadband distribution and public safety in the broader sense, 
i.e., everybody having a chance, knowing it. Otherwise I think 
this could become, the digital divide could become the next 
civil rights movement on a worldwide basis, with terrorism and 
all kinds of things involved. So I look upon it very 
differently than you do, obviously.
    My question, Mr. Ellis, is to you. You want to--having come 
to us and having gotten a great deal, you want the Brownback 
bill, which I do not support because I think it would undo some 
of the checks that the RBOCs want so badly to undo now, having 
settled for them earlier. So there is discussion about 
regulation.
    There are 37 co-sponsors to a bill that Olympia Snowe and I 
introduced which would give tax credits that would escalate as 
the broadband got more serious in its intensity for uploading 
and downloading for rural areas. SBC has not actually taken a 
position on this and it seems to me that tax credits are often 
a good way to motivate the private sector.
    Is this a bill that--as I say, it is very bipartisan. It is 
very good, I think. It relates to rural areas. Is this 
something that SBC would find in any way helpful?
    Mr. Ellis. Senator, we applaud the intent of the bill. We 
have had our tax people look at that at some length and we have 
some concerns that the bill does not in its present form 
accomplish what I think is intended, namely to create 
incentives to assist in the deployment of broadband. I think we 
certainly are in favor of the goals and the objectives, and we 
will be providing some thoughts to your staff and others on the 
problems that we see in its present formulation.
    But the idea is a good one. We applaud it.
    Senator Rockefeller. The idea is a good one, but you say it 
will not work.
    Mr. Ellis. I am not a tax expert, but I have been advised 
by our tax lawyers and the accounting people that the benefits 
are not delivered in the way I think was intended. That is, 
that the incentive, the whole purpose, does not work. The idea 
is a good one. We have got some ideas on how it perhaps could 
be improved.
    Senator Rockefeller. Could you share those ideas with us? 
Because it is not often that the federal government offers to 
help the private sector do what needs to be done. You I believe 
said, or somebody I think said, that 80 percent of the country 
was getting broadband or would get broadband. That certainly 
does not apply where I come from. It is closer to 5 percent of 
the geography.
    Mr. Ellis. What our commitment is that, independent of this 
legislation or others, we have made the commitment that we will 
deploy broadband, high speed access to 80 percent of our 
customers by some time next year.
    Senator Brownback. Well, I congratulate you. I wish you 
were working in the East.
    Thank you.

                STATEMENT OF HON. SLADE GORTON, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Gorton [presiding]. The Senate is in a roll call 
right now and Senator Brownback has left to go vote. Have 
either of you?
    We will try to keep this continuous. I can tell my 
colleagues here, Skip Haynes is both a constituent and a 
friend. Skip, I think the problems that you face may be 
evidenced at least in small part by the fact that you are from 
such a rural area and from so far away they do not know how to 
spell the name of your company, even the staff here. It is 
``Rainier,'' after the mountain.
    But I am going to let you add a little bit to the 
commentary that you make. You have done something that has not 
happened in most of the rural areas of the country. You are 
clearly a leader, perhaps in the top 1 percent. And yet what 
you are asking for here is to reverse some of the genius and 
the philosophy behind the 1996 Act and to restore a monopoly 
situation in broadband and perhaps even in telephony as well, 
directly or indirectly.
    You have arrayed against you not only a number of rather 
large companies, but most of the intellectual opinion, the 
outside academic opinion in the country. Your testimony states 
very eloquently, why should you make an investment, the kind of 
investment that you have made, if you have got to give it away 
essentially at less than cost?
    Is there not a cure for that complaint short of recreating 
a monopoly situation?
    Mr. Haynes. Senator Gorton, it is great to see you, and it 
is a reasonable question. But in my opinion, unfortunately, the 
regulators at the FCC and in Washington State have not been 
reasonable. It seems as though, while we should wear white hats 
as incumbents for having provided service as well as we have 
for as long as we have, that all of the advantages go to the 
``new entrants.'' I think if we did have reasonable cost 
procedures, reasonable prices that we could charge, that would 
improve the situation. But my experience has been that the 
regulators have not been reasonable with the incumbents, 
unfortunately.
    Senator Gorton. And you are speaking of regulators at both 
levels?
    Mr. Haynes. Yes, Senator.
    Senator Gorton. Can you differentiate between the State and 
the FCC at all?
    Mr. Haynes. It has been my experience that the FCC has been 
unfair and unreasonable in its treatment of incumbents and, if 
anything, in Washington State it has been worse.
    Senator Gorton. Would any of the other of you, any of you 
who are on the other side of this issue, like to comment 
generally speaking on my question?
    Mr. Taylor. Yes, Senator. I think a lot of the issues that 
revolve around rates, whether they are end user rates or 
contractual inter-carrier rates such as reciprocal 
compensation, have remedies out there today that do not need 
legislation. End user rates can be raised or lowered in most 
areas fairly easily today. Inter-carrier compensation, 
reciprocal compensation, are simply rates that are set by the 
Bell operating companies and dictated to the CLECs. The CLECs 
have in the past focused on getting those down lower and we 
have been successful.
    I think it is also interesting to note, where I live 
outside of the Chicago area I get both my phone service and my 
cable service from SBC and, interestingly enough, if cable is 
so well unregulated, it is surprising that SBC will not offer 
me high speed access on my cable system.
    But more importantly, though, I think as we look at this, 
the Ninth Circuit has already decided that cable modem service 
is a common carrier service. So we are beginning to make sure 
that the inequities get fixed on the regulatory side, and I 
think all of the companies here have the pricing flexibility to 
make sure that that $15 phone line that Mr. Ellis' daughter 
uses might be priced at $20 appropriately, or that the 
reciprocal compensation rates that SBC set at a penny might be 
appropriately priced at a tenth of a cent. Those can be done 
today without any changes from the Committee.
    Senator Gorton. Mr. Ellis.
    Mr. Ellis. Senator, it has taken Southwestern Bell 
Telephone Company 110 years to get the basic telephone rate in 
Texas to $9.85. I believe it was 1979 or 1980 since the last 
rate increase on basic telephone services in Texas, and then it 
was like 25 cents.
    I would like to take a little bit of issue, if I may, with 
the idea that we are seeking to reverse the Telecom Act. At the 
heart of the Telecom Act in 1996 was a concept that the local 
company had a monopoly and had a bottleneck control over the 
provision of basic telephone service, particularly to 
residential customers. That was at the heart of it. We got it 
legally. It was there because of public policy for 100 years.
    What we are talking about here is something where we do not 
have that bottleneck. In 1996, DSL was in the thoughts and 
minds of people. So was cable modem. New service. There are 
alternatives out there. There is no bottleneck. All we are 
asking is, given that there is no bottleneck, given that we are 
behind our competitors in the provision of advanced services--
as I said, four or five customers to one go to our 
competitors--given those facts, all we are asking is for 
advanced services to be treated like our competitors are, not 
to be burdened.
    If we have that option, I am here to tell you it will 
assist in the deployment to the rural areas, the other 20 
percent that my company is not reaching. But there is a 
fundamental difference in voice communications, where we at one 
time had a bottleneck, and advanced services where there is no 
bottleneck.
    Senator Gorton. My time is up. Senator Dorgan, I will leave 
it with you and I think Senator Brownback will be back by the 
time you have finished.
    Senator Dorgan. Well, if I am left alone I may pass some 
good legislation here.
    [Laughter.]
    Senator Gorton. All by unanimous consent.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan [presiding]. It is a rare occurrence.
    I probably only have a minute as well. I think the vote is 
nearly over. But I have been over in the Energy Committee this 
morning and regret that I have missed some of the testimony.
    I do want to just make a couple of comments, however. This 
hearing I think is important and useful. Monopolies are a kind 
of cholesterol to the free market system. They plug the 
arteries of the system. When we passed the Telecom Act, we 
attempted to unleash the forces of competition in this area. I 
regret it has not worked as well as I would have liked. There 
is far more concentration than I would have liked.
    But I also see evidence that the act is beginning to work--
new entrants, aggressive, robust competitors coming in, new 
investment money for startup companies. I think all of that is 
beginning to work. And I want to let it work. I frankly do not 
support S. 2902. I think it does short-circuit what we intended 
to accomplish in the Telecom Act.
    I must also say that selling this approach on the basis of 
its benefits to rural areas is not accurate. I would say in 
North Dakota, for example, U.S. West is selling off most of its 
rural exchanges and it has been doing that for the last 4 or 5 
years, trying to sell all these local exchanges. So I do not 
think that it can be documented that this somehow would be good 
for rural areas.
    I have introduced legislation called the Broadband REA 
Program, essentially saying that I do not think the buildout of 
the infrastructure of advanced services is going to occur 
unless we do something like we did with electricity or 
telephone service to rural areas of the country. I support some 
tax incentives. Perhaps that works. I support something similar 
to the old REA program with revolving loans. Perhaps that 
works.
    But I do not think that at this moment it makes sense for 
us to unravel portions of the Telecom Act, and for that reason 
I do not support S. 2902. I think this hearing is useful, 
however, to give an airing to these issues. While I have got to 
be on the floor of the Senate for the next hour, I will try to 
get a transcript, and I have read the testimony that you have 
presented.
    As you can tell from the initial discussions, this is going 
to be a robust, healthy debate for some while to come. It was 
our intention when we passed this Act to create a checklist by 
which the local exchange carriers could go out and compete in 
long distance, provided they meet certain things. Now, SBC has 
met that in Texas, as I understand it. It is not our intention 
to establish this as a barrier. We want the Federal 
Communications Commission, the state authorities, to work with 
the local exchange carriers. If they meet the checklist--and 
they ought to be able to meet it; we are not creating barriers 
here, we are trying to create opportunities--then we unleash 
the forces of competition.
    But I tell you, I have heard all over this country from 
people who are new competitors that there are subtle and some 
not so subtle ways for local incumbents to prevent effective 
competition. That is the nature of things. That is the nature. 
It is the way things work. I understand all that.
    But I think to pass S. 2902 really would begin unraveling 
forces in the Telecom Act that I begin to see working now in a 
way that I think can be exciting, yes, even for rural areas of 
the country.
    I regret I cannot spend more time. I would love to ask a 
series of questions, but because of the floor vote I have to 
leave. Mr. Chairman, thank you.
    Senator Brownback [presiding]. Thank you, Senator. If you 
would like to submit some of those questions for the record, we 
would be happy to have those as well. Senator Breaux.

               STATEMENT OF HON. JOHN B. BREAUX, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Breaux. Thank you very much, Mr. Chairman. Thank 
you for having the hearing. It gives us an opportunity to 
discuss a lot of the issues that have been bubbling up for a 
long period of time.
    I apologize to the panel for being in and out and having to 
testify before the Agriculture Committee and then having to 
vote. It shows you how things work or do not work around here, 
coming in and out.
    But I would like to talk a little bit about the reciprocal 
compensation issue. Mr. Ellis, my staff tells me you addressed 
this. I am sorry that I missed it. Can you give me some dialog 
a little bit, Mr. Ellis? Perhaps you have already done this, 
but how did it work before the Internet, the concept of 
reciprocal compensation? It kind of was a wash before we got 
into the new transition. We never had real strong rules with 
regard to payment for the use of other lines before the 
Internet came into being. How did it work back in the dark 
ages?
    Mr. Ellis. The concept was in the legislation simply to 
compensate a carrier for terminating a call if they were not 
otherwise compensated, and that call had to be, local calls. We 
had other things for long distance, but if it was a local call 
and the carrier was not compensated otherwise.
    What we have instead is the reciprocal compensation being 
paid for calls that, number one, are not local. These go to the 
World Wide Web. They are not reciprocal. You never get a call 
back from an Internet service provider at all. And they bear no 
relationship to the cost of completing that call. In fact, if 
you think about it, when a customer makes a call to the 
Internet and it goes to, let us say, ICG, ICG has a 
relationship with its ISP and that ISP pays ICG for one thing, 
to terminate the call that we pass off.
    Under the present rules as they are being applied, not only 
do they collect from their Internet service provider for that 
one way, because nobody originates--the Internet Service 
Provider does not originate a call. So not only does ICG 
collect from the Internet Service Provider, but they also 
collect from the telephone company, and they collect in a 
manner and in an amount that is totally disproportionate to the 
cost.
    We have specifically asked ICG and others, what costs, 
submit cost studies that show what your costs that justify 
these exorbitant rates for reciprocal compensation. I know in 
three jurisdictions they have not submitted it and to my 
knowledge not a single data CLEC has submitted the costs for 
completing a call to justify what we believe is an unjustified 
and unsustainable amount.
    Senator Breaux. Mr. Bryan, why has that not been done?
    Mr. Bryan. We have submitted costs to SBC. Maybe you are 
not current with what is going on between the two companies. 
But it is--as I said in my earlier testimony, there are actual 
costs that we incur before we carry one moment of traffic on 
it. We have to deploy switches that cost us about $10 million. 
We have to get an interconnection or trunking that, if we lease 
it from SBC, we obviously have to pay them. We then have to 
connect with the ISPs and then we have to go and see if we can 
market those services to the ISPs.
    The reason that we have been successful--so there are 
substantial costs associated with this.
    Senator Breaux. Do you think nothing should be done with 
regard to this issue?
    Mr. Bryan. I think that, as Mr. Ellis probably knows, the 
marketplace is sorting this out. In fact, with his company we 
are being paid probably 15 percent of what we were being paid 2 
years ago. So the rates have come down sharply and it is 
envisioned will continue to come down sharply.
    It is hard to imagine that any companies should deploy 
equipment and save, in this case, SBC capital they would 
otherwise have to pay. But there is a point here. We got in 
this business because the market, the ISP market, was not being 
well served by the various incumbents. We came in, we priced it 
maybe slightly below the Bellco prices. But we got it because 
we offered them service that the Bell companies did not want.
    Senator Breaux. I understand that. I am just worried about 
the compensation methodology that is being used.
    Mr. Ellis, did you make a recommendation on what you think 
we should do? Should this be something--I know Senator Lott and 
I have contacted the FCC with regard to some of their authority 
in this area to see what they might do about this. But what do 
you think? Is the marketplace going to take care of this? Do we 
need legislation? Do we just need to ask the FCC to make a 
decision on how these imbalances can be fixed or should be 
fixed? What is the solution?
    Mr. Ellis. We support this legislation. But I would just 
say, I think the industry as a whole agrees there ought to be 
one policy, not left to individual States. There ought to be 
one approach to it. That has not happened. The FCC has had it 
for a long, long, long time, and there has not been a 
rationalization of the reciprocal comp rules.
    Senator Breaux. What happens if we do not do anything 
legislatively? Then do you have 49, 50 different set-ups?
    Mr. Ellis. We all have different set-ups in all our 
jurisdictions. For instance, in Texas the rates have fallen 
significantly. I gave an example, at one time it was $450, we 
collected 15. That number is down around, somewhere around $100 
versus the 15. In Illinois it is closer to $200. So in all our 
jurisdictions there are different numbers.
    But there is still a significant problem that cries out for 
a rational resolution.
    Senator Breaux. So you are satisfied with that part? I 
mean, the whole bill that Senator Brownback has offered, but 
with regard to the reciprocal compensation issue?
    Mr. Ellis. Absolutely.
    Senator Breaux. Mr. Bryan, you disagree with that?
    Mr. Bryan. I disagree because it results that we deploy 
capital that the Bellcos would otherwise have to deploy and we 
just do not get compensated for it. There is an easy way for 
SBC to solve their reciprocal compensation dilemmas if they are 
concerned about it. It is the old-fashioned way: Go build a 
network, put us out of business.
    Senator Breaux. Mr. Ellis.
    Mr. Ellis. Well, they do get compensated. I just gave an 
example.
    There is no reciprocal in this concept. There is no 
reciprocal traffic from the Internet service providers. Their 
sole purpose when they connect with ICG is to receive calls 
that ICG terminates, and ICG gets compensated for that plant, 
no question about it. When they collocate, as they do with the 
Internet service provider, and they simply hand the call to the 
Internet service provider, the Internet service provider is 
paying them. When they pay them, it is for one thing: to 
receive calls from them. They never pay them to originate. 
There is no reciprocal here. They are getting compensated.
    Mr. Bryan. May I just add one thing to that? Of course 
there is reciprocity, because from inception we have used SBC's 
network and we have paid them for it. There is no question, we 
have always paid you on time for the use of your network. In 
this transaction--and in most transactions we had to pay you 
much more than you pay us. In these issues, you have to pay us 
more and I know that is offensive to you.
    But there is an issue here. SBC has a customer. That 
customer has come and wants access to the Internet. They have 
decided, because we have come in now and said to the ISPs, we 
will provide you with network. We are now in the middle of 
that. We did not need to be in the middle of that if they had 
provided the same service to the ISPs. Well, they can start 
that tomorrow. We will be put out of the marketplace.
    But we are providing a service. If we were not providing 
the service, then you could have deep concerns that your 
customers might switch over to the cable companies that are 
frightening to you.
    Senator Breaux. Ain't competition great. Well, Mr. Ellis, I 
happen to agree. I think that you have made some good points on 
the issue. I just do not think it is a level playing field at 
all and I think something needs to be done about that.
    Thank you.
    Senator Brownback. Mr. Bryan, let me ask you something on 
the specific legislation. In your prepared testimony you 
asserted that my legislation would deny the CLECs the ability 
to interconnect with ILECs networks. Where in my legislation is 
the interconnection requirement of section 251[a] eliminated 
for the ILECs? Rather than eliminate the ability to 
interconnect with the ILEC networks, does the bill not simply 
put the interconnection terms on the same level as 
interconnection with any other carrier and apply the same 
resale rules, contrary to your testimony? My bill really does 
not deprive you of selling an ILECs broadband service, but puts 
it on the same regulatory level as the resale of any other 
carrier's services.
    If I am a carrier, why should it cost me less to 
interconnect with SBC than it costs me to interconnect with 
ICG, or less to resell ICG's services than ICG's?
    Mr. Bryan. Well, Mr. Ellis and I agree on one point, that 
this country's telecom is vital because we can use other 
people's networks. No one is going to have a comprehensive 
network. We have to use other people's networks.
    It is I think better if we can now, if SBC develops a new 
technology, if we can then avail ourselves of that new 
technology and lease that capacity from them. We are happy to 
reciprocate that and have them use our network. Wherever we 
have network deployed, if there is a site where SBC wishes to 
use our network, we will work out an arrangement where they can 
then take our network and use it.
    But to be foreclosed from taking over and unbundling those 
elements, the very elements that are going to be the advanced 
and exciting elements, I think not only is it going to be bad 
for the competitive telephone companies, it is going to be bad 
for the creative element, because the most creative people in 
this industry are those who are thinking about new ways to take 
advantage of advanced networks.
    So my view is those networks need to be made open and 
available to creative--let us now go back to how this country 
was when each State would charge taxes. Before you could go 
from Delaware to Pennsylvania, you had to pay a tax. Let us 
have it be open and let us let networks be used. We should both 
be compensated for the use of the network, but we should not be 
able to create little feudal systems that blank it out.
    Senator Brownback. Mr. Ellis.
    Mr. Ellis. This goes back to one of my starting point 
principles that SBC evaluates legislation. In competitive 
markets, the government should not regulate rates, terms, or 
conditions. The advanced services, to distinguish it from the 
voice side of the business, advanced services is a competitive 
market. As I have said, we do not have a bottleneck. We have 
absolutely no bottleneck.
    There is no regulation on the other set of wires that go 
into every house or virtually every house. That is, the cable 
and cable modem services are completely unregulated. They have 
no interconnection obligation, no unbundling, and so forth. My 
basic principle is that, given the existence of alternatives to 
our DSL services, we should not be treated any differently than 
those alternatives.
    I believe in, as I gave the example of the wireless 
industry developing without regulation, on normal commercial 
transactions there would be the interconnection of networks. 
There would be normal business relations. But I submit, where 
there is no bottleneck and where cable modem has the exact same 
set of wires going into the house and they are treated one way, 
that there is no justification to treat the telephone DSL 
services in another way.
    Senator Brownback. Mr. Taylor.
    Mr. Taylor. I certainly sympathize with Mr. Ellis' position 
on that. But the great thing there is the Ninth Circuit and the 
FCC are going to regulate cable modems as a common carrier 
service. So that other wire into the house will be treated like 
the wire that is into the house today, so that we are solving 
that problem through the regulation of the cable modem, and the 
Ninth Circuit Court of Appeals decided that cable modem service 
was a common carrier service.
    Senator Brownback. Let me wrap up with one question that I 
have looking at this overall issue of how we get this deployed 
to rural areas, which is what the whole focus of the bill is 
about, is how do we get this out to rural areas. You are not 
there right now. You cite several companies that are, but the 
percentages are very low. Bob and Nancy Brownback on the farm 
in Parker, Kansas, and my brother Jim, they are just not having 
the access that other places do.
    That is what we are aimed at and that is what we are trying 
to create. Now, some people say let us create tax incentives, 
other people say let us put subsidies. We are going to do 
something to try to create a level field here for rural America 
so that they can have the same access to the same economic 
needs, and clearly we have those.
    I would hope that all of you on the panel would work with 
us to see the answer to that issue on through. I look at it and 
I see a clear opportunity to level the regulatory playing field 
here and create a system where they will reach out. In other 
words, even by leveling the regulatory playing field, we even 
put requirements on those people. If they want to have the 
level regulatory field, they have to build out, 100 percent 
buildout. So we do not even give just regulatory parity. We say 
to get regulatory parity you have to do something, and that is 
to invest in areas where CLECs and your companies have to date 
been unwilling to do so. They have not been willing to go out 
into those areas.
    Now, if you were to sit here today and to promise me that 
within a year or two the CLECs are going to be out there, 100 
percent competitive like the bill is requiring of the ILECs to 
do, I will be much more interested in what you are saying, 
rather than just--it seems like more of a protective interest 
in how do we address these rural needs. That is what the focus 
is.
    Mr. Taylor. If I could comment, I think that there are a 
lot of companies--and I cited McLeod USA, which is building out 
all over what I would describe as rural America. The underlying 
challenge, though, is it is not a technology, it is not a 
regulatory challenge. It is an enforcement challenge. Getting 
into incumbent central offices to deploy DSL technology takes a 
long time. If we could get faster access to the facilities 
necessary to deploy broadband, it can happen faster.
    But even then, it is a people and equipment challenge. 
Companies like Focal, companies like ICG, quite frankly I can 
imagine companies like SBC, are deploying technology as fast as 
humanly possible. If you opened up every door and took away 
every regulation, I am not sure that manufacturers could make 
and companies could install the equipment any faster than it is 
today.
    Senator Brownback. But they are able to do it in the urban 
areas now and you are able to get in there, but you are not in 
the rural.
    Mr. Taylor. There are DSL services in rural Iowa, in rural 
Illinois.
    Senator Brownback. Less than 5 percent.
    Mr. Taylor. It is less than 5 percent in Chicago have DSL 
services.
    Senator Brownback. I mean, I'll just go through the numbers 
with you again, but you are up to 73 percent in the urban-
suburban areas, where the market is good.
    Mr. Taylor. But they do not have DSL service. They have the 
potential.
    Senator Brownback. Cable modem and/or DSL.
    Mr. Taylor. And cable modems--I mean, cable. I have SBC 
cable service. They will not offer me a cable modem.
    So it is a choice, but the market is addressing it and 
moving as quickly as they can. I think the example at Rainier, 
they are deploying numerous different technologies and 
obviously being successful at it. I think that it will happen. 
It is a matter of time and enforcement of the current rules.
    Senator Brownback. How much time?
    Mr. Taylor. I cannot answer that because it still takes a 
technician to climb up a telephone pole and you still put in a 
piece of fiber optic cable.
    Senator Brownback. How much time before, under the current 
system, the CLECs will get these advanced services deployed in 
rural areas to the 80 percent level, Mr. Bryan or Mr. Taylor?
    Mr. Bryan. This is almost a bad and good answer to your 
question. It is unknowable. The only hope I can give you is 
this whole competition and the evolution of the Internet has 
resulted in creative solutions.
    Senator Brownback. In 5 years will you be 80 percent?
    Mr. Bryan. Let me just give you one little tidbit and then 
you will see why I am having trouble giving you a time-date. In 
the last 6 months we have seen the cost of the soft switch 
ports--these are not the traditional circuit switches, but the 
switches that Mr. Ellis and all of us are going to deploy 
starting next year--coming down sharply. We have also seen the 
capacity of these pieces of equipment going up.
    None of us could have predicted 6 months ago it was going 
to happen this way. So I think you are going to find that, with 
some somewhat traditional network deployed, by adding now new 
technology we are going to be able to make these old circuits 
that SBC has going into Farmer Brown's location much more 
robust in a relatively short time period. I am not a 
technician, but the one thing I would----
    Senator Brownback. If I could, Mr. Bryan, and I appreciate 
your answer because you do not feel like you can answer me. But 
in the legislation we put an answer in there. If the CLECs want 
this, they have got to do this within a date certain. That is 
what I am asking, and you are giving me no certainty.
    Mr. Haynes, let us wrap this round up, and if Mr. Breaux 
wants any more questions we will give him another shot at it.
    Mr. Haynes. Senator Brownback, I think one of the beauties 
of this legislation proposed is it will increase the demand for 
broadband services across the country. I will guarantee you 
when our customers come in and start asking for services and 
say they are valuable and they are willing to pay a reasonable 
cost, we find ways to do it.
    We pass 3 to 4,000 homes with cable. We have 1,000 cable 
subscribers. We have 57 with cable modems. The way our company 
is going to be more successful with cable modems and DSL is 
when they are reading the advantages in the Tacoma newspaper, 
where we do not serve, the Seattle newspaper, when they are 
seeing the Seattle stations bragging about the value.
    Furthermore, when the ISP providers complete the rest of 
the chain, so when you finally get something that works fast at 
home it does not get bogged down somewhere else in the network. 
It is very, very frustrating to have a cable modem sitting on 
my desk in my office, DSL in my home, and I get very slow 
speeds at certain locations at certain times of the day.
    So in my opinion, the beauty of your bill, bringing high 
speed data in the major metropolitan areas to 80 percent of the 
people increases the demand and gives us a better market to 
bring those services in rural America. I think it is a much 
bigger pie and that is where it is going to help small 
companies like ours to help serve our customers.
    Senator Brownback. Senator Breaux, do you have any followup 
questions?
    [No response.]
    Senator Brownback. Mr. Ellis, and we will wrap this panel 
up.
    Mr. Ellis. Senator, if I may, one of the attractive 
features from our perspective of your bill is the 
discontinuance of the reciprocal compensation. As I said, at 
both ends of the table we have companies that do not even serve 
the residential customers in the urban communities, let alone 
out in the rural. Why? I submit that the reciprocal 
compensation system disincents them from doing that. Every time 
they serve a residential customer instead of their ISP, every 
single time, they risk paying the exorbitant reciprocal 
compensation that we are paying. They are disincented.
    In terms of demand for advanced services, it is there. 
Every single day my company will sell between 3,000 and 5,000 
DSL lines, every single day. Where it is available, we cannot 
keep up. We cannot install as fast as we can sell. It would be 
the same or even more in the rural areas.
    Mr. Taylor. If I could just add for the record, Focal is 
providing and in the process of building out to 300,000 homes 
in rural northern California in Contra Costa County. We have 
tens of thousands of residential customers up in service today, 
and there are lots of residential customers being served by 
CLECs. We serve thousands of residential customers in the city 
of Chicago, and SBC has known that.
    Mr. Bryan. May I just add one thing for the record. The 
same thing for ICG. I would also add that while we are waiting 
for broadband services to the rural area, I think it would be a 
crime to cutoff their current lifeline, which is dial-up access 
to the Internet. People in the rural areas are getting that 
service to the Internet and to now place higher charges on that 
service I think will do your rural concerns great damage.
    Senator Brownback. Well, thank you all. Competition is 
great. I hope you all will help me get my folks served with 
this, because one way or the other, whether it is tax policy, 
subsidy, or regulatory relief, we need to act. I think the 
clear best route to go is on regulatory relief. I think it 
makes the most sense and it is the fairest way to go.
    I thank all the panel members for being here today. The 
record will remain open if you would like to submit other 
statements to be included in the record.
    We next go to the second panel. That consists of: Ms. Sue 
Ashdown, Co-owner, Xmission, of Salt Lake City, Utah; Mr. Tom 
Duesterberg, President and CEO of Manufacturers Alliance; Mr. 
James Glassman, Resident Fellow, American Enterprise Institute; 
Mr. Peter Pitsch, the Communications Policy Director for 
Information Technology Industry Council; and Mr. Eric 
Strumingher, the Managing Director of Paine Webber.
    Ms. Ashdown, let us proceed with you first on the panel. We 
look forward to your statement. Could I ask you to keep your 
statement to about 5 minutes so we can have as much time as 
possible for questions. I would appreciate that. The floor is 
yours. Welcome.

  STATEMENT OF SUE ASHDOWN, CO-OWNER, XMISSION, AND EXECUTIVE 
              DIRECTOR, AMERICAN INTERNET SERVICE 
                     PROVIDERS ASSOCIATION

    Ms. Ashdown. Sure. Thank you. Thank you for inviting me, 
Mr. Chairman and Members of the Committee. I am Sue Ashdown. I 
am a Co-owner of Xmission, an independent Internet service 
provider based in Utah. Xmission was founded in 1993 as the 
first Internet service provider in Utah, which has plenty of 
rural areas that it serves. I am also the Executive Director of 
the American Internet Service Providers Association.
    So I am very grateful to have the opportunity to testify on 
S. 2902, the Broadband Internet Regulatory Relief Act, because 
Internet service providers have been mentioned many times 
already this morning and I think that it is important for this 
group of Senators to remember that when we are talking about 
Internet access in rural areas, it is predominantly provided by 
the independent Internet service provider. We are not talking 
about AOL or Earthlink that are out there providing that 
access, but it is the small independent local Internet service 
provider providing that rural access, and we are very concerned 
about this legislation because we are concerned about the 
aspects, the way that it would control our access to phone 
company services that we need to be able to provide our 
service.
    We are excited about the opportunities that broadband 
Internet access services provide to our customers and as fast 
as we can get high speed digital subscriber line transport 
services we are rolling out broadband Internet services to our 
customers. But we are experiencing a number of disappointing 
obstacles in our efforts to bring competitive broadband 
Internet access to consumers.
    Foremost among those obstacles are the ongoing efforts of 
the incumbent local exchange carriers, and particularly in my 
territory U.S. West, favoring their affiliated Internet service 
provider in the provision of DSL services. In fact, the Utah 
Coalition recently filed a petition with the Federal 
Communications Commission asking for an investigation of U.S. 
West's practices that favor its affiliate, wholly owned ISP 
subsidiary to the detriment of independent Internet service 
providers.
    These are practices that are prohibited by FCC rules. They 
include practices such as the joint marketing of a bundled 
package of local, wireless, and Internet access services that 
result in Internet access service being provided at prices well 
below what that service costs independent competitors to 
provide.
    In the market today, incumbent monopoly carriers are 
ignoring their common carrier obligations and dragging their 
feet on opening their networks to competition as the law 
requires. So as a result, we Internet service providers find it 
hard to believe that Congress would consider amending the law 
to reduce or eliminate entirely those legal requirements for 
the very broadband services consumers are demanding. But that 
is precisely what Senate bill 2902 proposes to do.
    Xmission and the American Internet Service Providers 
Association oppose this bill because it would make it even more 
difficult, if not impossible, for independent Internet service 
providers to provide high speed Internet access. Senate Bill 
2902 undermines competitive ISPs in three ways.
    First, the bill would exempt all incumbent carriers from 
any common carrier regulation by the FCC or the States for the 
provision of advanced services, which are defined as packet-
switched services that deliver 200 kilobits per second in both 
directions. This definition includes DSL service, which means 
that U.S. West and the other incumbents would no longer be in 
violation of the law when they discriminate in favor of their 
own affiliate or refuse to provide nondiscriminatory access to 
broadband transport services for independent ISPs.
    I might add right here that that was at the heart of our 
request to the FCC to investigate the discriminatory 
provisioning that was going on with the Internet service 
providers in Utah.
    In a perverse twist, if this bill were enacted, competitive 
carriers would continue to be required to provide 
nondiscriminatory access to transport service for Internet 
service providers under the FCC's rules, but the monopoly 
incumbent carriers would be free of this burden. It is this 
rule, enacted as part of the FCC's Computer two proceedings, 
that is one of the basic principles that ensures that we have a 
competitive Internet today.
    Second, in a competitive market ISPs might be able to turn 
to other carriers in order to offer service to consumers, and 
we certainly do that today whenever a competitive alternative 
presents itself. For example, two reasons many Internet service 
providers prefer competitive carriers are that they will sell 
us collocation space for our equipment at a central point and 
they will let us buy local calling numbers so that our 
customers avoid paying in-state long distance charges for 
Internet access. The incumbents have always had the ability to 
sell us these services, but many still choose not to do that 
today.
    Unfortunately, there are unlikely to be many competitors to 
choose from if this bill is ultimately enacted. This is the 
case because Senate Bill 2902 exempts various formulations of 
packet-based, packet-switched, and advanced services, as well 
as the new fiber optic facilities, from the pro-competitive 
requirements of section 251[c] of the Communications Act. 
Competitive carriers, some of whom are testifying before you 
today, depend on being able to collocate their DSLAMs, get 
their access to unbundled network elements, and obtain cost-
based interconnection with the incumbent carrier's network in 
order to provide DSL services independent ISPs need.
    Under this bill, competitors would have to duplicate much 
of the monopoly network before they could offer any DSL 
services to ISPs, and the cost of this unnecessary duplication 
would be astronomical. The present rollout of DSL will screech 
to a halt and competitive broadband will come only to the most 
densely concentrated business markets, and I do not think that 
was the intent behind your legislation.
    Finally, if the other two changes I mentioned were not 
enough to ensure competition does not continue to grow, this 
bill would prohibit the payment of reciprocal compensation for 
Internet-bound traffic. I am sure we heard already from many of 
the competitive carriers about this, but let me address it for 
a moment from the ISP point of view if I have your indulgence.
    Senator Brownback. In 1 minute here, please, because we 
have got a big panel.
    Ms. Ashdown. Right. Reciprocal compensation occurs when the 
local carrier whose customer originates a call hands that call 
off to a second local carrier for delivery to the second 
carrier's customer. Wireless carriers pay incumbent carriers 
for completing wireless calls to customers on the incumbent's 
network and it is no different when the call goes from an 
incumbent carrier's customer to an ISP served by a competitor. 
These are costs for which the competitor should be compensated.
    If Congress removes the reciprocal compensation obligation, 
then competitors must either recover their costs from the ISP 
or stop serving ISPs, and neither result is good from a policy 
or a consumer point of view. If they have to turn to the ISPs 
to recover their costs, just as an example, based on the 
average cost for local traffic of \2/10\ of a cent per minute--
--
    Senator Brownback. If you could wrap it on up, Ms. Ashdown.
    Ms. Ashdown.--competitors would have to charge Internet 
service providers an average of six dollars per month to cover 
their costs. The Internet market is fiercely competitive right 
now. We are not in the position to be able to charge, to pass 
those costs on to our customers. They come out of our bottom 
line. They hurt our ability to serve rural Americans as well as 
urban Americans, and I hope that the Committee will not support 
this bill.
    [The prepared statement of Ms. Ashdown follows:]

 Prepared Statement of Sue Ashdown, Co-Owner, XMission, and Executive 
       Director, American Internet Service Providers Association
    Mr. Chairman and Members of the Committee, I am Sue Ashdown, a co-
owner of XMission, an independent Internet Service Provider (ISP). I am 
also the executive director of the American Internet Service Providers 
Association. Thank you for inviting me to testify on S. 2902, the 
Broadband Internet Regulatory Relief Act of 2000.
    XMission was founded in 1993 as the first ISP in Utah. The American 
Internet Service Providers Association represents independent ISPs 
serving both urban and rural consumers. Independent ISPs are excited 
about the opportunities that broadband Internet access services can 
provide to our customers. As fast as we can get access to high-speed 
Digital Subscriber Line (DSL) transport services, we are rolling out 
broadband Internet services to our customers.
    However, we are experiencing a number of disappointing obstacles in 
our efforts to bring competitive broadband Internet access to 
consumers. Foremost among those obstacles is the ongoing efforts of the 
incumbent local exchange carriers, and in particular U.S. West, to 
favor their affiliated ISP in the provision of DSL services.
    In fact, the American Internet Service Providers Association 
recently filed a petition with the Federal Communications Commission 
asking for an investigation of U.S. West's practices that favor its 
affiliated, wholly owned ISP subsidiary to the detriment of independent 
ISPs. These practices are prohibited by the FCC's rules. They include 
practices such as the joint marketing of a bundled package of local, 
wireless, and Internet access services that result in the Internet 
access service being provided at prices well below what that service 
costs independent competitors to provide.
    In the market today incumbent, monopoly carriers are ignoring their 
common carrier obligations and dragging their feet on opening their 
networks to competition as the law requires. As a result, ISPs find it 
hard to believe that Congress would consider amending the law to reduce 
or eliminate entirely those legal requirements for the very broadband 
services consumers are demanding.
    Yet that is precisely what S. 2902 proposes to do. XMission and the 
American Internet Service Providers Association oppose this bill 
because it would make it even more difficult, if not impossible, for 
independent ISPs to offer high-speed Internet services. S. 2902 
undermines competitive ISPs in three ways.
    First, the bill would exempt all incumbent carriers from any common 
carrier regulation by the FCC or the States for their provision of 
``advanced services,'' which are defined as packet-switched services 
that deliver 200 kilobits per second in both directions. This 
definition includes DSL service, which means that U.S. West and other 
incumbents would no longer be in violation of the law when they 
discriminate in favor of their own affiliate or refuse to provide non-
discriminatory access to broadband transport services for independent 
ISPs.
    In a perverse twist, if this bill were enacted competitive carriers 
would continue to be required to provide non-discriminatory access to 
transport services for ISPs under the FCC's rules, but the monopoly 
incumbent carriers would be free of this burden. It is this rule, 
enacted as part of the FCC's Computer II proceedings, that is one of 
the basic principles that ensures we continue to have a competitive 
Internet today.
    Second, in a competitive market ISPs might be able to turn to other 
carriers in order to offer service to consumers. We certainly do today 
whenever a competitive alternative presents itself. For example, two 
reasons many ISPs prefer competitive carriers are that they will sell 
us collocation space for our equipment at a single central point and 
will let us buy local calling numbers so that our customers avoid 
paying instate long distance charges for Internet access. The 
incumbents have always had the ability to offer us these services, but 
many still choose not to today. Unfortunately, there are unlikely to be 
many competitors to choose from if this bill is ultimately enacted.
    This is the case because S. 2902 exempts various formulations of 
packet-based, packet-switched, and advanced services, as well as new 
fiber optic facilities, from the pro-competitive requirements of 
section 251(c) of the Communications Act. Competitive carriers, some of 
whom are testifying before you today, depend on being able to collocate 
their DSLAMs, get access to UNEs, and obtain cost-based interconnection 
with the incumbent carrier's network in order to provide the DSL 
services independent ISPs need.
    Under S. 2902, competitors would have to duplicate much of the 
existing, monopoly network before they could offer any DSL services to 
ISPs. The costs of this unnecessary duplication would be astronomical. 
The present rollout of DSL will screech to a halt, and competitive 
broadband will come only to the most densely concentrated business 
markets.
    Finally, if the other two changes I mentioned were not enough to 
ensure competition doesn't continue to grow, this bill would prohibit 
the payment of reciprocal compensation for Internet bound traffic. I am 
sure that the competitive carriers represented here will address this 
issue in detail, but let me add the ISP point of view.
    Reciprocal compensation occurs when the local carrier whose 
customer originates a call hands that call off to a second local 
carrier for delivery to the second carrier's customer. Wireless 
carriers pay incumbent carriers for competing wireless calls to 
customers on the incumbent's network, and it is no different when the 
call goes from an incumbent carrier's customer to an ISP served by a 
competitor. There are costs associated with delivering the call for 
which the competitor should be compensated.
    If Congress removes the reciprocal compensation obligation, then 
competitors must either recover their costs from the ISP or stop 
serving the ISPs. Neither result is good from the policy or consumer 
point of view. If competitors stop serving ISPs we lose the choice of 
services they offer and our customers lose the reduced prices that 
competition brings.
    If competitors turn to ISPs to recover their costs, then ISPs must 
pass that cost on to consumers. Based on an average cost for local 
traffic of two-tenths of a cent per minute (as found by the Louisiana 
public service commission), and an average Internet use time for a 
rural user of 53 hours a month, competitors would have to charge an ISP 
an average of $6.00 per customer per month to recover their costs.
    This would represent a roughly 25 percent increase in dial-up 
Internet rates--an increase that the incumbent would not have to impose 
on calls it carries to its own affiliated ISP, since the incumbent 
bills the caller and keeps all the revenue. As a practical matter, with 
the incumbents favoring their ISP affiliate and almost giving away 
Internet access as part of a bundled package of services, it will be 
nearly impossible for an independent ISP to pass on an increase in 
costs to our consumers.
    In summary, this bill will stop broadband competition in its 
tracks. By freeing the monopoly incumbent carriers from any common 
carrier oversight, it ensures that they will favor their own affiliated 
ISP. The exemption of packet-switched services from the market-opening 
requirements of the Telecommunications Act ensures that competitors 
will not be able to cost-effectively serve anywhere other than the most 
densely populated markets. Lastly, by depriving competitors of 
reciprocal compensation for their legitimate costs of carrying dial-up 
ISP traffic, the bill removes an existing, narrow band revenue stream 
that competitors might use to finance their own broadband deployment.
    I hope that the Committee will not support this bill, and will 
instead encourage the FCC and the States to aggressively enforce the 
existing rules that require incumbent carriers to open their local 
networks to competition and provide non-discriminatory broadband 
transport services to ISPs.

    Senator Brownback. I can see we disagree on this topic. I 
hope we can have a discussion about how we do get things out to 
rural areas. Mr. Duesterberg.

STATEMENT OF THOMAS J. DUESTERBERG, Ph.D., PRESIDENT AND CHIEF 
               EXECUTIVE OFFICER, MANUFACTURERS 
                       ALLIANCE/MAPI INC.

    Dr. Duesterberg. Thank you, Mr. Chairman, and thank you for 
this opportunity to appear on behalf of the Manufacturers 
Alliance. The Alliance represents over 400 companies across a 
broad spectrum of industries from aerospace and pharmaceuticals 
to telecommunications, oil and gas, and others.
    I want to talk about your bill, which we support, in a 
broader context. This bill is important to manufacturers and 
related services. The American economy, including the 
manufacturing sector, is enjoying one of the most sustained 
periods of robust growth in its history and has regained the 
international advantage that many thought was lost about 10 or 
15 years ago.
    One reason for this strong performance is the advent of 
what is variously called the digital economy, the information 
economy, or the Internet economy. Whatever the proper name, the 
phenomenon of ever more connected and powerful information 
processing is at its core. It is both the explosive growth of 
connected computing and its systemwide efficiency effects which 
are contributing powerfully to the low inflation, above trend 
line growth we have experienced from at least 1995 through this 
year.
    The Internet and its predecessors have already 
revolutionized the financial sector and are now increasingly 
changing the manufacturing and retail sectors as well. The 
Alliance recently held a conference on business to business 
electronic commerce attended by nearly 150 companies. We 
learned that B2B sales are expected to grow from today's $400 
billion annually to nearly $2.7 trillion or 17 percent of total 
sales by the year 2004. About 56 percent of U.S. companies are 
conducting B2B sales over the Internet now and over 90 percent 
anticipate doing so as soon as 2002.
    The advent of Internet-based communications and 
transactions is also adding to the efficiencies of 
manufacturing in numerous ways. Auctions, better management 
practices, remote training, improved customer services, 
improved supply chain management and purchasing are among 
these.
    The application of these new information technology and 
Internet-related processes in the manufacturing sector is one 
reason that this sector has performed well in an increasingly 
competitive global environment. Productivity in the 
manufacturing sector has grown by an average of 6.1 percent for 
the 3 years ending in March 2000, substantially higher than any 
3-year period since 1950. Such sustained productivity growth in 
turn has helped keep a lid on inflation.
    Although one cannot attribute all gains in productivity to 
a single factor since other technological breakthroughs, 
management improvements, and more efficient financing tools, et 
cetera, are also contributing to this, data from a recent study 
conducted by the Federal Reserve Board indicates that up to 40 
percent of the recent upswing in trend productivity growth is 
accounted for by increases in the stock of information 
technology.
    Broadband telecommunications is playing an increasingly 
pivotal role in the advance of the digital economy. As both 
manufacturers and retailers move increasingly toward electronic 
commerce and the use of the Internet as a management tool, the 
need for ubiquitous high speed connections grows even more 
crucial. High speed connections are needed not only to play 
video games and communicate with one's neighbors, but to do 
video conferencing, exchange design data on the thousands of 
parts that go into an automobile or an airliner, conduct 
auctions for raw materials, coordinate just in time delivery 
systems, facilitate distance learning, promote telecommuting.
    If we are to achieve the projected gains from B2B e-
commerce in the next few years, we will require high speed 
connections not only in the urban environments where high speed 
connections are becoming more available, but also in remote 
areas where many of America's factories are now located and 
where numerous American small businesses and American 
telecommuters would like to be.
    Powering the digital economy and maintaining the pace of 
productivity enhancement responsible for this growth path will 
require more rapid deployment of broadband networks in both 
urban and rural environments. There appear to be few technical 
and economic barriers to the deployment of broadband networks. 
In fact, there are numerous technologies which are now being 
tested and deployed for current use and there is a reasonable 
potential to have a competitive market for broadband services.
    Many of the barriers to rapid near-term deployment of 
broadband services reside in the current regulation of the 
telecommunications sector. We believe that broadband services 
will be provided not only by the wireline providers that have 
been represented on the previous panel, but also by wireless 
providers, terrestrial and satellite-based providers, possibly 
even electric power distribution companies. Broadcasters as 
well are thinking about getting into the broadband businesses.
    While all of these technologies are currently available, 
they require substantial amounts of capital to develop, test 
and market. About $10 billion alone is needed to upgrade copper 
wire connections for DSL service. In the absence of 
deregulatory parity, some systems are more likely to advance 
quicker than others. Unfortunately, as the subscriber data 
show, in the current environment in which some services are 
subject to regulation or potential regulation, needed 
investments to develop the service are discouraged or made 
prohibitively risky.
    It is our view that steps to remove regulatory asymmetries 
and, indeed, to move to a less regulated environment in high 
speed services are required to promote more rapid deployment of 
these services. Because competition has already emerged in this 
market sector with choices between copper wire, cable, 
satellite, and terrestrial, and fixed wireless, we should move 
as rapidly as possible to reduce regulation of high speed 
services.
    Incumbent local operating companies, however, face real 
impediments to their investment in high speed services. The 
current requirements under section 251 of the Communications 
Act constitute a real disincentive to the types of investments 
required to upgrade their systems to offer broadband services. 
The CLECs clearly lag behind in building out their DSL 
networks, partly because the benefits of any investment would 
have to be shared with competitors.
    The economist and famous deregulator Alfred Kahn made the 
case for a lighter hand of regulation in a recent filing in 
which he said: ``If rivals can share use of whatever network 
facilities they ask for at prices explicitly intended to 
recover only the minimum cost of employing the most modern 
technology, it cannot but have a fatally discouraging effect on 
their initiative and their innovation efforts.''
    Senator Brownback. Dr. Duesterberg, if we could wrap it on 
up I would appreciate it.
    Dr. Duesterberg. I will wrap up by supporting your bill, 
Senator Broadback--Brownback. We think this goes a long way----
    Senator Brownback. Brownback.
    Dr. Duesterberg. I apologize. I have the same problem with 
my name.
    We think your bill goes a long way toward removing the 
current disincentives for investment by the CLECs. It is 
especially the relief from unbundling and resale requirements 
and from price regulations which are most significant for 
promoting investment.
    There are other steps the Congress and the FCC could 
consider to advance the case of broadband deployment. These 
might include making more spectrum available for high speed 
wireless data services, which would be important to rural 
areas, creating transferable property rights for spectrum 
holders. Congress could also consider allowing more competition 
in the Internet backbone market.
    All these steps would increase investment in broadband and 
stimulate broader competition and cannot fail but to result in 
quicker introduction of high speed services at lower prices in 
both urban and rural areas.
    Thank you for this opportunity to appear before the 
Committee.
    [The prepared statement of Dr. Duesterberg follows:]

Prepared Statement of Thomas J. Duesterberg, Ph.D., President and Chief 
          Executive Officer, Manufacturers Alliance/MAPI Inc.
    Mr. Chairman: I am pleased to appear before the Committee to 
present the views of the Manufacturers Alliance/MAPI Inc. (the 
Alliance) on S. 2902, the Broadband Internet Regulatory Relief Act of 
2000. The Alliance represents over 400 companies across a broad 
spectrum of industries, including aerospace, automotive, electronics, 
defense, machine tools, pharmaceuticals, telecommunications, chemicals, 
oil and gas, and many others. Since our founding in 1933, we have been 
a voice for industry supporting policies which promote capital 
investment, productivity enhancement, innovation, free trade, and 
economic growth in our free enterprise system. We support Senator 
Brownback's legislation as a means to advance the economic goals we 
have promoted for over 65 years.
                          The Digital Economy
    Before discussing some of the specific benefits of this 
legislation, I would like to discuss in the general context why more 
rapid broadband deployment, the goal of Senator Brownback's bill, is 
important to manufacturers and related service industries. The American 
economy--including the manufacturing sector--is enjoying one of the 
most sustained periods of robust growth in its history and has regained 
the international competitive advantage in manufacturing many thought 
was lost only a decade ago. One reason for this strong performance is 
the advent of what is being called variously the Digital Economy, the 
Information Economy, or the Internet Economy. Whatever is the proper 
name, the phenomenon of ever more connected and powerful information 
processing is at its core. It is both the explosive growth of connected 
computing and its system-wide efficiency effects which are contributing 
powerfully to the low-inflation, above-trend line growth we have 
experienced from at least 1995 through this year.
    The U.S. Department of Commerce estimates that one-third of U.S. 
economic growth is attributable to the sustained expansion of the 
information technology sector.\1\ Of more lasting significance are the 
system-wide efficiencies gained from the application of connected 
computing in all sectors of the economy. The Internet and its 
predecessors already have revolutionized the financial sector and now 
are increasingly changing the manufacturing and retail sectors as well. 
The Alliance recently held a conference on business-to-business (B2B) 
electronic commerce attended by nearly 150 companies. We learned that 
B2B sales are expected to grow from today's $400 billion to nearly $2.7 
trillion, or 17 percent of total sales, by the year 2004. About 56 
percent of U.S. companies are conducting B2B sales over the Internet 
now, and over 90 percent anticipate doing so by 2002.\2\ The advent of 
Internet-based communications and transactions also is adding to the 
efficiencies of manufacturing in numerous ways. Some of the more 
important Internet-enabled processes we discussed at our conference and 
now being deployed by manufacturers are:
---------------------------------------------------------------------------
    \1\ U.S. Department of Commerce: Digital Economy 2000, Washington, 
DC, June 2000, p. vi.
    \2\ Bruce Temkin, Forrester Research: ``What Does the Future Hold 
for Business-to-Business E-Commerce/E-Business,'' presentation to 
Business-to-Business E-Commerce--A Look at Manufacturers' Best 
Practices for Thriving in the Digital Economy, Arlington, VA, June 8, 
2000. See also, The Internet Economy Indicators, 
www.internetindicators.com/facts.html.

   Coordinated product design between companies and across 
---------------------------------------------------------------------------
        different locations,

   Improved human resource functions,

   Better management of inventories and supply chains,

   Remote training,

   Using auctions in both purchasing and selling,

   Improved customer services, and

   More efficient project administration and management.

    The application of these new information technology and Internet-
related processes in the manufacturing sector is one reason that this 
sector has performed well in an increasingly competitive, globalized 
environment. Productivity in the manufacturing sector has grown by an 
average of 6.1 percent for the three years ending in March 2000, which 
is substantially higher than any three-year period since 1950. Such 
sustained productivity growth, in turn, has helped keep the lid on 
inflation, an especially difficult achievement at this late stage in 
the business cycle given the low unemployment rate. Although one cannot 
attribute all gains in productivity to one factor--since other 
technological breakthroughs, management improvements, more efficient 
financing tools, etc., also are contributing factors--data from a 
recent study by the Federal Reserve Board indicate that up to 40 
percent of the recent upswing in trend productivity growth is accounted 
for by increases in the stock of information technology.\3\ A recent 
study by Goldman Sachs estimates that total GDP growth can be enhanced 
by .2 percent per year from the spread of B2B electronic commerce 
alone.\4\ Anything that contributes to economic growth, higher 
productivity, and lower inflation is good for the bottom line of 
manufacturers as well as consumers.
---------------------------------------------------------------------------
    \3\ See Jeremy Leonard, How New is the ``New Economy''? The Role of 
Information Technology Investment in Recent U.S. Economic Performance, 
Economic Report 498, Manufacturers Alliance/MAPI, July 2000.
    \4\ Cited in: ``B2B E-Commerce About to Explode, Affecting the 
Economy in Every Way,'' Daily Report for Executives, Bureau of National 
Affairs, Washington, DC, July 19, 2000.
---------------------------------------------------------------------------
                  The Role of Broadband Communications
    Broadband telecommunications is playing an increasingly pivotal 
role in the advance of the digital economy. As both manufacturers and 
retailers move increasingly toward electronic commerce and the use of 
the Internet as a management tool, the need for ubiquitous high-speed 
connections grows more crucial. High-speed connections are needed not 
only to play video games and download movies but to do video 
conferencing, exchange design data on the thousands of parts that go 
into an automobile or an airliner, conduct auctions for raw materials, 
coordinate just-in-time delivery systems, facilitate distance learning, 
and promote telecommuting. If we are to achieve the projected gains 
from B2B e-commerce and, if over 90 percent of businesses are to be in 
the B2B environment in the next few years, we will require high-speed 
connections not only in the urban environments where high-speed 
connections are becoming more available, but also in more remote areas 
where many of America's factories are now located and where numerous 
American telecommuters would like to be. While billions of dollars have 
been invested in broadband networks since passage of the 
Telecommunications Act of 1996, fewer than 3 million users are now 
hooked up to them.\5\ Powering the digital economy and maintaining the 
pace of productivity enhancement responsible for the robust growth and 
global competitiveness of our industry will require more rapid 
deployment of broadband networks in both urban and rural environments.
---------------------------------------------------------------------------
    \5\ Data on high-speed connections are taken from: U.S. Department 
of Commerce and U.S. Department of Agriculture, Advanced 
Telecommunications in Rural America: The Challenge of Bringing 
Broadband Service to All Americas, Washington, DC, April 2000.
---------------------------------------------------------------------------
                     The Need for Regulatory Relief
    There appear to be few technical and economic barriers to the 
deployment of broadband networks. In fact, there are numerous 
technologies which are now being tested and deployed for current use, 
and there is reasonable potential to have a competitive market for 
broadband services. Many of the barriers to rapid, near-term deployment 
of broadband services reside in the current regulation of the 
telecommunications sector. DSL (digital subscriber line) service across 
existing telephone lines and cable-based high-speed service have the 
most potential for near-term growth, but several satellite-based 
networks are being tested, as well as fixed terrestrial wireless 
systems. Fiber-optic cable directly to end users will be a viable 
option for some urban or high-capacity users. The just-announced entry 
of Enron subsidiary, Enron Broadband Services, and Blockbuster into the 
business of delivering movies on demand via fiber-optic cable also may 
portend wider use of this delivery mechanism to homes and rural areas. 
In the next few years, terrestrial wireless systems will roll out 
higher speed (up to 2.5 megabits per second or more) services which may 
be as ubiquitous as copper wire, cable, and satellite networks. 
Electric power distribution companies also are experimenting with the 
use of their systems for high-speed data offerings.
    Around the beginning of this year, there were only about one-half 
million DSL customers, although this sector is growing rapidly. Over 
1.1 million cable broadband subscriptions were in place at the same 
time, almost all to homes. At the beginning of this year, only about 40 
percent of all households and 57 percent of small businesses had DSL 
service available to them.\6\ Fiber deployment at this point is 
minimal, although several regional Bells and other providers are 
experimenting with this technology. The number of wireless cable (or 
fixed wireless) and satellite subscribers is in the tens of thousands, 
and terrestrial wireless broadband offerings are not yet available. 
Urban areas are clearly better served than rural areas. In sum, the 
reality of broadband connectivity is lagging far behind its promise.
---------------------------------------------------------------------------
    \6\ See Sanford C. Bernstein & Co., Inc. and McKinsey & Co., Inc., 
Broadband, New York, January 2000, pp. 27-29.
---------------------------------------------------------------------------
    While all of these technologies are currently available, they 
require substantial amounts of capital to develop, test, and market. 
About $10 billion alone is needed to upgrade copper wire connections 
for DSL service.\7\ In the absence of regulatory parity (or 
deregulatory parity), some systems are more likely to advance quicker 
than others. Unfortunately, as the subscriber data show, in the current 
environment in which some services are subject to regulation or to 
potential regulation, needed investments to develop the service are 
discouraged or made prohibitively risky. It is our view that steps to 
remove regulatory asymmetries and indeed to move to a less-regulated 
environment in high-speed services are required to promote more rapid 
deployment of these services. Because competition already has emerged 
in this market sector--with choices between copper wire, cable, 
satellite, and terrestrial fixed wireless now available in some 
places--we should move as rapidly as possible to reduce regulation in 
high-speed services.
---------------------------------------------------------------------------
    \7\ Ibid., p. 8.
---------------------------------------------------------------------------
    Although cable operators are potentially restrained in upgrading 
their systems for high-speed data offerings by the threat of regulation 
of access at the local and state levels, recent court decisions and the 
restraint shown by the FCC thus far appear to create reasonable 
certainty that the threat will not become a reality. As a result, cable 
companies are investing billions to upgrade their systems to allow 
advanced data and voice services, although most are targeted at 
residential customers. Most other broadband technologies, such as the 
various forms of wireless services, face few actual or potential 
regulatory restraints on investment.
    Incumbent local operating companies (ILECs), however, face very 
real impediments to their investments in high-speed data services. The 
current requirements under section 251 of the Communications Act for 
interconnection, unbundling, and resale of network elements used for 
advanced data services not only place the ILECs at a competitive 
disadvantage, but constitute a real disincentive to the types of 
investments required to upgrade their systems to offer broadband 
services. It is significant to note that 22 percent of DSL subscribers 
are using the services of competitive local exchange carriers 
(CLECs).\8\ The ILECs clearly lagged behind in building out their DSL 
networks partly because the benefits of any investment would have to be 
shared with competitors. The economist Alfred Kahn made the case for a 
lighter hand of regulation in a recent filing in which he stated quite 
bluntly that the section 251 requirements discourage investment. Kahn 
wrote: ``If rivals can share use of whatever network facilities they 
ask for at prices explicitly intended to recover only the minimum cost 
of employing the most modern technology, it cannot but have a fatally 
discouraging effect on their own initiative and innovation efforts.'' 
\9\ This analysis was reinforced in a 1999 letter to the FCC signed by 
the heads of 13 high-technology firms such as Compaq, Gateway, Intel, 
Cisco, IBM, Novell, and Kleiner Perkins. The signers argued: ``It is a 
simple but undeniable reality that new and unnecessary regulation will 
diminish the willingness of capital markets to finance the construction 
of new broadband networks.'' \10\
---------------------------------------------------------------------------
    \8\ Advanced Telecommunications in Rural America, op. cit., p. 22.
    \9\ Quoted in Adam Thierer, ``Broadband Telecommunications in the 
21st Century: Five Principles for Reform,'' Heritage Foundation 
Backgrounder, No. 1317, Washington, DC, September 1999, p. 19.
    \10\ See Jeffrey Eisenach, ``Computer Industry Flexes Its Muscle,'' 
www.intellectualcapital.com, July 28, 1999.
---------------------------------------------------------------------------
    The experience of cellular telephony is instructive in this regard. 
After hesitating to grant operating licenses for over a decade, the FCC 
originally deemed that each market would have just two competitors, and 
one of these would be the wireline carrier. We now know that the 
technology is much more robust and competitive than that. In the case 
of broadband, I believe it would be a mistake to try to ``manage'' 
competition or to ``handicap'' competitors. The important thing is to 
get obsolete regulatory barriers out of the way and let technologies 
and markets develop, subject to the rigorous discipline of consumer 
choice.
    Senator Brownback's bill goes a long way toward removing the 
current disincentive for investment by the ILECs in broadband 
infrastructure and services. It is especially the relief from 
unbundling and resale requirements and from price regulations which are 
most significant for promoting investment. The Manufacturers Alliance 
supports such efforts to achieve regulatory parity and gradually lessen 
the regulation of the fast-moving and economically crucial high-speed 
telecommunications sector.\11\ There are, of course, other measures 
Congress (and the FCC) could consider to stimulate an even faster 
transition to a ubiquitous broadband environment. These would include 
making more spectrum available for high-speed, wireless data services 
and creating transferable property rights for spectrum holders. 
Congress also could consider allowing more competition in the Internet 
backbone market. Such efforts to incentivize more investment in 
broadband and stimulate broader competition cannot fail to result in 
quicker introduction of high-speed services at lower prices. In turn, 
this would lower input costs to manufacturers and facilitate the more 
rapid deployment of Internet-based sales, marketing, management, and 
supply strategies by U.S. firms in urban and rural America alike. 
Senator Brownback's bill is an excellent first step toward this goal.
---------------------------------------------------------------------------
    \11\ Thomas J. Duesterberg, Broadband Access: Do We Need a 
Regulatory Solution?, BL-9, Manufacturers Alliance/MAPI, February 2000.
---------------------------------------------------------------------------
    I want to close by thanking Senator Brownback for holding this 
timely hearing and providing us with an opportunity to comment on this 
important legislation.

    Senator Brownback. Thank you, Dr. Duesterberg.
    Mr. Glassman, welcome.

   STATEMENT OF JAMES K. GLASSMAN, RESIDENT FELLOW, AMERICAN 
     ENTERPRISE INSTITUTE, AND HOST, TECHCENTRALSTATION.COM

    Mr. Glassman. Thank you, Mr. Chairman, and Senator Breaux 
of my former home State of Louisiana. It is an honor to be here 
today.
    My name is James K. Glassman. I am a Resident Fellow at the 
American Enterprise Institute, and I have to say immediately I 
am not an expert in the technical aspects of 
telecommunications. My interests lie, as many of yours do, at 
the intersection of the public policy, technology, and finance. 
For that reason, in February with some colleagues I launched a 
web site called TechCentralStation, whose slogan is ``Where 
free markets meet technology.''
    I spent the last 30 years as a journalist for The 
Washington Post and others and as an analyst advocating free 
market solutions to vexing public policy problems. I have 
become in recent months particularly concerned about new 
attempts by governments at all levels to regulate and tax the 
Internet.
    So you might ask, why would an ardent supporter--why would 
I be such an ardent supporter of the 1996 Telecommunications 
Act? For this reason: The Act provides a way to move from an 
intensely regulated environment to a deregulated environment. 
That is the goal and, as many others and this Congress 
understood, that had to occur through a sensible transition 
since the incumbent operating companies had been nourished and 
protected as monopolies by government over the past century and 
thus owned the final mile or so to the customer's home. I liked 
Senator Dorgan's characterization of monopolies being 
cholesterol to the free market system.
    So a compromise was reached after years of give and take. 
It was a noble compromise, a good compromise, that all parties 
appeared to support. But immediately after the bill was passed, 
the local monopolies began to file lawsuits. Finally, after 
litigation and foot-dragging, at long last one of the Bells was 
certified to have opened up in New York, where I now live. The 
competition as a result has become fast and furious, where 4 
years ago it was nil.
    Yes, there are problems in New York, as I am sure there 
will be in Texas, which is the second State to be certified. 
But in New York prices are falling and broadband hookups are 
proliferating. The system is working.
    Now, with competition here at last, we find the ILECs 
appealing to Congress to roll back the Telecom Act with such 
bills as this one. No wonder. Competition is no fun for 
competitors, especially for companies that used to be 
monopolies. But competition is great for consumers.
    In seeking political help to thwart competition, the ILECs 
are not alone. Sadly, it is becoming more and more common for 
high tech companies to ask government for help and for 
government, unfortunately, to provide it, as I showed in an 
article I wrote in April in The Wall Street Journal with the 
headline ``Is government strangling the new economy?'' With 
your permission, I would like to enter that article in the 
record.
    Senator Brownback. Without objection.
    [The material referred to follows:]

Is Government Strangling The New Economy?
By James K. Glassman
04/10/2000
    It's not hard to understand why Microsoft's stock price plummeted 
in the wake of Monday's unfavorable court ruling, but what explains the 
decline of the other high-tech companies that dominate the Nasdaq Stock 
Market?
    Just look at Microsoft's competitors, the companies that were 
supposed to benefit from the federal government's lawsuit. Scott 
McNealy, CEO of Sun Microsystems and one of the most aggressive 
Microsoft antagonists, was gloating in a press release Monday after 
Judge Thomas Penfield Jackson's ruling. But Sun's stock dropped $3.75 
that day. America Online owns Netscape Communications, whose complaint 
touched off the federal suit. AOL stock fell 7% in two days. 
RealNetworks, cited by Judge Jackson as suffering from Microsoft's 
``oppressive thumb on the scale of competitive fortune,'' was down 13%. 
Two makers of operating systems that compete with Microsoft's--Red Hat 
Software and Apple Computer--also dropped.
Changing Environment
    The rout in Nasdaq stocks--which only began to bounce back a little 
Wednesday--has been broad and deep. The breakdown of settlement talks 
in the Microsoft case was only the catalyst. What investors are 
realizing is that the environment that helped produce the high-tech 
boom--low regulation, low taxes, minimal government intervention and a 
low level of corporate rent-seeking--is changing profoundly.
    In the past, no one told the entrepreneurs in the garages of 
Silicon Valley what products to invent, how to sell them, what prices 
to charge or what deals to offer. Now, the new economy is beginning to 
look more like the old--an environment in which the winners are not 
necessarily the companies that please customers the most but the 
companies that do best at keeping government at bay--or, better yet, at 
using government to thwart competitors. Stock prices are falling 
because the risks to real innovators are rising.
    The pundits continue to argue that tech stocks are in a ``bubble.'' 
They said the same thing a year ago, when the Nasdaq was 40% lower than 
today--not to mention five years ago, when it was 80% lower. By this 
reasoning, stock prices are falling because they are too high. It is as 
if the law of gravity suddenly decided to kick in at, oh, around 5000 
on the index.
    But the question is why now? The answer is the increased threats of 
intervention in technology markets--threats made especially vivid by 
the Microsoft decision. To be specific:

   Doing a Smith & Wesson. The same team that gang-tackled the 
        makers of cigarettes and guns is going after not just 
        Microsoft, but smaller high-tech companies. The Justice 
        Department, state attorneys general and plaintiffs lawyers are 
        setting their sights on such firms as DoubleClick, the Internet 
        advertising company accused of privacy abuses. ``We want to do 
        a Smith & Wesson-like thing with DoubleClick,'' said Jennifer 
        Granholm, attorney general of Michigan, last week.

        Commenting on Ms. Granholm's statement, legal critic Walter 
        Olson wrote: ``We suppose this means that she and her 
        colleagues want to invent far-fetched legal theories to attack 
        business practices that have long been regarded as lawful; file 
        a great flurry of suits in multiple courts so as to overwhelm 
        the designated opponent; use the threat of bankrupting legal 
        expense to muscle it into submission . . . and instill fear 
        into other businesses that the same thing could happen to them 
        unless they cooperate.'' DoubleClick, by the way, is down 38% 
        since the onslaught began.

   Biotech blast. In a statement last month, President Clinton 
        and British Prime Minister Tony Blair made veiled threats about 
        ending private ownership of human genome information. Prices of 
        biotech stocks tumbled one-third (though Wednesday Mr. Clinton 
        backtracked on his remarks).

   Taxing e-commerce. Ever since Congress nearly unanimously 
        approved a moratorium on new Internet taxes, the National 
        Governors' Association has pushed aggressively to tax 
        electronic sales across state lines. Gov. Jim Gilmore of 
        Virginia, who heads the federal commission examining the 
        matter, worked hard for a ban but failed. Studies show that 
        sales taxes would throttle the rapid growth of e-commerce and 
        depress revenues of Internet companies.

   Revenge of the middleman. One of the joys of the Internet is 
        that buyers can go directly to manufacturers for their 
        purchases, cutting costs all around. But dealers, suppliers and 
        agents are feeling the squeeze. Rather than devise new clicks-
        and-mortar strategies, these middlemen run whining to 
        politicians for help.

        In South Carolina, auto dealers are pushing a bill that would 
        prohibit car makers from owning dealerships and would 
        explicitly bar Internet sales unless local dealers get a piece 
        of the action. Charles Condon, attorney general of South 
        Carolina, said of the bill: ``What if we passed a statute 
        saying cars couldn't be sold on a particular highway? Wouldn't 
        there be outrage? Why is there no outcry when cars cannot be 
        sold on the information superhighway?''

   Broadband slowdown. Companies are appealing to politicians 
        to increase telecommunications regulations on the Internet--an 
        effort that threatens to hold up faster broadband technologies, 
        already delayed by bottlenecks caused by local telephone 
        companies. For a year America Online campaigned in Congress, in 
        state legislatures and in city councils across the nation to 
        get laws passed that would force cable companies like AT&T and 
        Cox to permit AOL to use, at government-fixed terms, their 
        high-speed cable pipelines. Then, in January, AOL announced it 
        was buying Time Warner; suddenly the shoe was on the other 
        foot.

    But, as George Gilder pointed out on this page recently, it may be 
too late to say ``Never mind.'' The San Francisco Board of Supervisors 
is on the verge of mandating cable access, and decision by a Portland, 
Ore., municipal body regulating Internet-by-cable is now in the courts. 
If Portland wins, thousands of local governments can become Internet 
regulators.
    No one ever knows for sure why a stock falls on a given day, but my 
interpretation of Nasdaq's sharp decline is that investors, jarred by 
the Microsoft decision, have suddenly woken up to these threats of 
government intervention. If they haven't woken up, they had better. And 
so should Al Gore. The Clinton administration likes to take credit for 
a stock market that has quadrupled in the past decade. It can't avoid 
the blame for Nasdaq's collapse.
General Carnage
    While Joel Klein and his Justice Department lawyers were publicly 
and distastefully celebrating Judge Jackson's decision, the market 
capitalization of Microsoft was dropping by more than $100 billion. 
That's not some theoretical figure. It is a loss in real wealth--in 
many cases, in retirement savings--of more than two million direct 
shareholders of Microsoft and of tens of millions more who have 
substantial holdings of Microsoft in their mutual funds and annuities.
    But Microsoft is only part of the story. The Nasdaq carnage has 
been wide-ranging. And why not? The Internet intervention of 
government, often in league with trial lawyers, threatens every high-
tech firm in America.
                                 ______
                                 
    James K. Glassman is a fellow at the American Enterprise Institute, 
host of www.TechCentralStation.com and a member of the advisory board 
of Americans for Technology Leadership, a group supported by Microsoft 
and other tech firms.

    Mr. Glassman. Let me make a few quick points about this 
legislation. First, the Telecom Act is working. Do not change 
it. Two of the largest States in the country have been 
certified. The Yankee Group predicts that the number of homes 
subscribing to broadband services will rise from 1.4 million 
this year to 16.5 million in 2004. That is an incredible pace.
    Second, the CLECs are well equipped now under current law 
to vastly expand their broadband services. Permit me also, Mr. 
Chairman, to enter into the record a remarkable article that 
appeared just last month in FORTUNE magazine by Stephanie Mehta 
about SBC Communications. The headline was ``Why the biggest 
Baby Bell is wild about broadband.'' That article quotes the 
CEO of SBC as saying that his company has launched Project 
Pronto, which will sell one million broadband DSL connections 
by the end of 2000 and two million by the end of 2001, up from 
139,000 at the beginning of this year. SBC is spending $7 
billion to upgrade its system and it expects to get that money 
back quickly and more in productivity gains. This is without, 
Mr. Chairman, your legislation.
    [The material referred to follows:]

Why The Biggest Baby Bell Is Wild About Broadband
By Stephanie N. Mehta
06/12/2000
    SBC Communications, the runt of Ma Bell's litter, amazed telecom 
rivals by devouring its siblings and becoming a giant. Now it's 
attacking the cable guys with a massive rollout of high-speed phone 
lines for Internet service.
    Edward E. Whitacre Jr., the plain-talking CEO of SBC 
Communications, is in his headquarters in San Antonio, telling how much 
he likes the Internet. He volunteers that he has used his home computer 
to buy shoes and books online, and to send and receive digital photos 
of his 2-year-old granddaughter. That's all very charming, yet 
something's wrong with this picture: While Whitacre's executive suite 
has plenty of room for outdoorsy items such as golf clubs and fishing 
paraphernalia, there isn't a PC to be seen. Asked about it, Whitacre 
seems unembarrassed. He just shrugs and says he's not in the office 
enough to need a computer; his secretary and other aides handle the e-
mail.
    You'll find similar disconnects--is it e-schizophrenia?--all over 
SBC. As recently as two years ago, a visitor to the company's 
nondescript corporate offices wouldn't have heard much talk of the 
Internet; Whitacre and his lieutenants were focused on buying other 
phone giants, hawking second phone lines to households, and imploring 
regulators for permission to offer long-distance calling services. Such 
concerns are still crucial to SBC's lucrative $50-billion-a-year 
business, but they're no longer what the executives want to talk about. 
They steer the dialogue to nerdy topics such as Web hosting and the 
superfast online connections the company is unleashing across the 
country. ``SBC is going to be a major player in e-commerce and the 
Internet,'' Whitacre declares. ``We are not just caretakers of the 
network.''
    Investors, unsurprisingly, are skeptical at the notion of a Baby 
Bell morphing into a broadband data company that can compete with, say, 
MCI WorldCom or Qwest. In the midst of the Internet boom, SBC stock has 
remained a stubborn underachiever, trading recently at $42 a share with 
a lackluster P/E ratio of 22 times trailing earnings.
    Yet something strange has happened in recent months: By combining 
local monopoly power, marketing ingenuity, and financial brute force, 
SBC has emerged as the most formidable challenger to cable-TV companies 
in the race to deliver broadband Internet access to the home. Whitacre 
has declared that SBC will spend $6 billion over the next three years 
to make fast Internet connections available to most of the company's 36 
million business and residential customer locations.
    Quaintly named Project Pronto, the plan calls for SBC to sell and 
install a million connections by the end of this year alone, up from a 
mere 139,000 on Jan. 1. If Pronto works, it will open the way for SBC 
to add billions of dollars in annual revenues. The typical household 
that today pays SBC $20 a month for plain-vanilla local phone service 
could fork over $40 a month more for fast Internet service, plus money 
for add-on fare such as online 3-D games and even movies.
    Of course, every Baby Bell would love to transform itself from 
staid telephone monopolist to player in the Internet economy. But some 
smart money in telecom and on Wall Street is starting to like SBC's 
odds. Janus Capital, the Denver mutual-fund company, which manages over 
$270 billion, recently bought more than three million SBC shares for 
some of its growth-oriented funds. Analyst and portfolio manager Matt 
Ankrum thinks SBC will succeed in shifting revenue growth from 
traditional phone service to broadband. ``What got us interested in SBC 
is that through its broadband initiatives it will increase the return 
on investment capital over time,'' he says. ``That ultimately drives 
stock-price performance.''
    The smart money also likes SBC's size: With some 61 million access 
lines in 13 states, SBC can absorb the cost of deploying high-speed 
lines while driving suppliers to quickly develop cheaper, more reliable 
gear for its data networks. And it can leverage its relationship with 
millions of households to push fast phone connections and other 
services into the mass market. ``SBC can dramatically change the market 
conditions in terms of Internet momentum,'' says Don Listwin, executive 
vice president of Cisco Systems, which recently formed an alliance with 
SBC under which the telco will buy $1 billion of Cisco data-networking 
gear and help develop new products. While SBC may not be Cisco's most 
technologically advanced customer, Listwin explains that its size makes 
it an attractive partner: ``If you remember your physics, momentum is 
mass times velocity. They have a lot of mass.''
    Fifteen years ago, the old Southwestern Bell might have been voted 
the telco least likely to succeed. The smallest Baby Bell, it emerged 
from the breakup of AT&T with operations in just five states--Texas, 
Arkansas, Oklahoma, Kansas, and Missouri. Two of the region's main 
industries, oil and real estate, were in the dumps, and SBC's growth 
prospects were as flat as much of the terrain. While other Baby Bells 
moved to buy cable companies or contemplated making bids for Hollywood 
studios, SBC's big plan for growth was to create a national yellow-
pages business--a scheme it quietly abandoned after a few years. Yet in 
1986 SBC stunned Wall Street by making an aggressive $1.4 billion bid 
for Metromedia's cellular-phone operations. It showed that this 
seemingly dowdy carrier could dance. The deal made SBC an overnight 
leader in wireless, now a $7-billion-a-year franchise for the company.
    The pace of change picked up when Whitacre took over as CEO in 
1990. Born in Ennis, Texas, and schooled at Texas Tech, Whitacre is a 
flinty 37-year telco veteran who started as a facility engineer. One of 
his first moves was to relocate Southwestern's headquarters from St. 
Louis to San Antonio, where the company could be closer to TelMex, a 
south-of-the-border telco in which SBC had an investment, and where the 
CEO thought SBC's best growth opportunities lay.
    Under Whitacre, SBC quickly went from milquetoast to industry 
intimidator. Like most Bell CEOs, he had served a stint in the 
company's regulatory affairs department, and he immediately set to work 
getting the goal posts moved in SBC's favor. While some Baby Bells were 
grudgingly opening their markets to competitors, SBC spent heavily, 
successfully lobbying Texas legislators to pass a law making it harder 
to compete against SBC in its new home state.
    The growth strategy that Whitacre would use to transform SBC from 
the smallest Bell to the biggest was born of necessity. In February 
1996, President Clinton signed sweeping legislation that nixed SBC's 
guard-the-monopoly approach by forcing all the Baby Bells to open their 
markets to rivals. Faced with the prospect of losing market share, the 
Bells set out in different directions. BellSouth, in Atlanta, and 
Ameritech, in Chicago, invested heavily in telecoms abroad.
    Whitacre saw no reason to go that far afield. Days after the law 
was signed, he assembled his top managers at an Ojai, Calif., inn and 
declared that the way to grow would be to buy more local telephone 
lines in the U.S. and reduce costs by eliminating overlapping 
operations. Using its stock as currency, SBC made a bold $17 billion 
bid for sibling Pacific Telesis just a few weeks afterward. It later 
also acquired Southern New England Telecommunications, gaining a 
foothold in the Northeast, and last year--after 18 months of regulatory 
hearings--completed a $72 billion acquisition of Ameritech. The deals 
expanded SBC's reach to 13 states, a power base from which to pursue 
the ambition that Whitacre had laid out for a visitor in 1997. 
Predicting that the telecom industry would consolidate into a handful 
of international full-service companies, he promised then that SBC 
would be one of them.
    SBC digested its acquisitions with the efficiency and coolness of a 
true predator. Whitacre typically has little use for the senior 
officers of the companies he acquires; he doesn't try to blend 
management teams the way his counterparts at Bell Atlantic and AT&T 
have. At headquarters he is surrounded by trusted, like-minded no-
nonsense executives. Few high-ranking SBC executives have fled to dot-
coms or telecom startups--they are fiercely devoted to Whitacre, who 
enjoys a sort of Clint Eastwood status among his direct reports. A lot 
of statements at the San Antonio offices start with some variation of 
the phrase, ``Ed says.''
    Whitacre's prediction that the phone business would boil down to a 
gang of giants has become reality--and they are all gunning for SBC's 
most lucrative customers. Bell Atlantic, on the verge of completing its 
merger with GTE, has vowed to enter some of SBC's markets. MCI WorldCom 
and Sprint hope to combine in a deal that would create a formidable 
provider of data, phone, and wireless services to U.S. businesses and 
households. AT&T has spent more than $100 billion amassing cable-TV 
systems over which it will offer phone, entertainment, and broadband 
services. ``We are going to lose market share in our traditional 
businesses over time,'' says SBC vice chairman Royce Caldwell. ``It's 
almost preordained.''
    Like most telecom and cable companies, SBC sees broadband as 
essential to growth in the competitive crush. The Internet's 
popularity, even via slow, clumsy dial-up connections, makes it a cinch 
that demand for fast, convenient broadband access will be huge. A study 
by the Yankee Group, a consulting firm in Boston, predicts that in 2004 
more than 16.5 million households will plug into the Net via some 
broadband connection, vs. just 1.4 million at the end of last year. 
Eventually, when such high-speed services are ubiquitous, the broadband 
battle will be fought with weapons such as price and marketing. But for 
now, the technological challenge of delivering broadband to households 
is so formidable that large tracts of the market lie open to whichever 
competitor can get there first. ``The early race is just to sign up 
customers,'' says Tod Jacobs, a telecom strategist at J.P. Morgan. 
``Whoever locks up the customer early will clearly have an advantage 
going forward. The customer experience tends to be so good in broadband 
that customers don't easily switch.''
    Without question, cable companies have the lead in this giant land 
grab. Their cable modems were delivering broadband Internet service to 
about one million households by the end of last year. The phone 
companies, meanwhile, reached about 300,000 households using a rival 
technology called digital subscriber line, or DSL, which hooks up to 
ordinary copper telephone wire. From a user standpoint, cable modems 
and DSL are roughly equal. Both are ``always on,'' which means the 
connection to the Internet is instantaneous. Both are plenty fast, even 
for demanding tasks like downloading video. Cable companies claim their 
modems can receive data at up to three megabits per second (about 50 
times faster than a standard 56K dial-up modem), but industry 
executives privately admit that, in practice, customers never pull 
stuff off the Internet at those speeds. SBC's DSL offer pledges speeds 
of 1.5 megabits per second--half as fast as cable broadband 
advertises--but the company says that in some neighborhoods downloads 
will be much faster.
    Project Pronto is designed to overcome DSL's major shortcoming: The 
technology works only on ``clean,'' relatively short copper lines that 
don't stretch more than three miles from the customer to the telco's 
central office. Part of the $6 billion price tag involves building 
curbside switchlike facilities in far-flung neighborhoods. With this 
investment, SBC believes it can reach 80% of its customers with DSL.
    So far, by analysts' estimates, the company has reached the 250,000 
mark in installed lines--good, but a long way from the million it needs 
to meet Whitacre's goal. SBC has been hooking up customers free and 
giving away the expensive DSL modems. And in an un-Bell-like concession 
to consumers' busy lives, the company recently launched Saturday 
``drive ins'' in some cities. Customers sign up to bring their computer 
to an SBC facility, where a technician will equip the PC with the gear 
it needs to receive DSL service. Thus, working folks don't have to take 
a day off to wait for a technician, and SBC saves money by avoiding a 
costly truck roll.
    Users' experiences ordering DSL from SBC are far from hassle-free, 
however. Customers complain of having to wait weeks to get the service, 
even if they live close to a central office. They also give SBC low 
marks for the ordering process. ``The bad news is that, prior to your 
installation, the people you talk to are clueless,'' groans Bob Watson, 
a 46-year-old Los Altos, Calif., resident who ordered DSL from SBC's 
Pacific Bell unit last year. The good news? Since the installation, 
Watson says, ``It's been working great.'' SBC has launched a training 
program to get its order takers up to speed on Project Pronto.
    Such glitches haven't kept SBC's marketers from attacking its 
cable-TV rivals. SBC's advertising takes potshots at cable-modem 
systems that, in theory, can bog down if too many users in a 
neighborhood do things like download video at once. A clever commercial 
that has aired in several SBC states depicts discord in a suburb where 
the residents have cable modems. A homeowner laments in a voice-over 
that before cable Internet service, the fictitious town ``used to be a 
nice place to live.'' Onscreen a man surreptitiously snips his 
neighbor's cable line with gardening shears; neighborhood kids taunt a 
frazzled-looking adult, screaming, ``Web hog!''
    Cable operators aren't happy about this negative campaigning. AT&T, 
one of the largest cable providers, says that while traffic jams are a 
potential problem for its broadband systems, they can easily be 
remedied by adding extra equipment at the ``node'' serving a 
neighborhood. And AT&T scoffs at SBC's technology. ``You never see [new 
competitors] try to build over us with a copper-loop network,'' sniffs 
Tony Werner, chief technology officer of AT&T's broadband unit. ``This 
is really an effort to spruce up a 100-year-old network.''
    In the broadband war, cable operators can be hyperaggressive too. 
Time Warner Cable (which belongs to the same company as FORTUNE) caused 
a flap in May when its managers in Houston asked employees to order, 
then cancel, broadband service from SBC. The idea was to find out 
exactly which areas SBC could and could not serve. Higher-ups quickly 
squelched the scheme; SBC complained to federal regulators.
    The question now is whether SBC can move fast enough to impress an 
increasingly fickle Wall Street. So far, Project Pronto hasn't budged 
the share price. ``Our stock has not reflected the value we're 
creating,'' says CFO Don Kiernan. ``Investors like what we're doing, 
but they're saying, `Prove it, give us evidence.' '' SBC figures its 
stock should trade between $73 and $82 a share, based on a sum-of-the-
parts valuation. Kiernan likes to point out that SBC has delivered on 
promises before. It achieved cost savings from the Pacific Bell merger 
faster than expected, and it hasn't missed analysts' earnings estimates 
since Whitacre took over as CEO. That's a big reason Janus Capital 
bought the stock. The broadband story is ``what got us interested,'' 
says portfolio manager Ankrum. ``Then you ask, `Do they have the right 
management team with the right strategy?' We think the answer is yes.''
    Even though SBC's bread-and-butter local telecom business continues 
to generate billions of dollars in cash each year, the company needs 
Project Pronto and other growth schemes to attract investors. SBC has 
been working on plans to sell phone and Internet service to customers 
outside its 13-state footprint. It forged a joint venture with 
BellSouth to combine their cellular operations, boosting SBC's wireless 
reach by 50%. SBC continues to fight for permission to offer long-
distance services in its home regions. And as SBC becomes a national 
company, it expects to sell DSL services to corporations that want 
employees to work from home. (It has a contract with IBM to provide 
residential DSL for some 15,000 telecommuting employees in California, 
Texas, and Connecticut.) Within just a few years, SBC says, all these 
new lines of business will represent 50% of its revenue, up from about 
a third today. ``We believe SBC is one of the clear surviving telecom 
companies,'' says J.P. Morgan strategist Jacobs.
    SBC is already thinking beyond Pronto. Indeed, a time will come 
when consumers will expect more from their speedy Internet hookups than 
from always-on eBay. To keep its customers happy, and to attract a new 
breed of broadband junkies, SBC will have to start pushing attractive 
fare through those big pipes. Movies would be a natural, but games and 
home-security systems are also under consideration. ``We're looking at 
a whole palette of applications to help customers manage their 
lifestyles,'' says Abha Divine, a member of SBC's corporate-strategy 
team. She is helping develop an ``online home'' product that acts as a 
sort of electronic mom, keeping track of appointments and phone 
messages, and paying the bills electronically. Divine hopes to see a 
version of the service available to consumers next year.
    SBC employees may not know it yet, but Whitacre has already picked 
a goal for next year's DSL deployment. ``We'll get a million customers 
this year, and double that next year,'' he vows. And for anyone who 
doubts that SBC's future is firmly hitched to the Internet, he has a 
message. ``Broadband will be indispensable, and it's going to happen 
pretty quickly,'' says Whitacre. He pauses, then draws a comparison 
with a technology he knows pretty well. `'It will be as basic as 
telephone service.'' Maybe there's a good reason after all to listen to 
this guy without a PC.

    Mr. Glassman. Third, changing the Telecom Act will 
necessarily produce uncertainty in the minds of investors. 
Thanks to the Act, in just 3 years 300 CLECs have sprung up 
with $100 billion in market value. They are investing that 
money in new, deeper, broader systems. You in Congress should 
be proud of this Act that has made this possible.
    Uncertainty is the enemy of investors and of companies 
needing to raise capital. This bill will produce uncertainty. 
That is the lesson about uncertainty of a book that I co-
authored with Kevin Hasett called Dow 36,000. The point we make 
about the stock market is that as uncertainty has diminished 
stock prices have risen.
    But if you fiddle with this legislation, with the Telecom 
Act, make no mistake, if this bill passes the flood gates will 
open and other legislation will pour through. I believe that 
investment will slow sharply. Who will suffer? Consumers, your 
constituents.
    Fourth, this bill will just about assure that CLECs will be 
limited in sharing old-fashioned technology or they will just 
have to build out their own networks at prohibitive cost. That 
was not the intention of the Telecom Act. In effect, this bill 
brings back the old monopoly that we thought the Telecom Act 
had buried.
    Fifth, the Telecom Act is not holding back the deployment 
of new technology by the ILECs. In the first place, before the 
law, even though DSL had been available for many years, it was 
not deployed. The Act itself touched off competition from 
cable, from fixed wireless, from satellites, and as a result we 
now have a boom in DSL. As Senator Lott, the Majority Leader, 
said, deployment is happening not despite the Act, but because 
of the Act.
    Finally, just very briefly, Mr. Chairman, to refer to your 
question about rural constituents, how can your rural 
constituents be served. Basically, by the same way that they 
are served by Coca-Cola or Ford or buy clothes provided by 
Walmart--through market forces. The question really before us 
in the public policy sense is how to unleash those market 
forces, and I believe the Telecommunications Act does that.
    In short, Mr. Chairman and Members of the Committee, the 
Telecommunications Act of 1996 is working. As a fierce advocate 
of free market solutions and a believer in the power of 
technology to improve the lives of all Americans, especially 
disadvantaged Americans, I say do not change this Act; if 
anything, enforce it.
    Thank you.
    [The prepared statement of Mr. Glassman follows:]

  Prepared Statement of James K. Glassman, Resident Fellow, American 
         Enterprise Institute, and Host, Techcentralstation.com
Don't Roll Back the Telecom Act. Enforce It.
    Mr. Chairman, Members of the Committee, I appreciate the 
opportunity to share my views on the bill under consideration today.
    My name is James K. Glassman, and I am a resident fellow at the 
American Enterprise Institute. I am not an expert in the technical 
aspects of telecommunications. Instead, my field of interest is 
intersection among technology, finance and public policy, including 
such issues as Internet privacy, high-tech antitrust, Web taxation, 
and, of course, dissemination of broadband technology. It is to examine 
such issues that, with some colleagues, I launched a website in 
February called TechCentralStation.com
    My background is as a journalist. Many of you will remember that I 
was editor of Roll Call from 1988 to 1993. For six years after that, I 
was a columnist on financial and economic issues for The Washington 
Post. It is no secret that I have spent my 30 years as an analyst and 
journalist advocating free-market solutions to vexing public-policy 
problems.
    My aversion to unnecessary government regulation is exceeded only 
by enthusiasm for the New Economy--an economy made possible by new 
technology delivered in an atmosphere of healthy competition, with 
minimal political involvement.
    Our country and our economy have come a long way since Ronald 
Reagan was credited with saying: ``If it moves, we tax it. If it's 
successful, we regulate it. And if it fails, we subsidize it.''
    But the journey is not over. And this new economy of which we are 
so justifiably proud is facing a threat.
    I'm not talking about the precipitous drop in NASDAQ prices this 
spring or the shakeout in dot-com companies. Those are just symptoms.
    The threat that disturbs me is the recent trend for some companies 
to use the power of government to thwart competition--even if that 
means increasing government's involvement with the business of 
technology.
    That is what's going on right now in the telecommunications 
industry. The industry that's the delivery vehicle for the Internet--
the enabling industry of the new economy.
    The grandly named Broadband Internet Relief Act is pretty clearly a 
device for rolling back the competitive provisions of the Telecom Act 
of 1996. Instead of rolling back the Telecom Act, we need to enforce 
it.
    That Act was a remarkable accomplishment--a solid initiative, a 
gesture of statesmanship and compromise by government, to get itself 
out of a vital national industry. It was designed to replace regulated 
monopoly in the local telecom services industry with vigorous 
competition. And vigorous competition is the only guarantee for the 
rapid deployment of advanced technology at the lowest possible prices 
to all areas of the country.
    The best thing I can say about the Telecom Act is that it's 
working. It took a while, but it is working.
    A new class of competitive local exchange carriers has been 
created, known as the CLECs. And even though the incumbent regional 
monopolies still control 90 percent of the total market and as much as 
98 percent of the voice market, the new competition is turning up the 
heat. These CLECs, some 300 of them, have a market value of more than 
$100 billion. They did not even exist before the Act.
    The presence of competition is finally having the classic economic 
effect that Congress intended. We're seeing an upsurge in deployment of 
broadband Internet services, by the incumbent companies as well as 
their new competitors. The Yankee Group predicts that the number of 
homes subscribing to broadband services will rise from 1.4 million this 
year to 16.5 million in 2004, an incredible pace.
    The ILECs are dusting off the DSL technology they have had 
available for 10 years and installing it in the marketplace. Why? 
Clearly, because of competition. Look at SBC Communications. A June 12 
article in FORTUNE, headlined, ``Why the Biggest Baby Bell Is Wild 
About Broadband,'' discussed SBC's Project Pronto, a plan to install 1 
million broadband connections by the end of this year and 2 million by 
the end of 2001--from just 139,000 on Jan. 1, 2000. ``SBC believes it 
can reach 80 percent of its customers with DSL,'' said the article.
    SBC's CEO said earlier this month that his aim was ``to completely 
transform SBC and its companies into a data-centric business.'' And--
understand--these claims were made, and well received by Wall Street, 
without the expectation that the legislation under consideration here 
would become law.
    For as long as anybody can remember, the local services market was 
the equivalent of a no-substitutions box lunch served up by the 
incumbent telephone companies. But now that market is beginning to seem 
more like the food court at the mall. Not only a choice in menu, but a 
growing choice in providers.
    The job of public policy right now is to see that everybody in this 
country has access to this smorgasbord, not to shut it down. But make 
no mistake about it, passage of S. 877 would close the food court 
before most Americans get a chance to fill their tray. This bill would 
tell America that the promise Congress made in 1996 has been 
rescinded--just as we were beginning to feel the tangible benefits.
    Customers and investors won't stand for that. Competition in the 
local services market is crucial to delivering advanced services. And 
advanced services are crucial to the growth of the new economy. We 
can't afford to drop competition in the local telecom market as though 
it were last year's fad.
    But S. 877 would come dangerously close to doing just that. Its 
basic provisions amount to a recipe for concentrating market power back 
in the hands of the ILECs. The danger of re-monopolizing the market 
can't be overlooked. And if the agreed-upon requirements for local 
service competition were dropped, it would open the possibility for the 
ILECs to make a back-door entry into the long distance market, where 
they could leverage their monopoly position in local service to 
compromise the surging competition in long distance.
    This bill would basically excuse the incumbent monopolies from 
their obligation to provide new competitors with interconnection to the 
ILEC networks at reasonable prices under reasonable conditions. That 
obligation and the checklist that goes with it are central to the 
success of the Telecom Act. Take away these competitive requirements 
and you take away the ILECs' incentive to deploy new technology.
    Of course, well-intentioned advocates of S. 877 would say just the 
opposite. They see this bill as providing an incentive for the big 
incumbent companies to deploy broadband technology faster by freeing 
them from burdensome regulatory requirements. This is nonsense.
    Mr. Chairman, I stand second to no one in my contempt for 
burdensome regulatory requirements. But I also recognize that the local 
telephone monopoly was established and enforced over the past century 
by government. And no such monopoly will open its market to competition 
without a firm push. The competitive requirements of the Telecom Act 
provide that push.
    Those requirements are not holding back the deployment of new 
technology by the ILECs. To the contrary. The incumbents are deploying 
the technology now and will continue to deploy it for two fundamental 
reasons: One, the prod of competition. And, two, new technology like 
frame relay, packet switching and other applications generate billions 
of dollars a year in productivity improvements.
    Just look at SBC's Project Pronto. It's a $7 billion investment in 
broadband. Advocates of S. 877 would say that SBC needs freedom from 
competitive requirements to finance the cost of this investment. But 
the view on Wall Street is that SBC's ambitious $7 billion investment 
will bring the the company $9 billion in productivity improvements.
    And on the subject of technology, the proposed bill just about 
assures that any new competitor who did get access to the incumbent's 
network would be limited to sharing old-fashioned circuit-switched 
technology. Anything newer than that would be excluded under the 
heading of ``advanced services.''
    If a new competitor wants to offer the advanced services that we 
all want, that competitor would have to build its own network, which is 
a prohibitive cost for most new competitors. This is an approach that 
was specifically rejected by Congress when the Telecom Act was drafted. 
It would be nothing more than a roadblock to competition, and our goal 
should be tearing down roadblocks, not installing them.
    Let's review some history. It was not easy to get the Telecom Act 
passed, but all parties to the act agreed to its provisions. Then, the 
lawsuits from the local telco monopolies began. Finally, after much 
litigation and footdragging, a local Bell was certified as having 
completed its interconnection requirements in a single state, New York, 
where I live. I can tell you that the competition there--for local 
service, broadband, long distance, you name it--is hot and heavy. DSL 
rates are falling sharply. Now, Texas has been approved. We are on our 
way. But it is at just this time that the local incumbents want to roll 
back, to gut, the Telecom Act. Why? Maybe they don't like the heat of 
competition. I can't blame them. Competition is no fun for longtime 
monopolies, or for any company, for that matter. But it is wonderful 
for consumers. They are the winners.
    The legislation under consideration would have another effect: It 
would increase uncertainty in the markets. Investors need assurance 
that the rules of the game will stay the same. When they commit 
billions of dollars, they need to know that Congress won't change the 
competitive climate by passing bills that favor one group of companies 
over another. Why was investment put on hold for about three years 
prior to the passage of the Telecom Act of 1996? Because few investors 
wanted to put their money down if they did not know what game they were 
playing. Now, they know. Don't change the rules of the game in the 
middle, or the investors will find another game--perhaps in another 
part of the world. And American consumers will suffer.
    Let me also comment on one other specific provision of S. 877, the 
issue of reciprocal compensation.
    Like so many other telecom issues, reciprocal compensation is 
complicated in the details, but simple in its fundamentals. It says 
that one communications carrier should be fairly compensated when it 
handles incoming calls from another communications company.
    But now, this proposed bill would deny reciprocal compensation to 
the CLECs who handle the calls coming in to Internet Service Providers 
from ILEC customers. Mr. Chairman, this provision is the public policy 
equivalent of spot zoning. It is public policy targeted for the special 
interests of the few, instead of the general good of the many.
    In effect, this accommodation of the ILECs' wishes would drive up 
the cost of Internet access for millions of users. That's not a legacy 
that this or any other Congress wants to pass along to the American 
people.
    In summary, Mr. Chairman, I would urge the Senate to stay the 
course with the Telecom Act of 1996. It needs to be enforced, not 
destroyed. We're seeing progress now. We'll see much more in the years 
ahead. Real competition in local services will speed the arrival of 
21st Century technology to American homes.
    And it will create major growth opportunities for companies in the 
telecom market, including the very same companies who are now looking 
to government to throw competition into reverse.
    Thank you very much.

    Senator Brownback. Thank you, Mr. Glassman. I look forward 
to some questions to engage you as one who is for deregulation, 
and the bill directs that way as well.
    Mr. Pitsch.

  STATEMENT OF PETER PITSCH, COMMUNICATIONS POLICY DIRECTOR, 
              INTEL CORPORATION, ON BEHALF OF THE 
         INFORMATION TECHNOLOGY INDUSTRY COUNCIL (ITI)

    Mr. Pitsch. Thank you, Mr. Chairman, Senator Breaux. My 
name is Peter Pitsch. I am Director of Communications Policy at 
Intel. I am here today to testify on behalf of ITI, the 
Information Technology Industry Council. ITI is an association 
of leading information technology companies, the leading 
computer hardware, software companies, the leading ISPs, and 
Internet networking companies. Our companies employ over a 
million people in the United States and our annual revenues in 
1999 were over $460 billion.
    On behalf of ITI and its member companies, I want to thank 
you for this opportunity and I want also to endorse S. 2902, 
the Broadband Internet Regulatory Relief Act. In my oral 
testimony I want to make four main points.
    First, that ITI believes that the rapid deployment of 
broadband, affordable broadband technology, is absolutely 
crucial to the achievement of the full potential of the 
Internet and absolutely crucial to the success of high tech 
companies, and that the best means of achieving that goal is to 
rely on market-based competition unless there is a competitive 
bottleneck, a substantial competitive bottleneck.
    Second, ITI believes that S. 2902 meets this deployment 
goal and these competitive principles precisely because if it 
were enacted it would encourage more rapid deployment of 
broadband technology to consumers through deregulation without 
undermining the competitive process. Unbundling the ILECs' 
packet services and freeing them from unbundling regarding 
fiber deployed to residences would clearly increase the 
incentive to deploy. Today if they make investments and they 
fail, they deploy in marginal markets, in medium or small size 
markets, that fails, their shareholders take the entire loss. 
If they succeed, they have to share that success with 
competitors at some regulated, forward-looking economic cost.
    Third, while S. 2902 does remove significant regulatory 
barriers, we believe, ITI believes, that it sufficiently 
protects or safeguards competition because it requires the 
existing network to be unbundled. I think this is a very 
important point which I want to amplify on or, as we at Intel 
say, drill down on, because I do not think that a lot of the 
testimony to this point has really hit this crucial aspect of 
the bill.
    To get deregulated, an ILEC first must meet very important 
buildout benchmarks. Essentially, it must make advanced 
services available to 80 percent of its customers within 3 
years and 100 percent within 5 years. Now, besides directly 
benefiting consumers, this may actually increase the number of 
DSL-capable loops available to competitors.
    Also, deregulation is conditioned on the ILECs complying 
with Commission and State collocation and loop provisioning 
requirements. ITI has long maintained that the incumbents have 
to make these essential facilities available to their 
competitors. Indeed, this legislation would increase the 
incentive to be in compliance with these very rules, which are 
essential for them to compete.
    Indeed, the Act, this bill, goes so far as to require the 
telephone companies to, upon request, make existing copper 
available even where they have deployed fiber into the 
distribution network. Thus, on balance we think S. 2902 is a 
very sensible, balanced approach that removes regulatory 
barriers on the one hand and keeps protection for the 
competitors on the other by making the essential facilities 
available.
    The fourth and closing point I want to make is that in 
these broadband policy disputes ITI has not sided with any one 
camp. When I hear these debates I sometimes think the warring 
factions could not agree on a recipe for ice water. ITI has 
sided with the CLECs and back in December of 1998 when we 
reached an accord with the ILECs we insisted that the ILECs 
make their networks available to the CLECs, open up the loops 
and the collocation. That was something that we supported at 
the Commission. Of course, the Commission agreed.
    We also supported the ILECs before the FCC and said their 
packet switches or DSLAMs should not have to be unbundled, and 
that was the first step in the direction I think this 
legislation goes. But at the same time, we insisted that the 
CLECs have access to these essential facilities.
    Last, in the area of high speed cable access, ITI has 
supported the FCC in foregoing from injecting itself or 
regulating mandatory cable access, again for the very same 
reason, that we think it is crucial that we have the right 
incentive structure, particularly when we are not talking about 
bottlenecks, to encourage all players to deploy.
    So as you can see, Mr. Chairman, we have been actively 
involved in the broadband policy disputes and debates. We have 
consistently supported one goal, which is let us get a policy 
framework in place that encourages all the players, whether 
they be CLECs, ILECs, cable companies, to deploy broadband so 
as to get the cheapest, fastest, broadband to all Americans.
    We believe that your bill moves us, would move us in that 
direction, and I will be glad to take questions.
    [The prepared statement of Mr. Pitsch follows:]

  Prepared Statement of Peter Pitsch, Communications Policy Director, 
  Intel Corporation, on behalf of the Information Technology Industry 
                             Council (ITI)
    Mr. Chairman and Members of the Committee,
    My name is Peter Pitsch and I am Communications Policy Director for 
Intel Corporation. I am here today to testify on behalf of ITI, the 
Information Technology Industry Council. ITI is the association of the 
leading information technology companies, including computer hardware 
and software manufacturers, networking companies, and Internet services 
companies. ITI member companies employ more than 1.2 million people in 
the United States and exceeded $633 billion in worldwide revenues in 
1999.
    On behalf of ITI and its member companies, I would like to thank 
you for this opportunity to testify before your Committee and express 
our support for S. 2902, the Broadband Internet Regulatory Relief Act, 
introduced by Senator Brownback.
    ITI believes that the rapid deployment of affordable broadband 
technology is a key component to continuing the dramatic growth of the 
Internet and e-commerce. Consumers don't want to wait 15 minutes, or 
even one minute, for a website to download--they want high-speed 
Internet services that will make their online experience more 
convenient. There is no doubt that the Internet economy has grown 
faster and larger than anyone imagined. Today, according to recent 
study by the University of Texas, the Internet economy is valued at 
over $500 billion and is growing at an astounding 62% a year. Moreover, 
the impact of the Internet on our lives and our businesses has been 
tremendous. According to Duke University, 56% of U.S. companies will 
sell their products online by 2000, up from 24% in 1998. But for this 
growth to continue we need to have policies that support competition 
and encourage companies to develop the necessary high-speed 
infrastructure.
    The core telecom policy mission of ITI is to promote the rapid 
deployment of affordable broadband technology, providing all consumers 
access to the full potential of the Internet. In pursuit of our policy 
goal, ITI has adopted the following broadband principles:

    1. LMarkets, not regulators, should drive the deployment of 
broadband technology. To that end, ITI supports the deregulation of the 
telecommunications industry and the continued non-regulation of 
information services.

    2. LMarket-based competition among all channels of the 
communications marketplace is the best way to promote rapid deployment 
of broadband technology.

    3. LGovernment intervention in the market is appropriate only where 
a competitive bottleneck exists.

    4. LITI does not endorse any single broadband technology and 
believes deployment of multiple technologies will benefit consumers.

    Consistent with these principles, ITI is proud to endorse S. 2902, 
the Broadband Internet Regulatory Relief Act of 1999. ITI believes that 
this bill, if enacted, will encourage rapid deployment of advance 
services to consumers through deregulation without diminishing 
competition for broadband services. Furthermore, ITI believes this 
legislation is another important step in removing barriers to 
competition in the telecommunications markets, which in turn will 
stimulate investment, spur technological innovation, reduce prices, and 
increase consumer choices.
    ITI believes that S. 2902 would eliminate many of the incumbent 
local exchange carriers' (ILECs) disincentives to deploy digital 
electronics and transmission facilities to consumers. Specifically, by 
eliminating interconnection and unbundling requirements for new packet-
based equipment and fiber loops deployed to residences, this 
legislation removes a deployment disincentive that ILECs face--being 
required to allow competitors unbundled access to this new high-speed 
equipment. ITI believes that removing this disincentive will lead ILECs 
to deploy more quickly high-speed services such as DSL, bringing the 
benefits of broadband technology to more consumers. At the same time, 
ITI believes that eliminating these requirements will not undermine the 
ability of other competitors to provide their services so long as ILECs 
continue to comply with the collocation and loop provisioning rules. 
Unlike the existing local loop, ILECs do not have a legacy advantage in 
newly installed advance services and this equipment is readily 
available to competitors and ILECs alike.
    While S.2902 removes significant regulatory barriers, ITI is 
satisfied that it provides important safeguards to ensure the removal 
of those barriers has the desired effect and does not adversely impact 
competition. First, to get deregulated an ILEC must meet important 
build-out benchmarks. Essentially, it must make advanced services 
available to 80% of its customers within 3 years and 100% of its 
customers within 5 years. Moreover, obtaining these goals will 
significantly increase the number of households served by DSL-capable 
loops which could benefit all competitors. Second, deregulation is 
conditioned on the ILECs complying with Commission and state 
collocation and loop provisioning rules, which will ensure competition 
can continue to thrive. ITI has long maintained that it is important 
that the competitive local exchange carriers (CLECs) have access to the 
ILECs' loops and central offices. Indeed, in December 1998, it reached 
an accord with the ILECs that conditioned deregulation of their 
advanced services on their making these essential facilities available 
to the CLECs. Finally, in the case of new fiber loops, ILECs can be 
required, upon request, to maintain the existing copper local loop, so 
competitors do not lose access to the home capable of providing 
advanced and other telecommunications services.
    In sum, ITI believes that S. 2902 take a sensible step-by-step 
approach to eliminating regulatory barriers that will encourage rapid 
deployment of advance services to consumers through deregulation and 
competition. ITI's support of S. 2902 is one part of a consistent set 
of policies that we believe will increase the deployment of a variety 
of competing broadband technologies.
    For example, ITI has recently endorsed S. 2698, the ``Broadband 
Internet Access Act of 2000'', introduced by Senator Moynihan. This 
technology-neutral legislation would provide tax incentives for the 
deployment of broadband technology to urban and rural areas that today 
are often not served by high-speed services, as well as for the build-
out of very high-speed, next generation broadband services to 
residences. Like the legislation before us today, S. 2698 recognizes 
the need for this investment in our IT infrastructure so all Americans 
can realize the opportunities of broadband technology and the Internet. 
However, S. 2698 does not eliminate the need to make necessary 
regulatory reforms addressed in the current bill, S. 2902.
    In the area of high-speed cable access, ITI has supported the 
Federal Communication Commission's decision to forego regulatory action 
to mandate cable access. Last year, ITI wrote to FCC Chairman Kennard 
in support of the Commission's amicus brief in AT&T v. City of 
Portland. ITI argued that because cable Internet access is an emerging 
service and the providers currently lack market power in the Internet 
access market, they should not be subject at this time to open network 
requirements. Furthermore, ITI agreed with the position taken by the 
FCC that the question of whether cable companies should be required to 
open their cable modem services should be addressed at the federal 
level. Apart from legal arguments over federal and local jurisdiction, 
ITI believes that there are compelling economic and business reasons 
for developing a national policy on this important issue.
    ITI has also advocated regulatory relief for ILECs before the FCC. 
Last year, ITI argued, and the FCC agreed, that certain high-speed DSL 
equipment installed by incumbent local phone companies should not be 
required to be unbundled. ITI submitted comments to the FCC on this 
particular matter because we believe that it will enhance the 
competitive growth of the broadband market by providing an incentive 
for ILECs to deploy DSL quickly. At the same time, however, the FCC 
also agreed with the position taken by ITI that the local loop must 
remain open to all competitors.
    As you can see, ITI has been actively involved in broadband policy 
issues. ITI has not sided with one camp or another, but instead it has 
supported and opposed the positions of all of the major players at one 
time or another. Throughout this policy process, ITI has supported the 
same basic goal; namely, rapid deployment of widespread, affordable 
broadband for consumers.
    We would encourage the Committee to be as forward-looking as 
possible when it examines broadband issues. As we all know, the 
telecommunications debates of the latter part of the 20th century often 
involved pitting entrenched business interests against each other, or 
they focused on the competitive deficiencies of one communications 
medium or another. We have today a far different landscape, one that 
has emerged only in the last several years. With the Internet achieving 
status as a mass medium, consumer demand for broadband data service has 
grown exponentially. All major communications infrastructure providers 
should be incented to meet that demand even if, in practice, that means 
the government will be loosening some of the regulatory restrictions 
that may have made sense in a prior era. As this debate continues, I 
would urge you to turn to ITI and the high-tech community as an 
impartial voice on these important issues.
    On behalf of ITI, I would like to thank the Committee for its time, 
and I would be glad to respond to any questions.

    Senator Brownback. Thank you, Mr. Pitsch.
    Mr. Strumingher.

       STATEMENT OF ERIC STRUMINGHER, MANAGING DIRECTOR, 
                   PAINE WEBBER INCORPORATED

    Mr. Strumingher. Thank you, Mr. Chairman and Senator 
Breaux. My name is Eric Strumingher. I am the Managing Director 
at Paine Webber in New York.
    Senator Breaux. Still Paine Webber?
    Mr. Strumingher. Not for long. I think it is going to be 
UBS Warburg Paine Webber or something like that. But we will 
just go with Paine Webber for right now.
    My specialty there is in equity research, specifically in 
the telecommunications services area. I give investment 
recommendations to both large institutional investors as well 
as retail investors on telecommunications stocks. I hope that I 
am not representing any particular bias here in my oral 
testimony and in my written testimony. At times I will have 
positive recommendations on incumbent local exchange carrier 
stocks, at times I will have negative ones. The same for AT&T 
and other industry participants. So I hope that with that 
background you will agree that this is at least plausibly 
unbiased testimony.
    I want to give you observations on three issues that I 
think may help you to evaluate the merits of the proposed 
legislation as they pertain to deregulation of the incumbent 
local exchange carriers. The first is the challenges faced by 
these companies in making large investments, such as those 
required for consumer broadband and also rural broadband 
initiatives. Second, how regulatory uncertainty complicates the 
analysis of investment returns, and here I will have some of 
the same assumptions as Mr. Glassman, but some different 
conclusions in this area. Then last, the ramifications of the 
proposed legislation on investment in both consumer broadband 
and rural broadband by non-ILEC companies.
    So first of all, there are certain challenges in making 
large investments about which I would like to elaborate, that 
are faced by the large ILECs. Just by way of background, some 
basic premises, for an army to be successful in war the 
soldiers must have confidence in the general. This kind of 
confidence is bred by battlefield success. Well, the same is 
true in a publicly traded company. For a publicly traded 
company to be a successful competitor in the marketplace, 
employees must have confidence in the CEO. This comes through 
the performance of the stock price. That is a basic premise 
through which I attack this situation.
    Now let us consider specifically the issue for the large 
incumbent local exchange carriers. One, broadband initiatives 
such as consumer broadband and rural broadband require large 
up-front investments. SBC Communications, for example, is 
investing $6 billion by the end of next year in its Project 
Pronto initiative toward this end.
    Number two, these investments typically eat into earnings 
initially because of the large up-front expenses. The first 
costs of building a new network are dilutive to earnings in the 
near term.
    Now, last, the ILEC shareholder base is very focused on the 
consistency of earnings growth, I would say more so than that 
for a cable TV company shareholder or even a CLEC shareholder, 
both companies that are competing in this space for capital. 
The willingness of these companies to ignore, for example--or I 
should not say ``ignore'', but put less emphasis on--
depreciation expense, that expense associated with initial 
investments in plant, is not the same for the investors in the 
large ILEC stocks.
    That is very important. I think, to summarize here, Wall 
Street makes it tougher on these companies than on other 
companies to make these similar kinds of investments. Maybe 
this is part of the reason why companies like Verizon and Bell 
South and U.S. West have not adopted the same aggressive 
rollout strategies as SBC Communications.
    A case in point here on the effect that this has had on SBC 
stock. Last year in the middle of the year, the stock was 
trading as high as $59 per share, but it has traded in the low 
to mid-forties for the first half of this year, and I believe 
that this is in no small part due to this Pronto initiative 
that I have just mentioned to you and the dilutive impact on 
earnings.
    Now, in particular SBC has a CEO who I think has a lot of 
respect from his employee base, so he may not suffer these kind 
of reputational damages of the falling stock price. But other 
companies may not have the same type of situation there, and I 
would just submit to you that this is an important issue to 
take a look at.
    Now, the second question--this really leads into the second 
point that I would like to make, is that big ILEC CEOs--it is 
one thing for them to face this challenge in the marketplace if 
just leading a company and going into risky investments, but to 
face this challenge with the additional uncertainty about 
earning a return on the investment is something altogether. The 
basic return analysis, I would submit to you, is really 
complicated by regulatory uncertainty.
    Three areas in which the regulations may cause some 
problems here. One, additional costs may be imposed on the 
large ILECs to modify their network. They may be asked to build 
new and different networks for the CLECs. Two, these companies 
may be forced to bear risks of market adoption not only for 
their services, but for CLEC services as well as a result. 
Last, potential delays in implementing these first two things 
that I just mentioned will potentially hurt the large ILECs in 
terms of their competition with cable companies and other 
operators who do not face these same regulatory restrictions.
    You do not have to be an expert in math to know that it is 
hard to solve an equation with so many moving variables, so 
many unknowns, and I would submit to you that it is really hard 
for investors to do this.
    Now, last I would like to conclude by saying that there is 
a risk or perceived by some to be a risk that investment will 
dry up if the ILECs are required to offer extensive 
interconnection with an unbundling of new infrastructure built 
for advanced services. I do not think that this is really true. 
Broadband, especially consumer broadband, is an exciting growth 
area. It has attracted lots of investment in infrastructure by 
cable companies, by wireless companies, and I think that there 
will be more investment of this nature over the course of the 
next couple of months and in fact the next couple of years.
    We will have a very competitive market just by companies 
who are owning and investing in different facilities than the 
ILECs to compete with them in the marketplace.
    So with that, I will conclude my testimony and be happy to 
take any questions if you have them.
    [The prepared statement of Mr. Strumingher follows:]

Prepared Statement of Eric Strumingher, Managing Director, Paine Webber 
                              Incorporated
    Thank you for inviting me to offer some observations on S. 2902, 
the ``Broadband Internet Regulatory Relief Act of 2000''. I am a 
securities analyst specializing in the telecommunications industry, and 
I am here to offer my opinion on three issues that are related to this 
proposed legislation: 1) the challenges faced by incumbent local 
exchange carriers (ILECs) in making large investments; 2) how 
uncertainty surrounding the regulatory treatment of broadband 
infrastructure frustrates the analysis of returns on this investment; 
3) the ramifications of the proposed legislation on investment in 
consumer broadband services. The ILECs face specific challenges in 
executing a consumer broadband investment strategy that are worth your 
consideration. The success of any publicly traded company is in no 
small part a function of the success of its stock price. In order to 
marshal the troops into battle, a general must have the confidence of 
his soldiers. On the battlefield, this confidence is bred by a 
general's success in combat. In a publicly traded company a CEO must 
have the confidence of his employees. This confidence is bred by the 
performance of the company's stock price. The problem for large ILEC 
CEO's is that the stock market generally does not respond well to 
significant increases in investment spending like that required for 
consumer broadband. While such investments may bear fruit over the 
long-term, the investment community tends to focus on the reduction to 
near-term earnings growth caused by the investment and sells the 
shares. I believe that large ILECs are particularly vulnerable to this 
kind of reaction to investment because their primary shareholder base 
has a sharp focus on consistency of earnings growth. SBC Communications 
is a case in point. The company's stock price, which has traded in the 
low to mid $40 per share range for most of this year, has not recovered 
to the high of $59 per share reached in mid-July 1999. I think that 
this is in no small part a function of the ``Project Pronto'' 
initiative announced in the fourth quarter of last year.
    This leads to my second point about the difficulty in estimating 
investment returns. What is particularly agonizing, from the standpoint 
of a large ILEC CEO, is that his investor base has to deal not only 
with the up-front cost of the investment in consumer broadband services 
but also the uncertainty about the ability to get a return. I mean here 
not the uncertainty about the market-place demand for the service that 
many new investments entail but uncertainty driven by the specter of 
regulation. I find that the following unknowns complicate the return 
analysis: 1) additional costs may be imposed on the ILEC to modify its 
network architecture to accommodate competitive local exchange carriers 
(CLECs); 2) ILECs may be required to bear risks of market adoption for 
CLEC services; and, 3) that there may be delays in implementing the 
service based on mandated changes to the technology and network design. 
The last of these is especially risky given the very competitive 
environment that is emerging in consumer broadband services. The point 
is that there are so many variables in this equation that it's very 
hard (maybe impossible) to figure out. The approach adopted by many 
investors is to avoid the ILEC stock. Many prefer to invest in consumer 
broadband by investing in shares of companies that are attempting to 
deliver these services through cable or wireless infrastructure because 
the return analysis is less complicated. I'd also be surprised if the 
uncertainty created by the regulatory risks doesn't also frustrate the 
ILEC business planners who must justify the investment in consumer 
broadband services to their respective boards of directors. The current 
regulatory ambiguity simply does not lend itself well to stimulating 
investment in consumer broadband. Maybe this is why only SBC 
Communications has launched an aggressive rebuild of its outside plant 
to deliver broadband services.
    The last point that I'd like to make concerns the perception that 
competition in consumer broadband services will slow if regulators do 
not require extensive interconnection with and unbundling of new 
consumer broadband investments that the ILECs make. My view is that 
consumer broadband represents one of the great growth opportunities for 
the telecommunications and media industries and that there will be no 
shortage of competition here. Cable operators are spending tremendous 
sums of money to upgrade their networks to provide broadband services 
and have targeted consumer broadband services as among their brightest 
growth prospects. Just yesterday, AT&T indicated that the plant serving 
more than 60% of its 28 million home cable footprint has been upgraded 
for broadband services. The company plans to be at 80% by year-end. In 
addition, owners of satellite-based distribution systems, MMDS 
frequencies, and PCS frequencies are all investing heavily to provide 
consumer broadband services. There also appears to be a concern about 
the fate of CLECs as a result of this legislation. Business plans that 
are based solely or in great part on obtaining access to new ILEC 
investment in advanced services facilities are very high-risk business 
plans in my opinion, and the investment community is well aware of 
these risks. Companies relying heavily on this source of revenue are 
having a much harder time raising money today than they were a year 
ago.

    Senator Brownback. Thank you very much, Mr. Strumingher. We 
appreciate that. We appreciate all of your testimony. It is 
thoughtful.
    I disagree with some and I wonder how well the bill has 
been actually reviewed. The purpose of the bill is to expand 
these services and get them out to rural areas. Mr. Pitsch I 
think hit the point of what his group is after is what I am 
after. We want as much deployment out there as we possibly can 
have.
    It is a deregulatory approach that we are taking on this. 
Others would take the tax subsidy approach--others would take 
the subsidy approach, others would take a tax cut approach. 
This is a deregulatory approach to it, and it is not taking 
place today in the rural areas.
    Dr. Duerstberger--Duersterberg. Sorry, I did that to you as 
well, so I apologize. It was not intended, to do that.
    You are representing the manufacturers and retailers. They 
are moving to use the Internet as a management tool. Would you 
say that from an economic development perspective an entire 
community or region that lacks access to broadband services 
would be at a disadvantage compared to communities and regions 
that have such access? Is this going to impact your 
manufacturing in rural areas?
    Dr. Duesterberg. Well, let me answer by saying that in the 
abstract, if there were an area that totally lacked broadband 
connections, that would be a severe disadvantage, for two 
reasons. One, companies that are already located in an area 
would lack the ability to expand their services. For instance, 
the automobile industry is going to an on-time delivery system 
and on-time interactive auction type system for all of their 
suppliers. If you cannot be connected via broadband connections 
to the original equipment manufacturers, then you are at a 
severe disadvantage because you cannot share in the design 
phase, you cannot share the quality data that they require on a 
real-time basis. So that is a severe disadvantage.
    In terms of economic development, companies that would have 
to go into an area underserved by broadband access would simply 
have higher costs. They would have to run a line in at much 
higher cost than if it were generally available in that area.
    So the short answer is yes, I think it does make a 
difference.
    Senator Brownback. It strikes me in my communities that I 
represent we have a lot of manufacturers in these rural 
communities and this is a decided disadvantage and probably 
going to increase in its nature of impact on the companies in 
the future as these services are not available in many of the 
rural areas.
    Mr. Pitsch, in your group's efforts they want deployment of 
services as broadly and as rapidly as possible, because you put 
forward a lot of the equipment and the services associated with 
broadband. You have heard the testimony of a number of people 
here that feel as if this will not help in the deployment of 
these services, may actually hinder some CLECs from offering 
these services. Yet you have appraised the bill and do not deem 
that it would do that.
    What in your appraisal is different from what you have 
heard in the CLEC testimony or those supporting keeping the 
current regime?
    Mr. Pitsch. Mr. Chairman, our view is that competition 
primarily is going to drive this, that market forces and the 
profit incentive are going to drive companies to invest. So 
when we look at the effect of this legislation, we believe that 
it is crucial that it provide still stronger incentives to the 
ILECs by eliminating regulation where it is not necessary. So 
that is the key to understanding our position, is focusing on 
our belief that competition, unless there is a bottleneck, is 
the best way to encourage companies to deploy.
    For example, as long as the competitors have access to the 
existing customer lines and the companies, the incumbents, 
central offices, then they will be able to compete. But if the 
ILEC now takes a risk and employs fiber and upgrades its 
network, maybe that is going to drive the cable company to 
deploy more quickly. Maybe it is going to incent the CLEC to 
deploy additional facilities.
    We want not just ADSL, 1.5 megabits per second. We want 
VDSL, we want 20 megabits per second. We want people putting 
more and more fiber, more and more radio equipment out there, 
and the primary motivation is going to be a competitive threat, 
and therefore that is where we think policymakers should put 
their primary emphasis.
    We in my written testimony point out that we do support 
Senator Moynihan's investment tax credit as well. We believe 
you can make other arguments. However, from a regulatory 
standpoint, focus on incentives, require regulation only where 
there is a bottleneck. We think that exists for loops and 
central office space.
    Senator Brownback. Senator Breaux.
    Senator Breaux. Thank you very much, panel, for being with 
us.
    Mr. Glassman, Jim, I was trying to look at what you were 
saying about SBC's Project Pronto and what Mr. Strumingher was 
saying about it and it seemed like, at least I take it you have 
two different opinions. I think, Mr. Glassman, you were saying 
that SBC's Project Pronto is a $7 billion investment and the 
view on Wall Street is that that $7 billion investment would 
bring $9 billion in productivity improvement. But Mr. 
Strumingher, it seemed like you were saying that SBC has never 
recovered in their stock and it is trading in the low to mid-
forties, has never recovered to the high of $59 a share, and 
you think that is in no small part a function of their Project 
Pronto initiative. It seems like you are saying that Project 
Pronto has had a negative effect on the stock. And Jim, you are 
saying that this is a great example of a very good thing for 
the company.
    Can you both comment on your perspective on this?
    Mr. Glassman. What I was going to say was, look, in the 
short term, to quote the great Burton Malkiel of Princeton 
University, the market is a random walk. We do not know what is 
going to happen tomorrow or really in the next few months or 
over the course of a year. But it seems to me that over the 
long term--and I am not endorsing SBC stock--that this kind of 
investment is going to pay off.
    That is what the folks at SBC think and I think it is 
actually paying off already quickly. It does not necessarily 
immediately show up in the stock, however. If there is a 
difference between the two of us, I may have a longer term 
perspective about the stock and about this kind of investment.
    Senator Breaux. Mr. Strumingher, is broadband a good 
investment?
    Mr. Strumingher. Oh, I think it is a very good investment 
for SBC, notwithstanding some of the regulatory issues that are 
out there. The question is more how difficult is it to make 
this kind of investment, which requires major initial spending 
that will have an initially dilutive impact on the earnings of 
a company like SBC or any company that makes that.
    While it is true that this will probably make the stock go 
up over the long term, another great commentator on the market 
I think said in the long run we are dead. There is a--the CEO 
of any big company has a very hard time rallying the troops to 
do well and selling his vision of the company to Wall Street 
when the stock is underperforming. This is now a year later and 
the stock is still well below where it was at the high, and it 
could well extend for another half a year, a year, who knows. 
The point is that it has been rough sailing for the company.
    I do not want to excuse SBC or try to rationalize anything. 
I am just telling you this is tough, and when we add additional 
complications like regulatory uncertainty that makes it even 
tougher.
    Senator Breaux. Mr. Strumingher, I guess Senator Brownback 
would argue that his legislation is trying to clear up some of 
that regulatory uncertainty. In your opinion as one who follows 
this very closely, can the RBOCs and the regulated companies in 
this area under the current regulatory scheme make the billions 
of dollars of investment in broadband under the current system 
and do it effectively from a market standpoint? Or would 
something like Senator Brownback is suggesting make that market 
situation more predictable and stable for them?
    Mr. Strumingher. I think it would clearly make it more 
predictable. The problem, as I mentioned in my remarks, is that 
it is very difficult right now to try to estimate the returns 
on the investment when you do not really know what the 
requirements are going to be of you. You may be asked to 
redesign your network in a totally unanticipated way to 
accommodate competitors, for example. The providers of the 
technology to you may be asked to change the way the technology 
looks or the way the technology functions in order to satisfy a 
competitor.
    All the while, the cable operators, the companies that are 
using MMDS and PCS frequencies, the satellite operators, who do 
not face similar types of regulatory hurdles, are charging 
ahead fast and furious.
    Senator Breaux. The cable companies, for instance, which 
are not common carriers, is that a significant economic 
advantage to them as they move into broadband applications?
    Mr. Strumingher. In a word, yes.
    Mr. Glassman. Senator Breaux, can I just add something? It 
seems to me that perhaps it is true that Senator Brownback's 
bill will be beneficial to the ILECs, but I do not think that 
it is the function of this Congress--maybe it is a function of 
Mr. Strumingher--to pick winners here. Maybe this will be good 
for the ILECs, but it is not good for other competitors, and I 
do not think we should choose.
    My point in my testimony was quite simple, that even absent 
Senator Brownback's bill SBC has invested $6 billion. That is a 
lot of money, and I think we are going to see more investment 
from ILECs and CLECs under the current regime.
    Senator Breaux. Mr. Strumingher says that investment has 
contributed to their stock being very low.
    Mr. Glassman. Look, you know, I long ago gave up trying to 
figure out the short-term movements of the stock market. I do 
not think anyone can explain why a stock moves in the short 
term the way it does. I do not think, if I can put in a plug 
for my book or my basic philosophy of investing, I do not think 
anybody should try, really. I think you should buy good 
companies that have good leadership and stick with them for the 
long term.
    Senator Breaux. Mr. Strumingher.
    Mr. Strumingher. If I could just have one more opportunity 
to clarify what I am saying here. The argument here is not 
whether investing for the long term is good or not. It is just 
a recognition that short-term variations in the stock price can 
have a meaningful impact on a company's willingness to make 
certain investments. While SBC has in fact invested or 
committed to making this investment, it conceivably could have 
been a lot more, a lot faster.
    We have not seen Bell South, we have not seen U.S. West, we 
have not seen Bell Atlantic, et cetera, step up to the plate in 
the same way. While there may be a myriad of reasons for this, 
I would not be surprised if one was the issues that are being 
raised here, today.
    Senator Breaux. Ms. Ashdown, let me ask you a question. 
Bell South has stated that they are paying about $500 million 
or so to smaller telephone companies. This is more than they 
receive from their usage fees versus the flat fees. Mr. Ellis 
before I got here, talked in terms of it costing them $450 for 
installing his daughter's Internet line and getting $15 back 
from his daughter for the usage on the flat fee basis.
    Is there not an inequity here that needs to be addressed? I 
mean, those numbers are just astronomical.
    Ms. Ashdown. Are you suggesting that Internet prices need 
to be higher? I just want to make sure I understand the 
question.
    Senator Breaux. No, I am just suggesting that--the argument 
I think that some would make is that what they are able to 
receive as opposed to what they pay is vastly out of any kind 
of realistic proportions. The FCC, I know I have asked them 
along with Senator Lott to try and look at some ways to address 
the reciprocal compensation issue.
    Is there not a need to do that? I mean, it seems like they 
make a very good case about the inequities that they have right 
now.
    Ms. Ashdown. Well, I notice, though, that they are not 
asking to eliminate reciprocal compensation across the board. 
They are just asking to eliminate it where it is bothering them 
the most right now. They still want, I think--if they were 
asking for zero across the board, that would probably hurt them 
in terms of the competitive companies that are going to be 
dealing with a smaller base of subscribers, where all of their 
calls are going to be terminating on the network with the most 
market share. There they stand to do very well on reciprocal 
compensation.
    So where it is not hurting them they do not want to get rid 
of it, and where they have to pay they do want to get rid of 
it. As far as how that affects the consumer, I think that it 
definitely is a concern for the Internet service provider if it 
means that we are burdened with the cost of terminating those 
calls and we have to pass that along to our subscribers 
because, as you know, the average price for Internet service in 
this country is around $19, $20 a month. There is a reason for 
that, and if I have to add $6 a month to my prices on average 
that comes straight out of my bottom line.
    I cannot compete with--and I think Bell South is a very 
interesting example now that you mention it, because Bell 
South, for instance, is offering $39.95 DSL access. With that 
DSL access they are throwing in a free modem, they are throwing 
in the phone line, they are throwing in the Internet access. 
Then on the wholesale model that they are presenting to the 
Internet service providers in Bell South territory, they are 
selling the wholesale DSL loop to the Internet service 
providers for $39 per month and telling the Internet service 
providers: Go ahead and sell all the Internet access you want 
at 95 cents a month.
    I think that is a definite reason that Internet high speed 
DSL access is being deployed more slowly than it could be.
    Senator Breaux. So your recommendation is that we do not do 
anything in this area, either the Brownback bill or----
    Ms. Ashdown. Well, from what I have been able to observe 
and in my dealings with CLECs and buying phone services from 
them, what they have told me is that the reciprocal 
compensation issue is contractually agreed to between them and 
the phone companies, and of course the incumbent phone 
companies, thinking that all the traffic was going to be ending 
over there, insisted on a very high rate in the beginning, and 
that rate has come down quite a lot since they realized what 
was going to happen with the Internet traffic.
    I do not think that there are very many CLECs that are 
counting on that continuing to go away. But I do not see why it 
should go away for them and not go away for the incumbents.
    Senator Breaux. Thank you.
    Thank you, Mr. Chairman.
    Senator Brownback. I want to make clear, because there have 
been some assertions of what the bill is aimed at. The effort 
of the bill is not to advantage one company or another. The 
effort of the bill is to get these services out to rural areas. 
I have a problem. These services are not in rural areas. You 
have great robust competition in New York City, Mr. Glassman. I 
am glad you do. God bless you for it. I wish we had it in rural 
parts of Kansas, and we do not have it.
    The numbers again: 73 percent have these sort of services 
in cities with populations over half million, less than 5 
percent in cities 5 to 10,000. So that is the target. That is 
what we are trying to aim at, is how do we get these services 
there.
    I think most of you heard the last panel, where the CLECs, 
I asked them: When are you going to be there? When can we 
expect you? Not certain, we do not know, maybe some changes in 
technology, maybe some possibilities here.
    The bill has a buildout requirement. To be able to get the 
regulatory relief, you have got to build out 100 percent within 
5 years to be able to get that. So that is my focus with this, 
and it is a deregulatory effort.
    I would hope that if you do not agree with this, that you 
would come back and say, well, OK, but we could do it this way, 
we could get the buildout that you want by going this route. 
And Senator Moynihan's approach is one way to do that, which is 
to say let us provide a tax credit or a subsidy in some way 
through the tax code of doing that. I happen to think that 
going the regulatory relief is the way to go.
    But if you have a better way, I am all ears to be able to 
hear that, because we are being left behind New York City in 
this, and we take some umbrage about that occurring. We have 
not in the past left rural areas behind. So this is the effort, 
and if you have a different way to go to get this done--I do 
not know if you have, Mr. Glassman or Ms. Ashdown, now a way 
that we can go at that. I would appreciate the suggestion.
    Ms. Ashdown. I actually do have a suggestion, Mr. Chairman.
    Senator Brownback. Good.
    Ms. Ashdown. That is that enforcement of the existing 
regulations would be a big step in getting Internet access out 
to the rural areas. My big concern with the bill is that 
removing the obligation for incumbent carriers that, as you 
know, have been selling a lot of rural switches off, but in the 
areas where they still are in the rural areas and they own the 
switches, if this bill passes they are under no obligation to 
provide nondiscriminatory provision of the lines that Internet 
service providers need to be able to get to the phone company 
for access.
    Senator Brownback. Ms. Ashdown, if that is the case why has 
that not been a problem in urban areas, where you have 73 
percent penetration, and it has been a problem in rural areas?
    Ms. Ashdown. It actually is a problem in the urban areas.
    Senator Brownback. Well then, why have you busted through 
there and not in rural areas?
    Ms. Ashdown. I would submit to you that the Internet 
service providers are not busting through very well in the 
urban areas at all.
    Senator Brownback. 73 percent. I will be happy with that in 
rural areas if you will give me that.
    Ms. Ashdown. Right, I understand that. But I am not very 
happy with 73 percent when the lion's share of that market has 
gone to the incumbent by their violation of Federal 
regulations. Letting them continue to violate Federal 
regulations in order to get them to have the same kind of 
monopoly market share in the rural areas is not, I think, what 
you want to see. What you want to see is more competition in 
the rural areas.
    Senator Brownback. I want some service.
    Ms. Ashdown. Yes, but are you saying that you want service 
and you are happy to have a monopoly and you do not care 
whether it is competitive service or not? Because that is what 
this bill is going to do.
    Senator Brownback. We want some service and we do not 
presently have it.
    Mr. Pitsch.
    Mr. Pitsch. Thank you, Mr. Chairman. I want to emphasize 
that ITI wants competition. We want multiple providers. We 
think that is key. If we thought this bill would undermine the 
possibility of multiple providers, we would not be supporting 
it. We think that the bill prudently makes essential facilities 
available.
    But the goal should not be, to use Mr. Glassman's phrase, 
to favor one sector of the industry over another. I think the 
logic of the Telecommunications Act, 251[d][2], is this 
necessary to competition, I think speaks on behalf of the 
approach this legislation is taking.
    I think, to answer your question before perhaps more 
bluntly, different sectors of the various factions here arguing 
have very concentrated economic interests. They happen to be 
narrow. CLECs do not care how the ILECs do, ILECs do not care 
how the CLECs do. In fact, probably it is inverse, and the same 
for cable. I want to emphasize, we have been looking at this, 
we have a very intense interest, and, to put it perhaps 
uncharitably, we are arms merchants. We want all of them out 
there, we want them succeeding, and we want them going at 
loggerheads.
    We believe the best way to do that is to rely on 
competition and deregulation, but, very importantly, also make 
those essential facilities available. As long as that is the 
case, I think we will have robust competition.
    Senator Brownback. Mr. Glassman.
    Mr. Glassman. Mr. Chairman, I think sensible people want 
exactly the same thing, Mr. Pitsch, and I just think there are 
different ways to go about it. Now, I have a great deal of 
respect for you, Mr. Chairman, in sticking up for your rural 
constituents. But of course, as you know, there are Senators 
who have large rural constituencies, like Senator Stevens of 
Alaska, Senator Dorgan, who was just here, from North Dakota, 
who differ with you and who agree with me that the best way to 
get service to your constituents is through the competitive 
process that was set in motion by the 1996 Telecommunications 
Act.
    But I think we should not be naive about this. The truth is 
that rural areas are not going to be served as quickly as urban 
areas and suburban areas. As you said, I live in New York City. 
My block on Amsterdam Avenue, there is a Korean restaurant and 
there is an Italian restaurant and there is a Spanish 
restaurant, on and on and on. I am sure that is not true in 
most rural areas. However----
    Senator Brownback. That is not necessary for competition. 
For us, what we want is to be able to have access to be 
competitive. That is why we did rural telephony, that is why we 
did rural electrification.
    Mr. Glassman. But you are getting that and you are going to 
get that through the competitive process. Do not forget that 
the world's largest retailer is a company that started in 
Bentonville, Arkansas, serving rural communities. There are 
lots of businesses out there and we heard from the first panel 
about numerous CLECs that want to serve these underserved 
areas.
    I really think that we have a process that is working and 
to interfere with it at this point would be, I believe, a 
mistake. It has been a mistake throughout the history of this 
country, quite frankly, for government to intervene in markets 
when there is no one who has more incentive to provide services 
to someone who is going to pay for it than a business. We just 
should not be getting in the way of those businesses, even if 
we are extremely well intentioned in wanting to help them.
    Senator Brownback. Walmart would not be there without rural 
electrification years ago, nor without rural telephony.
    Mr. Glassman. I would agree.
    Senator Brownback. You can question whether that should 
continue today.
    Mr. Glassman. Right.
    Senator Brownback. I think there is a legitimate question 
about that. But my point is we have never tried to create a 
Swiss cheese across the country on competitive abilities and 
that is why you can get a Walmart in Arkansas, in rural 
Arkansas. I do not want the same here, but I would appreciate 
any thoughts that you would have, anybody, on this. If you see 
ways that we should tighten the bill down, that we can still 
deal with the rural competition and yet address the concerns 
that you have, Ms. Ashdown, anybody else, I am very open to 
doing that.
    My objective is quite specific on this and if you see that 
we are having negative impacts in other areas because of the 
way it is drafted, let me hear of how we could tighten that 
focus so that we still hit the target that we are aiming at 
without addressing your concerns. I know there are a number of 
different economic issues and interests that are here.
    I do appreciate the panels traveling here, your time, your 
interest, your intensity. The record will stay open for the 
requisite number of days.
    The hearing is adjourned.
    [Whereupon, at 12:07 p.m., the Committee was adjourned.]

                                
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