U.S. GOVERNMENT PRINTING OFFICE

66–467CC WASHINGTON : 2000

THE INTERNET FREEDOM AND BROADBAND

DEPLOYMENT ACT OF 1999

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

H.R. 2420

JULY 27, 2000

Serial No. 106–132

Printed for the use of the Committee on Commerce

(

(II)

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON TELECOMMUNICATIONS, TRADE, AND CONSUMER PROTECTION

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,

Vice Chairman

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

BILL LUTHER, Minnesota

RON KLINK, Pennsylvania

TOM SAWYER, Ohio

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

JOHN D. DINGELL, Michigan,

(Ex Officio)

(III)

C O N T E N T S

Page

Testimony of:

Cali, Len, Vice President, Federal Government Affairs, AT&T Corporation ................................................................................................................. 38

Ellis, James D., Senior Executive Vice President & General Counsel,

SBC Communications ................................................................................... 18

Haynes, Arne L., President, Rainier Group ................................................... 27

Khanna, Dhruv, Executive Vice President, General Counsel, Covad Communications ................................................................................................... 30

Pociask, Steve, Executive Vice President & Chief Economist, Joel Popkin

& Company .................................................................................................... 49

Schonhaut, Cindy, Senior Vice President, ICG .............................................. 36

Young, Edward D., Senior Vice President, Federal Government Relations,

Verizon Communications .............................................................................. 23

Material submitted for the record by:

Kennard, Hon. William E., Chairman, Federal Communications Commission, prepared statement of .......................................................................... 85

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THE INTERNET FREEDOM AND BROADBAND

DEPLOYMENT ACT OF 1999

THURSDAY, JULY 27, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION,

Washington, DC.

The subcommittee met, pursuant to notice, at 11:30 a.m., in room

2420, Rayburn House Office Building, Hon. W.J. ‘‘Billy’’ Tauzin

(chairman) presiding.

Members present: Representatives Tauzin, Oxley, Stearns,

Gillmor, Cox, Deal, Largent, Cubin, Shimkus, Wilson, Ehrlich, Bliley (ex officio), Markey, Eshoo, Wynn, Luther, Sawyer, Green,

McCarthy, and Dingell (ex officio).

Staff present: Justin Lilley, majority counsel; Cliff Riccio, legislative analyst; and Andy Levin, minority counsel.

Mr. TAUZIN. The hearing will please come to order. We will ask

our guests to take seats and to get comfortable.

The members are on their way back from a series of votes, so

they will be arriving shortly, but I think we can probably get started because we are going to have an interruption that I am going

to make clear to all of you in just in a minute.

Let me first thank the panel for assembling today. We appreciate

very much your being here.

Today is the first legislative hearing on H.R. 2420, the Internet

Freedom and Broadband Deployment Act of 1999.

Our ranking member, Mr. Dingell, and I introduced this bill last

year and I believe that it is one of the most important pro-consumer pieces of legislation that our subcommittee has considered

this session.

To date, the legislation enjoys a cosponsorship of a majority of

the House of Representatives, fully 225 members to be exact, including a majority of the Hispanic, rural and western caucuses.

While this overwhelming bipartisan support for the bill might

surprise some, the warm response here in the House to H.R. 2420

really should not startle anyone. In fact there is a quite simple explanation of how Mr. Dingell and I have built a broadband coalition

in such a short period of time, and that is this:

Most members of the House of Representatives understand that

policies put forward in H.R. 2420 are absolutely critical for American consumers.

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We are, after all, a consumer organization here in Congress. We

represent, first and foremost, the consumers of America, our constituents.

If enacted, most members realize that H.R. 2420 will create full

scale competition in our Internet backbone marketplace and thereby ensure that the Internet does not further vulcanize our society

of has and has nots. It is as simple as that.

It is no secret that a huge sector of our Nation is not receiving

or is not capable of receiving true, high speed, broadband services.

The reason is because hundreds of communities are not near or are

not linked to any of the hubs that enable access to Internet backbones, the real information super highways.

Moreover, very few companies are building high speed gathering

lines all the way back from the backbone points of access to the

rural remote and impoverished areas because it is simply too expensive and not profitable enough at this time.

What this means, of course, is that those living in areas that are

not near Internet points of presence, or POPs, or that are not tied

into a backbone facility via a gathering line, are not enjoying the

fruits of a new economy.

Without a high speed connection to the Internet backbone, these

Americans in rural areas and inner cities are relegated to the narrow band dirt road that is so incompatible with the rest of our high

speed infrastructure that the flow of communications across our national web-based infrastructures will be significantly impeded.

See, without a UUnet, a spread, a cable wireless or AT&T, an

email that is sent through a standard dial-up access must pass

through a pokey, congested, public access point, rather than zap

through a broadband hub.

Emails back up quickly. Web pages freeze and fold. You can forget about streaming video. And if we do not operate at these high

speeds, Internet cannot evolve into a fluid nationwide communications network that all of us are hoping it will be.

Instead, smaller ISP subscribers will continue to encounter service disruptions, data transfer delays in every instance where

broadband facilitated high speed traffic is thrust upon narrow band

slower speed infrastructures that were designed to carry only voice

for short intervals, not large volumes of data for extended periods

of time.

Consider the case of John Brown of Albuquerque, New Mexico

who runs a small ISP called IHighway. They quote a recent article

about Mr. Brown in Forbes magazine:

‘‘He’d like to give his clients the fastest possible link to the rest

of the world but he can’t because UUnet and a few other giant data

haulers that dominate Internet traffic don’t have the fat, 45-megabit lines in Albuquerque,’’ and Brown can’t afford the $120,000 a

year to lease a pipe running 330 miles to UUnet in Phoenix.

There is also the case of Sheldon Jefferson, CEO of Net.com, an

Internet provider serving residential business customers in the

New York area.

To quote from his testimony to this subcommittee:

‘‘My company is locked out of the broadband Internet market via

cable. Not only can I not get access to local cable facilities, I must

pay inflated prices for transit to the Internet backbone. These

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prices are so high because the concentration of ownership of Internet backbone is in the hands of a few carriers and companies.’’

Once more, Mr. David Cushman, with the Children’s National

Medical Clinic here in Washington who said that, ‘‘Even in Northwest DC, many impoverished residential areas, including the 100

block of Michigan Avenue, just right up the road, have no direct

links to the Internet backbone facility, must less a POP, despite

the fact that the Nation’s Capitol is the most’’ I repeat ‘‘the most

wired city in the United States today.’’

So we have a digital divide growing because many people do not

have access to backbone due to where they live and the dial-up access they have is limited or affords them only a narrow band Internet service.

To solve the problem, H.R. 2420 does something very simple,

very pragmatic. It lifts the 20-year-old LATA restriction to enable

the Bell Companies to haul data traffic from rural and underserved areas to Internet backbone facilities via their extensive fiber

optic networks that are already in the ground in most states today.

This makes sense because the Bell fiber infrastructure reaches

just about every square mile in states where Bell provides local

service. Moreover, the fiber is available today to serve the high

speed, broadband gathering lines that are absent in many rural

and under served areas today.

We saw in several of our hearings a map we produced indicating,

in my own State of Louisiana, 2 POPs, 1 in Baton Rouge and 1 in

New Orleans.

And we also saw on those maps and I think Teddy has them

again we saw the interlacing fiber optic lines that have been laid

and paid for by the telephone ratepayers of my State that have

been laid in the ground to serve the telephone network in our

State, but nevertheless are crossed by the black LATA lines drawn

on a map by a court here in Washington, DC in a settlement of the

AT&T breakup.

Those LATA lines separating communities from the POPs that

exist in New Orleans and Baton Rouge also separate those customers from those high speed POPs.

More importantly, those fiber lines that American citizens in my

State paid for cannot effectively be used by their own company to

deliver high speed Internet services for them to those POPs.

We also saw a competing map line at the last hearing, and we

may see it again today, accompanied of course by some new information addressing the state of Internet POPs across the country.

The contention being made as of yesterday by those opposing the

bill is that 94.7 percent of the Nation lives within 50 miles of an

Internet POP of DS3 speed or higher 45 megabits. It is quite a revelation.

Just a few weeks ago, it was revealed that many of the POPs,

however, represented to be high speed at our last meeting were in

fact no faster than DS1 or T1 speed, not truly broadband speed, a

far cry from the 45 megabits a second.

I know the Internet economy moves fast but I have my doubts

about whether 250 POPs have been upgraded so dramatically in

just a few weeks time.

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What concerns me most, however, about the materials being distributed is that they lack description. Despite being a flat contention that every POP displayed is at least a DS-3 POP or greater,

the materials being distributed provide no insight as to whether

these so-called POPs actually do.

It is not clear, in other words, whether many of these POPs represent mere peering points, points at which IXEs access local traffic or, more importantly, whether any of these POPs reach rural

and under served areas via gathering lines as opposed to serving

only certain IXEs a limited number of cable modem customers.

So while speed is an important issue, no doubt, purpose is every

bit as important. And equally important is the central question of

why on earth would Washington tell a few telecommunications

companies in this country that it cannot compete when even foreign countries’ providers can come into America and buy up companies here and compete for customers, Internet high speed,

broadband services.

And why, more importantly, have we paid for fiber in the ground

that we can’t use?

Anyway, I am interested in getting into a fuller discussion about

these so-called POPs, and will have a number of questions about

them as we move forward.

But let me just say at the outset that despite the contentions

being made about POPs in the U.S. today, we are still inclined to

doubt that enough of them are actually providing high speed Internet services to many of the small ISPs in communities across the

country.

If there truly were enough POPs to go around, if in fact there

were enough gathering lines extending to backbones, and if we did

enjoy true competitive choice among backbone providers today,

then I really doubt that folks like John Brown and Sheldon Jefferson would be up in front of my committee explaining that they are

being shut out of the high speed revolution.

I wonder why anyone would be talking about a digital divide and

why one exists, or why companies are predicting that as long out

as 4 years from now, fully half of our country will have, at best,

one provider, at worst, no provider, of broadband Internet services.

I doubt seriously that Dr. Cushner’s Children’s Hospital would be

so abandoned in the most wired capital city in America if backbone

providers today had a business plan to serve it, or the ISP it subscribes to.

In the final analysis, the high concentration of Internet backbone

ownership in the U.S. is, even as we hold this hearing, effectively

disenfranchising many Americans, not only in rural areas but in

under served and poor urban areas as well.

And because of this, there is a glaring need to update the 1996

Act so that our legal framework becomes compatible with consumer

demand and desire to facilitate a new Internet economy.

H.R. 2420’s premise of allowing the Bell fiber to be used to transport data to and from areas that are being neglected by the backbone oligopolists is simply the right thing to do for business, and

it is the right thing to do for consumers. It is the right thing to

do for our Nation’s economy.

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Two-hundred-and-twenty-five members of the House now recognize this. I am confident that more will soon follow.

One caveat before I yield to my colleagues.

There are those at the FCC who are predicting today that in as

short a period as 12 months to 18 months, all of the country will

be experiencing the 271 relief that has been afforded now to the

Bell Companies in New York and Texas.

We are just a year away or so from full, local and long distance

competition in 271. And yet we are being told that the fiber that

is laid in the ground to serve the data needs of America has to be

held hostage to LATA lines drawn on a map to separate local and

long distance years ago when AT&T was broken up.

My only point is, the sooner we get this legislation adopted, the

sooner that full blown competition that Texas and New York are

finally enjoying will be available to all parts of our country, and the

sooner I can be satisfied that folks in Louisiana will have the same

advantage of competition that folks in Texas and folks in New York

are enjoying.

The Chair will yield to my friend from Massachusetts, the ranking minority member, Mr. Markey, for an opening statement.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

I thank you for calling this extremely interesting hearing on the

broadband revolution that is taking place on the Internet today. It

is happening at a breathtaking pace in its sweep and its impressive

and its rapid revolution.

A few mere years after passage of the Telecommunications Act

of 1996, consumers are reaping the digital dividend of communications competition. Without the competitive forces unleashed by the

Telecom Act, we probably would not be having this hearing today.

The feature-rich, information-driven content that is every day igniting the enthusiasm of our Nation’s entrepreneurs and investors

is riding upon a telecommunications infrastructure that is the envy

of the world.

Across the globe, country after country is trying to emulate the

dramatic steps that America has made in opening up historic monopoly markets to marketplace competition, in building bandwidth

and in bringing the benefits to all sectors of society.

The cable industry alone makes broadband capability available to

41 percent of U.S. homes and has over a million subscribers today.

The competitive local telephone companies have driven broadband

deployment on the competing wire and currently invest roughly a

billion dollars per month on new telecommunications infrastructure

around the Nation.

Bell Atlantic has proven it can meet the market-opening requirements of the Telecom Act in New York and is poised to file applications in other states in the near future, including Massachusetts

which they expect to have approved by the end of this year.

In addition, wireless applications promise ever more capacity and

competition for businesses and residential consumers.

In short, the marketplace is responding and the Telecom Act is

working as we designed it. Moreover, the competitive telecommunications industry is exerting tremendous effort to meet the bandwidth needs of the growing Internet usage in our country.

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That is because the goal of the telecommunications policy is not

the deployment of a particular technology or application, but rather

the goal of telecommunications policy is competition, everywhere

and for everyone.

Competition will determine whether consumers prefer fireless

services, DSL, cable modems or any other technology, and competition will pick winners and losers among applications.

The fundamental issue before us is whether we will continue our

successful policy or instead insert uncertainty back into the marketplace.

The so-called carrot-and-stick approach contained in the Telecommunications Act clearly contains enough incentives to the Bell

companies to open up their local telecommunications monopolies to

free market forces as long as Congress does not entice them with

some alternative.

So I thank you, Mr. Chairman, for giving me this opportunity,

and I look forward to hearing from our witnesses.

Mr. TAUZIN. I thank my friend.

The Chair recognizes the gentleman from Richmond, Virginia,

the chairman of the full Committee on Commerce, Mr. Bliley.

Chairman BLILEY. Thank you, Mr. Chairman.

Today the subcommittee returns to the topic of broadband deployment. I am looking forward to hearing from our distinguished

panel of witnesses.

I am particularly interested in learning how parties might be impact if Congress were to deregulate the incumbent phone companies. These same companies tell the committee repeatedly that

they need relief and that they need it now.

But as I said at the last hearing, I am puzzled because, as far

as I can tell, this industry and its consumers are prospering under

the current set of rules.

Indeed, much has happened over the past year alone. We have

seen a real commitment to rolling out broadband service by competitors and incumbents alike. The numbers are astounding.

Let’s take SBC, who is with us today, as an example. In November 1999, SBC pledged $6 billion to update its network. SBC assured shareholders that Project Pronto would pay for itself by delivering cost savings and generating substantial revenue growth.

SBC has already condition 15 million customer lines for DSL

service, and the company aims to install between 4,000 and 5,000

DSL lines each day during the second half of 2000. That is right

between 4,000 and 5,000 DSL lines per day.

SBC’s customers are not the only ones who should be pleased. By

every measure, its shareholders are doing quite well too.

In the second quarter of this year, SBC Data Services revenue

grew by an impressive 38 percent, and SBC also announced a $1.8

billion of data services sales in just 3 months.

Verizon has also made great strides in just 1 year, reporting a

47 percent increase in the number of DSL subscribers since the

first quarter of this year.

Morgan, Stanley projects that by 2002, a full 92 percent of

Verizon’s lines will be DSL capable. In fact, I have read that the

real challenge for carriers like Verizon and others if finding enough

technicians to fill the orders that are pouring in.

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Covad is with us today too. And it has an equally impressive

story to tell. Morgan, Stanley recently estimated that Covad is 6

months ahead of the competition in terms of market penetration

and new product offerings.

It is worth noting that future job creation for Covad and others

is dependent on the ability to share lines with incumbents like

SBC. But the legislation before us today would extinguish new entrants’ rights to share lines.

I look forward to an explanation as to why it would be good for

the Congress new entrants’ ability to share lines, particularly in

light of the fact that future job creation in this industry is so dependent on line sharing.

So forgive me if I remain unconvinced that there is a problem

that requires the help of the Federal Government. These facts lead

me to conclude that competition is working, and that the 1996 Act

is working.

Indeed, SBC and Verizon themselves have proved it is working.

They are now offering a full bundle of services to consumers in

New York and Texas. They are both putting downward pressure on

long distance prices.

I look forward to Virginians enjoying this kind of price competition, and I yield back the balance of my time.

Mr. TAUZIN. I thank my friend. He is just a hard guy to convince.

But I want to thank the chairman for this hearing today and for

his participation and his continued interest in the resolution of the

issue.

And the Chair wishes now to make a unanimous consent that

the statement of the ranking minority member of the committee,

Mr. Dingell, and the written statements of all members who would

like to submit written statements for the record be accepted in the

record without objection, it is so ordered.

[The prepared statement of Hon. John D. Dingell follows:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Thank you, Mr. Chairman, for holding this hearing. I would also like to thank

the Chairman of the Full Committee, Mr. Bliley, for his help in scheduling this important hearing today on H.R. 2420, the Internet Freedom and Broadband Deployment Act.

Chairman Tauzin and I introduced this legislation just over a year ago. Many

changes have taken place in the telecommunications marketplace since then, but at

least one thing has remained constant. Consumers are still chomping at the bit for

faster access to the Internet, and continue to bemoan the ever-increasing ‘‘World

Wide Wait.’’

Despite the tremendous growth in the sale of broadband Internet connections over

the past year—both in the form of cable modem and DSL services—the clamor for

higher surfing speed persists. The president of IP services for Nortel Networks put

it best when he said, and I quote, ‘‘having a broadband pipe doesn’t guarantee a

broadband experience.’’

The reason for this disconnect (so to speak) is that the Internet is growing increasingly congested. And any connection between two points is only as fast as its

slowest link. Experts say the solution to this problem lies in strengthening the most

vulnerable points of the network. H.R. 2420 is designed to do just that.

By allowing Bell companies to transport data across LATA boundaries, this legislation will unlock the vast potential of existing fiber networks that are already built,

in the ground, and ready to go. These existing networks are capable of alleviating

the severe bottleneck that U.S. Internet traffic faces today. Unfortunately, the current regulatory scheme prevents these companies from fully utilizing this valuable

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investment and, in the process, deprives consumers of the benefits additional competitors would bring to this market.

Opponents of H.R. 2420, argue that allowing Bells to transport interLATA data

will reduce the incentive for them to comply with the market-opening provisions of

the Telecom Act. This is illogical, irrational, and simply at odds with the facts. It

is not surprising that more than 220 Members of the House recognize the fallacy

of this argument and flatly reject it.

First, Congress need not provide an ‘‘incentive’’ for any person to obey the law.

The Bell companies are required by statute to open their local networks to competition through various means. If they break the law, stiff penalties can and should

be imposed swiftly. I would point out that non-Bell incumbent local exchange carriers, such as the former GTE, Frontier, Alltel, Sprint and others are all subject to

the same Telecom Act mandates, but are not prohibited from offering long distance

service. As one might expect, these companies are fully complying with the law

without the need for any so-called ‘‘incentives’’ to keep them honest. The threat of

heavy fines, adverse publicity, and the loss of goodwill are more than enough to do

the trick.

Second, the long distance voice market generates nearly $100 billion in revenue

each year. Any Bell company that leaves that much money on the table by not aggressively pursuing Section 271 entry into this market will be dealt with harshly

by the financial markets and is likely to suffer the ultimate punishment for bad

management.

Finally, those who say the Bell companies will purposefully avoid Section 271 long

distance entry by offering voice telephone service over the Internet simply ignore

the cardinal rule of doing business: which is, always make sure you get paid. H.R.

2420 flatly prohibits Bell companies from billing, collecting, or marketing voice long

distance service. If a Bell company also is forbidden from spending a dime on TV

commercials, telemarketers, frequent flier miles or rebate checks, how many customers is it likely to steal away from AT&T or WorldCom each of whom spends millions each year just to convince consumers to switch carriers?

H.R. 2420 is a sensible solution to a serious problem confronting consumers and

policymakers today. The New Economy simply will not survive and prosper in a 56K

dial-up environment. Congress must remove obstacles to the deployment of

broadband technologies whenever and wherever it finds them.

Thank you, again, Mr. Chairman, for holding this hearing. I look forward to working with you to move this important legislation forward.

Mr. TAUZIN. The Chair now recognizes the gentlemen from Maryland, Mr. Wynn, for an opening statement.

Mr. WYNN. Thank you, Mr. Chairman.

In view of the shortness of time and the importance of this hearing, I would defer an opening statement and submit in the hopes

that we can at least get some of the witnesses before we have to

recess.

And with that, Mr. Chairman, I would relinquish my time.

Mr. TAUZIN. I thank the gentleman.

The gentlelady has an opening statement, Ms. Wilson?

Ms. WILSON. Yes, Mr. Chairman. I will just be very brief.

I am of the belief that the 1996 Telecom Act is working and that

competition is growing both in Albuquerque and around New Mexico.

As it happens, my local Albuquerque office gets our local phone

service from ESPIRE and I think that more competition should be

the goal of any changes to the Act.

I support the idea of more competition in the data backbone market, and I am concerned though about the bill that it might result

in less competition in local exchange Internet service providers and

broadband access markets.

I have heard from a lot of consumer groups, Internet service providers, competitive local exchange providers, public utility commissioners, small businesses all across New Mexico about this bill, and

almost unanimously they either outright oppose the bill, or they

9

have grave concerns that have to be addressed before it should

move forward.

I would like to hear from the witnesses today about the need for

the legislation. As I understand it, the Bell Companies are reporting record profits, and usually crediting their movement into the

data world for these record profits.

I would also like to hear more about the impact this bill is going

to have on backbone competition. And I would like to hear about

the impact it is going to have on our burgeoning competitive telecommunication market across the country and specifically in New

Mexico.

I would also like to make a clarification to a recent Forbes Magazine article that suggested that Albuquerque has no high speed

Internet access.

Contrary to the Forbes article, my constituents in fact can receive high speed Internet access. UUnet, a subsidiary of Worldcom,

provides high speed access. There are several DSL companies in Albuquerque including Covad, Rhythms, and ESPIRE. Comcast Cable

is rolling out high speed cable modems.

In Des Moines, New Mexico, which has I think it is now 400 telephone customers in 2800 square miles, you can get DSL from the

telephone co-op.

U.S. West, however, does not yet offer a high speed Internet access in Albuquerque. They have announced plans to roll out DSL,

however.

I think that is an important point. All of these things would not

have happened and high speed access would not be available in

New Mexico yet if it were not for competition. And I do not want

to do anything that would jeopardize the future vitality and competition within this industry and those will be the nature of my

questions.

I yield the balance of my time.

Mr. TAUZIN. The Chair thanks the gentlelady.

The gentlelady from Missouri is recognized, Mrs. McCarthy.

Mrs. MCCARTHY. Thank you, Mr. Chairman.

I am very grateful for this hearing and I am going to be very

brief and put my extended remarks in the record so that we can

get on with the panel.

There are a lot of very positive developments happening for consumers in my district because of competition, and I do not want to

change or act prematurely a law that is in place and working well.

Any change that might reduce competition I think would be very

adverse and it could lead to increased costs and stifling innovation,

and if it ain’t broke, don’t fix it.

So, Mr. Chairman, I will yield back the balance of my time and

put my remarks in the record.

[The prepared statement of Hon. Karen McCarthy follows:]

PREPARED STATEMENT OF HON. KAREN MCCARTHY, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MISSOURI

Thank you Mr. Chairman and Representative Markey for holding this hearing on

H.R. 2420, the Internet Freedom and Broadband Deployment Act. I look forward to

the witnesses’ testimony on the current state of broadband deployment and how this

legislation will affect deployment in the future.

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In 1996, Congress enacted the Telecommunications Act, which laid the legal

framework for deregulating the telecommunications market. The removal of regulatory barriers was expected to promote competition and benefit the public interest.

It was expected that the long term benefits to such deregulation would include increased consumer choice, decreased consumer prices, increased efficiency, the spurring of technological advances, and increased investment in the Nation’s information

infrastructure. I believe the Act is working and that we must ensure its continued

success by allowing for the ongoing competition among telecommunications providers. Such competition benefits all consumers.

We are in the midst of an exciting time from a communications perspective. The

communication tools people now have at their disposal due to the Internet is truly

astounding. What is even more amazing, though, are the things we will be able to

do in the future once broadband Internet access is more commonplace throughout

the United States. That is why I am so interested in the state of broadband deployment.

One of the many benefits of the Telecommunications Act of 1996 is that it created

a competitive telecommunications marketplace, as evidenced by the competitive

local exchange carrier (CLEC) industry’s success. There are currently over 375

CLECs in the United States, including 333 facilities-based CLECs, employing more

than 70,000 people. These companies operate over 820 voice and 1,400 data switches, 10.4 million access lines, and over 4 million miles of fiber.

The CLEC industry’s rise, in turn, created an amazing increase in broadband deployment. Competitors were the first to aggressively roll out broadband services,

and are still among the industry leaders in the provision and deployment of Digital

Subscriber Line (DSL) service. In fact, CLECs supply over 100,000 DSL lines, which

represents about 20% of the total number of DSL lines currently in service.

Further, CLECs are deploying to smaller cities and towns. For example, Missouribased BroadSpan Communications, which operates in my district, also provides

broadband service to the 40,000 residents of Cape Girardeau, Missouri. As a result,

CLECs are now able to offer DSL broadband service to approximately 25% of the

country.

Local phone companies, on the other hand, had DSL technology for some time,

but only began to deploy DSL in response to CLEC deployment. Now, however,

every regional Bell operating company (RBOC) and GTE are deploying broadband

services in their home regions. In fact, SBC has announced that, through its

‘‘Project Pronto’’ initiative, the company will provide DSL service to 77 million customers by 2002.

Other industries are also contributing to the current state of broadband deployment. For example, cable companies, wireless technologies, and other new entrants,

including electric utilities, are all now offering broadband services. In fact, there

currently are approximately 2 million U.S. cable modem customers, and 7,000 new

cable modem customers are being added per day.

These companies are leading the way in broadband service. Greater Kansas City

area customers are lucky to be the first in the country to benefit from these emerging technologies which the Telecommunications Act of 1996 has fostered.

I look forward to monitoring the innovations which competition brings through

the effective implementation of the Act. I believe any attempt to change the Act prematurely will only hurt consumers by reducing competition, increasing costs, and

stifling innovation. Allowing the Bells to transmit high speed data over long distance networks without requiring them to meet the 14-point competitive check list

of open-market requirements in Section 271 of the Act will ensure less competition

in the telecommunications market. In Chairman Kennard’s testimony before the

House Judiciary Committee on July 18, 2000, he stated that ‘‘eliminating data from

Section 271 would eliminate a crucial incentive for incumbent BOCs to open their

local monopoly markets. The opening of local markets is absolutely critical for accelerating broadband deployment.’’ I agree with Chairman Kennard’s assessment and

I do hope that Congress allows the Act to work by not reopening it.

Thank you Mr. Chairman, and I yield back the balance of my time.

Mr. STEARNS [presiding]. I thank my colleague.

The gentleman from Texas is recognized.

The gentleman from Oklahoma is recognized.

Mr. Largent?

Mr. LARGENT. Thank you, Mr. Chairman.

The chairman of the subcommittee said the chairman of the full

committee may be a hard guy to convince; I may be impossible.

11

In preparation for this hearing, this month I visited an SBC central office in Tulsa, and it is something that I would recommend

that every member of this subcommittee do is take a central office

tour, if they have not done so. It is extremely educational, and

helps to put into context what we are doing with this legislation.

I came away from the tour with the favorable impression that

Southwestern Bell has made a good faith effort in Oklahoma to

abide by the intent of the 1996 Telecommunications Act. More than

50 companies have been approved by the Oklahoma Corporation

Commission to provide local service.

Seventy-three interconnection agreements with SBC have been

approved. Competitive local exchange carriers provide competitive

local service in 66 of the 72 counties that SBC serves.

It is my understanding that SBC is very close to filing its 271

application in Oklahoma to provide long distance service.

I was left with the distinct impression that the Act is working

as intended. CLECs have invested $30 billion in new networks

since the passage of the Act, and continue to invest over a billion

dollars every month in their networks.

Despite the CLECs’ significant growth, incumbent local exchange

carriers continue to serve between 93 and 95 percent of the local

telephone market.

Since passage of the Act, the Bell companies and GTE have also

done quite well in the data market. In the first quarter of this year,

SBC, Bell Atlantic, Bell South, U.S. West and GTE posted anywhere from 32 to 41 percent growth because of data.

Why have competitors been able to make inroads in an industry

that has been traditionally dominated by a few large monopolies?

Largely because of Section 251 which lays out the interconnection

requirements that incumbent local exchanges must comply with.

H.R. 2420 makes some significant changes to Section 251 as it

pertains to data services. I believe these changes could hinder competition rather than help it.

I refer members to page 7 of the bill, beginning on line 7, it says,

and I quote. ‘‘The Commission shall not require an incumbent local

exchange carrier to a] provide unbundled access to any network

elements used in the provision of any high speed data service other

than those network elements described in Section 51.319 of the

Commission’s regulation as in effect on January 1, 1999, or b] offer

for resale at wholesale rates any high speed data service.’’

So in essence, what we would be doing if we were to enact this

legislation is to say to those companies who have invested billions

of dollars to spur competition and develop innovative technologies,

Congress really did not intend that data should be considered as

a telecommunication service. Throw your business plan out the

window and start over.

In my view, that is poor public policy. If we enact this legislation,

why should those in the telecommunications industry or any other

industry, for that matter, that comes before this committee, have

any certainty about how to construct a business model if we change

the rules of the road because one side does not like the rules.

As members of this subcommittee our first goal when developing

legislation should be to do no harm. I fear that H.R. 2420 would

12

do significant harm. The Act is working, and if it ain’t broke, don’t

fix it.

I yield back my time.

Mr. STEARNS [presiding]. I thank my colleague.

I understand that the gentleman from Minnesota does not have

an opening statement. Okay.

The Chair recognizes himself. Let me just compliment the Chairman, who just stepped out momentarily, for his alacrity. He has

220 cosponsors. He deserves to have a hearing, and I think he has

done great work in trying to present his case.

I, like my colleague from Oklahoma, am not one of the 220 members who are on the bill but I believe that this hearing is very important and I compliment him for having this hearing.

Like others, I am disappointed that the FCC has not sent a representative. I understand Mr. Kennard could not make it for personal reasons, and we respect that. I would remind him, though,

that this is the sixth time this year he has not appeared before this

subcommittee, and I think it is very important if he cannot come,

that he send someone who shares his feelings about this, so that

we have the full benefit of his sage wisdom.

The Telecom Act of 1996 I think is working. And I think the

landscape is continuing to change. Consumers now have mindnumbing options. I mean, it is almost either from DSL or ISDN on

long-distance providers and packages. Cable of course now is a legitimate competitor with Copper Voice and Data Services.

Competitive local exchanges have sprung up around the country,

effectively competing with incumbents and bringing competition to

the local phone market.

Additionally, new sectors have given birth to in the area of data,

broadband and bandwidth, with data being one of the key components driving the telecom revolution, and the demand for bandwidth and broadband is growing day-by-day, if not, my colleagues,

second-by-second.

Bandwidth now is even being traded as a commodity. Americans

are electing to do away with their dial-up modems for lightening

fast speeds being offered through cable and DSL to access the

Internet, and this demand is being met not only by the incumbent

phone companies but also by the cable providers, the CLECs and

the LECs.

Furthermore the Commission, the Commission itself, has finally

approved 271 applications for Bell operating companies’ entry into

long distance.

In the last year alone, Bell Atlantic won approval in New York

and SBC approval in Texas. Bell South will soon be filing in Georgia, and the flood of applications will soon make its way to the

FCC.

Now that the Bells finally have a clear blueprint for interLATA

entry, I anticipate the landscape to be significantly different 12

months from today.

So clearly, it is an exciting time for telecommunications, for this

revolution, and I appreciate the hearing, as I mentioned.

But the real question, members, we have to decide is do we want

to go back and change the Telecom Act of 1996? That is the main

question before this hearing.

13

Or, should we continue to let this percolate and try to let competition solve the problem without more government regulation?

And that concludes my opening statement.

The gentleman from Ohio, Mr. Sawyer, is recognized for an opening statement.

Mr. SAWYER. Well, thank you, Mr. Chairman. I assume that you

have already sought unanimous consent for members to insert

their statements into the record?

Mr. STEARNS. The Chairman had already done this, yes, sir.

Mr. SAWYER. Well, I thank you for the opportunity to speak, but

I will take advantage of that opportunity and we can get on with

the hearing.

[The prepared statement of Hon. Tom Sawyer follows:]

PREPARED STATEMENT OF HON. TOM SAWYER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF OHIO

The future of broadband is full of uncertainty, as competing companies and industries try to anticipate technological advances, market conditions, consumer preferences, and even cultural and societal trends. Congress should work to ensure that

broadband deployment is timely, that industry competes fairly, and that service is

provided to all sectors and geographical locations of American society.

H.R. 2420, the Internet Freedom and Broadband Deployment Act, would ease certain legal restrictions and requirements imposed on incumbent telephone companies

to encourage the growth of broadband services. Specifically, H.R. 2420 contains two

important provisions. First it allows the Bell companies to provide interLATA data

service without completion of the 14 point check list outlined in section 271. Second,

it exempts the Bell companies from unbundling and resale requirements.

Those supporting the lifting or modification of restrictions claim that action is

needed to promote the deployment of broadband services, particularly in rural and

under served communities. These communities argue that present regulations under

section 271 are overly burdensome and discourage needed investment in broadband

services. First, unbundling and resale requirements, when applied to advanced services, provide a disincentive for incumbent local exchange carriers (ILECs) to upgrade their networks. Second, the Bell operating companies (BOCs) interLATA data

restrictions unnecessarily restrict the development of the broadband network. Third,

ILECs are the only entities likely to provide these services in low volume rural and

other under served areas. Therefore, proponents claim, until these regulations are

removed, the development and the pace of deployment of broadband technology and

services, particularly in unserved areas, will be lacking.

Opponents claim that the lifting of restrictions and requirements will undermine

the incentives needed to ensure that the BOCs and the other ILECs will open up

their networks to competition. Present restrictions, opponents claim, were built into

the 1996 Telecommunications Act to help ensure that competition in telecommunications will develop. Modification of these regulations, critics claim, will remove the

incentives needed to open up the ‘‘monopoly’’ of local services. A major change in

existing regulations, opponents claim, would not only remove the incentives needed

to open up the local loop but would likely result in the financial ruin of providers

attempting to offer competition to incumbent local exchange carriers.

However, this belief that the RBOC’s will not want to move forward in the Sec.

271 process is unfounded. There is a very clear trend line that has been developing

within the telecommunications industry indicating a need to offer a complete bundled service to consumers. Consumers want to be able to receive one bill for all their

telecommunications services and lacking a long distance component would be a significant impediment to offering a bundled service. RBOCs will still be required to

complete Sec. 271 if they plan to offer long distance services. Therefore, regardless

of the relief in H.R. 2420, it is in the RBOC’s best interest to move forward with

the Sec. 271 process in order to offer long-distance among their other services.

Along these lines, it is also interesting to note that several large and medium

sized local exchange carriers—such as GTE, Cincinnati Bell, and Frontier—which

have the same market incentives as the RBOCs, are free of section 271 obligations

and continue to focus much of their business in local services. There is also robust

investment and vigorous competition from new entrants in markets served by these

medium sized companies.

14

I look forward to hearing from our witnesses today on the deployment of

broadband services and the pros and cons of H.R. 2420.

Mr. STEARNS. All right. The gentleman from California, Mr. Cox,

is recognized for his opening statement.

Mr. COX. I have no opening statement.

Mr. STEARNS. All right.

The gentleman from Ohio, Mr. Oxley, is recognized.

Mr. OXLEY. Thank you, Mr. Chairman, and welcome to our distinguished panel.

I strongly support efforts to promote broadband deployment

through deregulation which is why I have co-sponsored this legislation.

If a regulation has outlived its usefulness for protecting consumers, whether due to technological innovation or market competition, it ought to simply be repealed. That is why I favor data

relief for the Bell Companies and it is why I am against imposing

open access regulations and horizontal ownership caps on cable

systems.

I believe that when we look at the issue of broadband, we need

to step back and make sure we are seeing the big picture. We want

to make sure that we are closing the so-called digital divide in both

urban and rural markets. And we want to be sure that we remain

technologically neutral and not promote on way of addressing the

problem over other alternatives.

So in addition to ILEC deregulation, which is an order, in my

opinion, we should look at promoting wireless and cable solutions

as well. No options should be ignored.

As usual, the best thing we can do is pursue deregulatory parity

and let the consumer pick the winners and losers.

The most perfect mechanism for choosing technologies is not the

Commission or the Congress, it is the competitive marketplace.

I am sure we will hear lots of suggestions today on how to help

the market work its magic, and I am anxious to hear them all in

due course. I am less interested in hearing about the need to maintain or even increase regulations based on a competitor’s view of

fairness, although I am sure we will hear a fair amount of that too.

Mr. Chairman, this is a very interesting issue and critical to the

long-term deployment of broadband. I congratulate you for the effort, and I yield back.

Mr. TAUZIN. I thank the gentleman and I thank him for his support and his strong statement.

Are there any other members wishing to make an opening statement?

[No response.]

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Mr. Chairman: I want to thank you for holding a third hearing on this important

piece of legislation.

With over 220 cosponsors the need to act upon this measure is apparent.

Mr. Chairman, after this weeks hearing on the status of HDTV, I was struck by

how a lack of competition can undermine quality of services delivered to consumers.

Yesterday, the members of this subcommittee were treated to a demonstration of

the blame game on who was responsible for the slow rollout of Digital TV.

15

I walked away from that hearing wondering what would happen if there were two

digital standards for consumers to choose from.

That lack of choice is, I believe, what we are faced with today.

Many consumers in heavily urban and rural areas do not have enough options

when trying to gain access to a high speed Internet connection.

Lack of Internet options means that new business ideas are slower to develop,

economic redevelopment of our inner-cities and rural areas are hampered, and children are denied a valuable educational tool.

My primary concern is how we can increase competition to address these types

of issues as rapidly as possible. H.R. 2420 is important because it will further increase competition by allowing greater use of existing infrastructure.

We need to look no further than the cable industry to understand the importance

of using existing infrastructure to deliver to consumers with this important service.

Allowing the Regional Bell Operating Companies use of their existing infrastructure to cross Inter-LATA boundaries to deliver high speed Internet services would

provide consumer with more Internet options. Let me make one point very clear,

I want vigorous competition in the Internet marketplace.

Mr. Chairman, we must not lose focus in all the rhetoric surrounding this issue.

At the end of the day, it is not which company may or may not gain an advantage

over another.

The issue is are we going to increase the speed of broadband deployment to consumers.

Mr. Chairman, I again want to thank you for holding this hearing and I look forward to an informative panel discussion.

Thank you and I yield back the balance of my time.

PREPARED STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Thank you, Mr. Chairman for holding this hearing and offering another opportunity to appreciate the stunning success of the 1996 Telecommunications Act.

I had the honor of serving in Congress and on the Commerce Committee when

the ’96 Telecom Act was drafted and I served on the Conference Committee that

put the Act together.

Our respected colleague, Congressman Tauzin, was also on the Commerce Committee when the Telecommunications Act was shaped in 1996. When Congress

passed the Telecom Act, we intended that legislation to deregulate a communications industry in which competition had been choked off by years of monopolistic

practices.

Mr. Tauzin, Mr. Goodlatte, Mr. Boucher and I agree that open and rigorous competition among telecommunications companies is the best guarantee that consumers

will receive the broadest range of services at the best prices—and by definition, it

is the most effective means to end monopolistic practices.

Since the 1996 Act was signed into law, we’ve seen the telecommunications revolution occur with breathtaking speed. No sooner does one technology seem to offer

more speed and capability, when along comes another advancement that offers more

data, faster.

We know the Telecom Act has resulted in a larger menu of broadband delivery

options. It has increased competition and produced lower prices for the consumer.

One of the best examples of this is seen in the development of the Competitive

Local Exchange Carriers—or CLECs. These companies—companies like Covad—are

children of the Telecom Act.

And why do I call them this? These companies provide DSL-based access to the

Internet through local loops or on their own high-speed fiber networks. Before the

Telecom Act, these companies could not exist in a regulated environment. Only the

Bells could offer this technology. It’s important to note that the Bells had DSL technology but did not offer it. Instead, they offered the more expensive ‘‘T-1’’ lines to

businesses.

But the Telecom Act deregulated the industry and allowed these companies to

offer the DSL service. And once the Telecom Act allowed these companies to offer

their services, what happened? Telephone companies that before had only offered

the more expensive T-1 lines, began to rapidly expand their DSL service—a service

they could have offered much earlier. The result was increased broadband services

to consumers at a cheaper price.

And more dramatic successes are just around the comer. For example, there is

a company in California called Next Level Communications offering VDSL that’s

faster than DSL and no more expensive for the consumer.

16

So I hope, Mr. Chairman, that Congress will let time be our advisor on this issue.

We should be patient. We should refuse the temptation to change course in order

to meddle in the marketplace while this revolution in telecommunications is happening around us.

I don’t believe clear or convincing evidence has been offered that consumers are

suffering because of the Act. In fact, when I listen to testimony before this Subcommittee what I often hear is ‘‘the Telecom Act is working... but.’’ If the Act is

working, as I believe it is, I am inclined to let it progress unimpeded by what may

be well-intentioned but hasty Congressional intervention. While consumers are now

getting more choices and lower prices, I’m concerned that the evidence also points

to something else—namely, the different segments of the telecommunications industry are using the Internet as a reason to reopen the old debate that long distance

companies and the RBOCs had regarding deregulation.

I believe Congress decided in 1996 the forum for that debate is in the marketplace, not the legislature. The development of the Internet is not a reason to reverse

this decision. In fact, the one way to guarantee harm to the consumer is for Congress to try and re-insert itself into this competition. The best form of regulation

is competition.

The incredible rate of convergence should stand as a signal to proceed cautiously

and allow the Act to work. If we move hastily we may find ourselves confronted with

an even more difficult set of issues and at a time sooner than we, or the industry,

would prefer.

History can also give us reason to tread slowly. Recall that the law amended by

the Telecom Act of 1996, the Communications Act of 1934, was actually based on

economic principles contained in the Interstate Commerce Act of 1887 which regulated railroads. The principles to which we refer today, fair and nondiscriminatory

interconnection and price oversight, originally were associated with the railroads

and have been with us for a very long time. They have been around for almost as

long as the incumbents enjoyed monopoly status during which time they built up

significant economies of scale and scope. It was this entrenched status that the

Telecom Act recognized when it sought to stimulate competition by requiring the incumbents to make their network elements available on an unbundled basis. This bill

seems to forget that background and ultimate objective.

Broadband deployment has been stimulated because, using the timeworn principle

of nondiscriminatory access, along with the ability to collocate and enter into linesharing agreements, local markets have been opened. Consequently, broadband deployment is expected to increase exponentially over the next year.

I also want to try and put to rest a myth that some parties in the telecommunications industry are working hard to create—and that is when Congress was writing

the Telecom Act of 1996 no one knew about the Internet and how it would impact

the telephone industry. Therefore, goes the argument, we should re-open the Act to

take the Internet into account.

On prior occasions I have cited to testimony from the 1995 Hearings before the

Subcommittee on Telecommunications which demonstrates that the Internet not

only was well documented, but also that its potential was appreciated at the time

of the hearings.

And so I submit that the legislation being considered by you today may be premature. The so-called ‘‘incentives’’ for RBOCs to roll out DSL are unnecessary because clearly there are signals that competition already exists in this market.

And finally Mr. Chairman, let me lay an important marker down by asking this

Committee how Internet telephony will effect the legislation it’s being asked to consider. If we’re being asked to reopen the Telecom Act because of the Internet, how

will this legislation effect the developing market that allows telephone calls to be

made over the Internet? This technology which is already in use, could have a dramatic effect on how we define something as basic as what a telephone call is.

I suggest the wisest course is to see where this technological revolution will lead.

To do otherwise I believe will engender unnecessary marketplace disruption.

Mr. Chairman, again, thank you for holding this hearing on this important issue.

I hope if this legislation is reintroduced next year you will have more hearings on

it so we can fully explore the issues before us.

Mr. TAUZIN. Then I am pleased to begin the testimony of our witnesses.

As I do, let me announce that there is a special mass in memory

of the life of our good friend Mr. Stupak’s son who lost his life this

year, which starts at 12:10.

17

And we will begin taking the testimony of the witnesses but

members obviously will be excused if any would wish to go and attend that service, and we will try to complete the round of the witnesses and hopefully, by that time, members will have returned

and we can begin the round of questions of our witnesses.

So if members feel as I would love to personally attend—if you

want to attend, you are certainly excused to do so as we take the

testimony of the witnesses.

Any further opening statements from anyone?

[No response.]

Mr. TAUZIN. Then the Chair is pleased to introduce the panel.

The panel is indeed a distinguished panel and pursuant to the

request of the chairman of the Commerce Committee, we have

tried to build a balanced panel. We will hear support and opposition to the bill that is before us today, and we will hear strong support and strong opposition. And that is as it should be.

The panel consists of Mr. James Ellis, Senior Executive Vice

President and General Counsel of SBC Communications; Mr. Edward D. Young, Senior Vice President, Government Affairs of

Verizon Communications; Mr. Arne ‘‘Skip’’ Haynes, President of

Rainier Group; Mr. Dhruv Khanna who is the counsel for Covad

Communications; Ms. Cindy Schonhaut, Senior Vice President of

ICG of Colorado; Mr. Len Cali, the Vice President, Federal Government Affairs, of AT&T Corporation; and Mr. Steve Pociask of Joel

Popkin & Company here in Washington, DC.

Let me also indicate that we did receive a call suggesting that

two people who would love to attend could not make it here today,

and I just wanted to let you know that they did want to make.

The CEO of AT&T had called us and let us know that he would

personally have liked to have made it and hopefully we can hear

from him at a future date, Mr. Cali.

And also the Chairman of the FCC called and expressed his regrets that he could not be here. This of course is the fourth or the

fifth time that it has happened, and I assured my friend, Mr.

Kennard, that this is the first time he really had a good excuse,

not only a real authentic one but one I support.

He is attending the adoption hearing for his new son, and it is

kind of a big day for him, and an exciting day, and I wanted to acknowledge that today and wish him and his new son and his family

all the best wishes. It is a very big day for him and his family and

I want to wish him well. And he is certainly excused from being

here today.

We will begin with Mr. James Ellis, the Senior Executive Vice

President and General Counsel for SBC Communications.

Mr. Ellis, all written statements of the panelists are part of our

record, and so if you will kindly just summarize your statement

within the 5 minute rule.

Mr. Ellis, the lights will indicate to you green, yellow, and red

when you have just about completed your 5 minutes before the

committee.

Mr. Ellis, please.

18

STATEMENTS JAMES D. ELLIS, SENIOR EXECUTIVE VICE

PRESIDENT & GENERAL COUNSEL, SBC COMMUNICATIONS;

EDWARD D. YOUNG III, SENIOR VICE PRESIDENT, FEDERAL

GOVERNMENT RELATIONS, VERIZON COMMUNICATIONS;

ARNE L. HAYNES, PRESIDENT, RAINIER GROUP; DHRUV

KHANNA, EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL,

COVAD COMMUNICATIONS; CINDY SCHONHAUT, SENIOR

VICE PRESIDENT, ICG; LEONARD J. CALI, VICE PRESIDENT,

FEDERAL GOVERNMENT AFFAIRS, AT&T CORPORATION;

AND STEPHEN B. POCIASK, EXECUTIVE VICE PRESIDENT &

CHIEF ECONOMIST, JOEL POPKIN & COMPANY

Mr. ELLIS. Mr. Chairman, members of the committee, good afternoon. I appreciate the opportunity to share my company’s views on

this important legislation.

We support the bill because we believe it will lead to increased

deployment of advanced services, particularly in the rural areas. It

will mean more competition for advanced services, and with that

will be more customer choice and competitive prices.

It could not come at a more critical time. The experts say that

the amount of traffic on the Internet doubles roughly every 90

days, and certainly the demand for high speed access is exploding.

It is becoming increasingly clear that the role of the Internet and

high speed access is vital to all segments of the economy.

We believe, in considering the legislation, a beginning point is a

recognition of two fundamental facts. First, there is no bottleneck

for advanced services.

Cable modem, which is provided by the cable companies, competes directly with our xDSL services. Cable Modems provided over

their networks, their facilities, are completely independent from

ours.

In addition, we have terrestrial wireless alternatives, satellite alternatives. They provide their services completely independent of

our facilities.

Large customers have access to AT&T and Worldcom and others

who provide direct access to the Internet over high speed capacities, and again without resort to the telephone company facilities.

There simply is no bottleneck.

In addition, we do not have even a leadership, let alone dominant

position with respect to advanced services. Perhaps the best evidence why there is not a bottleneck is our competitors have four

or five customers for every one we do.

But despite the fact that there is no bottleneck, no control, and

despite the fact we are not even in a leadership position, we are

subject to asymmetric regulation. The result of that asymmetric

regulation is, on the one hand our competitors are completely free

to operate the most efficient way they can; at the same time, we

are subject to pervasive regulation.

It means we are handicapped. It means competitors are protected

from competition. And ultimately it means the consumers, the customers, are denied a competitive marketplace and the benefits.

Now there are many aspects to this but the one that is the subject of this bill is of course the long distance restriction. Because

of that restriction, we have significant handicaps in deploying

19

broadband services to our customers. It takes many forms, but let

me give a specific example.

Illinois has 12 LATAs. We go in there to provide advanced services. That means, because of the long distance restriction, we have

to put an ATN switch in each LATA and we have to put a point

of presence to the Internet in each LATA.

It is very expensive. We cannot operate in an efficient way where

you would follow normal traffic algorithms and combine demand

and use a combination of switches and trunks. You can’t do that.

Likewise, we cannot take demand for high speed access in one

community and combine it with another community and in that

way operate more efficiently and have a broader base deployment.

The discussion has mentioned project Pronto. We have been

handicapped. We could have done it more efficiently. We could

have reached many more customers without that restriction.

Another example is in the backbone. You have all heard of the

backbone discussed, the backbone of the Internet. Well, that is the

high level connection between the Internet hubs. And as was indicated several weeks ago when the Justice Department and the government took a position against the Worldcom merger, that was a

principal reason because of the heavy concentration in three companies, the provision of that backbone. We have the facilities. They

are in the ground. We are not permitted to participate in it.

Now there have been several suggestions in the comments today

and in other places that we are seeking to turn around the Telecom

Act. That is not true.

Advanced Services, DSL and Cable Modem, were not in commercial operation at the time that legislation was debated, and certainly the marketplace and technology have gone well beyond the

situation that existed at the time of the Act.

Furthermore, I would tell you, we are not even seeking in any

way to change our obligations to open the network. Indeed, it is absolutely critical that we be able to offer a complete package or we

are not going to have a business. We must have the opportunity

to offer voice telecommunications. In fact, 70-80 percent of our revenues are from voice. That will not change, we will continue to

have that obligation.

But the fact is, the basic underlying principles behind the 1996

Act that is, the existence of a bottleneck and a dominant control

of the local exchange simply do not apply in a case of advanced

services. That is, we have neither a bottleneck nor dominant position.

I would make one other point.

There has been reference to how many POPs there are. I would

simply say that the real question is whether the rural customer

has access to high speed access to the Internet. And the fact is, according to NTIA, about 5 percent of the rural customers have that

access, and we would like to change it.

Thank you.

[The prepared statement of James D. Ellis follows:]

PREPARED STATEMENT OF JAMES D. ELLIS, SENIOR EXECUTIVE VICE PRESIDENT AND

GENERAL COUNSEL, SBC COMMUNICATIONS INC.

I am Jim Ellis, Senior Executive Vice President and General Counsel of SBC

Communications Inc.

20

I want to compliment Chairman Tauzin and Ranking Member Dingell for their

leadership in sponsoring HR 2420. SBC strongly supports HR 2420 and encourages

this Committee to move this legislation to the full House. HR 2420 will have the

effect of increasing competition in the market for high-speed data and Internet access services, by eliminating much of the regulatory disparity that currently exists

between providers of these services.

There are two fundamental principles that should guide Congress in considering

any legislation in this area. First, competitive markets should be free from governmental regulation. Second, if there is some public policy reason for regulating a

market, all service providers should be subject to symmetric regulatory requirements.

In the market for high-speed data and Internet access services, these are the undisputed facts. First, there is no ‘‘bottleneck’’ in obtaining access to the customer.

Second, the incumbent local exchange carriers (ILECs) are way behind in the provision of high-speed data and Internet access services. Third, the ILECs are required

to assist their competitors in entering this market. Fourth, SBC provides high-speed

data and Internet access services through separate affiliates. Finally, SBC’s advanced services affiliates and the other Bell companies are at a competitive disadvantage in that they cannot provide high-speed data and Internet access services

on an interLATA basis.

The effects of these regulatory disparities include the inefficient deployment of

new technologies, higher costs, fewer choices for consumers, and continuation of the

‘‘digital divide.’’ Hence, elimination of the regulatory disparity between the ILECs

in general and the Bell operating companies (BOCs) in particular, and their competitors is essential to fulfilling the fundamental principles outlined above.

Background

Historically, the only telecommunications pathway or wire to nearly every home

and business in this country was the local copper loop. Until recently, the local loop

was part of a circuit-switched network that was capable of transmitting only narrow-band voice, and slow-speed switched data services. The local exchange telephone companies provided these services pursuant to a legally franchised monopoly,

and thus were subject to pervasive regulation at both the state and federal level.

As competition began to develop in the telecommunications marketplace, the local

loop continued to be viewed as the only way for competitors to deliver services to

the customer. In other words, it was considered a ‘‘bottleneck.’’

However, approximately 25 years ago, there developed another telecommunications pathway or second wire to the home. Cable service began to emerge as an

alternative to broadcast television service, through the use of antennas located at

the cable provider’s head-end that received programming from satellites, which was

then transmitted over coaxial cable to homes and businesses. Coaxial cable was different from the ILECs’ local copper loops, in that it was capable of transmitting

broadband video and high-speed data services.

Recently, additional telecommunications pathways to homes and businesses rapidly developed through various wireless technologies—in the form of digital satellite

service, cellular and PCS service, and fixed wireless.

Meanwhile, as competition was developing in the telephone industry, the Internet

began to evolve as a source of new high-speed broadband ‘‘advanced services.’’ When

the ’96 Act was being debated in Congress, the scope of the Internet and the precise

nature in which these advanced services would be provided to the public was uncertain. Congress sought to address this new telecommunications phenomenon and the

promising new 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.’’

Unfortunately, the FCC has not actively sought to eliminate, or even reduce, regulation of the ILECs’ offering of advanced services.

Cable Modem versus xDSL Service

With the evolution of the Internet, both the cable and telephone industries had

to develop the technologies necessary to provide their customers with high-speed

broadband Internet access and data services. The cable industry developed cable

modems to be used in conjunction with their broadband coaxial cable networks. The

ILECs were at somewhat of a competitive disadvantage, because their narrow-band

local copper loops were not designed nor equipped to provide high-speed broadband

21

services. Hence, they had to develop a new technology called Digital Subscriber Line

or xDSL service, in order to provide digital information at high bandwidths over

copper loops.

While the ILECs were developing xDSL service, the cable industry was rapidly

deploying its cable modem technology. The ILECs are now playing catch-up and are

scrambling to deploy Asymmetrical Digital Subscriber Line or 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.

Thus, the consumer market for the delivery of high-speed broadband Internet access and data services is a highly competitive market between the cable industry

and the ILECs. It is a market in which cable modem service and xDSL service will

provide the same high-speed Internet access and offer to the same residential and

small business customers the same advanced and high-speed data services.

Most importantly, the ILECs had no ‘‘head-start’’ in the deployment of advanced

service technologies. The ILECs possess neither de facto nor de jure monopoly in the

provision of broadband Internet access, advanced services, nor high-speed data services. And finally, it is absolutely clear that the ILECs’ local copper loop is no ‘‘bottleneck’’ in the provision of these services to consumers.

Asymmetric Regulation

Unfortunately, the rules and regulations that apply to the provision of advanced

services by the cable industry and the 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, nor unbundle its facilities and make

them available to competitors, nor resell its services. Moreover, the cable industry

is not currently required to give its customers a choice of an Internet service provider. This unparalleled ability of the cable industry to control both the means of

access to the Internet, combined with its control of the content that is delivered to

consumers provides it with an enormous competitive advantage in the marketplace.

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 directly and through its ownership of RoadRunner provides

cable modem service to approximately 38% of cable modem customers. Together, the

Time Warner and AT&T consortia also 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 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 broadband Internet access, advanced services, and high-speed

data services.

This is in stark contrast to the telephone industry, where the ILECs remain pervasively regulated today. Under Title II of the Communications Act, they are subject

to common carrier regulation in their provision of broadband Internet access, advanced services, and high-speed data services. In addition, 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. Moreover, SBC’s advanced services affiliates, through which SBC provides

Internet access and high-speed data services, are required to provide interconnection

under Section 251(a) and resale under Section 251(b).

Unfortunately, under such an asymmetric regulatory scheme, the regulators frequently determine the winners or losers in the marketplace, and not the consumer.

This significantly affects the growth of new services and the availability of choice.

Accordingly, any legislation addressing high-speed data and Internet access services

should eliminate the regulatory disparity between the cable and telephone industries.

HR 2420 goes a long way toward accomplishing this objective by exempting highspeed data and Internet access service, and the facilities used to provide such services from regulation, and by eliminating any further unbundling requirements and

the resale requirement in respect to high speed data service.

InterLATA Restrictions

One of the key regulatory disparities in the market for high-speed data and Internet access services is the interLATA restriction. Section 271(c) of the ’96 Act preVerDate 11-MAY-2000 08:04 Apr 03, 2001 Jkt 010199 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 E:\HEARINGS\66467 pfrm08 PsN: 66467
22

1 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 ¶ 28 (released February 2, 1999). 2 Id. at ¶ 26.

vents the Bell operating companies (BOCs) and their affiliates from providing these

services across LATA boundaries and Internet backbone service itself. Neither the

cable companies, the interexchange carriers, nor the CLECs are subject to this restriction.

The interLATA restriction thus places the BOCs at a significant competitive disadvantage in the provision of these services, particularly to business customers.

Most medium and large business customers have offices in multiple locations,

states or even countries that need to be interconnected for the exchange of highspeed data communications. Frequently, these business customers also want someone to manage these high-speed data networks, including for example the ATM and

Frame Relay engines, SONET rings, and interLATA transport. This requirement

places the BOCs at a distinct competitive disadvantage, because they are unable to

be a full service provider to these large business customers.

There is no need for the interLATA restrictions in respect to these services. As

the FCC has found, the business market for high-speed broadband services is separate and distinct from the consumer market for the same services.1 Virtually all

business customers have access to high-speed broadband service that is typically

provided over T-1 lines, and business customers have many competitive alternatives

for obtaining that high-speed broadband access.2 Accordingly, there is no ‘‘bottleneck’’ in the ‘‘last mile’’ to the business customer.

Finally, the interLATA restriction artificially inflates the BOCs’ costs of deploying

advanced service technologies, and renders that deployment less efficient. Further,

it means that significant portions of our nation, particularly in rural areas, cannot

receive high-speed access to the Internet because they are not close enough to a hub

that can connect them to the Internet backbone. With interLATA relief, the BOCs

will be in a position to connect these communities to the Internet, thus providing

rural consumers and businesses with access to the same Internet access and highspeed data services that are available in urban areas.

Conclusion

HR 2420 has gained the support of many members of this Committee and over

220 members of the House. It is a major step in the right direction to correct the

imbalance in regulation and close the ‘‘digital divide.’’ We look forward to working

with the Committee and the Congress to achieve these objectives.

Mr. TAUZIN. Thank you very much, sir.

We would now like to welcome the Senior Vice President for Government Relations for Verizon Communications here in Washington, DC, Mr. Edward Young.

Mr. MARKEY. Mr. Chairman?

Mr. TAUZIN. Mr. Markey, I will yield for a second.

Mr. MARKEY. When I was a boy growing up, Mr. Chairman, we

had a nice company. It was called New England Telephone, and we

all knew how to pronounce that and it was passed on to us by our

mothers and our fathers.

And then, about 15 years ago, Mr. Chairman, after paying about

a million dollars, they decided to change the name into something

that was absolutely unpronounceable, NYNEX. And it took us

about 10 years to figure out how to say this word, okay, because

it is some kind of test that you would give to, you know, to someone

who was in some advanced foreign language course. This would be

the last word you would give someone learning the English language, NYNEX. And so we all finally mastered it.

Then Bell Atlantic purchases or merges, I’m sorry, merges with

NYNEX and they decide to give up this word. And then we all have

to learn, in my home town, a new word, Bell Atlantic, which we

have just about gotten used to saying.

23

Then, this year, paying another million dollars, notwithstanding

the fact that 98 percent of all people who look at it say ‘‘Varr-azon’’, which is probably how they should pronounce it if that is how

the public wants to pronounce it.

There is a new name called ‘‘Ver-eye-zun.’’ Now it captures a

whole bunch of concepts that are supposed to be subliminally influencing us toward this horizon.

Mr. TAUZIN. It is pronounced ‘‘Her-i-zon.’’ Mr. MARKEY. Yes, Mr. Chairman.

So now after another million dollars, we now have a new name

for this company all providing the exact same services in my home

town with the hope that they will receive relief by the end of this

year so they can move into the new horizon of new services, but

the company is ‘‘Va-reye-zun.’’ Mr. TAUZIN. Thank you very much, Mr. Mokey.

As you know, both Mr. Bliley and I suffer from the below-theMason-Dixon-line pronunciations.

Mr. Young of Verizon Communications.

STATEMENT OF EDWARD D. YOUNG III

Mr. YOUNG. Thank you, Mr. Chairman.

Good afternoon and good afternoon to the members of the committee. And Congressman Markey, thank you for correcting that.

It is a combination of horizon and veritas, which we can talk about

later.

I should note that this is the first appearance before the subcommittee by Verizon. We were formed by a merger with GTE at

the end of last month, and I am delighted that this first appearance is in support of H.R. 2420, the legislation that you, Mr. Chairman, and Mr. Dingell have introduced to assure that all Americans

will realize the benefits of the Internet as fast as possible and affording more choices.

That the bill has already gathered 225 cosponsors is a testament

to your leadership and the importance of this issue.

In my brief time, I would like to emphasize two key points. First,

H.R. 2420 will help bring more quickly advance Internet services

to more Americans and at competitive prices.

And then second, I want to emphasize that this bill does not,

does not undercut the incentives that were put in place in the Act

to open up local markets to competition.

Okay, how will 2420 accelerate deployment of Internet services?

Well, the Bell Companies have the unique ability to provide vital

pieces of the high speed Internet infrastructure, the links and hubs

in the middle of the Internet architecture.

At one end, you have the high speed Internet backbones and at

the other end, you have the local connections that connect towns

and businesses to the Internet. But in between, there is a whole

host of links, hubs, interconnections, interoffice facilities, that the

Bell companies have at their disposal, as a result of providing ubiquitous local service, that could be used to increase the capacity of

the Internet and to provide more access to more customers.

A good analogy is, if you think of the big Internet backbone as

an interstate highway, what we provide is we provide the State

roads, the access roads that run next to the highways, and the onVerDate 11-MAY-2000 08:04 Apr 03, 2001 Jkt 010199 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HEARINGS\66467 pfrm08 PsN: 66467
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ramps that allow that interstate to get to the local communities to

provide Internet service.

So we have hundreds of thousands of miles of fiber among all the

local exchange companies to help provide these services. And the

benefits that H.R. 2420 provides is it allows us to use those facilities for a very narrow purpose, and that is just to provide Internet

data services.

It allows us to use these backbones in places where there are not

facilities today. Charleston, West Virginia; Duluth, Minnesota;

Fayettville, Arkansas, where we will be able to use those facilities,

once this bill passes, so that anybody can deploy high speed Internet services.

And I emphasize, anybody, Covad, Rhythms can take advantage

of this local architecture, they will have equal access to it, to offer

their own services under the Internet, so they will not have to go

as far to get high speed connections, they will be able to provide

services as well as we will, and therefore the customer wins.

Now, I say this is a narrow exemption because it only applies to

data. This does not affect at all the requirement that we meet the

271 requirements for long distance relief for voice services. So what

we are focusing on is a narrow exemption, an incidental interLATA

exemption in the same way that you saw fit to allow us to provide

cellular long distance service.

So if this bill has a narrow focus and benefits everyone, why do

people oppose it? Well the main opposition comes from those who

claim that this bill would gut the incentives in the Act to open up

our local markets, and that is just simply not so for a number of

reasons.

First of all, this bill does nothing to eliminate Section 251 of the

Act. Section 251 contains the market-opening provisions, the 14

point checklist, if you will, that the Bell companies have to meet

in order to get into long distance business.

The interconnection obligations still remain. The bill does nothing with respect to that.

With respect to voice service, there is still a valuable incentive

for us to get into that market. It is a $100 billion plus market a

year. We have every incentive to get into it.

Second, under our merger conditions, we have every incentive to

get into it. Verizon, for example, cannot offer long distance service

through its data affiliate, which it had to separate in its merger

with GTE until it meets the 271 requirements.

So the point here is that there are lots of options for us, lots of

incentives, excuse me, for us to continue to meet the 251 requirements.

The FCC has enforcement authority under which it can continue

to monitor the hundreds of measures that we have to report to

them every month to demonstrate that our markets are open.

So in sum, Mr. Chairman, we support this bill. We think that the

incentives to open up the markets remain, but we think that the

benefits to all Americans of getting more access to the Internet

should start now.

[The prepared statement of Edward D. Young III follows:]

25

PREPARED STATEMENT OF EDWARD D. YOUNG, III, SENIOR VICE PRESIDENT, FEDERAL

GOVERNMENT RELATIONS, VERIZON COMMUNICATIONS

Mr. Chairman, thank you for this opportunity to testify before the Committee. I

am Edward D. Young, III, Senior Vice President, Federal Government Relations for

Verizon Communications, the new company formed by the merger of Bell Atlantic

and GTE. I am before you today to tell you that H.R. 2420 will accelerate the deployment of high speed Internet access to all Americans.

Mr. Chairman, the Internet is a wonderful tool that has developed far faster than

anyone could have imagined. But its continued development and evolution into a

technology that can handle any form of communications and any type of service anywhere in this country is threatened.

The current infrastructure on which the Internet rides is insufficient to handle

the explosive growth, and the danger is that we won’t recognize the scope of the

problem until it seriously impairs our economic growth. Policy makers must avoid

applying old regulatory models to an entirely new, competitive technology. The consequences of inaction are very serious. The entire Internet economy rests on the

ability of businesses to reach consumers. Without Bell company broadband deployment and provision of high-speed Internet connections many local communities will

never realize the promise of high-speed Internet, and Internet companies will not

be able to reach their markets. This will have a serious impact on the value of the

Internet economy itself—the sector that everyone agrees is driving economic growth.

In some all-too-important respects, today’s policies for the Internet and broadband

services are those that were intended for a local voice telephone market. This will

slow deployment of broadband, inhibit competition and risk slowing investment at

the very time when we need every possible player involved to help advance the capabilities and capacity of the Internet.

THE STATE OF THE INDUSTRY

A few short years ago, the Internet was something that only researchers and computer experts knew about. Electronic commerce was not part of our vocabulary. In

the last five years, the growth of the Internet has been astounding, far outstripping

the predictions of most experts. A University of Texas study estimated that the

Internet economy was more than $500 billion last year.

With this growth, there has been increasing demand for bandwidth and speed.

The 14.4k modems that were state-of-the-art a few years ago are the slowpokes,

with 56k being the top speed achievable by most mass-marketed dial-up modems.

As more and more people use the Internet and more complex information and bandwidth-intensive applications appear, it is clear that 56k just is not fast enough.

Moreover customers need to be assured of high-speed service from end to end. If

the data is slowed at any point in the transmission, data can be lost, the connection

may drop and some of the more exciting applications for education and telemedicine

involving video, for example, will simply be impossible. The current regulatory

scheme is not designed to provide the needed capabilities. We need competition and

investment in the Internet from end-to-end—from the local connection to the nationwide and global backbone.

Whole new industries based on a more advanced Internet will be stymied and the

continued development of our high tech and computer industries will be slowed, and

economic development will be stunted in areas without high-speed connections. The

Internet has driven the growth of the high tech sector and is increasingly important

to American industries such as video and filmmaking. Disney, for example, recently

testified to the Judiciary Committee about the importance of broadband deployment

to its future. There is a very real danger that if the Internet does not advance to

a new level, one capable of providing higher speed, higher quality connections, the

growth and competitiveness of our economy based on the explosion of information

technology could well be undermined.

THE WEAKEST LINK

The Internet is an end-to-end system based on hundreds of connections between

different networks. At the top of this system is the Internet backbone, which links

together thousands of web sites and Internet providers and takes traffic back and

forth at high speeds across the United States. At the bottom are the local networks

of wires and cables that bring the Internet into homes and businesses. Between the

two are a variety of connection points and transport facilities and systems operated

by local exchange carriers, ISPs, interexchange carriers and others.

There has been much talk in recent months about the first link—the one that connects the customer to her ISP. Local telephone companies and cable operators are

26

upgrading their networks to provide high-speed local services, broadband services.

These can transport information to customers at many times the speed of 56k

modem that is becoming the standard. H.R. 2420 contains several provisions to

make sure this deployment is completed.

There has also been some focus on the Internet backbone. It was the degree of

concentration in this market that caused the Justice Department to intervene to

challenge WorldCom’s takeover of Sprint. This market is plainly in need of new

entry and more competition, and H.R. 2420 will allow this as well.

But less attention is being paid to the link in the middle, a link that is every bit

as important as the ones on either end. The speed at which a consumer gets her

data—a web page being transmitted to her home—is only as fast as the slowest link

in the communications chain. Even if the consumer has the best available highspeed DSL or cable modem service and even if the backbone is operating well, she

will not be able to get all the benefits of that service if the intermediate link to the

Internet backbone is too slow.

There are vast areas of the United States that simply have no nearby high-speed

connection to the backbone. Boardwatch Magazine, the standard authority on Internet backbone networks, reports that there are 43 Internet backbones that have

major hubs (hubs with connectivity of 45 Megabits or greater). While Boardwatch

shows more than 1000 major hubs, many of them are in the same city. For example,

the Commonwealth of Massachusetts has 29 of these hubs, but every one of them

is in the Boston metropolitan area; this leaves the western part of the state without

any high-speed Internet connection point. Missouri has 38 hubs, but all are in its

two big cities, with none in between. Illinois has 44, but all are in the northern part

of the state. When this duplication is factored out, Boardwatch Magazine shows

hubs in fewer than 130 cities.

The largest backbone providers have little incentive to connect their systems with

smaller providers or to locate hubs away from major urban centers. Many Internet

providers have no way to get their data traffic to the backbone efficiently and without numerous back-ups and delays. Many are simply located too far away from convenient backbone connections. And when they do get to the backbone, they find that

the lack of adequate capacity slows their customers’ service.

This is happening all over the country. Forbes last month told the story of Mr.

Brown and his ISP in Albuquerque, New Mexico. Mr. Brown wanted to gives his

customers in Albuquerque the kind of high-speed Internet services available to businesses and consumers elsewhere, but he couldn’t do that. The reason was that

WorldCom and the other Internet backbone giants did not provide enough highspeed capacity to Albuquerque. To get that capability, Mr. Brown’s only alternative would be to pay $120,000 a year to lease a circuit running to the WorldCom hub

in Phoenix, Arizona. He can’t afford to do that, so his ISP, therefore, uses a public

interconnection point in California, which is slow and often congested.

This is not peculiar to New Mexico. There are no high-speed hubs in communities

like Shreveport, Louisiana, Springfield, Illinois, and Jefferson City, Missouri. If an

ISP in those cities wants to give its customers high-speed, reliable Internet access,

it must buy high-capacity circuits of its own to carry its traffic to the nearest Internet hub. These charges are distance sensitive, so the farther away the ISP is, the

more it pays to get to the Internet. And because these links to the Internet are almost always interLATA, the ISP pays the very same long distance companies that

operate the Internet backbones.

However, the Bell companies already have high-speed fiber-optic facilities connecting virtually every city and town they serve. A Bell company could use this network to solve this Internet connection problem, and its incentives to do so are strong

because of its local customer base. The Bell company could build Internet hubs in

or near Shreveport, Springfield and Jefferson City, closer to the ISPs in these communities, and use the fiber that is already in place—but which cannot now be used

for these purposes—to connect these hubs to the Internet backbone. That same

fiber-optic facility could also be used to transport the Internet traffic collected by

other hub providers in those areas. The Bells would compete in the regional and

national backbone market place creating more hubs and offering more choices to

ISPs. ISPs in these communities would get better service at a lower price, to the

obvious benefit of their customers.

Rural areas, in particular, lack high-speed connections to the Internet backbone.

Without these connections, it will be difficult for rural areas to retain businesses

or to attract new businesses, especially those in the high growth area of today’s information economy.

Companies like Verizon have the resources and the capabilities to make new

backbone capacity and interconnection points available quickly to improve Internet

services. But, today, the government says we may not do this.

27

Keeping Verizon and other new entrants out of the Internet backbone business

has other harmful effects. In particular, it slows the deployment of high-speed local

Internet access technologies (such as DSL), particularly in rural areas. Many rural

areas of the country have no connections to the Internet backbone. In these areas,

interLATA restrictions aimed at long distance voice services have had the inadvertent effect of preventing Verizon from providing high-speed Internet services, including DSL access. The reason is simple: There is little reason that Verizon or any

other company would invest to provide DSL in a remote area if there is no costeffective way to get the data to the Internet.

Finally, these restrictions do more than merely prevent us from improving the

Internet—these restrictions, and the resulting high level of market concentration,

have anticompetitive consequences as well. The Big-Three long distance companies

can dominate the market, discriminate against other backbone providers and drive

customers to their own backbones. This enables backbone providers to leverage

downstream their backbone market power into the ISP and content markets. For

example, the Big Three’s backbone interconnection prices are about 50% higher than

the average of the 43 backbone providers. As Shelton Jefferson, the CEO of Netcom,

recently told this Committee, ‘‘These prices are so high because of the concentration

of ownership of Internet backbone in the hands of a few long-distance and cable

companies.’’ Bell company entry into the Internet backbone market would preserve

competitive parity, however. With their resources, Verizon and the other Bells could

rapidly enter the backbone market and be treated as peers by the existing major

backbone providers.

The Internet has stimulated economic growth and can continue to do so if we continue to invest in the necessary infrastructure and allow all to participate. It can

also spread this growth to our smaller cities and rural areas. Passage of H.R. 2420

can make this happen.

Thank you.

Mr. TAUZIN. Thank you very much, Mr. Young.

We are next pleased to welcome Mr. Arne Skip Haynes, President of the Rainier Group.

Now what is interesting about Skip here is that in his bio, he

tells us that his great grandfather, Pete, won the company in a is

that pinochle or pinochle?

Mr. HAYNES. Pinochle, sir.

Mr. TAUZIN in a Pinochle game in 1912. So your great grandfather actually won the company in a pinochle game in 1912?

Mr. HAYNES. Yes, sir.

Mr. TAUZIN. That is amazing.

Mr. HAYNES. The actual story is, they are not sure if he won the

company or if he won enough change to buy the company.

Because I can also tell you I am fourth generation manager of

our company and when my father took over the company in 1954,

the gross revenues were $32,000 a year.

Mr. TAUZIN. Wow.

Mr. HAYNES. And we are still very small.

Mr. TAUZIN. Well. Mr. Haynes, you are recognized, sir, for 5 minutes.

STATEMENT OF ARNE L. HAYNES

Mr. HAYNES. Thank you very much.

The point of my testimony here, sir, is to support H.R. 2420. I

thank you, Mr. Chairman and members of the committee, for the

opportunity to give that support.

I have submitted a record of the testimony. And just for the

record, my son just graduated from college. He has joined the firm

in our interactive media business and we have a commitment to

telecommunications in small communities.

28

Mr. TAUZIN. You are not doing pinochle on the Internet yet, are

you?

Mr. HAYNES. No, no.

We also have a lot of small company friends around the country,

for example, Smokey Scanlon down in ETEL is competing with Bell

South in New Orleans. And many of our friends throughout the

country, small companies, are competing.

I am going to be moving into Mr. Stearns’ area and competing

in Ocala with high speed wireless data and am anxious to do that

and am looking forward to it.

Again, I want to stress we are a small company. Our incumbent

phone company has 3,800 access lines and that is fewer than the

number of employees of most of the companies here.

We have about a thousand cable customers, those we have acquired since the Act was started. The Act was passed in 1996. We

have about a thousand Internet customers and we have about 400

CLEC customers, and those are primarily residential and small

business. I think our largest CLEC customer so far is six lines.

We are excited about being in telecommunications, staying in

telecommunications, and I would note that our employee base is

now up to 50 individuals which is about triple what it was when

the Act passed in 1996.

I am testifying on behalf of our company, as well as the United

States Telecom Association of which I am vice chairman.

The competitors we have include AT&T, Qwest, with their former

U.S. West operations. We also provide long distance service so we

compete with IXCs and a myriad of Internet service providers.

We need relief from regulation, both at the Federal and the State

level, and I would like to point out, that is extremely important

and there are some aspects of deregulatory effort here and more of

that should continue for small companies as well as all companies.

There is no digital divide in the operations that we serve. We

have Cable Modem service available to our cable customers. We

will be rolling out DSL within 90 days to 100 percent of our incumbent customers as well as our CLEC customers, and that is in the

State of Washington.

Our wireless they have not even got the technology to where they

are selling it for public use yet, but that is where we are going soon

in California and Florida.

I am either a very bright person for working the last 10 years

to develop a data-oriented telecommunications network, or I am

really stupid because I invested millions of dollars of our shareholders’ money to make a data-ready network.

And I would like to invite Mr. Largent and any member of the

committee to come to the foothills of Mount Rainier so that I can

show you why line-sharing, as the FCC put it forward, would devastate the operations of our company and be absolutely a bad thing

for residual customers who only want to use voice services.

The line-sharing concept is flawed. I have submitted some of the

details in the record, and I would be happy to explore those with

anyone.

And I would also like to suggest that while the record indicates

our costs are high in our incumbent area, approaching a hundred

dollars a month to serve a customer, 20 or so of which we get out

29

of local rates, those are not unusual or unrealistic costs in rural

areas.

Any RBOC will also have high cost areas to serve as any midsized company would. It is a question of geography and the cost of

facilities and the cost of employees who have to maintain these networks.

So again, it costs money to run these businesses. Competition is

opening a lot of opportunities. It would be better served without

any regulation but the regulation needs to be much lighter and

much more fair than what it has been to incumbents.

I think that H.R. 2420, if passed, would allow us to continue to

expand our operations in Washington State. If that and other regulatory efforts continue, we will be in trouble, and that is not good

for any of our customers.

I am amazed and I see my red light has already come on, but

a couple of points, if I could just have a second.

State regulators are drooling to fill a vacuum that any FCC regulation relief might come with, so I plead that every effort you make

will be to reduce State regulation as well.

Relieving the large companies of the interLATA obligation is very

positive for our customers because, as Mr. Young pointed out, there

is a link that is broken, and it is not at our end and it is not in

the middle, and we need high speed all the way through, and that

will benefit our customers.

Thank you, Mr. Chairman.

[The prepared statement of Arne L. Haynes follows:]

PREPARED STATEMENT OF ARNE L. HAYNES, PRESIDENT AND CEO, THE RAINIER

GROUP

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.

I am testifying for The Rainier Group and the members of The United States

Telecom Association (USTA) of which I am Second Vice Chairman.

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)

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. When the ‘‘Line Sharing’’ rule was passed by the FCC, I feared

I had been stupid. Here is why:

Line sharing is a concept that concludes that since voice services paid for the facility, the incremental cost for someone else to put their DSL and Internet in the

unused space is very low.

The concept is flawed because voice service was only part of the business case to

support the investment we made. Our average cost per month to provide service in

our rural ILEC is $100.00 per month. Our local revenues cover about 20% of the

cost and direct support from Federal and State USF pays another 25%. The remainVerDate 11-MAY-2000 08:04 Apr 03, 2001 Jkt 010199 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 E:\HEARINGS\66467 pfrm08 PsN: 66467
30

ing 55% comes from access revenue. Our IXC customers want access to come down.

USF is capped at the Federal level and restrained at our State level. Our State ordered us to reduce access rates. We either need new revenue sources or we need

to raise local rates.

We designed our data-centric plant with the plan to reap revenue from end user

customers who need higher speed data. It is a higher cost network. Higher speed

data is a service only some customers demand. We took the risk of investing more

with the expectation that the data users would pay for the service. Anyone can pick

their preferred ISP. We just want to be paid for the real cost of connecting at higher

speeds. We don’t think voice only customers should cross-subsidize high speed data

users. Line sharing creates that cross subsidy. HR2420 corrects the problem.

I believe the provisions of HR2420 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 continue to invest shareholder

money in our ILEC beyond the minimum required to meet plain old telephone service (POTS) obligations.1Meanwhile, 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 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.

State regulators get many of their misguided notions from the FCC. Further, they

are anxious 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.

HR2420 also provides the RBOCs with the opportunity to provide InterLATA data

services. This is a good feature that may allow small ISPs better rates for Internet

backbone connections. I note that it does so while still forcing the RBOCs to meet

existing criteria for entering the InterLATA toll business. The RBOCs will also have

to pursue long distance voice through the 271 process because I know from my own

experience you have to offer one stop shopping.

We do have a request into to Mr. Tauzin’s office (attached) to modify the ISP colocation language. This language takes into account some challenges our small company members face with accommodating co-location. We do ask inclusion of that language.

Please let market forces work by passing HR2420 with the requested ISP Co-Location Amendment.

Thank you.

Mr. TAUZIN. Thank you very much, Mr. Haynes.

Next, we are pleased to welcome Mr. Dhruv Khanna, the Executive Vice President and General Counsel of Covad Communications,

I understand one of the founders of Covad, and you actually helped

create it not even in a pinochle game.

We welcome you, Mr. Khanna.

STATEMENT OF DHRUV KHANNA

Mr. KHANNA. Thank you very much. Good afternoon. I am Dhruv

Khanna. I am co-founder and EVP and general counsel. I helped

start Covad from my living room.

Mr. TAUZIN. If you can get the mike real close, because we have

got a recorder who has to pick up your words.

Mr. KHANNA. I recall sending NYNEX an interconnection request

from my home fax machine on March 7, 1997.

31

Thank you, Mr. Chairman, and members of the subcommittee.

Thank you very much for the Telecom Act of 1996. But for the

Telecom Act of 1996, Covad would not exist.

When the Telecom Act was being debated in Congress in 1995,

the first of the Internet stocks, Netscape, went public back in the

fall of 1995.

There were a couple of things that we knew. I was in-house counsel at Intel at the time. I knew about the massive demand for

bandwidth. I knew about the massive PC penetration into the

homes across the United States.

I also knew about the Netscape IPO and about the Internet revolution that we brewing at the time. I also knew about DSL technology, a technology that the local phone companies had hoarded,

had put in mothballs, because they did not want to deploy the service that would radically cut their T1 revenues.

The Telecom Act of 1996 allowed us to break into that marketplace and compete with the phone companies, and we have done so

reasonably well.

To date, standing here today or sitting here today, Covad provides service to almost 40 percent of all homes and businesses in

the United States. By the end of this year, we have gone on record

saying it will be 50 percent. By the end of next year, we have gone

on record promising it will be 75 percent of all homes and businesses in the United States.

So I am proud to sit here today and state that our footprint, our

network deployment exceeds that of SBC’s and that of Bell Atlantic

with respect to DSL.

While we were busy exercising our entrepreneurial wit and growing our footprint, the phone companies chose instead to merge.

There was the No. 2 employee at U.S. West, Mr. Bob Knohling,

who decided to quit that company and join Covad as our CEO.

We recently acquired Blue Star, a small data CLEC based in the

southeast that competes in rural areas with Bell South.

To give you an idea of our growth, we are today one of the fastest

growing companies in the United States. Our quarter-over-quarter

line and revenue growth is approximately 40 percent. We did this,

as I said, through our enterprise and based on the Telecom Act of

1996.

Our footprint dwarfs that of Bell Atlantic and of SBC. We beat

them to marketplace. We were the first to offer two-wire DSL. We

were the first to cut prices. We brought prices down for consumers,

for example, in the U.S. west territory from $200 a month for

ISDM to $20 a month for greater bandwidth.

We are today providing service from almost 2,000 offices nationwide, and we are today the largest national local telephone company. Thirty-three percent of our lines are consumer lines. Even

without the implementation of line-sharing, our consumer base has

grown rapidly up from 15 percent earlier this year, and by next

year we expect to see our consumer business exceed our business

business.

Our success has been based on two things that the FCC did in

1999. The first was cageless co-location. The Telecom Act, in several places, speaks about non-discrimination. But, sir and

madames, we have been discriminated against.

32

We were denied cageless co-location by the phone companies

upon request. We were denied line sharing which is something that

the incumbents use to provide data services themselves. They are

able to do so at much reduced costs at a much better price to consumers because they are able to share lines with themselves. Our

requests for line-sharing were ignored.

We went to the FCC and were successful in persuading the FCC

to take the pro-consumer actions to in fact implement your intent

of nondiscrimination by giving us cageless co-location and linesharing, and those are the two devices that have promoted Covad,

have prompted Covad to go into the consumer space, and we shall

soon be competing very vigorously with the phone companies and

the Cable Modem service using our right to line-sharing, which is

something this bill would take away.

This bill would also take away cageless co-location in addition to

line- sharing.

If Congress is serious about bringing broadband services to rural

areas, what Congress should do is to eliminate the exemption from

competition that has been granted to the rural carriers.

And we would also request that Congress take far more seriously

the enforcement of the Telecom Act as it exists today. My company

has been subjected to not only violations of the Telecom Act, we

have had our contracts breached and fraud has been committed on

our company as well.

There was a central office in Menlow Park in which Mr. Ellis’

company denied us space for over a year-and-a-half. We proved

that. We won a $27.5 million verdict from the arbitration and that

is the first success that we expect to see in the series of legal actions that we have been forced to undertake to enforce our legal

rights.

Thank you.

[The prepared statement of Dhruv Khanna follows:]

PREPARED STATEMENT OF DHRUV KHANNA, FOUNDER, EXECUTIVE VICE PRESIDENT

AND GENERAL COUNSEL, COVAD COMMUNICATIONS COMPANY

Thank you, Mr. Chairman for the opportunity to testify today. I am Dhruv

Khanna, Founder, Executive Vice President and General Counsel of Covad Communications Company. I have one simple and concise statement to make today: Thank

you.

Despite the incessant litigation, despite the seemingly endless implementation

process, and despite the continuing lobbying battles, the Telecommunications Act

of 1996 is a stunning and startling success. The Act has touched off a boom in

telecommunications infrastructure investment never seen before. Broadband services are being deployed to residential consumers nationwide. With regard to DSL,

now that firms like Covad can exist and enter the market, there has been a ‘‘Copper

Rush,’’ as companies vie to sign up as many DSL subscribers as quickly as possible.

Today, as I testify here, Covad installation technicians will hook several hundred

homes and small businesses to the Internet. And incumbent giants like SBC, according to their General Counsel’s testimony yesterday before the Senate Commerce

Committee, will sign up between 3,000 and 5,000. To use his words, we can’t keep

up with demand.

Consumers have been the big winners under the policies of the Telecommunications Act. But H.R. 2420—the Tauzin/Dingell bill—would fundamentally undermine the market-opening, pro-consumer provisions of the 1996 Act and subsequent

FCC rules. This bill is not a ‘‘technical fix’’, as I have heard some folks describe it.

Nor is this bill directed at promoting broadband deployment in rural areas. Make

no mistake—H.R. 2420 is a direct blow to broadband entrants like Covad.

Rather than ‘‘promote deployment,’’ the bill would actually stifle competitive deployVerDate 11-MAY-2000 08:04 Apr 03, 2001 Jkt 010199 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 E:\HEARINGS\66467 pfrm08 PsN: 66467
33

ment, limit our rights to provide services to consumers—and would even require us

shut down our service to many homes. And it will not help most rural areas.

The Covad Story

Covad is the nation’s largest competitive provider of broadband DSL services in

the United States. Our service is available now in over 70 cities, to over 40 million

homes and businesses. That is quite an accomplishment for a company that didn’t

exist four years ago.

Immediately after the Act was signed and the FCC issued implementation rules,

I helped found Covad in the Fall of 1996. For nearly a year, we had no money— and while we were arranging for financing, I was negotiating contracts with Pacific

Bell, Bell Atlantic and others. I am pleased to report that Covad was the first company in America to deploy DSL on a commercial basis, back in December 1997.

During our founding, I personally had to answer the questions of the investment

community related to our legal ability to provide DSL services over leased phone

lines. And I had to fight the Bell companies every step of the way—over our legal

rights to lease phone lines and provide DSL, over arcane collocation rules, and over

delays in DSL loop delivery.

We have aggressively enforced the legal rights Congress, the FCC and commissions gave to us on behalf of consumers. And the signs of our success are beginning

to show. For instance:

As of June 30, 2000, Covad has over 139,000 DSL lines installed.

Covad service is now available in 35 states, to over 37 million homes and 4 million

small businesses. This represents 38% of American households.

Next year, Covad DSL will be available to 75% of the homes in America.

Our deployment footprint reaches far and wide. As a residential provider, we

must deploy in areas far from urban centers. For example, in the Baltimore/Washington area, Covad’s DSL footprint stretches from Manassas to the Eastern Shore,

and from Frederick to Fredericksburg.

Competition is occurring in small towns. Covad recently entered into an agreement to acquire a company called BlueStar, a DSL provider that was serving smaller cities in the Southeast—places like Lebanon, Tennessee, and Easly, South Carolina. Other start-up CLECs, like NewEdge Networks, are serving places like Durango, Colorado, and Prescott, Arizona. And NewEdge is just getting started. Entrants like NewEdge, BlueStar and Covad are in these towns well before the Bell

companies begin to provide service there.

Our market penetration matches up with the offerings of the telephone companies:

Company DSL Lines in Service

(March 31)

SBC ................................................................................................................................................................. 201,000

Verizon (Bell Atlantic/GTE) ............................................................................................................................. 148,000

Qwest (formerly US West) .............................................................................................................................. 136,000

Covad .............................................................................................................................................................. 93,000

BellSouth ........................................................................................................................................................ 49,000

We launched a residential DSL service last year and a substantial percentage of

our users are ordinary folks at home. Residential users are a key part of our business plan.

Our network build-out proves the genius of the 1996 Act. Indeed, our network relies heavily upon the unbundling and collocation provisions of Section 251 of the

Act, and we truly appreciate the efforts of Chairman Bliley, Congressman Tauzin,

Congressman Markey, Congresswoman Eshoo, and other members of this Committee and Congress who were instrumental in making sure that those provisions

became law.

Broadband Deployment is Happening

Covad and other new entrants took a technology that was stagnating on the

shelves of the Bell companies and are using it to breathe new life into the existing

copper loop plant. The Bell companies are now following us and other new entrants

into these new markets. So rapidly, in fact, that Credit Suisse expects SBC to be

adding 15,000 DSL lines A DAY by the end of the year.

It is very simple to understand how this would happen. Basic economics tell us

that monopolies have the incentive to restrict output of services and raise prices.

This is what was happening with DSL technology before the 1996 Act—incumbents

were selectively deploying only one form of DSL—called HDSL—and charging businesses upwards of $1000 to $1500 per month for this ‘‘T1’’ service. In the pre-1996,

34

monopoly era, residential consumers and small businesses were simply priced out

of high-speed broadband services. They were restricted to dial-up or perhaps ISDN,

which left them out of e-commerce.

As the following table shows, since 1996, the price of residential broadband services has continuously dropped.

Source: ‘‘NxGen Data Research—DSL & Broadband Markets, 1999—2005’’ July

1999

With these price decreases, an entirely new set of small businesses can now afford

dedicated, high-speed connections to the Internet. The world of ‘‘e-commerce’’ is now

open to the small, local, family-owned flower shop, because it can afford to take orders over the Internet. With a service like Covad SDSL, a start-up graphical design

firm can now send large image files to its clients, without incurring huge per-minute

ISDN bills. And a software programmer can telecommute from home, and spend

more time with his or her family.

In my opinion, Congress should take credit for these steep price decreases and expanded availability of services. The pro-entry provisions of the 1996 Act, and the

efforts of the FCC and state commissions to implement those provisions, are changing the lives of your constituents for the better.

H.R. 2420 Will Not Bring Broadband To Rural Areas

I understand that H.R. 2420 is being touted as a solution to the rural digital divide. This is simply not the case. Make no mistake, H.R. 2420 affirmatively undermines key principles of the 1996 Act and overrules important decisions by the FCC

and the states. This bill is neither a ‘‘technical fix’’ nor a reasonably tailored measure to spur the construction of fiber networks in rural areas—the biggest losers

under H.R. 2420 are data CLECs like Covad.

For instance, H.R. 2420 proposes a new section 232(j)(1)(A) of the Act that would

eliminate linesharing. Linesharing is a vital means of ensuring that competitive

LECs can offer broadband services in rural areas, where a second standalone line

to the home is often not available. With linesharing, Covad can offer consumers in

rural areas—even areas where the incumbent in not offering advanced services—

access to broadband capability over the existing voice line. Without linesharing,

such rural consumers would have no access to competitive broadband services.

Allow me to make a few additional points. First, as I demonstrated above,

broadband is being deployed in rural areas. Secondly, there are only four companies

in America that are bound by the interLATA restriction: Verizon, Qwest, SBC, and

BellSouth. In many cases, these companies do not serve the truly rural areas of a

State. Therefore, waiving the Section 271 requirements will do nothing for consumers in those areas because the companies that operate there already are free

to offer whatever type of service their customers demand. As an example, examine

the enclosed maps of Ohio and Minnesota. The Bell company does not operate in

the rural areas of the State. It is abundantly clear that freeing the Bells from their

Section 271 obligations will not help the rural customers of those states. And competitors like Covad often have no legal right to offer service in those areas.

Remember, any Bell company can operate free from regulation outside of its serving area. Yet to date, not a single Bell company has forcefully entered a market outside its territory. Bell companies are not entering the lucrative urban markets in

other serving areas, let alone rural areas.

In addition, and perhaps most importantly, the FCC has adopted rules permitting

a Bell Operating Company to request a modification of LATA boundaries in order

to provide broadband services in rural communities. The BOC must simply prove

to the FCC that no other broadband provider is willing or able to serve that rural

market, and that the BOC actually intends to serve the rural community. Again,

no RBOC has taken advantage of this rule. Given these facts, I am forced to ask

if the Bell companies are truly interested in serving rural America, or if their motives lie elsewhere.

Enforce the Act, Don’t Undermine It

Covad operates in the service territory of every Bell operating company and GTE.

When we first started this odyssey in 1996, our business plan was fairly simple: buy

DSL equipment, collocate it in the central offices of the incumbent, and lease

unbundled copper lines from those central offices to our customers. [Along the way,

we have struggled with repeated breaches by the incumbents of the Act, FCC rules,

antitrust law, and our interconnection agreements with the local telephone companies.] We have been reasonably successful to date in getting the FCC and state commissions to pay heed to our concerns over collocation and loop delivery. These efforts

culminated in several significant rulings and decisions in 1999 and this year.

35

Section 4(b) of H.R. 2420 would affirmatively repeal several of those decisions and

would preempt the FCC and states from further addressing competitive concerns

that we or other CLECs bring to their attention. I see no redeeming value to that

portion of H.R. 2420—all I see is Covad and other CLECs left crippled in the marketplace, unable to grow and succeed.

Even when we get clear rules from the FCC or state commissions, incumbent telephone companies undermine them at every turn. For example— GTE entered into a interconnection agreement with Covad to provide the 24 hour

a day, seven day a week, access to central offices as required by the FCC’s rules.

GTE subsequently informed Covad that GTE’s interpretation of ‘‘access’’ meant that

Covad employees could only do work necessary to offer service between the hours

of midnight and 4 AM.

BellSouth recently informed Covad that it did not have sufficient collocation space

in several central offices to house Covad’s equipment, and it rejected Covad’s applications for collocation space in those central offices. BellSouth then informed Covad

that a smaller amount of space, insufficient for Covad’s needs, may be available in

certain central offices, and that Covad should submit new applications for smaller

space. When Covad requested the central office tours to which it is entitled by FCC

rule, BellSouth refused to submit its central offices to inspection, stating that it had

not actually ‘‘rejected’’ Covad’s collocation applications, but rather had offered a

chance at smaller amounts of space. When the FCC intervened, BellSouth not only

agreed to provide tours, but relented in advance of those tours and admitted that

sufficient space was available.

These are only a few examples of the obstacles that new entrants like Covad must

overcome in order to provide service to your constituents. In thinking about enforcing the Act, you must keep in mind that since the incumbent carrier starts with

nearly 100% market share, it wins for each day it delays entry. As a result, when

an incumbent interprets the legal right of ‘‘24/7 access’’ to mean ‘‘between 12 am

and 4 am’’, the onus is now on the entrant to enforce this legal right in any forum

possible. Currently, Covad has pending two antitrust lawsuits and multiple state

and FCC enforcement proceedings, and enforcement is still not happening fast

enough for our end users, and your constituents.

I would also call your attention to the desires of your state regulators. At its annual summer meeting this week, the Telecommunications Committee of the National Association of Regulatory Utility Commissioners (NARUC) adopted a resolution on broadband deployment. Specifically, the NARUC Committee, comprised of

state regulators from around the country, called on Congress to leave intact the

market-opening provisions of the 1996 Act. In addition, the Committee called on

Congress and the FCC to utilize enforcement tools to ensure that Bell Operating

Companies and other incumbent LECs satisfy their obligations under existing law

to open their monopoly territories to competition, which will guarantee all Americans access to innovative broadband services. Thus, the States are concerned not

that existing laws are insufficient to provide consumers access to broadband services, but rather that incumbent monopolists are failing to meet their obligations, delaying competition and denying consumer choice. NARUC calls on Congress to reassert its dedication to competition by ensuring the Act is enforced properly, not by

undoing the beneficial market-opening provisions of the Act.

Conclusion

In conclusion, H.R. 2420 would substantially undermine the market-opening provisions of the 1996 Act. New entrants like Covad are building business cases around

those market-opening provisions of that Act and are deploying broadband services

throughout America to the benefit of consumers nationwide.

Indeed, the model of collocation and unbundling adopted by the 104th Congress

is being emulated throughout the world. Earlier this month, the European Commission issued a directive that would require incumbent telephone companies such as

France Telecom, BT, and DT to implement local loop unbundling by the end of the

year. Interestingly, U.S. local telephone companies have actually supported local

network unbundling initiatives abroad—advocating as ‘‘pro-competitive’’ the very

same rules that they are trying to eliminate at home. In addition, U.S. treaty commitments pursuant to the WTO oblige us to unbundle local networks—a treaty commitment that US trade negotiators are currently seeking to enforce on other WTO

member states.

In conclusion, what stands between the competitive industry signing up millions

of broadband subscribers is not the lack of interLATA ‘‘backbone’’ facilities or the

‘‘lack of POPs’’—what holds companies like Covad back is the fact that the incumbent local telephone companies have not fully implemented the 1996 Act. I urge you

to let competition work. Your constituents will benefit from innovation, greater

36

choices, and cheaper broadband access. The Telecommunications Act is working; let

it work.

Mr. TAUZIN. Thank you very much, Mr. Khanna.

Next is Ms. Cindy Schonhaut. I understand the Executive Government and External Affairs Vice President for ICG. Have you

just been promoted?

Ms. SCHONHAUT. No, but last promotion was a tough one to get.

It took a while.

Mr. TAUZIN. That is a long title. But welcome and you are recognized for 5 minutes, Cindy.

STATEMENT OF CINDY SCHONHAUT

Ms. SCHONHAUT. Thank you, sir.

I am Cindy Schonhaut and I work for ICG Communications. I am

also here representing two trade associations representing competitors, COMPTEL and ALTZ.

ICG is a competitive local telephone company that has actually

been around since the late 1980’s. We started in Denver, and that

is where we are headquartered now.

Myself, I have been in Telecom almost exactly 20 years and 10

of those years, I have worked in local competition. So myself and

the company really do both predate the Telecom Act.

Yesterday I was sitting on the Senate side in Senator

Brownback’s hearing on his broadband deregulation bill, and someone passed me a note and asked me if I could testify here today

because a witness became unavailable.

Well, I really did jump out of my chair because I have been wanting to talk to this subcommittee for a really long time, first of all

to tell you what I know, and what I have learned in my experience,

and second of all, to also thank you, like Mr. Khanna did, for the

Telecom Act that you passed, not just because it keeps me employed, although of course I like that, but also because it has done

so much for this country and given this country an opportunity to

see the economic benefits of competition.

Before the Act passed, there were local competitors. ICG existed.

We could provide very few services to very few people in very few

places. There was no way our industry was going to survive and

really we were not going to be able to thrive at all.

But we opened up the market, and what we did in return, to

thank you for passing the Telecom Act, is that we instigated the

technological revolution that we have today in telecommunications.

It just would not have happened without competition.

And that is why I am sort of puzzled by this bill. Because deregulating the ILECs and the Bell Companies to allow them to provide

data services in order to incent and instigate the broadband deployment of more data services does not make sense to me. A monopoly

is just not going to do it.

And here is a good example:

When the Act passed, right after the Act passed, Ameritech came

to Colorado and got certified to be a local competitor. They never

did use that certification. And of course they are not the RBOC

there, that is U.S. West.

So Ameritech was thinking of competing in Denver. They never

did it. And when they came along and decided to merge with SBC,

37

Ameritech said, well, we could not have gone to places like Denver

because we did not have the critical mass necessary to compete in

Denver against U.S. West.

We only had 35 million access lines. When we merge with SBC

and we have 65 million access lines, we will have the critical mass

to come and compete against U.S. West in Denver.

Well you can only imagine how that is received by investors in

my company because we have no critical mass whatsoever. We are

there and we are competing. We are struggling, but we are going

to make it. And an RBOC cannot even comprehend how to go about

doing that unless they have something like 65 million lines.

Mr. Young says the bill will not deregulate services because voice

services will remain subject to the provisions of the Telecom Act.

But that misses the point.

What is happening right now today is that voice services are fading, they are going to be given away free. I do not know if anybody

watched any of the NBA games but NetZero was sponsoring those

shows and they said they give away free voice long distance service. It is already here today.

It is going to be given away free and 90 percent of the revenue

within 3 years in the telecommunications industry is going to be

from data. Data and voice are going to be intertwined. That is what

we are talking about today. Voice will continue to be regulated but

nobody will be using it. So it is really not a relevant point.

I just want to make one point about the bill, and I am trying to

sort of comprehend how I can persuade you to sort of wait out until

competition does reach all these places with broadband services.

The problem I see with the bill is that it treats competitors like

we are the problem when we really are the solution. And I think

we have proven that where we compete now, and we are starting

to raise more money and compete further.

I want to speak briefly about interLATA relief. The Bell Companies know exactly how to get interLATA relief. They know how to

do it. Even SBC did it in Texas. If the Bell Companies comply with

the checklist, they will get interLATA relief, and my company will

be able to succeed.

We both want the same goals. We are not in the long distance

business. I do not care if they provide long distance service, but I

care if they comply with the checklist. And if they do, my company

will succeed.

I have the same goals. I will come here. I will be the first to tell

you they should be allowed to get into long distance, but they have

not made it yet, and it is not in their business interest to meet it

unless you make them, and unless the regulators that you rely on

also make them.

I will just end by saying:

Congress, you created us. You created my company. You gave us

the opportunity. You also have the power to destroy us. And I am

worried about that. And I want you to know that we will be able

to make it. We will be able to become a profitable industry and survive as long as you do not change the Act.

And I thank you for giving me this time, and I hope that we have

the opportunity to discuss this further.

Thank you.

38

Mr. TAUZIN. Thank you, Ms. Schonhaut.

And now we welcome Mr. Len Cali, Vice President, Federal Government Affairs, for AT&T Corporation.

Mr. Cali?

STATEMENT OF LEONARD J. CALI

Mr. CALI. Mr. Chairman and members of the subcommittee, it is

a pleasure to be with you today. Thank you for this opportunity to

share AT&T’s views.

H.R. 2420 raises an issue of profound interest. We all want

broadband services deployed more quickly, more cheaply and more

broadly.

The question is how best to achieve this outcome. For the reasons set forth in my written statement, we do not believe that H.R.

2420 is the right approach. As you consider this bill, we ask you

to consider in particular the following five points.

First, the marketplace for broadband is working. It is generating

unprecedented investment in new infrastructure and services, and

giving millions of customers new choices, quality services and lower

prices for broadband services.

Today, more than 3 million Americans subscribe to high speed

data services up many fold from just 2 years ago.

Analysts estimate that high speed Internet access will be available to 54 percent of U.S. households by the end of this year, and

more than 80 percent by 2002.

Dozens of competitive providers have blanketed the Nation with

over one thousand high speed DS3 Internet points of presence, and

nearly 95 percent of Americans now live within 50 miles of one of

these competitively provided POPs. The cable companies have invested more than $36 billion to date

of private risk capital since 1996. And the CLECs have installed

1400 data switches and laid 162,000 route-miles of fiber.

This competition has spurred the incumbent local carriers finally

to deploy their decade-old DSL technology. We now hear, for example, as we have heard earlier, that SBC will devote $6 billion to

provide 80 percent of its customers with DSL service by 2002.

Verizon, formerly Bell Atlantic, will invest $1 billion per year

until 2005 to develop its fiber network. And U.S. West will expand

its DSL services to 30 new cities. And while deployment is expanding, prices are plummeting, at least where competition exists.

Bell Atlantic recently announced that it is lowering its DSL rates

from $49.95 to $39.95. Other Bell companies have similarly slashed

prices. In fact, in one instance, Pacific Bell was charging $89 a

month in 1998; today it is charging $39.

And rural customers have not been forgotten. In addition to the

efforts of the many competitors, satellite providers are racing to

provide high speed Internet access on a national basis.

For example, Pegasus Communications Corporation has announced that, in conjunction with direct PC, it will begin to offer

high speed Internet access by satellite to rural households in the

fourth quarter of this year. Pegasus goes on to state that the service will enable consumers to obtain high speed Internet connections, ‘‘virtually anywhere in the Continental United States, no

matter how remote.’’

39

There is no public reason to change the rules that have given

rise to these benefits.

Second, these facts confirm that the Bell Companies do not need

long distance relief in order to deploy broadband services.

Moreover, under the existing law, the Bell Companies hold the

keys to any interLATA authority they desire. The FCC grant of

long distance authority to Bell Atlantic in New York and SBC in

Texas confirms that the requirements of the 1996 Act can be met

if the Bell Company will take steps to open its market.

Third, the proposed interLATA relief would undermine prospects

for local exchange competition by reducing the Bell Companies’ incentives and some of their obligations to open their markets to

competition. This is particularly significant because, notwithstanding the growth of broadband competition, the Bell Companies

continue to dominate the provision of local exchange services, particularly for residential customers.

Passage of this legislation would particularly hurt consumers in

the 47 jurisdictions where the Bell Companies have not yet obtained long distance authority.

If the legislation is enacted, the Bells in those states would have

no incentive to open their markets. As a result, competitive investment dollars would flow toward New York and Texas and away

from the remaining states where fewer opportunities would exist.

Fourth, the interLATA relief proposed in this bill would not necessarily enhance deployment of broadband in the Internet backbone or anywhere else.

As to the backbone, Bell Atlantic is already affiliated with

GENUITY, SBC with Williams, and U.S. West and Bell South with

Qwest, all of which are existing Internet backbone providers.

In addition, Bell Companies today can provide connections between their local exchanges and interexchange carriers who can

then transport traffic across LATA boundaries.

In this regard, the problem is not the LATA boundaries, it is the

inflated prices the Bells insist on charging for those access connections. Nothing in this legislation would change that.

Fifth, even if I am wrong on all of the points, this legislation is

overbroad. It would gut the carefully considered incentive-based

structure of the 1996 Act in order to enhance the extraordinary

broadband deployment that is already occurring. If there is a problem with broadband deployment, the solution should be tailored to

the problem.

The FCC has established an expedited process to target LATA

boundary relief if a Bell Company can demonstrate that such a

modification is appropriate for the deployment of advanced services. Yet, the FCC has not received any requests for LATA modifications under this process.

In short, we respectfully urge the subcommittee to promote continued deployment of broadband that is swift, widespread, and in

a commercially reasonable manner by maintaining the competitive

incentives provided under the 1996 Act.

Thank you.

[The prepared statement of Leonard J. Cali follows:]

40

1Morgan Stanley Dean Witter, The Broadband Report, May 1 2000, p. 8. 2 Remarks of James Ewalt, Vice President of Public Affairs, National Cable Television Association, to the Economic Development Forum, Economic Development Administration and the U.S.

Conference of Mayors, Albuquerque, New Mexico, June 1, 2000. 3 C.E. Unterberg, Towbin, Broadband Communications Providers, June 14, 2000, p. 8.

PREPARED STATEMENT OF LEONARD J. CALI, VICE PRESIDENT-FEDERAL GOVERNMENT

AFFAIRS, AT&T

Thank you, Mr. Chairman and Members of the Subcommittee, for inviting me

here today to share AT&T’s views on H.R. 2420, the Internet Freedom and

Broadband Deployment Act of 1999. I think that most of us would agree that allowing the competitive marketplace to work is the best way to spur the widespread deployment of broadband facilities and services. As a result of the competition generated by the 1996 Act, we are witnessing unprecedented investment in new infrastructure and services that is giving millions of consumers new choices, quality services, and lower prices for broadband services. The success of these competitive market forces renders this legislation unnecessary. Indeed, the legislation would jeopardize this remarkable success by disrupting the careful balance of the 1996 Act,

subverting its incentive-based framework, and undoing the reforms that made this

progress possible.

The Broadband Marketplace Is Working

Taking advantage of the new opportunities created by the 1996 Act, and with increasing certainty about what the Act provides, industry participants have devoted

tremendous resources and staggering investments to the development and deployment of advanced technologies and services. These participants include cable companies, competitive local exchange carriers, satellite providers, wireless providers, and

the incumbent local phone companies. There is, in fact, a broadband race underway

that is perhaps the most significant development resulting from the 1996 Act, and

one that is having a very real impact on consumers. Prior to enactment of the 1996

Act, there were only a handful of potential local exchange competitors, and incumbent local companies only offered consumers access to the Internet via dial-up access

or an expensive T-1 line. Today, as a result of the growth of investment and competitive activity during the last four years, many consumers can choose to access

the Internet using competing and high-speed technologies, such as those offered by

DSL, cable modems, satellite, and fixed wireless offerings.

The cable industry provides a particularly compelling illustration of how the 1996

Act and the marketplace is supposed to work—and how it is in fact working. Cable

had long been viewed as a likely potential facilities-based competitor to local telephone monopolies, because of its widespread deployment of facilities to residential

customers across America. Until the Act, however, cable companies evidenced little

interest in competing with the local telephone monopolies (and the local telephone

companies likewise seemed content to avoid competing in the video distribution

business). Because of the 1996 Act, this is now changing rapidly, to the benefit of

consumers. Led by AT&T’s massive investments, cable facilities are being upgraded

and the services offered over those facilities are expanding. Indeed, it is now safe

to conclude that cable companies represent the single most promising hope for facilities-based competition in local telecommunications for residential users—precisely

as Congress hoped and expected.

In particular, the cable industry has taken a leadership role in bringing

broadband offerings to residential consumers and has more than 2 million cable

modem subscribers today. Cable modems will be available to 54 percent of U.S.

households by the end of this year, and more than 80 percent by 2002.1 Cable

modems provide Internet access at speeds up to 100 times faster than dial-up telephone modems. Since 1996, the cable industry has invested more than $31 billion—

and the number is growing everyday—to enable this technology by rebuilding cable

plant and making cable facilities two-way interactive systems through the use of hybrid fiber coax networks.2 Analysts project that 7,500 high-speed cable modem service subscriptions are being added every day in North America, with an overwhelming majority of those in the United States.3

Fixed wireless providers, including companies such as AT&T, Winstar, Nextlink,

and Teligent also are investing significant resources to develop technologies that

will use radio frequency to transmit large amounts of data and permit American

businesses and consumers to obtain high speed Internet access. Broadband satellite

providers are also competing to provide high-speed Internet access. Gilat-To-Home,

in partnership with EchoStar, will begin offering two-way broadband Internet servVerDate 11-MAY-2000 08:04 Apr 03, 2001 Jkt 010199 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 E:\HEARINGS\66467 pfrm08 PsN: 66467
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4 Reuters, ‘‘EchoStar invests in satellite Net service,’’ CNET News.com (April 10, 2000) <http:/

/news.cnet.com>. 5 Jim Hu, ‘‘AOL Speeds Towards Satellite Service,’’ CNETNews.com (May 31, 2000) <http://

news.cnet.com>; Erich Luening, ‘‘Juno, Hughes team on Net satellite service,’’ CNETNews.com

(July 12, 2000) <http://news.cnet.com>. 6 ‘‘Pegasus to offer satellite internet access,’’ (July 20, 2000) <http://www.direcpc.com/consumer/scoop/pr14.html.> 7Telechoice, One Millionth DSL Customer!!!, June 6, 2000; see also C.E. Unterberg, Towbin,

Broadband Communications Providers, June 14, 2000, p. 7 (DSL Line Chart). 8Morgan Stanley Dean Witter, The Broadband Report, May 1 2000, p. 8. 9 US West News Release, US West Jumps Out of the Blocks in the Race to Speed Super-Fast

Internet to Mass Market-30 New Cities, Hot Multi-Media Portal & World’s Fastest Man, June

19, 2000.

ice later this year,4 and DirecPC is working with a number of ISPs in providing

high-speed Internet access service.5 In fact, Pegasus Communications Corp. has announced that, in conjunction with DirecPC, it will begin ‘‘to offer high-speed Internet

access by satellite to rural households in the fourth quarter’’ of this year, that the

service will have ‘‘full two-way satellite Internet access’’ beginning in 2001, and that

the service ‘‘will enable PC users to obtain high-speed Internet connections virtually

anywhere in the continental United States, no matter how remote.’’ 6

In addition, competitive local exchange carriers that have come to be known as

‘‘data LECs’’ or ‘‘DLECs’’ are rapidly deploying DSL technology for high-speed Internet access. (See attached chart of annual investment in infrastructure.) As of June

2000, more than one million Americans subscribe to DSL services provided by competitive and incumbent local exchange carriers, and analysts project that number

will exceed 2.1 million subscribers by year’s end.7 The analysts also tell us that DSL

service should be available to over 36 percent of U.S. homes by year-end, and 65

percent in 2002.8 As of the end of the first quarter of this year, three of the top

eight DSL service providers are competitive carriers, representing 22 percent of DSL

subscribers. Some of these companies, like Covad Communications, did not even

exist prior to enactment of the 1996 Act.

All this investment in broadband facilities and services has served as a powerful

competitive spur to the incumbent telephone companies, multiplying the benefits of

the investment across platforms and services and driving down prices. DSL technology has existed for more than 10 years, but until recently the incumbent monopoly telephone companies had no incentive to deploy it. Spurred by growing

broadband competition, however, the incumbent carriers have responded with their

own burgeoning DSL deployment in the past 18 months. For example, SBC announced last October that it will devote $6 billion to provide 80 percent of its customers with DSL service by 2002. Bell Atlantic has also announced that it will invest $1 billion per year until 2005 to further develop its fiber network. And just last

month, US West announced that it was expanding its DSL service to 30 new cities.9

Developing competition is not only driving the incumbent carriers to deploy DSL,

but where competition exists, it is also forcing the incumbent carriers to reduce

their DSL charges to consumers. Bell Atlantic, for instance, just announced that it

is lowering its DSL rates from $49.95 to $39.95 per month. Other Bell companies

have similarly slashed their charges, with one Bell company having been forced to

reduce its monthly charge from $89 in 1998 to $49 in 1999 and again to $39 in

2000. (See attached chart of RBOCs DSL pricing changes.) While these companies

might be commended for these efforts, it is only the growth of competition since

1996—and the prospect of greater competition—that is driving these aggressive rollout strategies and price reductions.

That kind of competitive marketplace response is good for consumers, good for the

economy, and good for public policy. Unfortunately, the incumbents’ response to this

unprecedented competition has not all been to the good. The incumbent monopolies

are leading the charge for new regulations that would free them from their marketopening obligations, hamstring new competitors, and otherwise delay or prevent the

1996 Act’s promise of local telephone competition.

The bottom line is that market participants in all regions of the country have

greatly increased their deployment of various broadband technologies. This competition means more choices and lower prices—clear evidence that the marketplace is

meeting the very needs that this bill seeks to address. The deployment to date has

required vast sums of capital that companies have been able to raise in the marketplace because of the growing regulatory certainty and framework provided by the

1996 Act. Congress should not jeopardize the further deployment of these technologies nor the competition that exists today by passing legislation that would reopen the 1996 Act and undercut its incentive-based framework.

42

10Qwest News Release, Qwest Communications Completes 18,500 Mile Nationwide Network

and Shifts Construction to 25 Local Fiber Networks, Sept. 13, 1999. 11 ‘‘Teligent to Buy Network Services from Level 3 Communications,’’ CNETNews.com (May

9, 2000). 12 Boardwatch Magazine’s Directory of Internet Service Providers (11th ed., 1999).

InterLATA Data Relief Is Not Necessary for the Deployment of Broadband Facilities

and Services

Just as the market, under the auspices of the 1996 Act, is fostering competition

in the deployment of broadband facilities , interLATA data relief is also not necessary to ensure adequate investment in broadband backbone facilities. There are

ample backbone facilities throughout the United States and a wide variety of companies, including Qwest, Level 3, Williams, Cable and Wireless, Global Crossing, and

NEXTLINK, that are currently adding fiber and deploying new transmission technologies to expand the capacity of existing networks. For example, Qwest recently

announced that it had completed construction of an 18,500 mile fiber network connecting 150 cities in the United States.10 Level 3’s high-speed network has over

16,000 miles of fiber optic lines and connects 50 U.S. cities.11 In 1999 alone, twelve

new companies began providing national Internet backbone services, for a total of

46 providers in the United States.12 There is no support for the claim that section

271 is somehow depriving the country of needed backbone capacity.

In fact, dozens of competitive providers have, in the last four years, blanketed the

Nation with over 1,000 high-speed Internet points of presence (‘‘POPs’’), and today

95 percent of all Americans live within 50 miles of one of these competitively provided POPs (as depicted in the attached maps of the United States). Each represents a DS-3 POP capable of providing customers with speeds of 45 Mbps or more.

And even this understates the level of access to the Internet backbone, because local

ISPs aggregate onto high-speed private lines the demand of local communities for

transport to the Internet backbone, regardless of the distance to the Internet POP.

In all events, this legislation is unnecessary because, under current law, the BOCs

themselves hold the key to obtaining the authority to provide any long distance

service by opening their local markets to competitors. For example, in December,

the FCC granted Bell Atlantic permission under Section—271 of the Act to provide

interLATA service in New York. More recently, the FCC also granted SBC approval

to provide interLATA service in Texas. Although AT&T believes that each of these

Bell company applications fell short of what the Act requires in particular respects,

it is clear that the requirements of Section 271 of the Act are attainable and can

be met, if a Bell Company takes steps to open its local markets to competition.

This is a particularly significant point because granting the Bell companies immediate interLATA data relief without regard to the development of local competition

would harm the very competition that Congress is seeking to promote. As this Subcommittee is well aware, in order to foster local competition, the 1996 Act permits

in-region interLATA authority only after a Bell company has opened its local market to competition. This incentive-based approach takes full advantage of the long

distance restriction to provide the Bell companies reason to open their local markets

for the benefit of all consumers. And the ability to provide high speed data services

across LATA boundaries is a powerful incentive: currently, the majority of traffic

travelling over long haul networks is data traffic, not voice, and analysts predict

that data traffic will make up 90 percent of all traffic within four years.

Nor is there any basis to conclude that, in adopting the Telecommunications Act

of 1996, Congress did not understand and intend for the interLATA restriction to

extend to broadband or advanced data services. Even Section 271 itself acknowledges and accommodates concerns with Internet access. Specifically, Section

271(g)(2) of the Act carves out incidental interLATA services that may be provided

by the BOCs without FCC approval, including ‘‘Internet services over dedicated facilities to or for elementary and secondary schools.’’ These were the only Bell company Internet services that were exempted from the interLATA restrictions of Section—271. Other provisions of the Act, such as Sections—230 and 254(h)(2) and associated conference report language, also acknowledge and accommodate concerns

relating to the ‘‘Internet’’ and ‘‘advanced services.’’ Too much remains to be done for Congress now to reopen the Act and remove or

lessen the incentives provided by Section 271. The Bell companies and GTE continue to dominate the local exchange market, particularly the market for residential

local telephone service. By permitting Bell companies to enter the high speed

interLATA data market without first opening their local markets, H.R. 2420 would

substantially reduce the likelihood that this dominance will end.

In particular, passage of this legislation would harm consumers in the 47 jurisdictions where the Bell companies have not yet sufficiently opened their local markets

43

13 Communications Daily, Bell Companies Predict Increase in Sec. 271 Applications, July 10,

2000. 14Mike Mills, ‘‘Holding the Line on Phone Rivalry; GTE Keeps Potential Competitors, Regulators Price Guidelines at Bay,’’ Washington Post, Oct. 23, 1996, at C12. 15 Covad News Release, ‘‘Covad is Awarded $27.2 Million in Arbitration Against Pacific Bell,’’

May 16, 2000. 16 John Barland, ‘‘SBC Record Dump Draws Feds’ Probe,’’ CNETNews.com (November 8,

1999); Covad News Release, ‘‘Businesses and Consumers Win in Minnesota and Texas,’’ December 2, 1999.

to obtain interLATA authority. Recent press reports indicate that other Section— 271 applications may soon be filed.13 But if this legislation were enacted, the Bell

companies would have less of an incentive to take any steps to open their local markets in these states to competition. Companies that lack the Section 271 incentives

of the RBOCs have been far slower to comply with the market-opening provisions

of the 1996 Act. For example, as the former CEO of Ameritech noted shortly after

the Act’s passage, GTE (then an independent LEC) has ‘‘no incentive’’ to cooperate

to open its markets because it is not subject to Section 271.14

The bill’s attempt to ‘‘limit’’ the interLATA relief to data transmissions would,

moreover, be unavailing. With the growth of services like IP telephony, the functional distinctions between ‘‘voice’’ and ‘‘data’’ services will start to break down.

From a practical standpoint, even if the distinction remained clear, there is no effective way to determine whether the BOCs are transmitting only interLATA data. The

data ‘‘exception’’ would quickly and surely swallow the policies and rule embodied

by Section 271.

Perhaps most telling is the fact that, if there is a problem here, it can be addressed far more narrowly than by legislation that rejects the incentive-based

framework of the 1996 Act. Indeed, the FCC has itself established an expedited

process under which it will approve targeted LATA boundary modifications if a Bell

company can demonstrate that such a modification is necessary for the deployment

of ‘‘advanced services.’’ It is notable that the FCC has not received any requests for

LATA modifications under this process.

Weakening the ILECs’ Obligations to Provide Unbundling and Permit Resale Are Not

Necessary to Encourage Them to Deploy Last Mile Broadband Facilities

The aggressive deployment of broadband facilities by a wide range of providers

confirms that, notwithstanding their claims to the contrary, the Bell companies do

not need regulatory relief to encourage them to deploy last mile broadband services.

Under the spur of competition—indeed, only under the spur of competition—the Bell

companies are already investing in broadband facilities and services. There is no

evidence that the ILECs’ obligations to provide unbundled network elements and

permit resale of services has hindered the deployment of advanced facilities and

services. To the contrary, full implementation and enforcement of Sections 251 and

252 are necessary to promote the widespread and rapid deployment of broadband

services by competitive LECs. And there is no evidence that the 1996 Act or the

regulatory structure built upon it has discouraged the ILECs from investing in

broadband facilities. Indeed, as I detailed above and FCC reports confirm, the

ILECs are investing substantial sums in broadband technologies in response to the

competitive forces unleashed by the Act.

Significantly, under the FCC’s existing rules, ILECs generally are not obligated

to offer unbundled access to packet switching and advanced services equipment, including digital subscriber line access multiplexers (‘‘DSLAMs’’) and routers used to

provide DSL service. Although AT&T disagrees with the FCC’s legal and policy determinations in this regard, it is clear that the FCC has provided the ILECs significant regulatory freedom in connection with advanced services and facilities. Extending such an exemption even further, to facilities that are used both to provide basic

telecommunications and advanced services—as the bill would do—would permit

ILECs to leverage their legacy market power in basic services to achieve dominance

in the provision of advanced services, by denying competitive carriers access to these

facilities. These are not hypothetical concerns. Pacific Bell has been required by an

arbitration board in California to pay competitive DSL provider Covad Communications $27.2 million because the ILEC violated the Communications Act by failing

to timely deliver collocation space and operable loops.15 In Texas, another arbitration board ordered Southwestern Bell to begin processing Covad’s and ACI’s re- quests for DSL provisioning immediately and ultimately imposed a $850,000 fine on

Southwestern Bell for abuse of the arbitration process.16

As written, the bill could ultimately exempt even the most basic network elements

from the 1996 Act’s market opening requirements, if these elements are used to provide high speed data services. Such a result would undermine one of the cornerVerDate 11-MAY-2000 08:04 Apr 03, 2001 Jkt 010199 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 E:\HEARINGS\66467 pfrm08 PsN: 66467
44

stones of the Act, by enabling incumbent carriers to avoid the fundamental obligation to open up their networks to competitors. Consumers should not, and as described earlier need not, be forced to pay such a high price for the deployment of

advanced facilities and services.

Conclusion

The marketplace for broadband offerings is working. Increasingly, consumers

throughout the Nation are enjoying the new technologies and lower prices for

broadband services that competition provides. As a result, there is no need for this

legislation. Moreover, because the Bell companies continue to dominate the provision of local exchange services, this legislation would harm consumers and set back

the cause of competition by undermining the very incentives and policies that Congress intended to foster local exchange competition, and that have led to the burgeoning broadband competition that we are witnessing today. There is no public interest reason to do this. Rather than eliminate the most important incentive for the

Bell companies to open their local markets, Congress should give the process that

it established in the 1996 Act an opportunity to continue to work.

45

46

47

48

49

Mr. TAUZIN. Thank you very much, Mr. Cali.

And finally, Mr. Steve Pociask, Executive Vice President and

Chief Economist of Joel Popkin & Company here in Washington,

DC.

Mr. Pociask?

STATEMENT OF STEPHEN B. POCIASK

Mr. POCIASK. Mr. Chairman and members of the subcommittee,

thank you for inviting me here today to give my views on the Internet market and broadband competition.

In our study, entitled ‘‘MCI WorldCom’s Sprint Toward Monopoly’’ published by the Economic Policy Institute, Dr. Jack Rutner

and I find InterLATA data restrictions to be a barrier to entry, in

effect contributing to the concentration of the backbone market.

The first chart in my written testimony, over here to the side of

the room, by various measures, show that much of the Internet is

in the hands of a few backbone providers.

That is not due to the lack of desire among potential entrants.

In general, barriers act to maintain market power, restrict supply,

and increase market prices.

Our study finds evidence of anticompetitive effects in the Internet backbone, and I would direct you to my written testimony for

examples of rejected orders of high speed circuits, degraded service

quality, price discrimination and problems with cooperative interconnection.

These problems negatively effect small ISPs, rural ISPs, and ultimately their customers. Now, do not get me wrong. Big can be

good.

And if you look at the second chart here.

[Charts shown.]

Mr. POCIASK. When increases in the volume of production lead

to falling per-unit costs, large firms can be more efficient. This is

commonly referred to as economies of scale.

However, as the next chart shows, the reality is that prices are

upward sloping with respect to size, not downward sloping, as you

would expect in a competitive market.

This is the result of network effects where dominant backbone

providers have no incentive to cooperatively interconnect with

smaller ISP networks.

Since large backbone providers see their networks as more valuable, they demand higher prices from smaller backbone providers

and ISPs. Thus, large Internet backbone providers have an advantage, not from productive efficiencies and not from economies of

scale, but from their ability to extract value from not interconnecting with smaller firms on equal terms.

These network effects lead to tipping whereby large firms stay

large and small firms stay small. The interLATA restrictions contribute to this problem by limiting supplier choice.

The final piece of evidence that the market is not competitive is

demonstrated on the last chart, which shows the super normal

profits of the large three interstate backbone companies.

This chart shows that the earnings-to-assets ratio has been going

up rapidly, compared to that of other non-financial corporations.

50

In economics, high profits normally attract entry and lower

prices, but this is not the case of the interstate backbone market

of voice and data where interLATA restrictions prevent market

entry.

So I ask you, does this look like an industry that needs protection? H.R. 2420 will encourage the RBOCs to invest in backbone

facilities and interstate points of presence.

Interestingly enough, what I see is that once these investments

become sunk, the desire to leverage their presence beyond the local

market into a full range of telecommunications services should increase.

Therefore, the RBOCs will urgently seek Section 271 approvals. After all, the $105 billion long distance market is a much greater

prize in the smaller $6 billion wholesale broadband market that we

see in the backbone.

As fast as the Internet market is growing, the market is big

enough for all comers. As far as local competition is concerned, the

State regulators still have Section 251 to open things up.

Consumers should have more choice. Having interLATA data relief gives customers choice, and that is why I support H.R. 2420.

Permitting full ownership of investments will keep costs lower and

lead to higher broadband penetration.

Let me explain to you why low regulatory costs are very important here.

Broadband services appear to be much more price-sensitive than

telecom services, like local services. What that means is that small

increases in taxes or regulatory costs will have large decreases in

economic benefits. They can have very big impacts in reducing the

number of subscribers.

On the other hand, reductions in regulations, such as those proposed in H.R. 2420, will have large stimulative effects and therefore huge economic benefits or consumer benefits.

You have seen the empirical evidence today. Regulations need to

stop protecting competitors. Instead, they need to promote competition and the market will do the rest and consumers will benefit.

In closing, I support H.R. 2420.

Thank you.

[The prepared statement of Stephen B. Pociask follows:]

PREPARED STATEMENT OF STEPHEN B. POCIASK, EXECUTIVE VICE PRESIDENT AND

CHIEF ECONOMIST, JOEL POPKIN AND COMPANY, WASHINGTON, DC

Mr. Chairman and members of the subcommittee, thank you for inviting me here

today to give my views on the Internet market and broadband competition.

Strong Demand with Restricted Supply

The Internet economy is growing by some reports at 1000% per year, fueling economic expansion, job growth and productivity improvements. Internet Service Providers (ISPs) provide consumers with access to entertainment, communications and

information in the form of data or news. The problem with the Internet does not

stem from a lack of demand, but a problem with supply in the Internet backbone.

Let me explain.

The current interLATA data restrictions on the RBOCs result in reduced market

entry. In general, barriers to entry concentrate capacity in the hands of a fewer producers. This leads to supply shortages and usually results in price increases. This

is exactly what Dr. Jack Rutner and I have observed with respect to the Internet

backbone market, in our book entitled ‘‘MCI WorldCom’s Sprint Toward Monopoly’’

and published by the Economic Policy Institute. Specifically, we find that interLATA

data restrictions are, in effect, entry barriers that support the concentration in the

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backbone market, maintain market power, lead to restricted supply, and likely higher prices to ISPs and ultimately consumers.

Besides higher prices, Internet consumers are not getting the quality services they

desire. Estimates show that consumers are spending nearly one-third of their time

waiting for computer screens to fill. Consumers are abandoning their online shopping carts, disconnecting, reconnecting and reloading screens. It’s a little reminiscent of long lines in the old USSR. There’s lots of demand, but supply is controlled

and regulated.

Market Barriers Always Hurt Consumers

The justification for the barriers is not based on enhancing consumer benefits. It

is based on protecting competitors. It is also not based upon normative economic evidence—there is no empirical evidence to support these regulatory barriers to entry.

Instead, it originates from an archaic regulatory mindset that comes out of a consent decree placed upon AT&T eighteen years ago. That decree divested, most notably, AT&T’s circuit switched voice telecommunications operations based on whether

or not voice traffic remained within designated geographic boundaries. That distinction of local and long distance for circuit switched voice traffic is still in use today,

at least in the U.S. Amazingly, the distinction is being used to justify the entry barriers for the RBOCs into new markets, while no restrictions apply to AT&T.

In general, an Internet online session does not require a telephone to call out. It

does not require a circuit-based switch. It does not even require a called-party at

the other end. Unlike toll, it does not result a billable conversation minute. It is

not a toll service.

The result of interLATA data restrictions is evident in a highly concentrated

Internet backbone market. The first chart shows the high concentration for frame

relay services and for ATM services. These are services that are provided to predominantly large business enterprises. The chart also shows the high concentration

in the Internet backbone market, as measured by the market share of ISP connections and backbone revenues. In short, by the various measures shown here, much

of the Internet backbone is in the hands of a few providers. This is not due to a

lack of desire among potential entrants. It is not market failure. It is the interLATA

data restrictions that have contributed to the concentration in the Internet backbone

market.

This market concentration is significant. By calculating industry concentration indexes and using the Department of Justice’s (DOJ) Guidelines, we find the data

backbone market to be highly concentrated, as defined by the DOJ. This conclusion

reflects today’s market conditions and is consistent with the DOJ’s recent complaint

regarding the MCI WorldCom proposal to merge with Sprint.

Concentration can lead to anti-competitive effects, particularly when entry barriers prevent the market from being contestable. High prices, restricted demand and

increased profits are all symptomatic of anti-competitive effects.

There is mounting evidence that large Internet backbone providers place strict

conditions for interconnection to smaller ISPs. Large Internet backbone providers

charge smaller ISPs for interconnection, provide smaller ISPs with lower quality of

service and price discriminate against smaller ISPs. In our study, we cite some of

this evidence, including that large Internet backbone providers provide poor service

quality, delay service repairs and reject orders for high-speed connections.

As for cooperative interconnection, we conclude that larger Internet backbone

companies are reluctant to interconnect with smaller ISPs. While providing freepeering among themselves, large Internet backbone companies charge smaller ISPs

for transit, and smaller ISPs who can’t pay the transit must complete their traffic

at congested public peering points. Those that pay transit charges often complain

52

1MCI WorldCom’s Sprint Toward Monopoly, Stephen Pociask and Jack Rutner, Economic Policy Institute, Washington, DC, 2000, p. 27.

about degraded services that sets them apart from the services provided by the

Internet backbone provider’s own ISP. In our study, we quote a Yankee Group report that one ISP claimed to have 50% of its DS3 orders rejected and another ISP

cited delays in OC-3 orders that exceed three-months.1 In short, congested Internet

service, higher circuit costs and lack of capacity, keep smaller ISPs small. Furthermore, rural customers are less likely to have access to high-speed hubs and their

ISPs tend to pay more for connections to the Internet.

Are Large ISPs Just More Efficient?

Let’s take a look at Chart 2. When increases in the volume of production lead to

falling per unit costs, large firms can be more efficient. This second chart shows

what is commonly referred to as economies of scale. In this case, Internet backbone

firms that connect more ISPs to the Internet can have lower costs per connection.

If this were the case and if the market were sufficiently competitive as some claim,

then prices should be normally aligned with costs. Therefore, we should expect to

see larger firms with some price advantage, which would possibly explain how these

large backbone providers continue to hold onto their market share.

However, as Chart 3 shows, the reality is that prices are upward sloping with respect to size, and not downward sloping, as we would expect in a competitive market. This is the result of ‘‘network effects’’ where dominant backbone providers have

no incentive to cooperatively interconnect with smaller ISP networks. Since large

backbone providers see their network as more valuable, they demand higher prices

from smaller backbone providers and ISPs. Thus, large Internet backbone providers

have a cost advantage not based on productive efficiencies and not based on economies of scale, but the ability of dominant firms to extract value by not interconnecting with smaller firms on equal terms. These network effects lead to ‘‘tipping’’ whereby large firms stay large, and small firms stay small. Thus, larger Internet backbone providers can charge ISPs more for Internet connections and not

worry about losing market share. This is market dominance. The interLATA data

restrictions contribute to this problem.

The final piece of evidence that the market is not competitive is demonstrated in

the last chart, which shows the supernormal profits of the largest three interstate

backbone companies. We show earnings (measured in what Wall Street analysts call

EBITA—earnings before interest, taxes depreciation and amortization) on tangible

53

assets compared to non-financial corporations. Chart 4 shows that the earnings-toassets ratio has been going up rapidly compared to that of other non-financial corporations, whose rates of return have been essentially flat in the same period. In

economics, profits attract new entrants and should result in lower prices that bring

returns toward normal levels. But this is not the case for the interstate backbone

market (voice and data), where interLATA restrictions prevent market entry.

H.R. 2420 provides for interLATA data relief. The passage of the bill will encourage the RBOCs to invest in backbone facilities and interstate points of presence. Interestingly enough, once an RBOC invests, its costs become sunk, and so the desire

to leverage its presence beyond the local market and into a full range of telecommunications services should increase. If that is true, then the RBOCs will want

Section 271 approvals more urgently than before, rather than less urgently. After

all, a $105B long distance market is a much greater prize than a smaller $6B wholesale backbone market. In any case, as far as local competition is concerned, state

regulators will use Section 251 to keep the RBOCs firmly moving toward open markets, regardless of their investment decisions.

What’s the Worse that Can Happen?

Let’s say, hypothetically, that the RBOCs turn out to be miserable failures as an

Internet backbone provider. Then, there is no harm done to consumer or existing

producers. So there is no risk to the market if the RBOCs are inefficient, have high

costs or provide low quality of service. In the end, the market will determine the

efficient quantity and price.

Let’s examine the other extreme. Let’s say the RBOCs are wildly successful and

consumers demand their services. The result would be a dramatic increase in consumer benefits. This can only happen if the existing firms currently charge higher

prices or have poor service quality. Why protect the inefficient at the expense of consumers?

The fact is that the demand for Internet service is growing at 1000% per year by

some accounts. So the existing backbone companies will have plenty of opportunity

to win over customers, regardless of how the RBOCs ultimately fare. Keep in mind

that the RBOCs have 0% market share in the Internet backbone market and pose

little threat to efficient providers. At this growth rate, the market is big enough for

them all.

In Summary, Put Consumers First

Total consumer welfare can only increase when competition increases by natural

market forces. Consumers should have more choice. Having interLATA data relief

gives customers choice and that is why I support H.R. 2420. Regulations need to

stop protecting competitors. Instead they need to promote competition. The market

will do the rest and consumers will benefit.

In closing, I favor competition for determining market share and production decisions, and I oppose rules that preordain winners and losers. Therefore, I support

H.R. 2420.

Mr. TAUZIN. Thank Mr. Pociask.

The Chair recognizes himself and members in order for 5 minutes.

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Let me first of all make the argument, Mr. Pociask, the opponents of 2420 made.

And that is, even though the bill specifically retains the requirements on the Bell Companies that they open up their markets in

order to get into the long-distance market, which as you point out

is worth $105 billion, even though the incentives are still in the bill

to open up the market to get to this $105 billion long distance market, they argue that if we give interLATA data relief through this

bill that somehow this $6 billion wholesale backbone market is

going to eliminate the incentive for the Bell companies to continue

their progress on 271 petitions and open up their local markets.

You say that is poppycock.

Mr. POCIASK. In fact the opposite may be true because—— Mr. TAUZIN. Could you pull the mike a little closer, Mr. Pociask,

so we can hear you?

Mr. POCIASK. In fact, the opposite may be true because once you

begin building out interstate facilities and points of presence, the

want to provide the full range of services increases. So to that extent it may be an incentive to build out.

Mr. TAUZIN. Your argument is that once they have sunk all the

money they have to sink into building Internet backbone facilities

for the broadband market that currently is worth considerably less

than the long distance voice market, that they will be incentivized

to maximize profits from that investment by completing their efforts to get 271 relief?

Mr. POCIASK. That is exactly right.

Mr. TAUZIN. And therefore the bill will actually serve as an incentive for the Bell companies to continue opening up their local

markets.

Is that right?

Mr. POCIASK. That is right.

Even if it is not the case, 251 is still there to make sure Mr. TAU- ZIN. It is still there.

You make a heck of an analogy in your written statement. I want

to read it.

You indicate that fully one-third of the customers today are

spending fully one-third of their time, rather, waiting for computer

screens to fill because they are at low speed and cannot get high

speed services.

And you make a point that customers are abandoning their online shopping carts, they are disconnecting, reconnecting and reloading screens. It is a little reminiscent of the long lines in the old

USSR. Lots of demand but supply is controlled and regulated. Big

lines at the supermarkets but no cabbage or potatoes in the store.

Mr. POCIASK. Thirty-one billion dollars of lost time is taken up

on the Internet.

Mr. TAUZIN. And you also conclude, in your economic review, that

the current interLATA data restrictions are entry barriers that

support the concentration of ownership in the backbone, which you

point out is very high.

They maintain market power in those concentrations and they

lead to restricted supply, likely higher prices to ISBs, and therefore

ultimately to consumers.

Do you conclude that this bill is very definitely pro-consumer?

55

Mr. POCIASK. Absolutely.

Mr. TAUZIN. Let me turn to you, Mr. Cali, to questions submitted

by a colleague who cannot be here, and he asked me to ask it of

you:

In your testimony, you argue in favor of each of the regulatory

requirements, including the interLATA data restrictions that currently exist in the law this bill would repeal. You argue that the

ILECs should continue to face them until they finally get 271 relief.

The question is. As the industry increasingly converges around

similar products and services, you, AT&T, are in fact providing

many of the same services to your own customers by cable modem

but you are not saddled with the same regulatory burdens.

And the question is. If you do believe that the presence of these

regulations is essential for the Bell companies, why wouldn’t you

want those same regulations applied to your company when you

provide the very same services?

Mr. CALI. Okay. Let’s look at why the regulations were applied.

But if I may, first, so we are careful not to overstate the regulatory burden on the Bell companies, let me make clear that the

FCC has been very careful to ensure that there is some flexibility

for the Bell companies when providing advanced facilities and services.

Consequently, packet switching and data facilities, such as the

D-SLAM, are not subject to the unbundling obligation. And when

a Bell company provides advanced services through a separate subsidiary, it is treated like a CLEC in terms of obligations.

With that said, you are quite correct. There are a number of obligations imposed on the Bell Company designed to open their local

telephone markets to competition. Those obligations were imposed

in an effort to erode a near century old, very resilient monopoly,

one that persists to this day; that is, a good public policy goal.

The long distance restriction, in particular, was needed to provide incentive to the Bell companies to give up this monopoly, to

provide them some reward for opening their markets. These are

good goals.

In addition, when on recognizes, as Verizon has done in New

York and SBC has done in Texas, that the path to parity, or the

keys to long distance relief lay with the RBOCs, and that those

keys will also unlock the local telephone markets to competition,

there is good public policy reason to pursue those goals.

Mr. TAUZIN. And so you think they still ought to be applied to

the Bell companies but not to AT&T when it provides the same

service.

I just want to make a point because my time is up.

Mr. CALI. Sure.

Mr. TAUZIN. I had this conversation with FCC officials just recently.

I think we can each draw our own conclusions from the New

York and Texas experiences. It is possible, as Chairman Bliley did,

to conclude that finally the Bell Company in New York and Texas

opened up their markets enough for the competitors to really go

after the residential customers finally, and therefore they are doing

it today.

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It is equally possible to conclude that competitors who could have

gone after the residential customer withheld doing so until they

had to, until it was very clear that the Bell Company was going

to get its relief in Texas and in New York. And therefore this question arises, and I will just leave it as a rhetorical question for the

record, because my time has expired.

If in fact, when 271 relief is finally granted on voice, which is a

bigger market as Mr. Pociask points out, the competition really

heats up at that point.

If I am right in my conclusion, and if the FCC speeded up the

process of 271, we would already have healthy competition for residential customers going on right now, because you guys would have

to be competing in all markets.

I think Mr. Pociask is equally correct, that if we are smart

enough to pass this bill, we are going to get more incentives for full

blown competition, not less, because that is the nature of removing

barriers to entry.

Mr. Pociask, I think you put your finger on it. Entry barriers protect competitors, they do not protect consumers. There is no case

I can make for keeping stores out of my town in an effort to protect

my consumers. I can make a huge case for bringing more stores

and more competition into my town. But I find it very difficult to

argue in preserving restrictions on one competitor, helping my consumers get a better deal. That is the problem with the current law.

And I finally want to say, if, in fact, we are really going to get

271 relief over the next 12 months to 18 months for everybody in

America, as the FCC is now saying is possible, if that really is

going to happen, then it is time for us to cut this thing lose and

let competition flow.

The Chair will yield to the gentleman from Texas, Mr. Green, for

a round of questions.

Mr. GREEN. Thank you, Mr. Chairman.

I was surprised I was the only Democrat left here.

Mr. TAUZIN. Let me again say, I want to recognize again that we

have excused members to attend that memorial service. And I want

to apologize to any members who had to leave and could not hear

this testimony but we were obliged to do so because we have some

witnesses who have schedule arrangements, and I wish you would

convey that to any member who might have been offended by our

decision.

Mr. GREEN. No problem, Mr. Chairman. In fact, for our colleague

on our committee, Bart Stupak, there is a memorial service, although I was actually on the floor on the rule a few minutes ago,

and I appreciate the forbearance of our panel.

Mr. Ellis, first I want to congratulate you on SBC’s 271 application and hopefully your approval will be used as an example for future 271 applications and allow the FCC to expedite what so far

has been a very laborious approval process.

And I know the committee shares that desire, having watched

that experience.

In reference to your 271 approval in Texas, if H.R. 2420 had

passed say to 2 years ago, and you were given the ability to cross

the interLATA boundaries, would you have still gone ahead with

your 271 application?

57

Mr. ELLIS. Absolutely, Congressman.

I think it has been discussed here that we have no choice under

the law but to open our networks. But beyond that we have a tremendous incentive to pursue the voice market, not just because in

and of itself there is $100 billion there in revenues, but it is an essential to our ability to market our full range of services to offer

the complete package, the one-stop shop. That is what is driving

our industry.

Mr. GREEN. That takes care of my next question. And while we

are on that topic of long distance, are consumers currently able to

purchase software that allows them to make long distance calls

through their personal computer?

Mr. ELLIS. Yes, they are, they do, and of course they bypass the

whole regimen of access charges, and that is a reality today.

Mr. GREEN. I know Chairman Kennard recently stated this ability to make these long distance calls over the Internet is one of the

main reasons not to give interLATA relief.

What is your response to Chairman Kennard’s solution?

Mr. ELLIS. Well, my response is that with respect to the world

of data and data high speed advance services, there is no bottleneck. It was not contemplated under the Act. The CLECs are seeking to take an unfair competitive advantage of the Act that did not

contemplate DSL, did not contemplate the growth in the Internet,

and that ultimately the high speed access is something that is

going to happen, and the question really is whether particularly

the rural areas are going to be denied that benefit for some period

of time, or whether they are going to enjoy the same benefits that

the urban and less rural areas are.

Mr. GREEN. Thank you.

Mr. Young, I know my staff Mr. Chairman, I understand we had

a difference on the pronunciation of the new Bell Atlantic, but at

least in my area of Texas, GTE is now Verizon? Is that correct, Mr.

Chairman, how we pronounce it?

Mr. TAUZIN. We have got several variations here if you want to

play with it.

Mr. GREEN. Okay.

Mr. TAUZIN. Verizon is correct.

Mr. GREEN. Verizon, okay. Sounds pretty good until our colleague

the ranking member comes back. In Massachusetts, I have always

had trouble with some of their pronunciations.

And my California folks have trouble with mine.

To date, the FCC has approved the two 271 applications, taking

into account the length of time the FCC has needed to complete

their reviews, do you believe that the FCC is capable of completing

more than one 271 each year?

And again, coming from the Bell Atlantic arm of Verizon?

Mr. YOUNG. Yes. I believe they are capable of handling more

than one application at a time. Otherwise it would take about 9

years to get through, literally, if they were to handle one right

after the other in the statutory period.

Mr. GREEN. And then it would be time for us to do another

Telecom reform act.

Mr. YOUNG. Well, there’s be the Internet 3 or something at that

point.

58

I do believe that they have the ability to do that and that is why

I am confident that the 271 process will go forward for voice. It is a large market, $100 billion plus. Our customers require us

to be full service providers. That is, to offer local, long distance,

wireless, and data all in one convenient form for them to use and

to be billed for.

So there is a tremendous incentive to continue the 271 process.

We believe that the template has been identified. We have two examples of it. New York and Texas. We are going to be filing in

Massachusetts and Connecticut this year, and then we will be able

to roll that template along into other states.

So I am quite confident that the 271 process will continue.

Mr. GREEN. Thank you. Mr. Chairman, I yield back my time.

Mr. TAUZIN. I thank the gentleman.

The gentleman from Florida, Mr. Stearns, is recognized for 5

minutes.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. Khanna and Ms. Schonhaut, this question is for you.

When we passed the Telecom Act, we talked about the 14 points

that the Bell Operating Companies would have to comply with before they get into long distance.

And over the years, they found that the FCC has increased these

points beyond the 14 and, depending on which State you go in, the

public service commission has made additional requirements.

So what would you say to the argument that they are having

trouble complying with the 14 original points in the Telecom Act

because the FCC has made it more difficult for them and so they

are at a disadvantage?

Ms. SCHONHAUT. I think I would say to that that that is a superficial view, frankly.

Mr. STEARNS. That is a what?

Ms. SCHONHAUT. A superficial view of how the 271 process

works. In each State and this happened in New York and Texas

the competitors and the Bell Companies attend what is called

workshops, which are really cooperative processes of discussing—— Mr. STEARNS. Can you keep this real short. I have got about

three or four questions here.

Ms. SCHONHAUT. Okay. I think my point is Ms. STEARNS. Because I understand.

Ms. SCHONHAUT is that the states work with the RBOCs. The

RBOCs are very involved in how the 271s are granted, and they

influence the process and it is a compromise process.

Mr. STEARNS. Okay.

Ms. SCHONHAUT. And so I do not think that you could say that

it is unfair.

Mr. STEARNS. You just do not agree?

Ms. SCHONHAUT. No, I do not.

Mr. STEARNS. Okay.

Mr. Khanna?

Mr. KHANNA. Well, I think it is very simple.

They ought to have implemented the Act on non-discriminatory

terms. That was one of the checklist items. So they should have

given me cageless co-location. They should given me line-sharing.

I should not have had to go to the FCC to get it.

59

They have gotten the 271s. I would have supported them 6

months ago or, you know, 3 years ago, had they given me what I

had asked for.

Mr. STEARNS. Okay. And Mr. Young, would you like to reply? I

mean, you obviously agree with what I said, I assume?

Mr. YOUNG. Yes. The process at the State level has been very

thorough. A lot of what is in the act came out of the New York regulatory process before the Act was introduced.

The collaborative process gives companies an opportunity to

present their views and have them taken into account. It is quite

unprecedented but it has worked successfully.

Mr. STEARNS. Okay.

Mr. Cali of AT&T had mentioned the waiver process.

Let me ask, Mr. Ellis, have you taken advantage of the waiver

process for the long distance data for the rural locations?

Mr. ELLIS. We have joined in a Mr. STEARNS. Just answer yes

or no.

Mr. ELLIS. Yes. We joined in a 706 petition. Bell Atlantic filed

for a specific waiver and the FCC applied a set of rules that make

it virtually impossible. You can only get a waiver to provide a cross

LATA if you show there is no other long distance interLATA carrier in that LATA, and it is impossible; you cannot. That is not a

solution to this problem.

Mr. STEARNS. Okay, Mr. Pociask, let’s talk about the investment

that these other folks have made. You have supported the bill but

what happens to this investment, in your opinion, in the event that

this bill is passed? Wouldn’t all these folks be hurt?

Mr. POCIASK. No, not really, because by various accounts you

have the Internet doubling every few months and others have said

Mr. STEARNS. So Covad has an investment of $4- or $5 billion in

one area like that Mr. POCIASK. I think there is plenty of growth.

Mr. STEARNS and you think that that would not affect their business at all?

Mr. POCIASK. Only to the extent that when the backbone operates as a cartel, that there is umbrella pricing.

But I think the more important thing here is that we have competitive prices. I do not think we need to inflate those prices or protect them. And if that is the case, in their business cases I do not

know, but I think what we really need is competitive prices. And

am sure that backbone is not going to go to waste, believe me.

Mr. STEARNS. Okay. Mr. Khanna, do you think your company

would be affected financially if this bill is passed?

Mr. KHANNA. Absolutely. We would be denied the cageless co- location. We would be denied line sharing. We would not be able to

compete for consumers.

Mr. STEARNS. Okay. Ms. Schonhaut?

Ms. SCHONHAUT. The way I look at it is that when the elephants

dance, the mice get crushed. I saw three large companies up on the

board when Mr. Pociask talked. There are two of the RBOCs here.

We are little mice, and if one relies on competition from all those

companies, we will really be destroyed.

Mr. STEARNS. Okay. In New York, they have approved your company going in. I was just curious, Mr. Young, how that is going?

I mean, are you happy with how that is going? Is it going quickly

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enough? Are you excited about it? Because you are the bellwether

here.

Mr. YOUNG. Well, actually it has been quite successful. We are

ahead of projections in getting long distance customers. One of the

main reasons is we are targeting a market that has been largely

ignored, and that is the sort of low-volume consumers that usually

get stuck with the minimum usage fees.

We eliminated minimum usage fees for them. We have given

them flat rate pricing so they see exactly what it is they are paying, and it has been quite a bit hit in New York.

Mr. STEARNS. There have been some claims here on this panel

that the RBOCs had violations and committed these violations with

the intent here, and I would certainly want to have you have the

opportunity to respond because you used the word ‘‘fraud,’’ and I

thought that you should have every right to respond to that.

Would you like to comment?

Mr. YOUNG. I do not believe Mr. Khanna was referring to

Verizon.

Mr. STEARNS. No, I know he was not but I mean he was saying,

in a vernacular sense, that they have had a very difficult time implementing and getting agreements and once they have, they have

found it difficult because the lines are being shifted and being

transferred and so forth like that, so I was curious if you would

like to comment?

Mr. YOUNG. I think that given the enormous number of transactions that are being handled on a daily basis, it is tens of thousands in New York, inevitably claims arise.

I did not hear Mr. Khanna say that there was a lack of forums

that he could go to to have his claims considered. And I think that

he will make his claims, and in some cases he will be victorious,

in other cases others will win.

But the point is, and I want to hammer this home, the requirements of Section 251 will exist after this bill has passed and there

will be recourse at the FCC and appropriate Federal district courts,

in the event that people believe that they have been wronged and

that markets are not open.

In addition, both SBC and Verizon, under our merger conditions,

have to file regular reports to demonstrate that our markets are

open. So you combine the enforcement activities that the FCC engages in under Section 251, you combine the availability of reports

that can demonstrate that our markets are open. You combine the

market incentives to continue to get 271 relief.

I think that these are all going to benefit consumers, and that

the bill can only be positive.

Mr. STEARNS. Mr. Chairman, could I have unanimous consent

just to ask one more question?

Mr. TAUZIN. The gentleman’s time has expired. Without objection, the gentleman asked for an additional minute, and without

objection.

Mr. STEARNS. Mr. Cali, you know what the RBOCs are saying,

they have all this regulation and the other folks do not. Isn’t that

a legitimate argument of how can they compete if they are trying

to compete with cable, Direct Television, people like Covad and yet

they have all this burdensome onerous regulation.

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Isn’t that a valid argument?

Mr. CALI. When set in context, it is not.

Mr. STEARNS. Say again?

Mr. CALI. Set in context. Let’s look at the history.

These are broadband services they did not deploy. They did not

deploy them until competition spurred them into deploying them.

Now that they feel the spur of competition, they are deploying

quite well, and they are competing quite vigorously.

And again, we have to look at the other public policy concern

here that the rules of the 1996 Act were designed to open the local

exchange market’s competition, something that remains

unachieved, undone.

Mr. STEARNS. Mr. Ellis, is there anything you would like to comment to that?

Mr. ELLIS. Yes, I sure would. Thank you, Mr. Congressman.

Just so everyone is clear, there are two sets of wires that go into

most residences, cable and telephone. The cable people provide the

exact same kind of advanced service over their pair of wires. They

do it with their own network, completely independent of our facilities.

At the same time, we want to provide the exact type service over

our pair of wires, and what we have now is a system of asymmetric

regulation. We are totally regulated and they are unregulated and

we are in the same market.

And what is important I think as a public policy matter for the

future, they are permitted to absolutely discriminate, to refuse to

interconnect, and they do.

Mr. STEARNS. Who is ‘‘they’’?

Mr. ELLIS. They being the cable companies and in particular

AT&T.

They also have the right to refuse to provide open access. They

have the right to acquire content. If you want to see in the future

and have access to instant messaging to talk about AOL, for a

minute, AOL and Time Warner merge.

If you want access under instant messaging from Time Warner,

they have the right whether they do it or not is another question

they have the right to tell you, as a subscriber, the only way you

get access is if you take our cable modem access as opposed to the

telephone company’s. They have the right, in other words, to leverage content over transmission and transmission over content. That

is something we do not have.

Our position is simply this. In a competitive market, there

should not be government intervention over the rates, terms, and

conditions. But if you are going to have regulation, then it ought

to apply equally to all providers in that market specifically; the

cable people and the DSL people and the wireless people and the

satellite people, either regulate us the same or do not regulate anybody.

Mr. TAUZIN. The gentleman’s time has expired.

Anyone else who wishes to respond may certainly do so.

Ms. SCHONHAUT. Again, the elephants are yelling at each other,

and I am a mouse here. I will say that my company will volunteer

to be regulated exactly as the RBOCs are. I will unbundle, I will

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interconnect, I will do telework, whatever it is, if that is what it

takes to keep the Act the way it is.

Mr. TAUZIN. Without passing of the bill?

Ms. SCHONHAUT. Yes.

Mr. CALI. May I make one point? I think it is particularly telling

that some of the most vocal proponents for forced access to cable

systems or regulating the systems are the incumbent local carriers.

And one has to ask why is that? What benefit do they gain? They

are, by and large, not ISPs. Why are they doing this?

The reason they are doing this is the cable industry is investing

tens of billions of dollars of capital at risk to create local telephone

competition. To the extent they can create costs, impose delay, and

otherwise create marketplace uncertainty, they will slow the cable

industry down. And right now the cable industry, as far as residential local telephone service is concerned, is the greatest hope that

consumers will have that facilities-based choice for telephone service.

Mr. TAUZIN. Anybody else who would like to throw any invectives

at anybody else?

Mr. HAYNES. If I may—— Mr. TAUZIN. The gentleman’s time Mr. Haynes might respond,

and Mr. Pociask. We will let you both respond, and then the

gentlelady from California.

Mr. Hayes first, and then Mr. Pociask.

Mr. HAYNES. Mr. Chairman, are you still restricting 251 or can

I say something about line sharing?

Mr. TAUZIN. Please do.

Mr. HAYNES. The line sharing issue, when I listen to Covad worrying about being a small company, sort of gets my attention. Our

equity is somewhere between 2 and 5 percent of the equity of

Covad and we are a privately held company.

Most of that money came from competitive enterprises since

1983, when we started getting involved in cellular. We provide our

own loops everywhere we provide service. We intend to provide our

own loops wherever we go. The line sharing is devastating to existing customers and I just do not get this I’m-too-small-at-their-size

argument.

Mr. TAUZIN. Mr. Pociask, we will have to wrap this up. I need

to go to the gentlelady from California.

Mr. POCIASK. Just two short things.

One, we should point out that it was the FCC that initially denied video dial tone which was the ADSL. So when we say who

came first, it was I believe Bell Atlantic that had to go to the Supreme Court to have a right to provide video content over an ADSL

line.

So that is one thing we should point out.

The last thing is back to the initial question. We should point out

that if you look at the 3 days before the 271 approval in New York

to the 3 days after, to see how the stock market reacted to the business cases, the CLECs had over a 5-percent increase in growth over

that period, whereas the long distance and local incumbents were

negative on average.

So I would say that the market will not blink. There is plenty

of growth out there.

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Thank you.

Mr. TAUZIN. The Chair now yields to the gentlelady from California, Ms. Eshoo, and I will be as generous with time as I can be.

Ms. ESHOO. Thank you, Mr. Chairman, and good afternoon to

you, my colleagues and to everyone that is here to testify.

First I am assuming that you have done a unanimous consent.

There has been a request, a unanimous consent request for statements to be placed in the record. And I will place my full statement

in that record.

Mr. TAUZIN. Without objection.

Ms. ESHOO. Mr. Chairman, I want to thank you for holding this

hearing. It is a very important issue.

I know, or I am sensing that there was some apparent confusion

today and some last minute changes regarding this legislative

hearing.

Many of us were at St. Peter’s for the memorial mass for B.J.

Stupak.

For the witnesses that are at the table, Art Stupak is a member

of this committee and he and his wife lost one of their sons, so we

joined together over there.

I feel like I am diving into the ocean instead of, you know, one

of the feeders for this.

So if I am asking questions that have been asked before, I do not

think very many people really came to this. We were going to take

a break to accommodate.

What I am after is another legislative hearing on this issue when

we come back.

Mr. TAUZIN. Will the gentlelady yield?

Ms. ESHOO. I would be glad to.

Mr. TAUZIN. Again, let me apologize to the gentlelady. Our problems basically were compounded when we had to start 40 some odd

minutes late. We have witnesses who have commitments to and

time slots at the airport. I could not do anything but move on. I

apologize for that.

Ms. ESHOO. I understand that.

Mr. TAUZIN. The gentlelady is recognized.

Ms. ESHOO. Everyone is wondering what the two of us are talking about. We had a lovely chat yesterday on the floor and there

was going to be a break taken ‘‘lunch’’ in quotes, while we went

over for the mass. But at any rate, thank you, Mr. Chairman, and

I look forward to a continuation of this legislative hearing on this

very important issue.

Now let me get to my questions.

To Verizon and whomever else would like to jump in, it is my

understanding or view from the information that I have gathered

that the 271 process is working. SBC in Texas and in New York

and that this can indeed work nationwide.

Now that the two applications have been approved, would you

comment on what you think what we will have in terms of a national blueprint in this area?

Let me get another question down because I used quite a bit of

time on my conversation with the Chairman.

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I would like to ask Mr. Khanna from Covad about the court

cases. I do not know whether this has been touched on but I want

to get some of this down for the record.

Both Pac Bell and SBC have been found guilty of bad acts.

Are you still facing co-location problems and what is the status

of these antitrust cases and what forced you to file them?

If you could comment on that.

And then I have another question but let’s see if we can get to

these first.

Mr. YOUNG. Okay. I do believe that there is a pattern, a blueprint, a road map, if you will, for other companies to get 271s approved, and you know, the aspects involve some sort of testing of

your systems to demonstrate that they do operate in a non-discriminatory way, and that they can handle the volume of orders

placed by competitors over your systems.

Both SBC in Texas and Verizon in New York have demonstrated

that.

I am pleased to report that we plan on filing additional applications this year in Massachusetts and Connecticut based on the

same blueprint, if you will, that was successful in Texas. And it is

for that reason that I believe that, you know, initially when the Act

was passed, you sort of had the incentive for Bell’s companies to

get into long distance, was open up your markets.

What we are seeing now is we are opening up our markets anyway, and that we now have the blueprint for the 271. But there

is this additional benefit that could be realized if we had

interLATA data relief, and that is is that we could bring advanced

high speed services closer to the local communities, provide more

capacity, and you can do that without sacrificing the incentive that

is inherent in the 271 process. And that is why I was emphasizing the market is $100 billion market. The Internet backbone business, if you will, is only a $6

billion market.

So what we are trying to do here is preserve the incentives to

open up the local markets, which is happening, while at the same

time providing Internet access to others.

One additional point, but SBC and Verizon have been through

mergers. As a result of those merger conditions, we also have additional incentives to open up the marketplace.

Mr. Chairman, I did want to clarify a comment I made earlier.

I misspoke when I said that part of our merger——

Ms. ESHOO. I do not want you to use my time clarifying. You can

do that after. Maybe the Chairman can ask you what you want to

clarify, because I think that I am getting close to running out of

time.

Let me just ask you, since you are just finishing up on that, how

does the elimination of line sharing accomplish the purposes of the

legislation?

Mr. YOUNG. Well, one of the challenges, when you are deploying

high speed services, is there is a lot of innovation involved. There

is a lot of investment in equipment involved, and one of the challenges for companies that want to deploy this new technology, as

well as for regulators in trying to make sure that things are deployed in an evenhanded way, is how do you permit companies to

65

benefit from their innovation and from their commitment to investment while, at the same time, making sure that markets are open?

Ms. ESHOO. I think you are giving me a response and not an answer, but we will get to that another time, because we are going

to have another legislative hearing on this gigantic issue.

Mr. Khanna, can you address yourself to the issue I raised?

Mr. KHANNA. Thank you. I would be pleased to.

With respect to our court cases, we have several arbitration proceedings pending with the SBC Company, Pacific Bell.

In the first instance, they were found to have engaged in pervasive and fundamental bad faith in addressing our co-location and

other issues.

There was a subsequent award of $27.5 million, that is excluding

attorneys’ fees and costs that we were awarded.

Our antitrust case is currently pending and is set for trial for

September of next year. Our case is against Bell Atlantic. We filed

an antitrust case which has continued to proceed toward trial.

Their counter lawsuit against us on patent infringement was dismissed on a summary basis.

So at this point, it is fair to say that we have won 100 percent

of our actions against the phone companies.

Ms. ESHOO. What forced you to file these cases?

Mr. KHANNA. It was a pattern of behavior that we saw, for example, excluding us from central offices on the grounds that there was

no space when in fact we were aware that there was space in those

central offices.

So when we do not have access to a central office, we are unable

to provide service to anybody served by that central office.

Similarly, we were put in a position of a price squeeze with respect to the denial of line-sharing, which we now have. That linesharing does not require any innovation. It is simply a physical division of the frequencies on the use of a copper wire. It is plain old

copper wire that has been in the ground for about a hundred years.

And we were denied line-sharing until the FCC expressly ordered

it, and that has allowed us to serve consumers and bring competition for consumers and really brings Covad into the consumer

space in a big way.

Ms. ESHOO. Thank you.

And thank you, Mr. Chairman, for your commitment to have a

further hearing on the issue. I appreciate it. And this is, I mean,

we are where we are on these issues. Some members really have

not made up their minds on what you are offering legislatively, but

I think that we all benefit when many of us are here.

We have some very lively it is always lively at your side of the

table because we have excellent witnesses but we need more members engaged in this and I appreciate your commitment.

Mr. TAUZIN. I thank the gentlelady. And I would respond that of

course we did have a hearing on the issue. It was much more widely attended, and we had some interesting give-and-take in that

hearing.

This is not over yet, but we are certainly well on our way I think

to building consensus around it.

I thank the gentlelady.

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The Chair recognizes the vice chairman of the committee, Mr.

Oxley, for a round of questions.

Mr. OXLEY. Thank you, Mr. Chairman.

Mr. Khanna, is this your map? Is this part of your testimony, the

map of Ohio, showing the services of SBC and non-SBC Ameritech?

Mr. KHANNA. I believe it is.

Mr. OXLEY. And I am not quite sure exactly where this is, but

it is my understanding that this map indicates that the Bell companies do not serve areas like my home county of Hancock. But I

have seen the articles in the paper that Ameritech serves Findlay

and our neighboring communities, many of them rural.

And in fact, Ameritech is installing DSLAMs in order to provide

DSL service this year.

Was your testimony prepared before that was the case?

Mr. KHANNA. I am not exactly certain as to when Ameritech was

rolling its or SBC were rolling out their DSLAMs in those central

offices. But I do know that in most markets, we have been first to

market, prior to the incumbent offering their DSL services from

those central offices.

Mr. OXLEY. Well, as you know, Findlay and Springfield in Ohio

are separated by an interLATA barrier. And with the passage of

this legislation, Ameritech would be able to combine high speed

services and equipment in Findlay, and also be able to provide new

services in Springfield, which is probably about 65 or 70 miles

south of Findlay.

And if, indeed, Ameritech were able to do that, wouldn’t that

open up the market then for Covad to provide DSL competitive

services in Findlay and Springfield?

Mr. KHANNA. I believe the markets are currently already open to

Covad. The markets would be open to the incumbents as soon as

soon as they comply with the 271 process which is frankly an area

where we would like to see them comply.

And it is a disappointment frankly to us that only two of the incumbents have in fact complied and have demonstrated compliance

with the Telecom Act. We would frankly like to see more of them

do that.

Mr. OXLEY. What kind of service do you have in those regions I

mentioned?

Mr. KHANNA. My understanding of our standard configuration for

our DSLAM service is to afford at least five versions of DSL service. We offer not only ADSL, we also offer SDSL services, which is

a symmetric DSL service so we offer our customers a menu of DSL

services that is far more rich than the range of services afforded

and offered by the incumbents.

Mr. OXLEY. And where are those services available?

Mr. KHANNA. I do not have a detailed list in front of me. That

list is being revised every day. We were opening up new central offices.

My belief is that we are today offering service in terms of in Columbus, Cincinnati, Cleveland, and Akron. Those are definitely——

Mr. OXLEY. Those are all urban areas?

Mr. KHANNA. We provide service both in the urban areas, as well

as the suburbs and going into what we sometimes call rural areas.

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In fact, we have an IDSL service which allows us to serve our customers that are served by long loops.

In rural areas, for example, you will typically have a

customer—— Mr. OXLEY. Where would you, in these rural areas that are apparently the white parts of the map, what part of those, particularly in northwestern Ohio do you serve?

Mr. KHANNA. It would depend on which point in time we are

talking.

Currently, for example—— Mr. OXLEY. I am talking about right now. This reminds me of a

story. People asked Yogi Berra what time it was and he said, do

you mean right now?

That is a fair comment. Our business is changing. We are expanding very, very quickly, but at this point in time, I am aware

that we are offering service in Columbia, Cincinnati, Cleveland,

Akron, both in the urban and suburban areas.

Mr. OXLEY. Okay. Well, that is pretty urban and suburban. And

this issue is rural, of course.

Let me turn to Mr. Cali.

Mr. Cali, by your estimation, by how long did the litigation that

followed passage of the 1996 Act set back the process of opening

local and long distance markets to competition?

Mr. CALI. It is difficult to estimate and it is continuing to set

back, to some extent, local competition. There was an Eighth Circuit order recently concerning the pricing methodology.

And that is one of the problems. The marketplace needs certainty

to invest. There was extensive litigation following passage of the

Act.

We have started to move beyond that. As I said, there is a recent

Eighth Circuit decision which introduces more uncertainty and

more concern currently.

Mr. OXLEY. But you say there is still some vestiges of that litigation still hanging out there?

Mr. CALI. Right. It is being resolved as we move forward, but

there is still some vestige.

Mr. OXLEY. Mr. Young, GTE was never subject to the long distance restriction, as you know, under the MFJ or Section 271.

In the wake of your company’s merger with GTE, Verizon now

serves a substantial portion of my district including Marion, Wyandot, and Hancock Counties. As a matter of fact, GTE has a substantial presence in Marion, as you know.

What steps has or is or will the newly merged company be taking

to offer high speed data service in those areas?

Mr. YOUNG. Well, we have a DSL offering underway in those

areas.

We have signed, despite the fact that there is no 271 requirement hanging over GTE, GTE has signed over 1400 interconnection

agreements nationwide. So the point is that our markets are open.

Mr. Khanna was able to use them to get in first, as he so noted.

Mr. OXLEY. But precisely because we do not have that concern

Mr. YOUNG. Right.

Mr. OXLEY my question was specifically to those areas, and it

seems to me that despite the litigation and all of the stuff that

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went on, you lost a lot of time in providing high speed Internet access service to those particular areas, did you not?

Mr. YOUNG. Yes, we did.

Mr. OXLEY. And you are trying to play catch-up now?

Mr. YOUNG. That is correct.

Mr. OXLEY. Hopefully?

Mr. YOUNG. Yes.

Mr. OXLEY. Thank you. I yield back.

Mr. TAUZIN. I thank the gentleman.

The Chair will recognize himself for another round and I believe

Mr. Dingell is on his way down, and I know he wants to engage

you all as well, so we will keep this going a little longer.

Let me turn to the question of capacity of the broadband networks, and Mr. Cali, I want to talk with you just a second about

that.

Two studies done by AT&T’s own engineers entitled ‘‘Internet

Growth: Is There Moore’s Law for Data Traffic?’’ which we are done

July 11 the preliminary version came out in July 11, 2000 points

up the need for indeed a great deal more backbone capacity simply

to make sure we do not face a serious backup.

And this is the observation your own studies made.

‘‘The conventional wisdom is that the exploding increase in Internet traffic is the main driver of the expansion of the networks,

backbone networks. ‘‘It also seems to be implied that the ever increasing capacities

of WDM, wave length division multiplexing systems, both in terms

of the number of channels and individual channel rates, coupled

with the forecasted fiberglut will result in the national networks

being easily able to accommodate whatever growth rate the Internet throws at it. ‘‘We do not think the carrying capacity of the network, at least

the long-haul national backbone networks, can or will grow to accommodate arbitrary traffic growth rates.’’ And here is the real

kicker.

‘‘In fact, we believe that if traffic grows by factors of more than

2 or 3 times a year for any sustained period, the transport backbones are likely to become a serious bottleneck.’’ The point again

is that with the ever-increasing growth rate of broadband usage

that is predicted, if in fact we have this explosive growth once

Americans feel the full capability of backbone, once broadband,

once in fact video becomes part, as it appears to be real soon to be

a part of the broadband Internet systems, your own studies indicate we are going to be in trouble. We are going to have real problems with capacity.

And your own studies seem to indicate that the more players out

there investing in backbone, the more likely the whole systems are

going to work better, yours as well as the systems that your competitors in this marketplace will need in order to give all Americans full access to full backbone marketplaces.

What is your comment about again your own studies in that regard?

Mr. CALI. Let me say this, and I am unfamiliar with the specifics

of those studies. But we do know that there are more than 40

Internet backbone providers.

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This year and next, six new networks are coming on line that represent an $18 billion investment. Capital has been pouring into

the industry, and the reason it has been pouring into the industry,

and the Congress should be very proud of this, is because of the

framework and certainty provided by the Act.

We believe the growth will continue if we have the marketplace

certainty we need and we rely on the competitive market to drive

investment.

And the final point I would make is the point I made in my opening statement, that we should recall that the Bell companies are

currently affiliated with Internet backbone providers and it is not

at all clear that this Act would drive more deployment than those

affiliates are currently providing.

Mr. TAUZIN. We also see in these studies an indication that while

there are controversies about how many POPs exist and how many

of these POPs are fully capable at high speeds, and depending

upon whose definition of what high speed is, and we all hear different definitions of it, we are told that there are an average of 17

router HOPs on Internet connections today.

That is an indication that the so-called POPs, if they are out

there, they are not as connected to as many ISP backbones and

they are not as certainly as close to where the users live.

What is your comment about that statement?

Mr. CALI. Well the point, and the point we make with our map

of the more than a thousand POPs being deployed is what is relevant for a customer to access a high speed node that would deliver

and traffic, its data, to the Internet at high speed. And that seems

to be the most relevant measure to whether customers dispersed

across the country can get access to the Internet at high speed.

Mr. TAUZIN. Well the point the studies made, the point we are

seeing here, is that capacity supposedly widely available is in fact

strained. And that, ironically, your own studies seem to back that

up.

And let me turn quickly to Mr. Pociask.

If that is correct, if AT&T’s studies about capacity being strained,

if the reports we have of router HOPs and strained conditions and

lack of interconnections to those POPs are true, and yet the demand is there for these services, are we facing a problem for consumers where a few companies own the only backbone that is

available and the backbone ain’t enough to get around?

Mr. POCIASK. What the observation that there are shortages is

typical of is what you would see in something that is a cartel or

an oligopoly, in the sense where you have limited supply and higher prices as a result.

I should direct you to a PR News December 6 news report that

AT&T announced an agreement with three telecom companies to

construct 16,500 miles of fiber to an existing 30 cities. It would not

be there, they would not be building this if there was not a shortage.

I think what we are seeing is that there is a lot of demand out

there, and it is important that we get some supply.

Mr. TAUZIN. As a final question, Mr. Ellis, would you like to respond to Congresswoman Eshoo’s concerns with the Pac Bell and

SBC problems?

70

Mr. ELLIS. Thank you, Mr. Chairman, I would.

I would point out that SBC has well over 2000 interconnection

agreements across the country with hundreds, literally hundreds of

carriers.

And the almost 5 years since the Act has passed, we have this

single arbitration decision in California that was adverse to us.

That is on appeal. We are in the courts challenging it. I am hopeful

that it will be set aside.

But I believe, when you look at our record of the thousands of

transactions that have taken place with countless carriers in Texas

alone, for instance, we have almost 400 carriers, interconnection

agreements, interactions all the time.

We have a record we are proud of in meeting our obligations

under the Act. I regret deeply that the arbitrators reached a different conclusion. We are on appeal, and I am hopeful that we will

eventually prevail.

Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Ellis.

The Chair yields to the ranking minority member, Mr. Markey,

for a round of questions.

Mr. MARKEY. Thank you, Mr. Chairman.

Mr. Ellis, do you believe that Mr. Tauzin’s bill is a bill of attainder?

We are going to check from now on.

The last time SBC testified, they were encouraging us to pass the

bill, then they sued on it.

So it is a bill of attainder?

No?

Mr. ELLIS. Unfortunately, we lost that one.

Mr. MARKEY. That is what I am saying. That is what I am wondering about. I mean, how many—— Mr. ELLIS. The Chairman is a bill of attainder. Good question,

Mr. Markey.

Mr. MARKEY. Mr. Ellis, I see that both of you have statements

in your testimony on the first page that I would like to read and

ask you a question about to get to the heart of your philosophy.

Mr. Ellis, on the first page of your testimony, you say. All service

providers should be subject to symmetric regulatory requirements.

And Mr. Young, you state, however, that policymakers must

avoid applying old regulatory models to an entirely new, competitive technology.

So my question to you guys is, is how these statements reflect

on whether there should be per minute charges, access charges on

Internet telephone calls, IP telephony.

Should we treat everyone the same and apply such charges to

Internet calls forbear from applying them to a new, competitive

technology, or take the opportunity to revamp the old, bloated access charge regime that today exists, and deregulate charges and

drive out historic subsidies.

Which way would you go on that?

Mr. ELLIS. Well, Congressman, the first point I would say our

basic position is in competitive markets there shouldn’t be any regulation by government rates, terms and conditions. That is the

threshold point.

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But to get to your point——

Mr. MARKEY. So you would agree to get rid of those subsidies,

then? No longer would the government be able to protect?

Mr. ELLIS. No. My position is the government can have it either

way. Either you can have a deregulatory regime and that is fine.

If you are going to have pervasive regulation, the fact is there

are subsidies that are reflected in those access charges that are not

reflected in local rates.

In Texas, our local rate, after 110 years, is less than ten dollars.

No one would contend the local rate, the cost is ten dollars. It is

20, 30, we could argue about it, but it is substantial. The difference

between the ten dollar rate and the $30 of cost in round numbers

in our jurisdiction in Massachusetts, everywhere, there are different levels of subsidy.

It is not something that we dreamed up, it was a public policy.

Mr. MARKEY. So you would keep the old access charges.

Would you have access charges for IP too?

Mr. ELLIS. No. I am saying I am comfortable, let’s go to a deregulatory model. Fine. Let’s do it.

Mr. MARKEY. So you get rid of the old access charges?

Mr. ELLIS. That is fine, get rid of them.

Mr. MARKEY. It will not be so low, but they are you are being

subsidized. Would you get rid of all those subsidies coming from

the competitive companies?

Mr. ELLIS. The system that you all put in place was supposed to

get rid of those subsidies, called a universal service. We have been

waiting for five, almost 5 years for that to happen.

We are not here to argue for subsidy. What we are here to say,

let’s have deregulation, but what I submit the country’s not ready

for is to have a local rate in my State of Texas to go from $9.85,

which is on average Mr. MARKEY. Will you help us to get rid of

those subsidies, though, that are built into the system for the local

companies?

Mr. ELLIS. The FCC was charged by——

Mr. MARKEY. So you would support us in that, getting rid of subsidies?

Mr. ELLIS. I would support, I would support the rationalization

of the subsidies, absolutely.

Mr. MARKEY. That is important.

Let me ask one final question.

I am sorry, Mr. Young.

I do not want to take up too much time.

But there is a lot of emphasis being placed in the debate on getting broadband services to rural America, something on which I am

not as familiar as I am with urban and suburban America.

The Telecom Act is working quite well in fact in urban and suburban America. I do not think there is any debate about that. It

does work there.

But critics of the Telecom Act allege that competition and high

speed capability lag in rural communities.

My question is how much of this alleged problem is that the Bell

companies have not been permitted long distance carriage to and

from those rural communities?

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How much of it is due to a national time line for growing competitive alternatives to grow out into rural America?

And how much is due to the fact that the Telecom Act largely

exempted rural communities from competition at the request of the

rural members here in Congress?

That is something that I acquiesced to because that was a request made to me.

Mr. Young?

Mr. YOUNG. Well, the issue of service to rural America has historical roots in how companies chose to deploy services based on

the ability to recover those costs, and obviously there has been a

system of subsidies that is designed to make sure that rural America has had voice grade telephone service.

Now the question arises, as we get to high speed data services,

how should we make sure that rural America is connected.

And the interesting thing here is that this bill helps because the

local companies already have those little inner office facilities that

are needed; the State roads, the on-ramps, the access roads. They

are already in place to serve to provide local service, so it is just

a question of turning them on to cross the line of boundaries to provide high speed data service.

Let me give you an example. Charleston, West Virginia, there

was no high speed POP. Customers in West Virginia came to us

and said, can you provide the service. Well, Pittsburgh is the nearest high speed Internet facility, so we asked the FCC for permission to cross the line of boundary to go to Pittsburgh to haul a facility back into Charleston. That was a 706 request that you all authorized us to ask.

What happened at the end of this situation is that, faced with

this request, suddenly where no inter-exchange character had in

the past offered to provide the service, suddenly one appeared and

the FCC said, oh, well there is someone here to do it, and so they

denied our petition.

Now the fact of the matter is, if that is the way we are going

to deploy high speed data or data services in rural America, I think

that is unacceptable that we have to wait for someone to come in

and provide it when in fact we have the facilities already in place

and can do it much cheaply.

So I think that the time is now. I think that in the context of

this bill, it is appropriate to make that narrow exception to allow

us to do it.

Mr. MARKEY. Okay, Mr. Khanna, could you just respond to the

same question?

Mr. KHANNA. I am itching to respond.

If the rural area is served by a Bell company, I have no problem

because I can go in there and compete with them. So just as we

have brought competition to urban and suburban areas within the

Bell operating companies, we will do that. So I submit to you that

this bill has it backwards, which is this bill should eliminate the

exemption for rural carriers because you can rely on competition.

And we have demonstrated, I stand on our record; 40 percent

today, 50 percent by the end of this year, 75 percent by the end

of next year, and on thereon.

73

So my point is competition and the Telecom Act will bring competition to the Bell operating areas that include the rural areas,

but will not reach the areas from which I am excluded which are

the areas that are exempt under the existing law.

Mr. TAUZIN. Thank the gentleman.

The Chair recognizes the gentleman from Michigan, the ranking

minority member of the full committee for a round of questions.

Mr. DINGELL. Thank you, Mr. Chairman.

This question is to Mr. Cali, yes or no.

Your company, AT&T, provides high speed Internet services

using cable modems?

Mr. CALI. Yes, sir.

Mr. DINGELL. Mr. Ellis, your company, SBC, provides high speed

Internet or DSL service using telephone wires, yes or no?

Mr. ELLIS. Yes.

Mr. DINGELL. And Mr. Young is that true in your case?

Mr. YOUNG. Yes.

Mr. DINGELL. Now, Mr. Ellis, this again is a yes or no. I understand that there may be differences in the relative technologies but

these are functionally equivalent services, are they not?

Mr. ELLIS. Yes.

Mr. DINGELL. Mr. Young?

Mr. YOUNG. Yes, they are.

Mr. DINGELL. How about you, Mr. Cali, yes or no?

Mr. CALI. I hesitate to answer yes or no, only because I know

that many of the Bells, or at least one of the Bells is currently in

an ad campaign competing with cable modem service pointing at

the differences.

Mr. DINGELL. Can’t you just give me a yes or no answer?

Mr. CALI. They do both provide high speed internet access.

Mr. DINGELL. Pardon?

Mr. CALI. They do both provide high speed Internet access, yes.

Mr. DINGELL. Okay, and you do too?

Mr. CALI. Yes, yes.

Mr. DINGELL. Functionally equivalent?

Mr. CALI. To my knowledge. I hesitate to say functionally equivalent, we are a shared medium, they are not a shared medium.

Mr. DINGELL. Functionally equivalent.

Mr. CALI. It is high speed Internet access.

Mr. DINGELL. The same services the same people.

Can you tell me a reason why AT&T has such great difficulty in

answering a question yes or no?

Mr. CALI. Because I am unsure of the meaning of functionally

identical.

Mr. DINGELL. I see.

Mr. Pociask, do you agree?

Mr. POCIASK. I think they are a functional equivalent.

Mr. DINGELL. Thank you.

Now, let’s look at the regulatory situation here.

Mr. Ellis, your company is subject to interconnection obligations

with competitors when it provides high speed Internet service, yes

or no?

Mr. ELLIS. Yes.

Mr. DINGELL. Is that true with regard to you, Mr. Young?

74

Mr. YOUNG. Yes, it is.

Mr. DINGELL. Okay.

Now how about you, Mr. Cali? Is that true with regard to you?

Mr. CALI. Yes.

Mr. DINGELL. It is?

Mr. CALI. I am sorry, can you repeat the question?

Mr. DINGELL. The question is, your company, AT&T, let me say

your company is subject to interconnection obligations with competitors?

Mr. CALI. I am sorry. No.

Mr. DINGELL. It is not.

So then, yes or no again, AT&T is subject to the same obligations

to interconnect with competitors when it provides high speed Internet service using cable modems?

Mr. CALI. No.

Mr. DINGELL. No.

So I guess I am coming to the conclusion that you are treated

differently than these other two companies. Is that right?

Mr. CALI. That is correct.

Mr. DINGELL. I see.

Now, Mr. Ellis, is DSL required to be sold to competitors at

wholesale rates that are determined by the FCC?

Mr. ELLIS. Yes.

Mr. DINGELL. Mr. Young, are you subject to the same burdens?

Mr. YOUNG. Yes, we are.

Mr. DINGELL. Mr. Cali, are you subject to those burdens at

AT&T?

Mr. CALI. No, we are not.

Mr. DINGELL. Ah.

Mr. Cali, is AT&T required to sell its cable modem service to

competitors at wholesale prices, or does the free market dictate

your company’s choices in this regard?

Mr. CALI. It is free market.

Mr. DINGELL. Free market.

Mr. Ellis, are Bell companies required to unbundle their networks and lease out pieces or parts to competitors at cost-based

rates for the purpose of providing high speed Internet service?

Mr. ELLIS. Yes.

Mr. DINGELL. Is that true with your company, Mr. Young?

Mr. YOUNG. Yes, it is.

Mr. DINGELL. Mr. Cali, AT&T is not subject to similar obligations

under the law, is it?

Mr. CALI. That is correct.

Mr. DINGELL. Now, Mr. Cali, H.R. 2420 would provide a level

playing field between telephone and cable companies by deregulating high speed Internet services offered by both types of companies.

Is that correct?

Mr. CALI. No, I do not believe if it, sir.

Mr. DINGELL. You don’t.

Well, I guess AT&T is incapable again of a simple yes or no answer.

What is the answer to that, Mr. Pociask?

75

Mr. POCIASK. H.R. 2420 will put the different services on the

same playing field.

Mr. DINGELL. Put them on the same playing field.

Do you agree with that, Mr. Cali? Yes or no?

Mr. CALI. The reason I am not going to give you a yes or no is

we have different facilities, different context——

Mr. DINGELL. Please. I have limited time and I want to help you

because you have great difficulty answering my questions.

And what I am trying to find out is, would H.R. 2420 put AT&T

and the former baby Bells on a level playing field?

Mr. CALI. My concern is that we are comparing different networks, different histories, and I do not believe it would be a level

playing field.

Mr. DINGELL. But you are providing identical service?

Mr. CALI. We are both providing high speed Internet access.

Other carriers are also providing high speed Internet access.

Mr. DINGELL. Functionally, functionally identical services?

Mr. CALI. Congressman, the issue is this Mr. DINGELL. Functionally identical services? We have already agreed on that.

Mr. CALI. The point I made earlier was that the Bell

companies——

Mr. DINGELL. Mr. Cali, I think you are a fine fellow, but is it impossible for you to just answer these questions simply, rather than

obfuscating the matters?

Mr. CALI. I think it is more complex, Congressman, and that is

my concern. There were two points I made earlier that were worth

noting.

Mr. DINGELL. I am sure it is, but if you do not mind, I will ask

the questions.

Now, Mr. Cali, do you think that existing regulatory mandates

on telephone companies are necessary to ensure competitive roll

out of broadband services to consumers?

Mr. CALI. Yes.

Mr. DINGELL. You do.

Now, if regulation of high speed Internet services results in these

benefits, would not the same benefits flow to the public if these

regulations are also applied to cable companies offering similar

services?

Mr. CALI. They would not because of the different history and

different context.

Mr. DINGELL. Now why do you say that? What is the difference

between telephone and cable? And what is the difference between

AT&T when they offer a service and the service that is offered by

Mr. Ellis’ and Mr. Young’s companies?

Mr. CALI. There are a couple of bases for the difference, sir.

Mr. DINGELL. Well, one of them is clear to me. And that is that

it gives your company an economic advantage. I am sure you wish

to hold on to that.

But what are the other differences?

Mr. CALI. In implementing the Act, the FCC has gone to great

lengths to ensure that the Bell companies, when providing advanced services and facilities——

Mr. DINGELL. You are having great difficulty——

76

Mr. CALI. [continuing] enjoy the same flexibility as other carriers

providing those same advanced services.

Mr. DINGELL. You are having great difficulties giving me a simple yes or no answer, or a simple explanation.

Mr. CALI. I am because I believe the issue is more complex.

Mr. DINGELL. I am sure that you are happy to make it so. But

to me, you have a service which is offered by AT&T, one which is

offered by SBC, one which is offered by Verizon. They are the same

systems.

Mr. YOUNG. ‘‘Va-rey-zun.’’ Mr. DINGELL. They are the same—— Mr. TAUZIN. We went through—— Mr. DINGELL. They are also—— Mr. TAUZIN. Would the gentleman yield? Would the gentleman

yield for a second?

We went through an extensive—— Mr. DINGELL. I appreciate that, Mr. Chairman. It is always difficult to function in the face of obfuscation.

Mr. TAUZIN. I was just saying that even before any of that had

begun, we had trouble with Verizon, so we just wanted to make the

gentleman aware that we agreed on the pronunciation as Verizon.

Mr. DINGELL. I am not a defender of anybody, nor am I a defender of obfuscation.

Mr. TAUZIN. Let me ask unanimous consent here. The gentleman’s time has expired.

Does the gentleman which to proceed?

Mr. DINGELL. I would. I would ask 2 minutes to assist Mr. Cali

who is having great difficulty.

Mr. TAUZIN. Is there any objection?

[No response.]

Mr. TAUZIN. The gentleman is recognized for 2 additional minutes.

Mr. DINGELL. Now, Mr. Cali, what is the argument for giving different treatment to SBC, Verizon, and AT&T?

Mr. CALI. Okay, the argument is this.

Mr. DINGELL. Why shouldn’t the same service to the consuming

public be priced the same way to all of the above?

Mr. CALI. Four years ago the Congress imposed certain obligations on incumbent carriers in an effort to erode their monopoly,

a near century-old resilient monopoly that persists till today.

The FCC, in implementing those rules, has attempted to reduce

the regulation where it relates to advanced services and facilities

while it has continued to adhere to the requirements of the Act in

an effort to open the local markets to competition.

That is an important public policy goal that is worth adhering to.

Mr. DINGELL. Mr. Cali, I have only got 2 minutes and you have

used a lot of it.

You do have essentially a monopoly on cable, do you not, in this

country?

Mr. CALI. No, we do not. We do not agree with that.

Mr. DINGELL. In the markets you serve, you do, don’t you?

Mr. CALI. In the markets we serve, there is a strong public policy

to introduce competition for cable and I would submit that public

policy is far more advanced than for local telephone service.

77

Mr. DINGELL. What is your market share for cable in the markets you serve?

Mr. CALI. In the markets I serve, I do not know. I could give you

an overall——

Mr. DINGELL. It is on the order of 100 percent. It is on the order

of 100 percent.

Mr. CALI. No, that is incorrect. The satellite industry has taken

15 to 20 percent of the multi-channel video market.

Mr. DINGELL. So 85 percent then?

Mr. CALI. That is correct. And the satellite industry is winning

2 out of 3 customers.

Mr. DINGELL. My 2 minutes is rushing toward expiration.

Mr. Pociask, you are a man of enormous patience, and you are

sitting next to that nice Mr. Cali, and I know you and I both want

to help him.

We have this awkward problem that Mr. Cali is offering an identical service to that which is offered by Mr. Ellis and Mr. Young,

and also by cable people in other parts of the country, and also by

other carriers.

Is there any reason why these all ought not be treated the same

way for regulatory purposes?

Mr. POCIASK. As I pointed out in my oral testimony today, because of the price sensitivity, if you impose a cost on these services,

you will have a big drop off in subscribership, so it is no surprise

that Cable Modem service commands almost 90 percent of the market today.

I think the answer is to have a level playing field, to have these

services go head-to-head. I really hope Cable Modem service does

well.

Mr. DINGELL. The consumer benefits from this, doesn’t he?

Mr. POCIASK. Absolutely.

Mr. DINGELL. And if the playing field is slanted a little bit toward Mr. Cali, Mr. Cali has a huge benefit, doesn’t he?

Mr. POCIASK. That is right.

Mr. DINGELL. And that comes at the expense of Mr. Ellis and Mr.

Young and at the expense of the consumers. Isn’t that right?

Mr. POCIASK. My concern is consumers, that is right.

Mr. DINGELL. Yes. So therefore it is plain why Mr. Cali likes this

situation so well: that he and his company are deriving an immense benefit at the expense of consumers and at the expense of

their competitors, isn’t that right.

Mr. POCIASK. I cannot speculate for his motives, but——

Mr. TAUZIN. The gentleman’s time has expired again.

Mr. DINGELL. I thank you, Mr. Chairman.

And thank you, Mr. Cali.

Mr. TAUZIN. Thank you.

The Chair would ask any of the members who would like a second round. Let me first ask the gentleman from Texas. Would you

request a second round, Mr. Green?

Mr. GREEN. [Nods in the negative.]

Mr. TAUZIN. The gentlelady from California.

Ms. ESHOO. Thank you, Mr. Chairman.

78

I want to go back to some of the things that our colleague, Mr.

Markey, was exploring. I just flipped this switch to have my microphone go on.

Let’s just pretend that we flipped the switch and the legislation

that is on the table is law right now.

Let me ask the Bell people, what is your plan for rural America,

and when would it be implemented?

Mr. ELLIS. We have a plan that by 2002 we will have service to

80 percent of our customers. If this legislation passes——

Ms. ESHOO. I am talking, when you say customers, who are they?

Identify them?

Mr. ELLIS. Well our customers are in rural and urban and——

Ms. ESHOO. I am not talking about urban and I am not talking

about suburban.

See the reason that I raise this, and this is one of the things that

I have grappled with in this whole discussion of broadband, is that

when anyone comes to the Congress and says, do I have a deal for

you, your constituents in rural America and there are many Members of Congress that have totally rural districts or some parts of

their district are rural that you are automatically going to get their

ear because of course they want their constituents to enjoy the best

of what another Congressional district already has.

And so it kind of puts a hook in them. And every American goes

for open versus closed. So these are very powerful words that are

used relative to this whole argument.

I don’t think this argument is really about the Internet because

believe it or not the worldwide web was up and we knew an awful

lot about the Internet when we passed the Telecom Act.

But very specifically. We have flipped the switch.

What do you have for rural America?

What are you going to do?

What is the plan?

Mr. ELLIS. The plan is, NTIA has a study that says 5 percent of

the rural population has access to high speed advanced services,

cabel modem or ours.

Ms. ESHOO. I want to know what you are going to bring to them.

Because remember we have flipped the switch now. This legislation

is law, and the promise of this legislation is to bring something to

rural America because they are not getting it.

Tell us what you are going to deliver and by when.

Mr. ELLIS. What we will do is take the $6 billion investment that

we are making and use that money more efficiently to expand to

go into areas that we cannot afford to do it, it does not make financial sense to cover that other 24 percent.

Ms. ESHOO. If you cannot afford to deliver it today, why is it that

you can deliver it because we just flipped a switch?

Mr. ELLIS. I will give you a specific example.

Congressman Oxley was mentioning Ohio. There are eight

LATAs in Ohio, eight. That means we cannot combine demand

across those LATA boundaries. Today, under our plan, under the

law, we would have to put eight switches, eight ATM switches,

eight internet hubs in each LATA. Each one would have to have

one.

79

If you pass this piece of legislation, we will be able to follow conventional networking plans, the same that our cable competitors

can plan, and probably get by in Ohio with maybe two by doing

conventional engineering.

That saves money, lets us build out, lets us close that gap, then

give to the customers that, in our areas, the opportunity to have

not slow speed but high speed.

Ms. ESHOO. Excuse me. Let me just excuse me.

Can you give to us, to members of this committee, your plan for

rural America, the rural communities, so that we have, we can see

how the promise will be kept.

Because you know, being at this side of the table, I am very sensitive about advertising, about marketing. We are in the marketing

and in the communications business at this side of the dias as well.

And I want to really pull back the layers on onion skin here. I

want to test what the promise is from your part. If you can convince members that you are really going to do what you are promising to do, then it becomes something else.

I am not convinced of it, I really am not. And when you say

‘‘rural,’’ I am not talking about the businesses, I am talking about

the homes that are way out in the middle of nowhere.

I mean, what do you have for Turlock, California and Tulare, and

the back waters of Bakersfield? I mean, I would really like to know

that. I am just naming off some communities in California.

I am not convinced of that. I think that this is under the guise

of something else, myself, because you have not, you did not even

do what you were supposed to do, what you signed off with in the

Telecommunications Act. That is where you lose me. That is where

you lose me.

There was a checklist. You all came to town. You lobbied for God

knows how long, and you never and as soon as the ink was dry,

you sued on what you agreed to.

Now I do not know where your competition is in the local market

with what you promised before you get into the long distance. You

didn’t even do that.

Mr. ELLIS. May I tell you?

Ms. ESHOO. Well I do not know. I think my time is running out.

I see a red light. You have time to talk, I don’t, so yes, you can

respond to that. But I really want to press on this rural

business——

Mr. TAUZIN. Would the gentlelady yield for a second?

Ms. ESHOO because I do not see it and there are veiled references

to it. And yet, that is what the advertisement to the bill is.

Mr. TAUZIN. The Chair would ask the gentlelady to yield just a

second. I am going to extend the time to the gentlelady because I

would like everybody have a chance to respond who wants to.

We are going to have some problems with witnesses having to

make plane connections, and I want to let you all know, that if you

have to leave, kind of raise your hand and let me know. I do not

want any of you to miss that.

The gentlelady has asked if anyone else wants to respond.

Mr. Haynes, please?

Mr. HAYNES. Mr. Chairman, thank you.

80

Congresswoman Eshoo, I would like to tell you want we plan to

do in Merced County.

We intend to compete with Pacific Bell/SBC with high speed

wireless to residences initially starting with businesses with closerin; new businesses don’t startup immediately but we have a county-wide license. We are a CLEC in the State of Washington. We

provide high speed data services in the State of Washington.

I have built a network that I could show any member of the committee how line-sharing could devastate incumbent customers who

do not use high speed data, and I can show you, ma’am, how we

can provide competitive high speed data services.

Two things are going to happen if H.R. 2420 passes. The Internet

will become more valuable. I have a cable modem on my desk at

my office, a DSL in my home, and I still get bogged down because

of the State and the county links that do not work. This improves

the State and county links.

And the rest of us, my 800 and some peers, as small companies

are itching to get the competitive ball further rolling. We have already started it.

And I thank you for the opportunity to comment.

Mr. TAUZIN. Anyone else?

Mr. Young? Mr. Cali?

Mr. YOUNG. There are 2 phases or 2 parts to the rural issue.

As I mentioned before, all of our offices today are interconnected

with fiber, but we have to artificially constrain traffic across LATA

boundaries so the day that you flip the switch and we have the legislation, we can flip the switch and end those constraints, so that

that provides more high speed data, more interconnectivity.

So day one, there is a benefit when this bill passes.

Then my colleague, Mr. Ellis, points out the other piece.

And by the way, Verizon has more rural customers than any

other local telephone company, so this is a very real problem for

us, is we can now do the sort of regional planning.

Congressman Markey mentioned New England Tel. Well, that is

an operational entity that historically has planned its services as

a regional group.

So for example, there might be a hub in Massachusetts. There

might be a hub in Maine or New Hampshire, that is used to serve

the whole region.

Again, because of the interLATA restrictions, we cannot engage

in that sort of regional engineering that historically we have been

able to do for local telephone service.

In Charleston, West Virginia, which now we have to go to Pittsburgh, it is an interLATA link, in order to provide high speed service. We could provide those kinds of services.

So there’s sort of two pieces. what we can do today and then

what we could do as a result of the planning that we could now

do without the interLATA restrictions.

Mr. TAUZIN. Mr. Khanna wanted to respond.

Mr. KHANNA. The first point I would like to make is that the SBC $6 billion investment has to do with remote terminals.

This is in an area between the central office and the customer

premise. This has nothing to do with ATM switching, which is

what Mr. Ellis was talking about.

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I also want to talk about what Covad is doing today. Our IDSL

service goes the distance. It goes five miles, six miles beyond that.

So we are able to provide service to customers in Half Moon Bay,

in Santa Cruz, people who are commuting into Santa Clara, who

software developers out in Half Moon Bay in Santa Cruz, regardless of the distance there from the central office, and they are able

to get IDSL service from Covad today.

None of the incumbents, rural or urban or suburban, none of the

Bells, not GTE, offers IDSL service in combination with our high

speed service. That is an innovation that Covad has brought to the

marketplace. Other CLECs have copied us but we have brought

that innovation to people who live in remote locations who are not

close to the central offices today.

Ms. ESHOO. Mr. Chairman, could I just ask one quick follow-up

question?

Mr. TAUZIN. The gentlelady certainly may.

Would you like to let all the witnesses respond first to your first

question, or?

Ms. ESHOO. I am dying to ask this one.

Mr. TAUZIN. Go ahead.

Ms. ESHOO. Now what happens to what you just described if,

again, we flip the switch, if this bill becomes law. What happens

to you and what you just described?

Mr. KHANNA. Two things happen.

One, our ability to co-locate in central offices in rural areas rapidly diminishes because the cost of cageless co-location is much

lower than the cost of caged co-location.

Second, we would lose line-sharing. Line-sharing is nothing but

unadulterated 100 percent consumer benefit. There is no negative

impact to any consumer from line sharing, because if there were,

the incumbents would not have deployed it themselves.

The consequence of denying us, taking line-sharing away from

us, which is a consumer benefit we are providing today, would be

to adversely affect consumers in urban, suburban, and rural America.

Ms. ESHOO. So, Mr. Ellis, why do you want to snuff him out?

Mr. ELLIS. That is absolutely not the case.

Ms. ESHOO. Well I mean that is what he is suggesting, right?

Mr. ELLIS. Well, he is wrong.

Ms. ESHOO. I am just paraphrasing.

Mr. ELLIS. He is wrong.

Let me address line-sharing for just a minute so everyone understands.

First of all, our position on line-sharing is simply this. For a long

time, Covad and every other carrier can take the loop from the

local company, put voice and data on it, just like we do. They have

had that right and nothing here is going to change that. This piece

of legislation does not change it.

What Covad and other companies do not want to do, they do not

want to offer the voice piece, the less attractive piece. So when they

talk about line-sharing, it’s they want to take the line that we provide the voice on, and while we provide the voice, in my example,

the $9.85 voice line in Texas, the one that is subsidized, they want

82

to then put their data on it. That is what they mean by line-sharing.

Our position on that is, as far as we are concerned, they can continue to do line-sharing. We are committed to that, and we will let

them keep doing line-sharing regardless of what happens with this

piece of legislation.

Mr. TAUZIN. We are going to run out of time because we have

a vote on the floor.

Let me recognize the gentleman from Massachusetts for closing

comments.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

First of all, I want to congratulate SBC and Bell Atlantic for

their success in Texas and in New York. Much like George Bush

and Al Gore, you are both going where the Electoral College piles

up the most credit for industry and for Presidential candidates.

And I expect that by this time next year, we will see a lot more

success in those delegate-rich electoral states.

I think that it is most likely that at the end of the day, we will

come back here in a year and we really will have a rural issue, because you each have a stake in solving the large State issues.

Like Presidential candidates, you just do not tend to spend as

much money in those smaller states if you are going to try to maximize your dollar.

So we will have that left over.

We have, I think, something that will be viewed a success, but

there will be a rural kind of anomaly that is partially driven by the

exemption which we were requested to build into the Act, which as

an urban American, I had very little ability to analyze in terms of

its impact upon those residents.

And with regard to again the cable industry, I do believe that the

Telecom Act quite specifically said that all telecommunications

services should be treated and regulated identically, and I do believe that Internet access is a telecommunications service.

So my goal is now and continues to be, you know, attempting to

reach that point in which everyone is doing everything and ultimately we can just pull the Federal Government out of this whole

area and let the free market determine what is in the best interest

of the consumers.

I thank you all for the fabulous hearing today.

I yield back the balance.

Mr. TAUZIN. I thank the gentleman.

Let me first, for the record, on behalf of Mr. Dingell, introduce

a comparison of regulatory requirements, as he went through the

list with the witnesses, prepared by SBC communications into the

record.

[The information follows:]

DSL V. CABLE MODEM SERVICE

The regulatory disparity between ILECs and cable operators when providing functionally equivalent services is most graphically shown when the regulatory requirements of DSL services are compared to functionally equivalent cable modem services.

83

DSL Service (an interstate telecommunications service) Cable Modem Service (a cable service)

Common Carrier Duty Every common carrier must furnish communications services upon request and establish

physical connections § 201(a).

No Comparable Requirement

Discrimination and

Preferences.

It shall be unlawful for any common carrier to

make any unjust or unreasonable charges,

practices or classification § 202(a).

No Comparable Requirement—Local franchise

authority only regulates basic cable television

rates and equipment; no rate regulation of

cable modem service

Tariffs ....................... Every common carrier must file with the FCC

schedules showing all charges for services

provided § 203(b)—FCC limiting tariffing to

dominant carriers.

No Comparable Requirement-Cable operator

must file rates for basic tier and equipment

with local franchise authority

Extension of Lines .... No carrier shall construct a new line nor terminate an existing line without FCC approval

§ 214(a).

No Comparable Requirement—Local franchise

authority negotiates build-out requirements

with cable operator

Annual Reports ......... The FCC is authorized to require carriers to file

annual reports.

No Comparable Requirement

Depreciation ............. The FCC may prescribe depreciation charges

§ 220(b).

No Comparable Requirement

Accounts ................... The FCC may prescribe the forms for any and

all accounts and establish a uniform system

of accounts § 220(a).

No Comparable Requirement

Subscriber List Information.A telecommunications carrier shall provide subscriber list information available on an

unbundled and nondiscriminatory basis

§ 222(e).

No Comparable Requirement

Interconnection ......... Incumbent Local Exchange Carriers (ILECs) have

a duty to interconnect with the facility and

equipment of any requesting telecommunications carriers § 251(c)(1).

No Comparable Requirement

Resale ....................... ILEC must offer its telecommunications services

at wholesale rates 251(c)(4).

No Comparable Requirement—Leased access

obligations—10-15% based on channel capacity

Number Portability ... Local exchange carriers (LECs) must provide

number portability to the extent technically

feasible § 251(b)(2).

No Comparable Requirement

Dialing Parity ........... LEC must provide dialing parity to competing

providers § 251(b)(3).

No Comparable Requirement

Reciprocal Compensation.LECs have the duty to establish reciprocal compensation arrangements § 251(b)(5).No Comparable Requirement

Duty to Negotiate ..... ILECs have the duty to negotiate access to their

networks with any requesting telecommunications carrier.

No Comparable Requirement

Unbundled Access .... ILECs have the duty to provide any requesting

telecommunications carrier with non-discriminatory access to network elements on an

unbundled basis § 251(c)(3).

No Comparable Requirement

Collocation ................ ILECs have a duty to provide physical collocation of equipment necessary for interconnection or unbundled access § 251(c)(6).

No Comparable Requirement

Universal Service ...... All telecommunications carriers shall provide

schools, libraries, and health care providers

access to services at discounted rates

§ 254(h).

No Comparable Requirement

InterLATA .................. No Bell operating company may provide

interLATA DSL services without prior FCC approval and competitive checklist compliance

§ 271.

No Comparable Requirement

Separate Subsidiaries BOC InterLATA telecommunications and information services must be provided through a

separate affiliate § 272(a)(2).

No Comparable Requirement

Electronic Publishing BOCs may provide electronic publishing only

through a separate affiliate § 274.

No Comparable Requirement

Alarm Monitoring ...... BOCs cannot provide alarm monitoring until

2001.

No Comparable Requirement

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DSL Service (an interstate telecommunications service) Cable Modem Service (a cable service)

Computer III/ONA ...... BOC/GTE required to provide access and

unbundling for ESPs (ISPs).

No Comparable Requirement

Mr. TAUZIN. Let me also, by Mr. Blunt’s request, introduce a

similar comparison that we I think talked about at our previous

hearing into the record that was prepared by I think the United

States Telephone Association.

[The information follows:]

Is there Regulatory Parity Between DSL and Cable? No.

Regulatory Requirement Applies to

DSL Service

Applies to

Cable Modem

Service?

Common carrier duty ....................................................................................................................... Yes No

Prohibition against discriminatory treatment ................................................................................. Yes No

Required to file tariffs .................................................................................................................... Yes No

FCC approval to extend lines .......................................................................................................... Yes No

Annual reports ................................................................................................................................. Yes No

Prescribed depreciation charges ..................................................................................................... Yes No

Prescribed uniform system of accounts and accounting forms ..................................................... Yes No

Duty to provide subscriber list information .................................................................................... Yes No

Duty to interconnect ........................................................................................................................ Yes No

Duty to offer resale ......................................................................................................................... Yes No

Duty to provide number portablilty ................................................................................................. Yes No

Duty to provide dialing parity ......................................................................................................... Yes No

Duty to establish reciprocal compensation ..................................................................................... Yes No

Duty to negotiate access to network .............................................................................................. Yes No

Duty to provide unbundled access .................................................................................................. Yes No

Duty to grant physical collocation .................................................................................................. Yes No

Duty to support universal service ................................................................................................... Yes No

Approval to provide interLATA DSL services ................................................................................... Yes No

Requirement to use separate subsidiaries for interLATA telecommunications .............................. Yes No

Requirement to use separate affiliate for electronic publishing ................................................... Yes No

Prohibition against alarm monitoring until 2001 ........................................................................... Yes No

Duty to unbundle for ISPs ............................................................................................................... Yes No

Like services should be subject to like regulation. Support S. 877.

Mr. TAUZIN. And let me also say a few words in conclusion with

a great deal of thanks to our witnesses. I know you have to move.

We too.

Let me point out that the Department of Justice findings in the

Court challenge to the WorldCom/Sprint merger give us I think a

very important view as we go into legislative action on this piece

of legislation.

It basically said about the backbone, the most important part of

this whole system we are discussing, that it is dominated by several key players.

In fact, in paragraph 32 of the June 28 filing, it says UUNET

is by far the largest here one. By any relevant measure, it is approaching a dominant position in the backbone market.

It is critical, I believe, as Mr. Pociask has pointed out to us, that

we have more competition, as your own studies I think point out,

Mr. Cali. More competition in creating the backbones, more competition in creating the infrastructures.

And I would say to my friends who are concerned about what

kind of proposals are going to be made for rural America, rural

America is always unfortunately going to be the last to be served.

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But where there is fiber in the ground, and where there are systems prepared to deliver services to rural America, it is insane for

us to retain Federal restrictions that prevent the use of that fiber

to bring those Americans into the loop.

And what we are suggesting is that if over the next 12 and 18

months, 271 relief is finally going to come to places like Louisiana

and Wyoming, which are not delegate-rich states and have to wait

in the back of the line before we can join the high speed world of

commerce, that the sooner we can pass legislation to introduce, as

many of my consumers in Louisiana and in Wyoming and in other

western states to this high speed commerce world and in fact to

this new economy, then the better. That is why this legislation is

and remains so important.

Again, I want to thank you for your contributions today. I want

to thank my friends who have joined in the spirited debate and the

hearing must unfortunately be adjourned.

[Whereupon, at 2:15 p.m., Thursday, July 27, 2000, the hearing

was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF HON. WILLIAM E. KENNARD, CHAIRMAN, FEDERAL

COMMUNICATIONS COMMISSION

Thank you Mr. Chairman and Members of the Committee. I appreciate the opportunity to testify before 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.

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, but 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 Bell Operating Companies’ (BOCs) incentives to open the local

markets 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.

Pull the thread of data traffic, and the seams of the Section 271 provisions are

weakened. Pull the thread of data traffic, and the threads of telephony, video transport, and wireless transmissions will fray. 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.

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Under our system, the 1996 Act had to be carried out in three stages: rules had

to be written, the rules were tested in court, and now the rules are being implemented. Now that implementation is fully underway it would be tragic to change

directions.

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.

The Commission has a long history of fostering innovation and investment in new

technologies, such as the Internet. Specifically, we have consistently refused to impose legacy telecommunication regulations on providers entering new markets. For

example, in 1983 the Commission declined to subject information service providers

to access charges, concluding that such regulation is unnecessary and would be

harmful to the development of the industry. More recently, in order not to stand

in the way of successful advanced services deployment, we declined to require incumbent LECs to unbundle packet switched and other advanced services equipment.

The Commission found that in a dynamic and evolving market, regulatory restraint

was the best way to further the Act’s goal of encouraging facilities based investment

and innovation. Similarly, as I discuss later, we have thus far refused to impose legacy telecommunications regulation on cable broadband service providers.

Rapid Growth of Broadband Deployment

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

numbers are growing. For example, Verizon (formerly Bell Atlantic) alone reported

on July 21, 2000, that it has already reached 221,000 DSL customers at the end

of the second quarter of this year.

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 will have 20 million subscribers. Incumbent 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 prevented 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.

The Section 271 Incentives to Open Local Markets

The opening of local markets is absolutely critical for accelerating broadband deployment. Exempting data traffic from Section 271 would eliminate a crucial incentive for the incumbent BOCs to open their local monopoly markets. This is not an

insignificant exemption. In fact, as I discuss below, data traffic has already surpassed voice traffic on long haul networks.

Simply stated, the Act requires the BOCs to open their local markets to competitors. Section 251 states the rules of the game and Section 271 provides a structured

incentive for BOCs to play by the rules. At its core, Section 271 is a simple yet clevVerDate 11-MAY-2000 08:04 Apr 03, 2001 Jkt 010199 PO 00000 Frm 00090 Fmt 6633 Sfmt 6621 E:\HEARINGS\66467 pfrm08 PsN: 66467
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er proposition: in exchange for opening their local facilities to competitors, the 1996

Act provides the BOCs with the substantial reward of the long distance ‘‘carrot.’’ Altering this balance by exempting data traffic from the restrictions in Section 271

would inhibit, rather than further, the Act’s goal of fostering robust 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.

Unfortunately, the first three years of the implementation of the 1996 Act were

characterized not by cooperation but by confrontation. Litigation instead of collaboration. The result was uncertainty, confusion, and delay. We lost valuable time.

Then, in January of 1999, the Supreme Court largely affirmed the Commission’s implementation of the market-opening provisions of the Act. Once the smoke cleared,

we began to witness a sea change. Finally, the battles began to move out of the

courtroom and into the marketplace.

Within approximately the last six months, the Commission has unanimously approved Section 271 applications for both New York and Texas. We need only review

the state of competition in New York and Texas to know the Act is working. More

activity is on the horizon. The BOCs have indicated that they intend to file applications for numerous states across the nation within the next six to nine months. The

Commission welcomes, and looks forward to, these filings.

As I have stated before, opening markets can be difficult work, and establishing

competition is not easy or fast. But both Verizon and Southwestern Bell have shown

that it is well within the grasp and control of the BOCs. I commend both of these

companies, and the New York and Texas Commissions, for their dedication and

hard work in ensuring that the fruits of competition are enjoyed by local and long

distance consumers in Texas and New York.

As envisioned by the 1996 Act, the Section 271 carrot has fueled the growth of

local and long distance competition. Because Verizon and Southwestern Bell opened

their local facilities to competitors in New York and Texas as required by the Act,

competition in the local telephone market has flourished in those states. One analyst estimates that competitors 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 the local lines that competitors served in New

York at the end of 1999 (approximately 1 million lines). Verizon is completing over

270,000 local orders each month for competitors in New York. Local competition is

thriving in Texas as well. The Department of Justice estimated that competitors

served over 800,000 lines in Texas at the end of last year. That is about an 8 percent market share. Competitors’ customer base, however, has been steadily increasing. For example, in May—the most recent month for which we have data—competitors added over 170,000 new lines in Texas. And, I am happy to report, that a large

portion of the increase in local competition in these states since Section 271 authorization has been in the residential and small business markets.

The hard work of satisfying Section 271 has not only benefited New York and

Texas consumers of local services. In the first six months after gaining Section 271

approval, Verizon captured nearly 900,000 long distance customers in New York.

Analysts estimate that Verizon will take as many as 1.5 million long distance lines

in its first year alone (about 10% of the market)—well ahead of the 1 million lines

Verizon set as its goal for the year. Verizon expects to capture 25 to 30 percent of

the long distance market within 5 years. Analysts predict that they will meet this

goal easily. Many predict that Southwestern Bell will have similar success in Texas.

This is no small prize. Texas alone represents about 10 percent of the nation’s long

distance voice and data market.

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.

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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.

I am proud of the FCC’s record in holding firm on the requirements of Section

271. As our experiences with New York and Texas have shown, there is no substitute for the hard work of compliance. The rewards of Section 271 compliance are

plentiful. 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.

Removing Incentives By Exempting Data

The great competitive success stories we have been witnessing as a result of the

incentive structure established by Section 271 would be few and far between if the

proposed legislation becomes law. As currently written, Sections 251 and 271 do not

draw a regulatory distinction between voice and data services. Carving out

interLATA data traffic from the prohibitions in Section 271 would remove a potent

incentive from the 1996 Act.

Currently, the majority of traffic travelling over long haul networks is data—as

opposed to voice traffic. Indeed, analysts expect that data traffic will comprise approximately 90 percent of all traffic within four years. The wholesale data service

market is expected to generate 41.3 billion dollars in 2005, up from 9.9 billion in

1999. In a world where data is experiencing explosive growth and is rapidly outpacing voice traffic, allowing the BOCs to carry long distance data traffic before they

have satisfied the requirements of Section 271 would severely undermine the BOCs’

incentive to open their markets.

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 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.

I disagree with the notion that further deregulation is the only way to enable incumbent LEC deployment of broadband services in rural and high cost areas. The

BOCs simply do not need to provide access the entire way from the customer to the

Internet backbone in order to provide broadband access to their rural customers.

Rather, they can provide such broadband services to those customers the same way

they serve their urban and suburban customers—by handing data traffic that is

headed out of the LATA off to another provider who can carry it across the LATA

boundary. That provider then carries the traffic to the Internet backbone.

Is this the most efficient way to provide service to customers? No. Is it the most

cost effective? Certainly not. Does it preserve the incentives of the BOCs to open

their local monopoly markets to competitors faster than they otherwise might? Absolutely.

The simple reason why rural customers, and other customers in unserved and underserved 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, we are mindful that some rural customers face more limited competitive choices for broadband services at this time. Accordingly, 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;

89

• 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. It is difficult to understand how LATA boundaries are a barrier to broadband

deployment when no BOCs have even attempted to obtain such relief in the past

five months. 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. The explosive growth in the deployment

of broadband services and the vigorous local competition in New York and Texas

prove that the 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.