[Senate Hearing 106-103]
[From the U.S. Government Publishing Office]
S. Hrg. 106-103
THE THIRD ANNIVERSARY OF THE TELECOM
ACT: A COMPETITION AND ANTITRUST REVIEW
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
REVIEWING COMPETITION AND ANTITRUST ISSUES RELATING TO THE
TELECOMMUNICATIONS ACT
__________
FEBRUARY 25, 1999
__________
Serial No. J-106-3
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
58-453 CC WASHINGTON : 1999
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
______
Subcommittee on Antitrust, Business Rights, and Competition
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
Louis Dupart, Chief Counsel and Staff Director
Jon Leibowitz, Minority Chief Counsel and Staff Director
(ii)
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
DeWine, Hon. Mike, U.S. Senator from the State of Ohio........... 1
Kohl, Hon. Herbert, U.S. Senator from the State of Wisconsin..... 3
Thurmond, Hon. Strom, U.S. Senator from the State of South
Carolina....................................................... 4
Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont... 5
CHRONOLOGICAL LIST OF WITNESSES
Panel consisting of William E. Kennard, Chairman, Federal
Communications Commission, Washington, DC; Joel L. Klein,
Assistant Attorney General, Antitrust Division, U.S. Department
of Justice, Washington, DC; Larry Pressler, O'Connor and
Hannan, Washington, DC, and Former U.S. Senator from South
Dakota; and Reed E. Hundt, Former Chairman, Federal
Communications Commission, Washington, DC...................... 9
ALPHABETICAL LIST AND MATERIAL SUBMITTED
Hundt, Reed E.:
Testimony.................................................... 28
Prepared statement........................................... 30
Kennard, William E.:
Testimony.................................................... 9
Prepared statement........................................... 11
Klein, Joel I.:
Testimony.................................................... 17
Prepared statement........................................... 18
Pressler, Larry:
Testimony.................................................... 23
Prepared statement........................................... 26
APPENDIX
Additional Submission for the Record
Prepared statement of the National Coalition for Competitive
Choice in Telecommunications................................... 55
THE THIRD ANNIVERSARY OF THE TELECOM ACT: A COMPETITION AND ANTITRUST
REVIEW
----------
THURSDAY, FEBRUARY 25, 1999
U.S. Senate,
Subcommittee on Antitrust, Business Rights
and Competition,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine
(chairman of the subcommittee) presiding.
Also present: Senators Thurmond, Kohl, and Leahy.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Senator DeWine. Good afternoon. Welcome to the Antitrust
Subcommittee hearing on the third anniversary of the
Telecommunications Act of 1996. As most of you know, this
subcommittee has been very actively monitoring the progress of
competition under the Telecommunications Act, and we have been
working hard to try to promote competition in
telecommunications markets throughout our country. This is our
fifth hearing on the telephone aspect of the industry, and we
have had two other hearings focusing on the video aspect.
It won't surprise anyone when I say that we continue to be
frustrated, frustrated by the slow pace of competition in the
industry. Although we have seen some competition, it is mostly
for business customers. We have yet to see large-scale
competition in local residential markets. Instead, we have seen
a blizzard of litigation and an increasing amount of
consolidation.
Despite these problems, there is some reason for optimism.
Recent developments indicate that the markets may be about to
open up in ways that we perhaps did not anticipate when we
passed the Telecommunications Act 3 years ago.
The Internet has emerged as an enormous economic force, and
the developing market for broadband services is forcing
telecommunications providers to rethink their strategic visions
so that they can provide these services. The recently approved
AT&T/TCI deal will, in the near future, allow AT&T to provide a
bundle of local and long distance phone services, video
services, and high-speed data services. If AT&T is able to
offer such bundled services, it will increase pressure on the
regional Bell operating companies, the RBOC's, and other
telephone companies to provide similar services all over the
country. In fact, SBC/Ameritech and GTE/Bell Atlantic have
announced publicly that if their mergers are approved, they
plan to begin providing local phone service out of their region
as a first step toward providing these bundled services
nationwide.
In addition, we have reason to hope that we are approaching
the end of the litigation and the regulatory deadlock that has
been hampering the industry for 3 years. The Supreme Court
recently resolved to a great extent the issue of how much
authority the FCC has to implement certain important aspects of
the Act. We are hopeful that the various phone companies will
view this decision as a confirmation of the ground rules for
competition and not as an invitation for further litigation.
Additionally, we are told that a number of Bell companies
are making tangible progress in their efforts to obtain section
271 authority. The results of these processes in New York,
Texas, South Carolina and elsewhere should provide a great deal
of guidance for the RBOC's as they attempt to gain approval to
provide long distance service in those regions.
For these reasons, as I have said, there is some reason for
some more optimism. The market does appear finally to be moving
toward the competition that we all desire. Accordingly, this is
not the right time to be considering major changes to the Act
itself. Any such changes, in my opinion, might scramble the
marketplace just when competition is starting to take hold. We
need to stay the course and continue to push hard for
competition within the framework of the Act wherever and
whenever we can.
Still, there are some things that can be done right now to
promote more competition. Senator Kohl and I are going to work
with Senator McCain, Senator Hollings and the Commerce
Committee to develop legislation that will ensure all
telecommunications providers have equal and nondiscriminatory
access to buildings. This will help assure that new entrants
have a fair shot at winning customers in residential and in
commercial multidwelling units. This legislation will be done
in a fair, balanced manner that protects the legitimate
interests of the building owners while ensuring at the same
time that this barrier to competition which is clearly a
problem today is, in fact, addressed. I look forward to working
on that legislation.
In addition, today Senator Kohl and I introduced a bill to
impose time limits on the FCC review of telecom mergers. This
bill will not limit the scope of the FCC review, nor attempt to
dictate to the FCC how to evaluate these mergers. Rather, it
will simply impose a deadline for FCC action. As the
subcommittee has stated before, these mergers will have a major
impact on competition and they require careful scrutiny from
the FCC.
However, careful scrutiny does not mean endless scrutiny.
These mergers must be evaluated in a timely fashion so that the
merging parties and their competitors can move forward. The
longer these deals remain under review, the longer the market
remains in limbo and the longer it will be before we see the
vigorous competition that we all want.
Now, let me just put aside the competition and market
issues for a moment to make a point about a group of people who
are sometimes ignored when a merger is announced, the employees
of the merging companies. These people, through no fault of
their own, just because they happen to work for a company that
is planning a merger, are often thrown into complete turmoil by
the announcement of a merger. They don't know if they are going
to lose their jobs. They don't know if they are going to move.
They don't have any way to know what is going to happen to
their company. We need to make it a priority to give these
people some quick answers so they can plan how they are going
to adjust to these mergers and how they are going to provide
for their families.
For all of those reasons, we have introduced legislation
that will impose some deadlines on the FCC, and we look forward
to working with Senator McCain, Senator Hollings and the
Commerce Committee on that legislation, as well.
Now, before I turn to the ranking minority member of the
subcommittee, Senator Kohl, let me just state for the record
that we have an outstanding group of witnesses today before us
and we appreciate all of them being with us. By now, you may
have noticed that we are asking them to testify as one panel.
We would normally ask that Mr. Klein and Mr. Kennard testify on
a separate panel, but in the interest of time and efficiency,
and in the recognition of the stature of our former government
officials, Senator Pressler and Mr. Hundt, we have asked them
to all appear together, and we appreciate their patience and
kindness in doing that. I would also like to thank Mr. Klein
and the chairman, in particular, for their gracious acceptance
of this somewhat unusual arrangement.
Let me turn now to Senator Kohl.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Thank you, Senator DeWine. This month marks
the third anniversary of the Telecom Act, a law designed to
make industry more competitive and give consumers more choices
and lower prices, in part, by letting everyone get into
everyone else's business.
We are here today to ask a few simple questions: Is the Act
working? If so, how well? Is the average consumer beginning to
see some benefits, or do we need to revise the law to promote
more competition?
My own sense has evolved considerably. Two years ago, when
Senator DeWine and I first took over this subcommittee, we saw
little of the ballyhooed competition that the law's authors
expected. But today, a full 3 years after we passed the Act, we
are seeing some positive signs. There are now 10 times as many
competing local phone companies as in 1995, and these startups
have raised almost $20 billion in investment capital from Wall
Street. Convergence technologies, which will give consumers
video, phone and Internet service, seem just over the horizon.
Whether this progress is the work of a better telecom law,
better technology, or better entrepreneurialism is not exactly
clear. But one thing is becoming clear, at least to me.
Breaking open the Telecom Act could be a dangerous idea, one
that will result in more harm than good. Rather, I believe we
would be better off by fine-tuning our telecom and competition
laws where we can find consensus.
For example, we need to update the Satellite Home Viewer
Act to allow local-into-local broadcasting. Only when satellite
becomes a viable competitor to cable, we believe, will it
clearly discipline cable rates and provide viewers with more
choice. We made a mistake, I believe, when we deregulated cable
prices before we had cable competition.
And we need to ensure that, if anything, the playing field
isn't skewed against new entrants. So we are working with
Senator McCain to craft building access legislation that would
grant new providers access to apartment buildings on the same
terms and conditions as incumbents.
Finally, companies, their customers and their employees are
all too often left to the mercy of a time-consuming merger
review process in which the two lead Federal agencies, the DOJ
and the FCC, act in sequence rather than in tandem. Today,
Senator DeWine and I are introducing legislation that will help
move these reviews along. Our bill says to the FCC: approve it,
reject it, or require conditions, but don't just sit on it.
Move within a reasonable time period, because businesses need
certainty and the folks who work for these merging companies
need to plan for their future.
In contrast to those who want to take away the FCC's merger
review authority altogether, we believe our proposal takes a
middle-ground approach. But it would also make a significant
change in the way the Commission reviews mergers. So before we
decide whether to move this measure, we need to have a serious
debate about the merger review process.
This is one reason why we are delighted to have Larry
Pressler and Reed Hundt, who, along with Senator Hollings,
helped craft the Act, as well as Joel Klein and Bill Kennard,
its two thoughtful implementers, here with us today. Gentlemen,
we look forward to your participation in this hearing.
Thank you so much, Mr. Chairman.
Senator DeWine. Thank you, Senator Kohl.
Let me turn to a longtime member of this subcommittee and
the former chairman of this subcommittee, Senator Thurmond.
STATEMENT OF HON. STROM THURMOND, A U.S. SENATOR FROM THE STATE
OF SOUTH CAROLINA
Senator Thurmond. Thank you very much, Mr. Chairman. Three
years ago, I was actively involved in the passage of the
Telecommunications Act, and I was pleased that we were able to
make clear that the Antitrust Division maintained an important
role in the review process under the Act.
Unfortunately, in practice, the Act has not created
competition in the local telephone markets at the rate that we
had hoped. However, I believe that the blueprint of the Act is
sound, and I am pleased that the courts have upheld the law. I
remain confident that, with time, we can reach the goal of
competition in local markets.
I also wish to note that I support the concept of placing a
deadline on the amount of time the FCC has to review mergers. I
recognize that the FCC has a difficult job and must evaluate
mergers carefully. However, I believe a reasonable deadline is
important to bring about finality to mergers. Companies invest
a great deal into proposed mergers and they need a decision one
way or the other. It is not good for the companies or the
marketplace for proposed mergers to remain pending for long
periods of time.
Thank you, Mr. Chairman.
Senator DeWine. Thank you very much.
Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman. When we speak of
our friend, Strom Thurmond, as being a longtime member of this
committee, Strom has been a longtime member of virtually every
committee around here. I can remember him when I was first a
member of this committee working on some of these issues.
Senator Kohl talked about the satellite companies and
local-into-local, and I want to compliment both of you, both
Senator DeWine and Senator Kohl, for your work. We reported out
the bill this morning that will allow satellite TV carriers to
compete directly with cable by offering a full range of local
TV, superstations, movie channels, and everything else. You two
held the hearings on this issue over the past year and it is
one of the reasons why it moved so quickly.
As my former colleague, Senator Pressler, knows, I was one
of the five Senators who voted against the Telecommunications
Act because of concerns I had about areas where I felt that
there would not be adequate competition. For example, I felt
that cable rates would not come down, that instead they would
go up, and a number of other things that have happened.
But my concern was also that in some respects, Congress
would favor one technology over another, and that is very
anticompetitive, especially if Congress guesses incorrectly on
which technology will work better. And we have shown a
consistent ability to guess incorrectly when it comes to
technological issues. We shouldn't take sides. We should let
science dictate what works best.
I think of this problem, when I first became aware of it,
when I was informed about what happened on Thistle Hill, near
Cabot, VT, a beautiful area in Vermont. A mobile phone company
that wanted to offer analog mobile phone service made a huge
mistake. They had to put up a tower, so they hired a company to
survey the land for the tower. They moved ahead without talking
to either the local officials or local homeowners, something
that is not viewed favorably in a State like Vermont.
They put in survey signs, they pounded stakes in the
ground. They drove nails into maple trees, which are a valuable
commodity in our State, without any regard to who owned the
land. And they picked one of the wrong yards, one that was
owned by the chairman of the select board of that town. And
when the town residents and officials complained, the lawyer
for the phone company said, well, we take these sitings as far
along in the process as we can get them before having to go
public.
Well, I wouldn't want them sneaking into my yard in
Vermont, or pounding nails into my trees--and I have got a tree
farm there--or stakes into the ground. It could be dangerous to
those doing it. We also have a pistol range there, Mr.
Chairman. I just wouldn't want anything to happen. There were
no prior discussions with the town. There was no notice to the
landowners whose trees were being damaged.
What I am concerned about, though, is that there is a mad
dash in Vermont and other rural States by analog mobile
companies to put up a bunch of towers to try to beat out
digital phone service which uses newer technologies, and in
some ways having the Congress favor one over the other. For
example, mobile phone service that is using PCS over cable only
requires small whip antennas. You don't have to build these
huge towers with flashing lights near people's homes, and this
PC's-over-cable is working in California and other States.
Satellite phone companies don't require towers. There are other
competing technologies, and we in the Congress should not favor
one over the other.
I will put my whole statement in the record, Mr. Chairman,
but I want to commend Chairman Kennard. He came up to Vermont,
and while we brag about our weather, he came up on probably the
worst weather day we had had in a long time, but sat through a
public meeting for hours listening to Vermonters who are
concerned about this loss of control. I don't want to see local
and State governments overridden in their ability to site
towers, and I don't want to see us favor one technology over
another.
So, Mr. Chairman, even though I am supposed to be at
another hearing, I just wanted to come and compliment you and
Senator Kohl for all the work you have done on this, but also
to make sure for all the people who are here in the audience
that there are a lot of technologies out there and I want them
to compete; I don't want some to be favored over others.
Thank you.
Senator DeWine. Senator Leahy, thank you very much for your
statement and, of course, your full statement will be made a
part of the record.
[The prepared statement of Senator Leahy follows:]
Prepared Statement of Senator Patrick J. Leahy
Mr. Chairman: I appreciate that you and Senator Kohl have convened
this important hearing. It is no secret that I consider the
Telecommunications Act of 1996 as a missed opportunity.
We had the opportunity--then--to increase consumer choice for local
telephone service, to ensure that cable TV rates did not skyrocket, to
protect the traditional role of local governments in setting land use
policies, and to keep the lid on payphone rates.
We also missed the opportunity to install safeguards to ensure that
the old ``Ma Bell'' did not come back together again.
I was convinced then, and am still convinced, that we could have
achieved these goals without interfering with the positive aspects of
that Act.
As one of the five Senators to vote against the 1996
Telecommunications Act, I remain convinced that the law should not have
been passed as written and should be overhauled now. I intend to
reintroduce legislation in the near future to impose reasonable
standards on future RBOC mergers, to give local governments more
control over the siting of telecommunications towers and to address the
huge increases in payphone charges. The Act has invited consolidation
through maga-mergers among the Bell Companies. The proof is clear: we
started with seven Bell Companies and are now down to four, with no
standard in place that would forestall additional consolidation.
I will introduce antitrust legislation, similar to the bill I
introduced last Congress, to bar future mergers between Bell Operating
Companies or GTE, unless the federal requirements for opening the local
loop to competition have been satisfied in at least half of the access
lines in each State served by the merging carriers. In addition, the
bill will require the Attorney General to find that the merger would
promote competition for telephone exchange services and exchange access
services.
To date, not a single incumbent Bell Operating Company has fully
opened its local access lines to competition as required in section 251
of the Act.
While businesses may choose from a variety of companies offering
local phone service, most residential customers can only get service
from their existing phone company. I know that I have no local choices
where I live. I still have only one choice for dial-tone and local
telephone service, whether or not the service is good. That ``choice''
is the Bell operating company or no service at all.
I want to focus on payphones for a moment. Compared even to the
increases in cable rates, payphone increases get first prize any day of
the week. In Vermont, the cost of a local payphone call has increased
250 percent since passage of the 1996 Act. In fact, many Americans are
now paying 50 cents for local payphone calls if they cannot quickly get
change for a quarter--since the typical cost is now 35 cents.
I introduced a bill last Congress, and will do so again this
Congress, to deal with this windfall and allow States to use the change
for better pay phone service for public safety or health reasons.
Boosters for the Telecommunications Act of 1996 also claimed the
new law would bring consumers lower cable rates and better service.
This was slick sales talk that many of us questioned from the outset.
I was not alone three years ago in warning that we did ``not want
to see a repeat of the skyrocketing cable rates * * * It is too easy to
see what might happen if the cable companies are not restrained, either
by competition or by laws.''
I am gratified that our Committee was able to begin to address this
cable rate problem this morning. We reported out a Hatch-Leahy bill
that will allow satellite TV carriers to compete directly with cable by
offering the full range of local television, superstations, movie
channels and everything else. This is a great idea and Senators DeWine
and Kohl deserve a lot of credit for this effort and their work last
year on this.
Another flaw in the Telecommunications Act, in my view, is that in
some respects it has Congress favoring one technology over another.
That is very anticompetitive--especially when Congress guesses
incorrectly on which technology will work better. Congress should not
take sides--but should, instead, let the best science dictate our
progress.
I first became aware of the seriousness of the problem when I was
informed about what happened on Thistle Hill near Cabot, Vermont. A
mobile phone company that wanted to offer analog mobile phone service
made a huge mistake. They hired a company to survey land for their
tower. They moved ahead without talking to town officials or the local
homeowners.
They did not bother their homework--they surveyed sites, pounded
stakes into the ground and drove nails into maple trees without any
regard to who owned the land.
They picked the wrong yards--one was owned by the Chairman of the
Selectboard of the town.
When town residents and officials complained a lawyer for the phone
company said ``we take these sitings as far along in the process as we
can get them before having to go public'' because they know there is a
lot of opposition.
I certainly would not want them on my yard in Vermont pounding
nails into my trees and stakes into the ground.
There were no prior discussions with the town and no notice to the
landowners whose maple trees were damaged.
What I am concerned about is that there is a mad dash in Vermont
and other rural states--by analog mobile phone companies--to put up a
bunch of towers to try to beat out digital phone service using newer
technologies. For example, mobile phone service using PCS-over-cable
only requires small whip antennas. You do not have to build huge towers
with flashing lights near people's homes.
This service is widely available in California and other States and
works well.
Also, satellite phone service does not require towers. By
preempting the traditional local role in the siting of towers the
Telecom Act provides special treatment to one, in this example,
technology that is already outmoded.
I was very pleased that Chairman Kennard came up to Vermont to hear
firsthand how concerned Vermonters are over this loss of control.
Congress should not pick analog tower technology over digital phone PCS
technology or satellite phone service.
I introduced legislation in the last Congress that was designed to
halt FCC rulemakings to override local and state controls concerning
the siting of towers. Other industries do not have a right to build
structures wherever they may wish by running around local authorities--
the analog cellular industry should live by the same rules as everyone
else.
I am working with groups throughout the nation to update my bill
which I will reintroduce with a number of cosponsors soon.
The Congress should revisit the telecommunications Act and this
time do a better job promoting competition and protecting consumers
from increasing telephone, payphone and cable rates, and not trying to
pick winners and make others losers.
The Act now has produced a track record that is pointing in many
cases in far different directions than we were promised when it was
enacted. It is time to take a fresh look at the law, and it is time to
make course corrections for those missed opportunities that can help
fulfill some of those earlier promises.
Senator DeWine. Before we start, I would like to note for
the record that two of our witnesses here today, Senator
Pressler and Mr. Hundt, currently have business relationships,
I am advised, with a range of clients involved in the
telecommunications industry. Their testimony here today,
however, is being offered in their capacity as former
government officials and now as private citizens and does not
necessarily reflect the views of any clients.
We do have a very distinguished panel which I will briefly
introduce. William Kennard was confirmed by the Senate on
October 29, 1997, as the Chairman of the Federal Communications
Commission. He also served as general counsel during the FCC's
implementation of the Telecommunications Act of 1996. We
certainly welcome him back.
Joel Klein was confirmed as the Assistant Attorney General
of the Antitrust Division in July 1997. He has testified before
us frequently over the past several months and we are looking
forward, of course, to his testimony again today.
Larry Pressler is a former U.S. Senator and served as a
Member of Congress for 22 years. He spent 18 of those years
right here in the U.S. Senate representing the people of South
Dakota. Senator Pressler is a past chairman of the Senate
Commerce, Science and Transportation Committee, and the author
of the 1996 Telecommunications Act. Larry, thank you for
joining us.
Reed Hundt served as Chairman of the FCC from 1993 to 1997.
During his tenure, he presided over the implementation of the
1996 Telecommunications Act. Among his other telecom work, Mr.
Hundt now serves as a senior adviser on communications and
technology for McKinsey and Company. We thank him for coming
and look forward to hearing his testimony as well.
We will start from my left to right with Mr. Kennard. Thank
you very much.
PANEL CONSISTING OF WILLIAM E. KENNARD, CHAIRMAN, FEDERAL
COMMUNICATIONS COMMISSION, WASHINGTON, DC; JOEL I. KLEIN,
ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT
OF JUSTICE, WASHINGTON, DC; LARRY PRESSLER, O'CONNOR AND
HANNAN, WASHINGTON, DC, AND FORMER U.S. SENATOR FROM SOUTH
DAKOTA; AND REED E. HUNDT, FORMER CHAIRMAN, FEDERAL
COMMUNICATIONS COMMISSION, WASHINGTON, DC
STATEMENT OF WILLIAM E. KENNARD
Mr. Kennard. Thank you, Mr. Chairman, Senator Kohl. Thank
you very much for the opportunity to be here. I think that this
hearing is very important and very timely, and I commend you
for assembling this panel today. All of the folks before you
have been instrumental in the design and implementation of the
1996 Act. Joel, Reed, Larry and I have all worked tirelessly
together to get to this point, and I think that we all share
Congress' vision that we must have a competitive, deregulated
telecommunications marketplace in our country. So it is great
to be here today.
In thinking about the subject for this hearing, the status
of competition in telecommunications markets, I am reminded of
a famous comment that Winston Churchill made in 1942. It was
right after the Allied forces had won the first major battle of
World War II, the battle of El Alemagne, and Winston Churchill
was able to come to the House of Commons and talk about how the
tide of World War II had turned. And he said that this is not
the end, it is not even the beginning of the end, but it is
perhaps the end of the beginning.
And I believe that that is where we are in the status of
competition in telecom markets. We are at the end of the
beginning. I say that because I believe competition is taking
root, that the Act is working. I know this everyday because
people come and meet with me in the industry, and I can't tell
you how many times companies have come to meet with me and have
told me that they would not have companies but for the passage
of the 1996 Act. Competitive local exchange carriers, long
distance providers, resellers--their companies would not exist
but for this legislation.
And the statistics that I have in my testimony bear this
out. All of the economic indicators in this area are up.
Investment is up, stock values are up, employment is up,
revenues are up. Since 1996, revenues have grown over $140
billion in the telecommunications industry. We have today 600
providers of long distance service. Sixty million Americans
have mobile phones today. There is more competition in the
wireless industry than we have ever had before, and I think
that is a direct result of the actions of this Congress, and
also some of the procompetitive decisions of my predecessor,
Reed Hundt, in creating competition in wireless telephony.
Now, the challenge, of course, that we all face is how do
we get more competition in local phone service, as you pointed
out, Mr. Chairman. I think that there we are at a very pivotal
point because we all know that this area has been plagued by
litigation. We have worked hard to implement the Act, but some
of the incumbents have had their one eye on the courts, the
other eye on the Congress, the other eye on the FCC. And now
that we have a little bit more certainty--some of the major
legal issues have been resolved--I feel that we are at a point
now where the parties are going to come back to the table and
really do the hard work that is required to implement this
piece of legislation.
Now, how do we do that? First and foremost, we have to work
to make sure that what I think is the heart and soul of this
Act, the procompetitive provisions of the Act, sections 251 and
252, are implemented in a procompetitive way. And we are
working very hard on that at the FCC. We are working to come up
with stronger rules on colocation, for example, for new
entrants to get into those local phone markets. We have learned
in the 3 years' experience with the Act. I think we know what
to do.
I have directed the FCC to deploy more resources to
enforcement. Now that we have the rules in place, we have to
enforce them; we have to enforce them fairly but swiftly. We
will continue to work very closely with the RBOC's and all the
other stakeholders in the marketplace on the RBOC entry
provisions.
Now, I wanted to say a word about mergers. This Act has
created a massive restructuring in the telecom marketplace.
That was anticipated, I believe, by Members of Congress. But we
must make sure that the consolidation that is resulting out of
this Act does not undermine the fundamental thrust of the Act,
which was all about competition. Our view at the FCC is to view
consolidation through this prism. How do we reconcile
consolidation with your vision of competition in telecom
markets?
We view this through a different prism than the Department
of Justice. The Department of Justice has a valuable and
indispensable role in looking at these mergers, but our
analysis is different and our analysis is under the public
interest. We do not use an antitrust analysis that is cloaked
in the public interest. The jurisdictions are different.
Now, in conclusion, I wanted to reiterate my firm belief
that this Act is working. Consumers are seeing benefits, but I
do believe that we are at a very delicate tipping point. I
think that with more time and lots more effort, we will be over
the top, a point that Mr. Klein refers to as the point of
irreversibility, where we have reached a point where the growth
of competition has become irreversible. We are not there yet in
local telephony. We are getting there.
But we must make this final effort to tip that balance in
the direction of competition, and the FCC is committed to doing
this hard work. We need the support of you in the Congress.
Senator Lott said just this week that the important thing to do
is empower the FCC to make sure that it has the tools to
complete this job.
And my final thought for you today is let's not forget that
the world is watching what we are doing here. This framework
that you gave us in the 1996 Act, this framework for
competition, is one that we are hoping will be replicated
around the world. Indeed, it is the centerpiece of our efforts
worldwide in the WTO agreement on basic telecom services.
The people sitting at this table talk to leaders around the
world and all the time we are saying watch what we do; we have
the right framework to introduce competition and deregulation.
So we have a huge stake as a Nation in making this work. We
have a huge stake in making sure that the FCC is a strong,
independent regulator with the tools and the independence to
get this job done. And I am confident, Mr. Chairman, that with
your support and the support of your colleagues in the Congress
that we will get this job done and we will succeed.
Thank you.
Senator DeWine. Thank you very much.
[The prepared statement of Mr. Kennard follows:]
Prepared Statement of William E. Kennard
Mr. Chairman and Members of the Subcommittee, thank you for the
opportunity to review with you today the status of competition in
telecommunications markets and the progress that has been made in the
three years since the enactment of the Telecommunications Act of 1996.
Because so much of that Act was focused on promoting competition in
local telecommunications services, encouraging deployment of advanced
services and promoting deregulation where market forces are strong, I
will focus my remarks today on these subjects.
I am pleased to report that the Act is working: consumers are
beginning to see competitive choices in local telecommunications
services, competitive deployment of advanced broadband services is well
underway and the stage is therefore set for less regulation as
competition expands.
I can also say that we are by no means near the end of the process
of introducing local competition and then deregulating the competitive
markets.
But I can say that we are approaching the end of the beginning and
we can see some tantalizing glimpses of this competitive, deregulated
future. I believe that many--but not all--of the fundamental
prerequisites for a fully competitive telecommunications industry are
now in place as the result of the Act and the vigorous implementation
of the Act by the FCC and our colleagues in the State Public Utility
Commissions.
This is not to say that fully competitive markets are inevitable
and that we could now declare victory and simply walk away. Indeed,
today we are at that very delicate ``tipping point'': with just a
little more time--and probably a lot more effort--we'll be ``over the
top'' and competition will gain a firm foothold. But if we are unable
or unwilling to make this final effort, the momentum toward competitive
markets will slow, the balance will tip the other way and just as
inevitably send us back to the 1996 and even 1990.
Telecommunications competition is not yet firmly established in
local markets and it will take diligence and hard work by the FCC and
our partners in the State Public Utility Commissions before fully
competitive local markets are the norm. I know that the dedicated women
and men at the FCC and the State Commissions are ready and willing to
undertake this hard work. I hope that you and all the members of the
Judiciary Committee, the Senate and the entire Congress will support us
in this effort.
good news: the telecommunications sector is thriving
By every measure, the telecommunications industry is thriving.
Since the passage of the Telecom Act, revenues of the communications
sector of our economy have grown by over $140 billion. Stock values of
the companies in the telecommunications sector are up, indicating that
Wall Street sees a future of a rapidly enlarging pie that is big enough
for all, not a zero sum game.
One-fourth of our country's economic growth has come from the
information technology sector. For 1998, it is estimated that the
communications sector of our economy will have revenues in excess of
$500 billion. This growth has touched the lives of almost every
American. Now, a growing number of American families across this nation
have a choice of a vast array of high-tech communications services,
services that now cost less.
This growth comes not only from established providers but, since
the passage of the Act, we can now clearly see benefits flowing from
the new competitors. The revenues of new local service providers more
than doubled in 1997, and they increased substantially again in 1998.
And this growth has meant new jobs for thousands of Americans.
In the wireless industry, capital investment in 1998 has more than
tripled since 1993, with more than $50 billion of cumulative investment
through 1998. Similarly, the wireless industry generated almost three
times as many jobs as in 1993. All this while the cost of service to
the consumer has dropped. A cell phone is no longer a luxury for the
privileged, but with the advances in cellular service, the advent of
PCS and digital, mobile phones are now a common communications tool for
over 60 million people every day.
AT&T, BellSouth, MCI Worldcom, Ameritech, Sprint, SBC, Bell
Atlantic and US West are all among the top 20 telecommunications
companies, by revenue, worldwide. Similarly, GE Americom, Hughes, Loral
and Panamsat are among the top 20 satellite service providers, by
revenue, worldwide. And U.S. satellite manufacturers such as Hughes,
Lockheed Martin, Loral, Motorola and Orbital Sciences, maintain a
strong lead in contracting and subcontracting satellite systems
worldwide.
And I can't finish a summary of the sector without mentioning the
Internet. It goes without saying that the Internet is booming, creating
new jobs, new and better means of education and commerce * * * the
Information Age has clearly arrived. The Internet is a testament to a
wise regulatory policy: don't regulate unless there is a clearly
demonstrable need to do so. The reality is that something as dynamic
and revolutionary as the Internet probably can't be regulated and,
unless and until there is a demonstrable market failure affecting the
general public, we should resist calls to regulate it. The unregulated,
highly competitive Internet is a useful model for the more traditional
telecommunications sector.
These are just a few examples of how the telecommunications economy
and market are thriving, and are doing so in an increasingly
competitive environment.
status of competition
Let me take a few minutes to give you an idea of how competition is
evolving, starting with the long distance market.
At the end of 1997, there were over 600 long distance providers
offering services, some on their own facilities, some entirely by
resale and still others by a combination of owned facilities and
resale. The competition they bring has had an appreciable difference on
the consumer price for long distance service.
Long distance prices have steadily dropped over the past few years.
The average cost of domestic interstate long distance dropped from 11.8
cents per minute to 10.3 cents per minute from 1996 to 1997. At the
same time, the average rate per minute for an international call
dropped from $0.70 in 1996 to $0.64 in 1997. We do not yet have the
data for 1998, but I expect that it will show similar decreases.
Consumers have responded to these rate reductions by increasing their
use of these services. Interstate and international calling increased
from 468.1 billion minutes in 1996 to 497.3 billion minutes in 1997.
The wireless industry is surging. Everything that is supposed to be
up is up, everything that is supposed to be down is down.
Subscribership is up, jobs are up, investment is up, consumer bills are
down, and the wait for a license is down. What is important to remember
is that this surge of the wireless industry followed the elimination of
the original duopoly structure and the introduction of competition by
making more spectrum available to more players. In other words, FCC
policies to foster competition have proven to work for consumers'
benefit and we suspect that our local competition policies will bring
similar benefits to wireline services.
The international market is also flourishing. With the adoption and
implementation of the WTO Agreement countries representing 90 percent
of the $600 billion global market for basic telecommunications have
pledged to open their markets to international competition. And, we
have been successful in our negotiation of bi-lateral agreements with
other governments to permit provision of satellite service in their
countries, such as Mexico and Argentina.
But local service competition was a principal focus of the
Telecommunications Act and I would like to review the progress in this
area in more detail.
Local competition is still nascent, but it is making significant
strides. The revenues of local service competitors are $4 billion since
1996. It is estimated that new local competitors now provide, over
their own networks or by reselling incumbent company lines and UNE
loops, between four and five million telephone lines to customers--
between two to three percent of the nation's total telephone lines.
Local competitors are taking and increasing share of nationwide
local service revenues. Local competition is broadening: new
competitors are reselling incumbent company lines in almost every
State--and about 40 percent of the incumbent telco lines they resell
are connected to residences; new facilities-based competitors are
active in almost every State. Local competitors continue to attract
investment capital and deploy their networks. Industry sources report
that 20 publicly traded competitive local exchange carriers (CLEC's)
have a total market capitalization of $33 billion--compared to 6 such
companies with $1.3 billion of total market capitalization prior to the
1996 Act. And these new competitors are working faster and working
smarter. They continue to build fiber optic-based networks at a faster
rate than incumbents.
advanced services/broadband deployment
I would like to speak briefly about the progress in the last three
years in the area of ``advanced telecommunications capability,'' or
``broadband'' as it is popularly known.
What is broadband? It is two-way communications of voice, data and
images via any technology and, most importantly, at vastly higher
speeds than most consumers have ever had in their homes.
In practical terms, broadband will make it possible to change web
pages as fast as you can flip through the pages of a book; will make
possible two-way video conferencing in the home so that family members
can see each other instead of just talking; and can make possible the
downloading of feature length movies in minutes.
Broadband can also greatly increase the possibilities of distance
learning and medical treatment at home; and its potential for persons
with disabilities--for increased communications via sign language or
speech reading with the advantage of facial expressions and other
nuances, and the possibility of text-based Internet pages converted
into braille--is enormous.
Section 706 of the 1996 Act, of course, makes it a national goal
for the Commission to encourage the deployment of broadband to all
Americans on a reasonable and timely basis, and we just released a
Report on our nation's progress toward that goal.
Our Report is just a snapshot taken a few seconds after the
starting gun of a very long race--we and the runners in that race have
a long way to go. But we find that at present, the deployment of
broadband appears to be reasonable and timely.
We see two things, in particular.
First, since the 1996 Act, there has been an enormous amount of
activity in the broadband area. Investment in broadband facilities has
been tens of billions of dollars--large sums even by the standards of
this business. In what is usually the most difficult part of this
business to enter--the so-called ``last mile'' to the home--many
companies are building last miles, or giving serious study to the idea.
Local exchange carriers, both incumbent and competitive, are
deploying new technology that has reinvigorated the ubiquitous
and simple copper telephone loops into effective and low cost
broadband connections for residential consumers as well as
businesses.
Cable television companies are adding two-way broadband
capabilities to their networks which are inherently focused on
residential consumers, including rural and non-urban areas.
Electrical power utilities, wireless cable companies, mobile
and fixed radio companies, and many satellite companies are
building or planning broadband systems--some with revolutionary
new technologies--to serve residential consumers.
Second, in terms of residential subscribers who are paying for the
service, today broadband is on par with, or ahead of, the telephone,
black-and-white and color TV, and cellular service at the same stage in
their deployment. And according to the cable and telephone companies,
by the end of this year they will be offering broadband to millions of
residences.
I also want to note that broadband is being offered to residential
consumers in a number of small towns and rural areas, which indicates
that rural areas do not present intractable problems for broadband
deployment. Rural areas may be targeted especially by satellite
companies, which already have the highest proportion of their customers
for Direct Broadcast Satellite television services in rural areas.
The success of broadband so far is the result of many longstanding
FCC policies. For example, the FCC has sought to facilitate new
competition in all phases of the telecommunications business, giving
newcomers access to essential elements of incumbent networks, and
allocating large blocks of spectrum in ways that make them usable for
any technically feasible service.
Because this is the very early stage in broadband's deployment, the
nature of consumer demand is very unclear. Certainly, at present, it
seems that many companies are entering broadband and offering it at
consumer-friendly prices, and residential consumers are starting to
find out about broadband. The market seems to be working and the best
role for government is to observe, monitor and enforce our long-
standing policies of promoting competition and providing the spectrum
and access rights that are the building blocks for a competitive
market.
telecommunications mergers and acquisitions: reconsolidation or
foundation for the future?
A strong effort to firmly establish competition in local markets
and your support of this goal is all the more necessary since the
telecommunications industry is experiencing a wave of mergers and
acquisitions. As this Subcommittee is aware, smaller companies are
``bulking up'' by merging with each other, major ``name brand''
telecommunications companies are also merging as well as acquiring the
smaller, younger companies.
This activity could portend a reconsolidation of the
telecommunications industry that reduces competition, to the public's
detriment, or it could establish a strong foundation for aggressive
competition and innovation that greatly benefits the public.
With the stakes so high, when formerly monopolized markets are
being opened to competition, it is essential that we do as much as we
can to prevent anything that will retard the development of
competition. This means lowering entry barriers, ensuring efficient
interconnection of facilities, and encouraging the development and
deployment of new technologies. This also means that the Commission
needs to be particularly careful in evaluating mergers during this time
of change and uncertainty, because a merger, once consummated, cannot
easily be broken up. You can't unscramble an egg.
``Good'' mergers can spur competition by creating merged entities
that can compete more aggressively and that can more quickly move into
previously monopolized markets. Just last week, for example, the FCC
approved the merger of AT&T and TCI, two companies that have
complementary skills and assets with which to enter the local exchange
service markets. This merged company will have an incentive to build
out local telephone systems that will be able to compete with the
largest local exchange companies, particularly in residential markets.
If this competition develops, it will make it possible to substantially
deregulate the local exchange markets, just as strong competition
justified the substantial deregulation of the long distance and
wireless markets.
But ``bad'' mergers are likely to slow the development of
competition. Among the anticompetitive harms arising from a ``bad''
merger are: eliminating firms that would have entered markets; raising
barriers to entry; discouraging investment; increasing the ability of
the merged entity to engage in anticompetitive conduct; and making it
more difficult for the Commission and State Public Utility Commissions
to monitor and implement procompetitive policies.
In this time of great change and uncertainty, the FCC needs to be
particularly vigilant to not allow any developments, including mergers,
to slow the development of competition. That is why the FCC and, in
some cases, State Public Utility Commissions, need to apply their
unique knowledge, expertise and judgment in reviewing proposed mergers
and acquisitions under the Communications Act's ``public interest''
standard.
barriers to competition remain
Some of the most crucial prerequisites for local competition take a
considerable period of time to put in place, even under the best of
circumstances. Unfortunately, but not surprisingly, the availability of
some of the most important prerequisites have been delayed, sometimes
through litigation, sometimes through the intransigence of parties that
are threatened by competition, and sometimes through the sheer scale
and complexity of the task.
This latter factor--the sheer complexity of the task--cannot be
ignored: the development of local exchange competition is simply an
order of magnitude more complicated, more labor-intensive and more
capital-intensive than was the development of long distance
competition.
While the industry players actually have to do the work, regulators
can play a critical role by getting the players together, insisting
that a solution be found, setting standards and deadlines, and by
resolving implementation disputes. For example, by facilitating the
development of the technical solution and establishing a clear
implementation schedule for Local Number Portability, the FCC played a
catalytic role in eliminating one complex technical barrier to
competition.
Although some amount of litigation is inevitable, the Supreme
Court's recent reaffirmation of the FCC's fundamental responsibility
for implementing the Act has removed considerable uncertainty that may
have been slowing the development of local competition. And one major
barrier to local competition will fall as soon as the FCC is able to
complete the determination of what constitutes ``Unbundled Network
Elements''--or UNE's--in accordance with the Supreme Court's remand.
It is important that those of us in government work to bring
stability to the legal and regulatory environment. In the wake of the
Supreme Court decision, there was immediate and deep concern among
CLEC's and investors that incumbent local exchange carriers (ILEC's)
would use the uncertainty of this remand as an excuse to slow down the
evolution of local competition.
That is why we sought and obtained commitments from the regional
Bell operating companies and GTE to honor their current inter-
connection agreements to provide unbundled network elements while the
FCC considers the UNE issue in accordance with the Court's opinion.
This is the good faith needed for all of us to move forward to a
competitive marketplace, and to bring more stability to the
marketplace.
Unfortunately, the litigation isn't over: some of the parties who
were disappointed by the Supreme Court's decision on the Commission's
authority are now asking the 8th Circuit to review the substance of the
Commission's pricing standards.
And there are some very disturbing reports of incumbents attempting
to deny fundamental interconnection rights to competitors. I have said
this before, and I'll say this again: under my chairmanship, no
competitor will be denied fair interconnection. It is inexcusable. And
it won't be tolerated.
To keep markets open and the competitive momentum going, the FCC
will act as the liaison between the incumbent LEC's and the CLEC's to
minimize disputes and avoid lengthy proceedings and litigation. And
where the FCC's intervention cannot quickly resolve interconnection
problems informally, we are using our ``rocket docket'' to end these
disagreements quickly, and to keep the market functioning smoothly.
the last mile and the last meter: the last bottleneck?
Just as a chain is only as strong as its weakest link, a fully
competitive local market can't be achieved unless ALL the fundamental
prerequisites are in place. Unfortunately, there are two essential
prerequisites--access to rights-of-way and access to buildings--that
are increasingly problematic and may not be readily amenable to
resolution by the FCC.
There is a simple truth: before we can have local competition, new
entrants must be able to deploy their competitive network facilities
and reach prospective customers on roughly the same basis as the
incumbents. Unfortunately, this is not always possible today because of
the inherent tension between property owner's rights to control the use
of their property and the need of CLEC's to use public and private
property on the same basis as the ILEC's to deploy the ``last mile''
and the ``last meter'' of their competitive networks.
Congress enacted section 253 of the Communications Act to resolve
some of the issues relating to municipal rights of way. However, a few
municipal governments are making it difficult for CLEC's to use public
rights-of-way for fiber optic cables. Indeed, some communities have
imposed obligations ostensibly related to the use of rights-of-way even
on competitors that do not use public rights-of-way for their own
facilities, such as wireless service providers and resellers. Section
253 is currently subject to litigation so it is too early to know
whether it will solve all the problems.
Obtaining rights-of-way on private property for the ``last meter''
is often even more problematic for local competitors. Facilities to
which competitive providers require access on private property in order
to serve occupants of office and apartment buildings typically include
inside wire, riser conduit, and, in the case of wireless providers,
rooftops for the placement of antennas. Some State laws permit public
utilities to condemn rights-of-way, but CLEC's are not always
classified as public utilities for these purposes. In any case, the
condemnation process is generally expensive and very time consuming. I
am committed to exploring what we can do to address these critical
issues.
Just as the FCC must work in partnership with State Utility
Commissions on the broad range of regulatory issues affecting
telecommunications services, the FCC must work cooperatively with the
State and local government organizations whose actions can advance or
retard competition. I have therefore worked hard to involve the
Commission's Local and State Government Advisory Committee (LSGAC) in
these issues.
In August 1998, the Commission announced an agreement between the
LSGAC, the Cellular Telecommunications Industry Association (CTIA), the
Personal Communications Industry Association (PCIA), and the American
Mobile Telecommunications Association (AMTA) addressing local zoning
requirements relating to the siting of personal wireless service
facilities. The groups presented a joint agreement setting forth
voluntary guidelines for use of moratoria on tower and antenna siting,
as well as an informal dispute resolution process for moratorium
issues. These groups are also pursuing similar discussions regarding
other issues relating to wireless facilities siting. I hope and expect
that this process will help to reduce many of the problems associated
with wireless facilities siting, and I hope that similar arrangements
can be established to speed the deployment of fiber optic cables in
public streets.
With respect to the issue of access to private property, some
States have enacted nondiscrimination requirements applicable to
private landowners, and the National Association of Regulatory Utility
Commissioners (NARUC) has passed a resolution supporting such
requirements. I intend to continue working with NARUC and the
appropriate State government bodies to further this policy. It is not
clear, however, whether piecemeal State legislation can be fully
adequate to address these issues.
ILEC's are not as adversely affected by these property issues as
CLEC's because they generally have their networks in place. This has an
insidious side-effect: it makes the CLEC's even more dependent on the
ILEC's for the last mile and last meter connection to customers. And it
neutralizes a CLEC's ability to bargain with ILEC's over the price and
availability of unbundled loops because CLEC's don't always have a
``build it yourself'' option of the ILEC's terms and conditions are
unreasonable.
conclusion
We have come a long way toward a more competitive marketplace in
communications, but we have much more work to do. The transition from
monopoly regulation to open markets, from today's technologies to
tomorrow's breakthroughs, is not yet complete. For the coming year our
agenda is clear--to promote competition, to foster new technologies, to
protect consumers, and to ensure that all Americans have access to the
communications revolution.
These will be goals that guide us as we implement the Supreme
Court's instructions on UNE's, as we continue opening local phone
markets, as we work to make communications available to all Americans,
as we review the mergers now before the Commission as well as those
that may come.
The agenda for this year continues on the foundation laid last
year--competition, community, common sense. We have a lot of work to
do, and we have the will to do it well.
We will promote competition in all sectors of the
marketplace. We will reform access charges, and ensure that
proposed mergers are pro-competitive and benefit consumers.
We will continue to deregulate as competition develops,
eliminating any unnecessary regulatory burdens, reducing
reporting requirements, streamlining rules and our own internal
functions.
We will continue to protect consumers from unscrupulous
competitors, and give customers the information they need to
make wise choices in a robust and competitive marketplace. We
will continue our policy of ``zero tolerance'' for those
competitors who would rather cheat than compete.
We will work to ensure that the Act's provisions of RBOC
entry into the long distance marketplace are implemented in a
manner that promotes competition and consumer welfare and is
fair to all of the parties.
We will ensure that broad access to communications services
and technologies for all Americans, no matter where they live.
We will complete universal service reforms, continue oversight
of the schools and libraries and rural health care universal
service programs, encourage accessibility of emergency
information via closed-captioning and video description, and
ensure that the 54 million Americans with disabilities can use
and have access to the communications network.
We will foster innovation, working to ensure that America
remains the world's leader in innovation. We will continue to
promote the development and deployment of high-speed Internet
access, promote compatibility of digital video technologies
with existing equipment and services, and promote competitive
alternatives to cable and broadcast TV.
Finally, we will advance these concepts worldwide, serving
as an example and advocate of telecommunications competition
worldwide. We will work to encourage the development of
international standards for global interconnectivity, work to
promote the fair use of spectrum through the WRC 2000, and
aggressively work on the worldwide adoption of the WTO
Agreement for Basic Telecommunications. We will continue to
assist other nations in establishing conditions for
deregulation, competition, and increased private investment in
their telecommunications infrastructure so that they too, can
share in the promise of the Information Age, and become our
trading partners.
During this time the ground rules we set now will structure
competition and the telecommunications industry for years to come.
Decisions we make today will determine whether or not all Americans--
irrespective of where they live, their race, their age, or their
special needs--can share in the promise of the Information Age.
Thank you. I look forward to answering any questions you may have.
Senator DeWine. Mr. Klein.
STATEMENT OF JOEL I. KLEIN
Mr. Klein. Thank you, Mr. Chairman, Senator Kohl, Senator
Thurmond. It is indeed a pleasure for me to be here again with
you to talk about this issue of mutual interest to the
administration and to this subcommittee. It is a special honor
to appear with my friend and colleague, the Chairman of the
FCC, as well as his predecessor--it is rare that I get to be
bookended by two chairmen of the FCC--and my old law school
classmate and good friend, Larry Pressler. So this is a high
honor.
I want to be very brief, make one fundamental point, Mr.
Chairman, and then three supporting points. I believe that the
vision that the Congress had and the administration supported
in the 1996 Telecom Act is correct. And it is not a question of
whether that vision will ultimately be implemented and we will
see the full benefit of competitive markets; it is simply a
question of when.
And as we sit here today, 3 years later, I think there is
much that we can all be proud of. The architects of this Act,
in particular Senator Pressler, Reed Hundt--and indeed I want
to personally thank Senator Thurmond for actually ensuring that
the Justice Department would have a critical role in the
implementation. I think there is much that has been
accomplished and we should not miss that point, not just the
consistent lowering of rates in long distance, the increased
competition in the business arena, the really incredible
sprouting up of new technologies on the cable side, with new
promise from the AT&T/TCI merger, with respect to other cable
companies already in business, like Media One, CableVision and
Cox.
We are beginning to look at new developments in wireless,
broadband, as you said, Mr. Chairman, and so on and so forth.
And that is all good stuff. Indeed, the President's Council of
Economic Advisers on February 8 of this year in the annual
report detailed these developments, and I have asked that that
information be included in the record.
Now, it is true that while a lot of good has been
happening--and I think it is important to emphasize that before
we turn to what seems to be the difficult problem that
everybody is talking about. How do we take this good and expand
it for more and more people, particularly for the average
American consumer? And, in part, I think the frustration we
feel is, as Chairman Kennard said, about to come to an end, but
it will be a time in working through the end game here.
The last time I was here, the statute had been declared
unconstitutional by a Federal judge in Texas. I told you at
that point I thought that decision would not hold, and indeed I
went to Louisiana to argue the case on appeal. I am pleased to
say that we prevailed and that the constitutional soundness of
the statute was upheld. By the same token, Chairman Hundt's
foresight has now largely been vindicated by the U.S. Supreme
Court, as well, in the Iowa Board case.
But what happened--and I think it is unfortunate, but what
happened is essentially the incumbents decided that they might
get a better deal from the courts than they could get from this
Congress. And unfortunately they had some early success and
then litigation became the favored tool. I think they have now
had a sufficient number of setbacks that they realize, given
what is going on in the market and with technology, it is time
to come to the table.
We in the Department as competition advocates in this
process are working closely with a number of State agencies to
work through the important complications to make sure that we
get this right. Both Texas and New York have spent a great deal
of time with us and we continue to remain optimistic about what
is ahead.
So I do see this as a continuing journey, and the one thing
I would hope--and I think it is reflected from all the comments
from the subcommittee--is that we continue to stay together on
the course that we have charted, for it is the right course and
one that will ultimately do us all great pride.
Thank you.
Senator DeWine. Mr. Klein, thank you very much.
[The prepared statement of Mr. Klein follows:]
Prepared Statement of Joel I. Klein
Good morning, Mr. Chairman and members of the Subcommittee. It is a
pleasure for me to appear before you today on behalf of the Antitrust
Division of the Department of Justice to share our perspective on the
progress of the Telecommunications Act of 1996 in the three years since
it was signed into law. As always, we are grateful for your support and
your interest in our work, and for your continuing dedication to
ensuring that the Act achieves its purpose of bringing more competition
to all sectors of the telecommunications industry.
A report released by the President's Council of Economic Advisors
earlier this month describes with statistic after statistic a
telecommunications marketplace that has become increasingly vibrant and
robust in the wake of the 1996 Act and other pro-competitive policies.
As reported by the CEA, hundreds of new firms have entered all sectors
of the industry, new and incumbent firms have collectively invested
tens of billions of dollars in facilities, services, and R&D, network
capacity has increased, new technology is being deployed, and roll-out
of advanced communications services is accelerating. Output has
increased and prices have declined industry-wide. A copy of that report
is attached. The 1996 Act and its procompetitive, deregulatory
framework clearly set the right course.
Even with these tremendous strides, there remains much hard work to
be done before the job of bringing competition to all parts of the
telecommunications industry is finished. That is particularly true as
to the local exchange. And we are still awaiting the day when a Bell
Operating Company will have achieved the degree of local exchange
market-opening required as a precondition for long distance entry.
While some of this is taking longer than many might have liked, we at
the Justice Department remain as convinced as ever that the Act's
fundamental framework is sound and that, if we stay the course, we will
continue making steady progress under the Act in bringing increased
competition to all telecommunications markets, with its associated
benefits to America's consumers.
Unfortunately, but perhaps predictably given the stakes involved,
we have had to devote a significant amount of time and energy during
these first three years to litigation--regarding not only numerous
specific local exchange market-opening disputes under the Act, but also
the meaning of the Act, its jurisdictional scheme, and even its
constitutionality.
Happily, in the last few months, the most fundamental of those
court challenges have been resolved, and in favor of the Act. The D.C.
Circuit and the Fifth Circuit have now rejected constitutional ``bill
of attainder'' challenges to the Act, with the Supreme Court denying
certiorari in the Fifth Circuit case.
And just last month, the Supreme Court issued its ruling in the
Iowa Utilities Board case, which resolved the Act's major
jurisdictional issues and upheld the FCC's authority to adopt a uniform
national set of rules for implementation of local exchange market
competition, including rules governing pricing and unbundled network
elements.
The litigation is not over yet. Challenges to the substance of the
FCC's pricing rules, which the Supreme Court did not rule on, remain to
be considered by the Eighth Circuit. And the FCC will conduct further
proceedings on its unbundled network element rules, which may be
subject to further court challenges. But hopefully, the remaining
issues can be dealt with quickly, so firms will focus more of their
energies on business strategy instead of litigation strategy.
local competition
The Act embodies ambitious goals. It was designed to dismantle the
legal, administrative, and regulatory structure that had governed local
phone monopolies for decades, and replace it with a fundamentally new
imperative: the local telephone market must be opened to competition.
That is the Act's linchpin. The Act also envisioned competitive
benefits to consumers from allowing the Bell Companies to enter and
compete in long distance, once they had demonstrated that the local
bottleneck logjam was broken.
The Act provided for three different distinct avenues of
competitive entry into the local exchange for a competitor to use
separately or in combination to build or assemble a competing service:
first, using the competitor's own networks and facilities,
interconnected with the incumbent carrier's network; second, using the
unbundled network elements (or ``UNEs'') of the incumbent's network (or
a combination of UNEs and the competitor's own facilities); and third,
reselling the incumbent's retail service offerings. According to the
CEA report, competitive local exchange carriers (``CLECs'') have so far
captured between 2 and 3 percent of the local exchange market as
measured by lines, or about 5 percent of the market measured by
revenues. Resale and UNE account for more than 70 percent of lines
served by CLECs, with facilities-based accounting for the remainder.
Although there are some important success stories, each of these
avenues has its own limitations, and it is important to consider each
of them separately.
Facilities-based competition
In the limited sphere where competitors have been able to reach
numerous profitable customers and to limit their reliance on the
incumbent carriers network to simply connecting their own networks to
it--the urban business customer market--competition has already made
considerable headway. According to the CEA report, since the Act's
passage new competitors have been authorized to enter local markets in
every state in the U.S., and new carriers have entered all of the top
100 U.S. urban markets, as well as 250 smaller business trading areas.
In fact, most major cities nationwide already have several facilities-
based carriers competing with the incumbent for urban business
customers. The number of switches owned by CLECs has grown from 65
before the Act to nearly 700 by the end of 1998, and the CLECs are
building out their fiber network at a fast clip. According to the FCC,
the amount of fiber deployed by CLECs tripled between 1993 and 1997.
And some estimates indicate that CLECs added more than 120,000 route
miles of fiber to their networks during just the first three quarters
of 1998. According to the CEA report, new entrants have successfully
raised billions of dollars in financing in capital markets, increasing
market capitalization for CLECs from almost nothing in 1993 to over $30
billion today. (This figure does not include debt financing or private
venture financing).
These new entrants typically, and naturally, set their sights first
on urban business customers as the most profitable slice of the local
exchange market, just as the first competing long distance carriers
did. Their focus has initially been limited to dense business
districts, although their network coverage areas have begun to expand
to reach other urban and suburban business ``corridors'' and office
parks and, in some cases, have even begun to reach some residential
apartment buildings.
In addition, there are now some encouraging signs regarding the
prospects for cable company entry into local telecommunications
markets--although it is taking longer than some predicted. AT&T's
decision to acquire TCI may have been what put this prospect back into
the headlines recently. But a number of cable companies are now well
into the process of implementing the necessary upgrades to their cable
systems to offer services such as local and long distance telephony and
high-speed Internet access.
Wireless technology also offers some competitive potential. Market
expansion and increased competition within the cellular and personal
communications systems sectors is making these mobile wireless services
more ubiquitous and affordable. In addition, several new competitors
have begun to enter the local exchange market using fixed wireless
technologies to provide the ``last mile'' of network connection to the
customer. Finally, there are a number of firms hoping to enter the
local exchange market using satellite technology.
While these developments are encouraging, facilities-based mass-
market local entry efforts are still extremely limited and will take
time to develop.
Unbundled network elements competition
The avenue of using the incumbent's unbundled network elements, or
a combination of unbundled elements and the competitor's own
facilities, has often developed at a frustratingly slow pace, and the
overwhelming majority of the very few mass-market customers served by
competing carriers are resale customers.
The FCC estimates that CLECs are now using UNEs leased from
incumbent carriers to serve approximately 260,000 U.S. customers. This
represents a tiny portion of all local customers, and most of them are
concentrated in a few areas. In most states the figure is still
extremely low. For example, in Bell South's second Louisiana
application, we found that only about 100 unbundled ``loops'' had thus
far been ordered and provisioned in the entire state. In some other
states, the figures are somewhat higher, nut the fact remains that
competition using UNEs--an integral part of the Telecom Act's mandate--
still has to go.
Resale competition
In sheer numbers of new local customers signed up, resale
competition appears to have been the most successful avenue thus far.
But because competition is largely confined to marketing and billing
for the incumbent's services--with virtually total reliance on the
incumbent's network--resale does not allow for a full range of possible
cost-saving innovations, so its potential competitive benefits are
limited. It is therefore highly unlikely to be a sufficient engine by
itself for bringing the range of competitive benefits to mass-market
consumers that the Telecom Act intended. Indeed, many CLECs, including
AT&T and MCI, have abandoned the resale strategy. And a company that
was once one of the nation's fastest growing local service resellers,
with hundreds of thousands of local access lines, was forced by late
last year to lay off almost half its employees.
In short, all three avenues for competitive entry have limitations
that keep any one of them from being a complete solution. We need all
three.
For broad, mass-market entry, the facilities-based avenue has
limitations that can be solved only over time, and at considerable
expense, as competing networks are physically extended to individual
households. And the resale avenue has limitations that are inherent,
because by nature it involves selling the incumbent services. That is
why we believe it is critical that the unbundled network elements route
remain viable, and why so much attention is being focused on overcoming
the difficulties in pursuing it. So let me talk for a minute about what
those difficulties are.
Difficulties to remedy in UNE access
There have been two different kinds of UNE difficulties to deal
with. The first has been the difficult legal process of clarifying and
interpreting the Act's UNE mandates. The second has been the difficult
technical and logistical process of implementing those mandates.
Let me first say a few things about the legal difficulties. The
meaning of the UNE mandates has been a major focus of the litigation
over the Act, figuring prominently in the Iowa Utilities Board case--
and perhaps predictably, given the extremely high stakes involved in
exactly what CLECs are entitled to under the Act, in what manner, and
at what price. Disputes over the meaning of these mandates have
generated a tremendous amount of federal litigation, as well as related
state commission rulings, arbitrations, and FCC rulemakings.
Some, though by no means all, of that skirmishing has been laid to
rest by the Supreme Court's decision in the Iowa Utilities Board case.
That decision has resolved most of the disputes to date involving
unbundled network elements, and has rejected a variety of incumbent
local exchange carrier policies and practices which unnecessarily
increased the costs or diminished the quality of services for
competitors that use the incumbent's UNEs. For example, the Court
upheld the FCC's rule prohibiting the incumbent carriers from the
anticompetitive and wasteful practice of refusing to provide already-
combined network elements in their combined form, thus forcing
competitors to purchase them separately and recombine them on their
own, at additional expense. While there are still some details to be
worked out--which will likely involve some further proceedings before
the FCC and the federal courts--we are hopeful that the Supreme Court's
resolution of so many of these issues will now make it easier for
important business and investment decisions to be made with more
certainty regarding the legal landscape, propelling the competitive
process forward as the Act intended.
Now let me turn to the technical and logistical difficulties. Quite
apart from the difficulties in clarifying and interpreting the UNE
mandates, the process of implementing the unbundling and
interconnection requirements of the Act has been an enormously complex
undertaking, requiring hard work and substantial expenditure by the
incumbent local exchange carriers as well as by the new entrants. In
particular, working out the technical details for sharing complex
telecommunications networks, and developing the systems to support such
sharing, has proven to be a formable task.
However, as we have explained in our section 271 evaluations, it is
such a formable task precisely because access to operational support
systems (``OSS'') and other wholesale support processes is so essential
to the development of mass-market competition. This access is what
enables a competitor to sign up a new customer, process the customer's
service order and transmit it to the incumbent, switch the customer's
service from the incumbent to the competitor, provide a new service to
the customer, provide accurate customer billing, and manage any repair
or service problems.
Put simply, I do not believe that you will have mass-market
competition in local markets without adequate non-discriminatory access
to the incumbent carrier's OSS, a reliable means to measure the
incumbent's wholesale performance, and an effective enforcement
mechanism to ensure against poor performance or ``backsliding'' after
section 271 approval.
We already have a telling example of the critical importance of OSS
in the resale context, where access to the incumbent carrier's OSS is
no less important. I am sure many of you are aware of the efforts by
MCI and others to roll out mass-market resale service in California in
late 1996 and into 1997. MCI was quite successful in marketing its new
local service offering, and in the ensuing months signed up some
30,000-35,000 customers wishing to switch their local service provider
from Pacific Bell to MCI. But Pacific Bell did not have adequate
electronic systems and wholesale support processes developed to handle
MCI's order volume. Pacific Bell was not able to keep up with
processing these orders manually, which resulted in huge backlogs of
thousands of orders. Pacific Bell attempted to remedy the problems by
adding hundreds of employees to help with manual order processing, but
the order backlogs remained or grew even larger. In the end, MCI was
forced to withdraw its resale offering in California. I use this
example not to single out Pacific Bell, but rather to underscore why
these OSS interfaces and support process are so very important if we
are to give local market consumers meaningful competitive options.
Role of the Department of Justice
Now let me turn more specifically to the Department of Justice's
role in all this. The role given to us in the Act is to advise the FCC
on Bell Company applications for long distance entry under section 271.
And, of course, to enforce the antitrust laws. But we have always
viewed our responsibility under the Act as more than merely giving a
thumbs-up or thumbs-down to section 271 applications as they come in.
That's why we not only articulated our standard for recommending
section 271 approval--that the local exchange market involved be
``fully and irreversibly open to competition''--but also have devoted
considerable resources to helping the Bell Companies and all others
concerned understand what we mean by that standard. And we have tried
to do this not only in the competitive analyses we have provided for
section 271 applications to date, but also in formal and informal
discussions with everyone concerned.
Recognizing the critical importance of OSS access to the process of
opening local exchange markets, as part of our overall section 271
responsibilities we have, when asked, collaborated with the efforts of
state commissions in New York, Texas, and elsewhere to tackle the OSS
issue. There is no question that non-discriminatory access to OSS has
emerged as one of the remaining hurdles to the market opening that is
an essential precondition to the Bell Companies' gaining section 271
approval at both the state commission and FCC level. These ``OSS
testing'' proceedings at the state level have demonstrated that
developing these systems, interfaces, and processes is difficult, but I
think they have also demonstrated that it can be accomplished. In
addition, the involvement of the state commissions and independent
third parties in the testing processing has been particularly useful
not only in pointing out problems and moving forward to remedy them,
but also in removing some of the ``he said-she said'' disputes between
the Bell Companies and the new entrants from the debate.
These proceedings are well underway, and we will continue to work
with the state commissions and the industry to complete them. We hope
that these proceedings will identify Bell Companies whose OSS and other
wholesale support processes may now be sufficient to obtain section 271
approval, or at a minimum that they will clearly demonstrate what steps
we still need to take towards local market opening and section 271
approval.
importance of section 271
As we reflect on the first three years of the Act, I believe one of
the most important lessons we can take from our experience is how
absolutely critical section 271 is to achieving the Act's market-
opening goals. The progress toward opening the local exchange markets
that many have complained is far too slow has taken place in good
measure because of the prospect of long distance entry for the Bell
Companies as a reward. One of the most ambitious aspects of the Act is
that it requires and expects the incumbent local exchange carrier to
assist competitors that wish ultimately to take away its customers.
Imagine how much more difficult this process would be without the
incentive of long distance entry for the Bell Companies.
For the same reasons, the Department has paid considerable
attention, in developing our competitive standard for assessing section
271 applications, to the question of how to ensure that a local
exchange market remains open even after the application has been
approved and the incentive of gaining entry is no longer a factor. We
are hopeful that the collaborative proceedings in New York, Texas, and
elsewhere will help fine-tune and implement the performance measures,
the reporting requirements, the performance benchmarks, and the
regulatory and contractual enforcement mechanisms that will be
necessary to protect against such post-271 entry ``backsliding.''
conclusion
We never expected the monopoly structure that has characterized the
local exchange for most of this century to be removed overnight. But
Congress made the right decision three years ago in deciding that it
was time for competition to be the touchstone for our national
telecommunications policy in all markets, including the local exchange.
The Act reflects Congress's well-founded faith in our free-market
economy, faith that in the telecommunications industry as in others,
competition will strengthen our economy and ensure that American
consumers benefit from increased choices, enhanced offerings, and
better prices.
Just as MCI and other refuted the many pessimists who said that
competition in long distance would never be achieved--as recently as
1986, one observer predicted that AT&T would find itself alone in the
basic long-distance market by the end of the century--so will the many
large and small CLECs ultimately prove that competition is the right
choice in local markets as well.
Before we get there, there is a lot of hard work yet to be done.
Rather legislatively revisiting the Act, I think the right approach is
to maintain our efforts to make the Act work. In my view, its basic
framework is sound. The difficulties we have experienced in
implementing it are of the kind to be expected with such an ambitious
undertaking. After all the work that has gone into implementing the
Act, and litigating it to a common, judicially interpreted
understanding where required, I am concerned that revising it at this
point would only lead to more litigation and more delay.
The work before us now is not to set the policy--you have already
set the policy, and it is the right one--but to continue sweating the
details that go into implementing that policy. We in the Justice
Department are used to sweating these kinds of competitive details. We
remain committed to the pro-competitive goals of the Telecommunications
Act, and we will continue working vigorously to help enforce them.
I urge you to read the attached Council of Economic Advisors
report. It lays out the remarkable competitive vibrancy of the
telecommunications industry on a macro level. As we continue to work in
the trenches to ensure all markets are competitive, we should not lose
sight of the dynamism of the telecommunications marketplace writ large
and the instrumental role the 1996 Act plays in this story.
Senator DeWine. Senator Pressler.
STATEMENT OF LARRY PRESSLER
Mr. Pressler. Thank you very much, Mr. Chairman, and may I
greet my colleagues, former colleagues, Senator Kohl and
Senator Thurmond. It is an honor to appear before this hallowed
committee.
As I revisit here, I think I should say that the antitrust
area in the telecommunications will become more and more
important as the telecommunications bill matures because if the
telecommunications bill matures completely, we will have
deregulation, or as the Europeans say, liberalization, and
everybody will be competing. But we will need ground rules, and
they are predatory pricing and other antitrust rules.
So what you are doing here today is probably the
continuation of what you have been doing, but will become more
and more important because as the telecommunications bill
matures, when everybody gets into everybody else's business, we
will need the antitrust laws and the related standards of
business practices to become the ground rules, in essence.
Let me say that when we were doing the telecommunications
bill--and it is to the credit of many people that it passed,
certainly all the Senators in this room and the people here at
the table with me. Let me say that Mr. Kennard was a key factor
in the passage of that bill. Reed Hundt and many others were
heavily involved. I might say my colleague, Joel Klein, who got
all the A's in our class at Harvard Law School, or at least
most of them--all were involved, but our motto sort of was
let's get everybody into everybody else's business in
telecommunications. That was the goal and that is the
objective, and when the bill is fully mature, we will have
everybody into everybody else's business.
And, granted, there have been some bumps along the way, but
many people deserve credit for the passage of that piece of
legislation in 1996. Senator Fritz Hollings and many others
worked on that on a bipartisan basis. In fact, I hand-carried
the original copy, the original draft of the bill to each U.S.
Senator, and I believe each member of the Senate had some
input, plus some House members and the White House, and many,
many others. It was truly a bipartisan effort in which many
people cooperated, and labor and industry and consumer groups
and even the labor unions finally endorsed the bill. So it was
a moment of Camelot when it finally passed, and that moment
quickly passed, but hopefully we will have another moment of
Camelot when we get the long distance/local thing served.
I like to point out in some of the speeches that I give
that there were at least 11 groups that had a veto power over
the telecommunications bill toward the end, and that is an
unusual area. And I want to commend you, Mr. Chairman, and the
ranking member for your continued legislation on speeding
things up in the regulatory area.
And I am sure that there will be related pieces of
legislation, but I have predicted that there probably won't be
a major piece of telecommunications legislation similar to the
telecom bill for many years because so many groups have a veto
power over it. Therefore, we will depend more and more on our
antitrust laws to resolve some of the disputes.
It was with some amusement that I recently heard Justice
Scalia comment during a Supreme Court proceeding that a certain
paragraph of the Act was not entirely clear and that clearer
draftsmanship could have been used. I wanted to jump out of my
chair and recall how we had to negotiate each weekend so that
an equal number of House members and Senators who each insisted
on adding adverbs, adjectives and punctuation to that
paragraph--indeed, one even insisted on the addition of a
comma, so making legislation or making sausages is probably not
a pretty business. But I wanted to say to Justice Scalia I wish
I had the luxury of being able to just draft like Supreme Court
Justices do.
But considering all the business, labor and consumer
interests that had a veto power over the bill, I think we have
a pretty good result. However, as we move forward, we have to
evaluate certain things. One thing I would certainly like to
see that hasn't happened yet is the RBOC distance dispute.
I dream of the day when we have the RBOC's in long
distance, the long distance companies in local service, and
everybody in everybody else's business. And we could then use
the antitrust rules to prevent unfair business practices and
traditional regulators would fade away. That was the goal when
we passed the Act. There is a strong fear of letting the RBOC's
into long distance, but they are already in the cellular
business and smaller cellular companies are able to compete
quite well. Getting everyone into everyone else's business was
part of the deal when the Act was passed.
I understand that Bell Atlantic probably will get into long
distance by the end of this year, and I hope that the FCC, the
courts and everyone else concerned will tell the other RBOC's
exactly what they must do to gain entry, as the fulfillment of
the Act will be in everyone's best interest.
In terms of antitrust, in drafting section 251 of the Act,
we were mindful of one of the most fundamental principles of
antitrust law, the essential facilities doctrine. Indeed, it is
black letter antitrust law that essential facilities must be
made available to competitors only if they are not available
from another source or capable of being duplicated by the
competitor or others.
In the context of the 1996 Act, we wanted to be sure that
access to an unbundled network element of an incumbent is only
justified when a new entrant has a genuine need for such an
element. Thus, section 251 requires that in determining what
elements an incumbent must make available, the FCC shall
consider, at a minimum, whether access to proprietary network
elements is necessary and whether the failure to provide access
to other network elements would impair the ability of the
requesting carriers to provide service. We intended for there
to be a preference that new entrants invest in their own
facilities, where possible, in order to promote facilities-
based competition and encourage innovation.
Some of our debate got very flowery. I recall in one debate
that I said I considered that the CLEC's would grow up like
flowers across the face of American telephony and that the
RBOC's entry into long distance would merely heighten
competition and not harm anyone. Someone shot back that the
CLEC's, rather than being flowers on the face of American
telephony, might well be blemished pock marks on the face of
American telephony. You can see we had some high rhetoric. The
point of the rhetoric was that we wanted new competitors, but
we also would let the RBOC's into long distance. Now, some
people are saying we really didn't mean that, and what the Act
clearly says is being ignored in some cases.
Antitrust rules and legislating for telecommunications is
extremely complex, in an industry which needs some very big
companies and some small companies. I mean, telecom is a very
difficult industry because you have to have some very big
companies, obviously, if you are going to make a long-distance
call from Seoul, Korea, to my hometown of Humboldt, SD. On the
other hand, it is more obvious in some industries, like the
automobile industry, people accept that we have to have some
very big companies. But we also, in telecommunications, need
the small companies, and we have made provision for them and we
have called them the competitive local exchange carriers.
Others are smaller manufacturers, and others are things such as
local rural LEC's, and so forth.
Several things have happened since the passage of the
Telecommunications Act. It is working and much progress has
been made. We now have more than 140 local competitive exchange
carriers currently operating with their own facilities-based
local telephone service, far more than the 13 at the end of
1995. Those new companies are vigorously raising money on Wall
Street, and they are deploying fiber optic subscriber lines
more quickly than the local incumbents. We all want to see them
thrive, and we want to see everyone into everyone else's
business. I hope that the courts, the FCC, and others find a
format by which the RBOC's can get into long distance so that
we truly can complete the maturation of this bill.
Mr. Chairman, I shall summarize the rest of my statement,
since it was my pet peeve when I was chairing committees if
somebody would come along and talk forever in the opening
statement.
There is a study by Harvard called ``Mergers, Sell-Offs,
and Economic Efficiency'' that pointed out that close to half
of all these mergers don't work out and that they result in
smaller companies, and some of the big companies find
themselves cumbersome. Justice Learned Hand said in the Alcoa
case that bigness itself was not a basis for preventing a
merger, but rather unfair business practices were. This
committee will have more influence over which mergers should
and should not be allowed, and I commend to you Learned Hand's
philosophy.
On the international picture, I keep a chart of how quickly
countries are opening up or liberalizing their
telecommunications markets. The most liberalized or open ones
include England, Sweden, Finland, Chile, Norway, New Zealand
and Australia. The middle group includes the United States,
Canada, and most other European countries. And then this is
followed by a third group of other countries in the world that
are the last liberalized that include countries such as China,
Pakistan, India, Vietnam, and others.
But I hope the time comes when all the telecommunications
markets are open to competition, and that will raise the
question of antitrust extraterritoriality as to how far we go
in our country in comity, in respecting other countries, and
their respecting our decisions in the area of antitrust.
We live in an age when we want to be able to use a credit
card in a remote country and be billed accurately later. We
also want to be able to directly dial a telephone call or send
an E-mail around the world instantly and have it go accurately,
and be billed fairly and accurately for that transaction. It
requires big organizations or big companies to be able to
accomplish that. The trick is to be able to retain
competitiveness with that necessary bigness, and that is what
your committee is charged with, and also to allow startup small
companies to compete.
We must recognize that the marketplace, especially in this
industry, is an international one. This is understandable, as
we all want to be able to directly dial that phone call or send
that E-mail. When international companies combine, not only
U.S. law is invoked, but that of other countries as well. Your
committee will need to examine questions of international
comity, antitrust extraterritoriality, and the other issues in
the application of those antitrust laws.
Thank you for the opportunity to testify here today. I will
do my best to answer any questions that you may have.
Senator DeWine. Senator Pressler, thank you very much.
[The prepared statement of Mr. Pressler follows:]
Prepared Statement of Former Senator Larry Pressler
(Larry Pressler is currently a partner in the law firm of O'Connor
& Hannan. He served in the U.S. Senate from 1978-1996, and in the U.S.
House of Representatives from 1974-1978. He was the principal author of
the Telecommunications Act of 1996, and served as Chairman of the
Senate Commerce. Science and Transportation Committee as well as that
Committee's Subcommittee on Telecommunications.)
Thank you, Mr. Chairman, for this opportunity to revisit the
Judiciary Committee, on which I formerly served. It is a great honor
for me to be able to testify before this Committee, which has such a
hallowed tradition.
Let's get everybody into everybody else's business in
telecommunications'' was my motto in speeches to staff, industry, labor
groups and consumer groups during the four years of final consideration
of the Telecommunications Act of 1996. I first started working on the
new Telecommunications Act with Barry Goldwater when he preceded me as
chairman of the Telecommunications Subcommittee of the Commerce
Committee, back in the 1980s.
Many people deserve credit for passage of the Telecommunications
Act of 1996. Senator Fritz Hollings and I, and many others, worked
hand-in-hand on that bill on a bipartisan basis. Many senators on this
committee made major inputs to that bill. I hand-carried an original
draft of the bill to each U.S. Senator, and I believe each member of
the Senate had some input, plus some House members, the White House and
many others. It was truly a bipartisan effort on which many people
cooperated.
In the end, at least eleven interest groups from industry, labor,
consumer groups, and decency groups had virtual veto power over passage
of the Act. Somehow, we had a moment of ``Camelot'' when the fighting
paused, and I went to Bob Dole, Newt Gingrich and many others and
begged for floor time to move the bill. Somehow the moment of
``Camelot'' lasted long enough, and we accomplished this.
Thus, it was one of the great honors of my lifetime to have been
the Chairman of the Commerce, Science and Transportation Committee, and
to have been the principal author of the Telecommunications Act of
1996. That Act took 13 years to pass, and was a hard-fought bill.
I do not believe it is generally known, but teams of about 35-45
staff worked on Saturdays and Sundays throughout much of 1995 to hammer
out differences. They worked as volunteers--as you know, there is no
overtime pay in government service--so the least I could do was pay for
their lunches!!
It was with some amusement that I recently heard Justice Scalia
comment during a Supreme Court proceeding that a certain paragraph in
the Act was not entirely clear. I wanted to jump up and recall how we
had to negotiate each weekend so that an equal number of House members
who each insisted on adding adverbs, adjectives and punctuation to that
paragraph. Indeed, one even insisted on the addition of a comma! Making
legislation or making sausages is probably not a pretty business. But
considering all the business, labor and consumer interests that had a
veto power over the bill, I think we did a pretty good job of getting
it done.
Many have called for changes in the telecommunications bill since
its passage, but to my knowledge, no serious effort has reached either
floor, or, indeed, has been considered in any committee. According to a
speech I regularly give on telecommunications interest groups, there
are about a dozen groups which have veto power over any new
telecommunications legislation for five to ten years, if then even.
There are several groups which can veto telecommunications legislation.
Included among them are: regional bells; cable; labor; newspapers;
long-distance companies; decency lobbies; burglar alarm companies;
universal service and consumer leagues; electric utilities; the
American Association of Retired Persons; broadcasters; and several
others.
Therefore, it is my conclusion that this Anti-Trust Subcommittee,
chaired by my friends, Sens. DeWine and Kohl, will play a major, major
role in telecommunications activities in the next five to ten years, as
I do not anticipate any new legislation.
The ideal thing would be for the traditional regulation to wither
away with time, and, indeed, on an international basis for the WTO,
regulations to be met and to have less regulation in each country.
Everyone would compete with anti-trust rules, to ensure that fair trade
practices are used. The true ``nirvana'' of telecommunications
deregulation might be when we don't need any more regulation, and anti-
trust laws can take over.
It is my feeling that we are also about to enter an era when anti-
trust extraterritorial rules will govern more and more. We presently
use ``positive comity'' among Europe, the U.S. and many of our other
allies. I predict that Europe, especially, will attempt to impose its
anti-trust standards on the U.S., via the World Trade Organization.
the 1996 telecommunications act is working
The 1996 Telecommunications Act is working positively and has
worked. There are bumps in the road, and the biggest one is probably
the long-distance/RBOC controversy.
As author of that Act, I dream of the day when we have the RBOCs in
long distance, the long distance companies in local service and
everybody else's business. We would then use the anti-trust rules to
prevent unfair business practices and traditional regulators would fade
away. That was our goal when we passed the Act.
There is a strong fear of letting the RBOCs into long distance. But
they already are in the cellular business and smaller cellular
companies are able to compete quite well. Getting everybody into
everybody else's business was part of the deal when the Act was passed.
I understand that Bell Atlantic probably will get into long distance by
the end of this year, and I hope that the FCC, the courts and everyone
else concerned will tell the other RBOCs exactly what they must do to
gain entry, as the fulfillment of the Act will be in everyone's best
interests.
I recall in one debate I said that I considered the CLECs would
grow up like flowers across the face of American telephony, and that
the RBOCs' entry into long-distance would merely heighten competition
and not harm anyone. Someone shot back that the CLECs, rather than
being flowers on the face of American telephony, might well be
blemished pock marks on the face of American telephony! You can see
that we had some high rhetoric! The point of the rhetoric was that we
will have these new competitors but we also will let the RBOCs into
long distance. Now people are saying that we didn't really mean that.
And what the Act clearly says is being ignored.
Anti-trust rules and legislating for telecommunications is
extremely complex, as it is an industry which needs some very big
companies and some small companies. The automobile industry, to
everyone's agreement, needs large companies to build automobiles. The
telecommunications industry needs large companies if one is to make a
direst-dial phone call from India to my home in South Dakota. However,
the telecom industry also needs small companies--we call some of them
competitive local exchange carries, others are smaller manufacturers,
other are rural local exchanges, etc. Several things have happened
since the passage of the Telecommunications Act. It is working, and
much progress had been made. We do not yet have the long-distance local
situation solved, but as the author of the Telecommunications Act, I
very much want to see the development of more CLECs on the one hand,
and I want to see the regional bell operating companies get in on long
distance, on the other hand.
We now have more than 140 local competitive exchange carriers
currently operating with their own facilities-based local telephone
service--far more than the 13 at the end of 1995. These new companies
are vigorously raising money on Wall Street, and they are employing
fiber optic subscriber lines more quickly than the local incumbents. We
all want to see them thrive. On the other hand, we want everybody into
everybody else's business and I hope the courts, the FCC and others
find a format by which the RBOCs can get into long distance so we truly
have everybody into everybody else's business.
Some people have been concerned about the number of mergers under
the Telecommunications Act of 1996. Let me point out that these same
mergers are occurring in agricultural companies, international
companies, manufacturing companies and all types of companies. The
Harvard Study, Mergers, Sell-Offs, and Economic Efficiency by David J.
Ravenscraft and F.M. Scherer, points out that about half of mergers
never work out. They create a company which is too clumsy or
cumbersome, and there is either a business failure or essentially a
business divorce. We need some big companies and some small companies
in telecommunications.
Justice Learned Hand said in the Alcoa case that bigness itself was
not a basis for preventing a merger, but rather unfair business
practices were. This committee will have more influence over which
mergers should and should not be allowed, and I commend you to Learned
Hand's philosophy.
the international picture
The Telecommunications Act of 1996 was used as a basis for much of
the language of the WTO agreement on telecommunications finalized in
1997. That agreement has encouraged other countries to open up their
markets to foreign competition, and to have transparent systems for
issuing licenses. I do an annual rating of how quickly countries are
opening up, or liberalizing, their telecommunications markets. The most
liberalized, or open, include: England, Sweden, Finland, Chile, Norway,
New Zealand and Australia. The middle group includes: the USA, Canada,
and most other European countries. This is followed by a third group of
the other countries in the world and, finally, are the least
liberalized or the least open. They include: China, Pakistan, India,
Vietnam and others. Of course, many other countries in the world do not
have very well-developed telecommunications systems.
The point is, though, that almost all countries of the world have
made it their business to try to cooperate on international
telecommunications standards, and many of those are based almost
verbatim on the 1996 Act.
Herein, enters the issue of anti-trust extraterritoriality.
Increasingly, those countries in categories one and two are demanding
that fair business practices be followed, and they are using ``comity''
in demanding that there be an international anti-trust standard.
Europe, in particular, is pushing for broadened WTO anti-trust
standards.
We live in an age when we want to be able to use a credit card in a
remote country, and be billed accurately later. We also want to be able
to directly dial a telephone call or send an e-mail around the world
instantly and have it go accurately and to be able to accomplish that.
The trick is to be able to retain competition with that bigness, and
also to allow start-up, small companies to compete.
We must all recognize that the marketplace, especially in this
industry, is an international one. That is understandable as we all
want to be able to directly dial a telephone call or send an e-mail
around the world instantly and have it routed accurately and billed
fairly and correctly. It requires big organizations and big companies
to be able to accomplish such feats. The trick is to be able to retain
competition with that bigness. This will stimulate fascinating
questions concerning the international application of anti-trust laws.
When international companies combine, not only U.S. law is invoked, but
that of other countries as well. This committee will need to examine
questions of international comity in the application of anti-trust
laws.
conclusion
Thank you for the opportunity to testify today. I will do my best
to answer any questions that you may have.
Senator DeWine. Mr. Hundt.
STATEMENT OF REED E. HUNDT
Mr. Hundt. Thank you very much, Senator. Thank you both for
inviting me. It is a pleasure to see you again. It is a
pleasure to be here with my current friends and former
colleagues. And, in particular, when I think of the work that
Joel and Bill are doing now and the burdens they have, I
chuckle. [Laughter.]
It is pathetic, but it is a relief to observe their work.
It is also a pleasure to commend them because they have
continued to do a fantastic job.
Let me say that on the third anniversary of the Telecom
Act, it is my personal view that we have to judge the law to be
a very, very substantial success, and then we have to say how
can we make it be even more successful and how can we make sure
that we don't lose the gains that we have obtained because this
is the most important active and dynamic sector in the entire
American economy. This communications and information sector,
however we want to define it, is a sixth, growing to a fifth,
and to be within a decade as much as a fourth of the entire
American economy.
It is clearly the fastest growing part in terms of job
growth, in terms of productivity gains, in terms of investment
capital. By any measurement whatsoever, this is the sector of
the economy that is doing the best of all. It is also the
sector of the economy that, in my personal view, inspires the
most consumer confidence and gives us the greatest feeling
across the entire range of the economy that we are actually
able to get things right.
Every time you read about the Internet and whether the
bubble will burst, I always say, you know, I don't know whether
you want to call it a bubble or not, but, boy, it sure is a
wealth creator and it sure is a source of hope and excitement
for every young person in America. And that is really the
truth. You go out there across this country--and I know you
Senators have had this experience--everybody is talking about
it. How do I get into communications? Most of them want to skip
going to college now and go straight to invention.
And they have the record of Thomas Edison, Henry Ford and
Bill Gates to cite back at you when you tell them maybe they
ought to spend some time in college. Well, this isn't the
education committee, so we won't go on about that choice. But
we should say how did this happen in this country and how do we
make sure we don't lose it.
The number one story in the communications age, of course,
is the Internet, and I think that this committee should take
great pride in the fact that Congress has made possible the
growth of the Internet in this country. Maybe we didn't invent
the technology, maybe we were very lucky in that respect, but
we would not see happening with the Internet in this country
what has happened if it were not the case that the right
policies were passed, have continued to be held by this
Congress, and are part of the Telecommunications Act.
Very briefly, just to approach this from two perspectives,
first of all, there are two countries that lead the world in
terms of new telephone lines added, two at the top and they are
essentially tied. One is China--they add the size of a Bell
company every year--and the other is the United States. Now,
how can that be? The answer is two totally different
explanations.
In one, the whole country is mobilized to catch up. In the
other, in this country, we have unleashed the power of
innovation, and so the market is driving--not a centralized,
state-run economy in some capital, but the market is driving
tremendous line growth. People in their homes are ordering an
extra line. People in businesses are ordering ten extra lines.
Why are they doing this? No. 1, to get on the Internet, and,
No. 2, because they are finding competitive choices,
particularly for Internet access that never existed before.
We have 5,000 companies in this country that sell Internet
access. When I started as the Chairman of the FCC, we had about
two or three. When I started as the Chairman of the FCC, which
my kids regard as a very long time ago, but it wasn't all that
long ago by adult measurements, there was no electronic
commerce, absolutely zero. It was only in 1994 that the Web was
invented, in 1995 that Netscape went public. The whole
burgeoning of electronic commerce and the tools for having this
all happen has just happened in the last 3 years.
But let's not forget this. We have the cheapest Internet
access of any country on the planet, and if we had the prices
for Internet access that they have in Japan or China or France
or any of these other countries, nothing that I have told you
about now would be happening in our country. And the reason we
have those cheap prices if fundamentally we have a very, very
intelligent combination at the State level and at the Federal
level of smart regulation and no regulation, a combination of
the two.
We don't regulate the Internet, and the FCC and the
Government decided that they would not impose on Internet
traffic the old cumbersome regulatory system applied to voice
traffic. And that decision, which has been carried out by my
successor--that decision is the reason why we have a
deregulated, cheap Internet access economy.
The second thing is that all these new lines added,
particularly the businesses that are getting on the Internet.
One-half of all the new lines added in this country per month
are not supplied by the incumbent telephone company in the
business market. In the business market, one-half of all new
line adds are supplied by these new, competitive companies that
didn't even exist until you passed the telecommunications law
and that would not exist if you had not passed it. And if the
principles of that are not enforced, those companies will not
exist in the future. We must not forget that.
If the principles of the telecommunications law are not
enforced in the future, if courts intervene again--I hope they
don't--and block the law, if there is any backing off, then all
this competition will go away because it is not established
yet.
So I will just say, in conclusion, all the glories of the
Internet, all the marvels of our productivity-gaining economy
are directly attributable to this combination of wise
regulation and a fundamental commitment to deregulation. And so
far, we have pulled it off and it is magical and let's stick
with it.
[The prepared statement of Mr. Hundt follows:]
Prepared Statement of Reed E. Hundt
introduction
Mr. Chairman and Members of the Committee: It is a pleasure to
appear before you today to testify on the state of competition in
telecommunications. During my tenure as Chairman of the Federal
Communications Commission, I had the privilege to appear before this
Committee on several occasions. I am delighted to have this opportunity
to renew acquaintances with many members of the Committee and to meet
members who have joined since I last appeared.
This is my first opportunity to appear as a member of the private
sector. My testimony today reflects my personal views and not
necessarily the views of any of the companies with which I am
affiliated. I currently serve as a member of the boards of directors of
Allegiance Telecom, Inc. and NorthPoint Communications, Inc., both of
which are facilities-based providers of telecommunications services. I
also serve on the boards of Ascend Communications, Inc., a
telecommunications equipment manufacturer, and Novell, Inc., a
manufacturer of computer software. In addition, I am a consultant to
venture capital firms and an international consulting firm.
I am especially pleased and honored to appear today with such
distinguished colleagues, each of whom has played a critical role in
making the telecommunications and information sector the most dynamic
and productive in our nation's economy.
Senator Pressler spearheaded the bi-partisan legislative effort
that resulted in passage, by overwhelming majorities, of the first
comprehensive reform of the Communications Act of 1934. Over the past
three years, we have seen incredible growth in new investment in
telecommunications and information service firms and an equally awesome
expansion in the array of services that these firms are delivering to
the American people. The dynamic growth and expansion have even spread
to other industries and undoubtedly have contributed to the country's
productivity gains. And this economic growth has created thousands of
new jobs for American workers. None of this would have been possible
without the Telecommunications Act of 1996.
Assistant Attorney General Klein has led the Administration's
vigilant enforcement of the nation's antitrust and merger laws. These
efforts are vital to preserving the unprecedented robust growth of our
free market economy. In particular, they provide an assurance to
investors and entrepreneurs in the telecommunications and information
industries, an assurance that they will succeed or fail on the basis of
the creativity and quality of their products and services, free from
the pernicious effects of anticompetitive practices.
Of course, Chairman Kennard has been at the center of the FCC's
implementation of the 1996 Act, first as the Commission's General
Counsel and now as Chairman. Throughout the Commission's deliberations
on the scores of rulemaking proceedings mandated by the statute, Bill
was an invaluable source of insightful, prudent legal advice on an
enormous range of complex issues. He also supervised the work of Chris
Wright and other extremely able litigators in the Office of General
Counsel who have defended the Commission's orders in federal courts
throughout the United States. I learned from my experience as Chairman
that you can count on somebody appealing every decision that the FCC
issues in carrying out its responsibilities under the 1996 Act.
Incidentally, a major accomplishment under Chairman Kennard and General
Counsel Kennard is the FCC's outstanding success record in appellate
cases.
In my testimony today, I would like to concentrate on a few
principal themes:
The forces of competition and innovation in
telecommunications that were unleashed by the
Telecommunications Act of 1996 have fueled the unprecedented
growth in this sector of our economy over the past three years.
The dynamics expansion of telecommunications and information
services since 1996 would not have occurred without the
concerted efforts of the Congress, in particular the leadership
of this Subcommittee, the Department of Justice and the FCC to
undertake initiatives that removed legal and economic barriers
to entry into local and other telecommunications markets.
The challenge of the coming months is to ensure that
consumers, especially residential consumers, throughout the
country enjoy the benefits of competition.
The ultimate objective of the 1996 Act is deregulation of
local telecommunications markets so that consumers, not
government agencies, decide the products and services that are
offered and the prices charged.
telecommunications in the united states--a true success story
Over the past three years, the United States economy has
demonstrated a unique ability to continue to grow and prosper in a
faltering world economy. I believe that the unparalleled growth in this
country's telecommunications and information sector has contributed
significantly to the expansion of the national economy. We are the
world's leaders in these industries--Americans have more choices among
providers, services, and educational resources than consumers else in
the world.
The Telecommunications Act of 1996, in my view, is largely
responsible for this economic success story. The Act opened
telecommunications markets that have been closed to competition since
the beginning of this century. It unleashed the creativity of
innovation entrepreneurs and gave Wall Street the confidence needed to
invest billions of dollars in these start-up firms. Indeed, the
Telecommunications Act of 1996 was instrumental in converting the
telecommunications and information sector from a beneficiary of
national economic growth to one of the key drivers of that growth.
The impact of the 1996 Act on the telecommunications industry is
well documented in the report released on February 8, 1999 by the
Council of Economic Advisers.\1\ The Act jump-started the entry of
competitive local exchange carriers (CLECs) into markets around the
country. Today, CLECs are competing with the incumbent monopoly
telephone companies in every one of the top 100 urban markets as well
as 250 business trading areas.\2\ The number of switches deployed by
CLECs increased from 65 before the Act to almost 700 by the end of
1998.\3\ These firms have a market capitalization of over $30 billion
and employ more than 50,000 workers.\4\
---------------------------------------------------------------------------
\1\ Progress Report: Growth and Competition in U.S.
Telecommunications 1993-1998. Council of Economic Advisers (Feb. 8,
1999) (Progress Report).
\2\ Progress Report at 18.
\3\ Id. at 17.
\4\ Id. at 18, 16.
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And the CLECs are having a significant impact on the markets where
they compete. Data analyzed by the Council of Economic Advisers
indicate that CLECs doubled their share of total local access lines
during 1998 \5\ and accounted for approximately five percent of the
revenues in local telecommunications markets by the end of 1998.\6\
---------------------------------------------------------------------------
\5\ Id. at 24 (Chart 6).
\6\ Id. at 24 (Chart 7).
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The expansion of the wireless telephone industry over the past few
years has been even more remarkable. In 1993, approximately 16 million
Americans subscribed to cellular service. By 1998, subscribership had
increased to more than 60 million.\7\
---------------------------------------------------------------------------
\7\ Id. at 29 (Chart 9).
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New competition from digital personal communications services (PCS)
has contributed importantly to the expansion of the wireless industry.
It is estimated that median prices per minute for wireless customers
(what the typical customer pays) declined by up to 30 to 40 percent for
residential subscribers and between 30 and 50 percent for business
customers.\8\
---------------------------------------------------------------------------
\8\ Id. at 27.
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According to the CEA Report, capital investment in the wireless
industry now amounts to $50 billion and annual revenues approach $30
billion.\9\ The new challenge for this burgeoning industry is clear: to
compete with traditional wireline telephone services for residential
and business customers.
---------------------------------------------------------------------------
\9\ Id. at 27-28.
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Although the CLEC and wireless segments of the industry have
enjoyed unprecedented growth over the past three years, nothing has
surpassed the explosive expansion in Internet use and Internet
companies. The CEA Report estimates that the number of Internet
``hosts'' (computers that store information that is accessible via the
Internet) increased from fewer than 3 million world-wide in 1993 to 20
million in 1997 to over 35 million in early 1998.\10\ Estimated
Internet users in the United States grew from about 28 million in 1995
to over 73 million in 1997 to more than 80 million in 1999 or almost
one in three American adults.\11\
---------------------------------------------------------------------------
\10\ Id. at 36.
\11\ Id. at 36-37.
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Recognizing the importance of this new medium, Congress included a
provision in the 1996 Act, section 706, that is expressly designed to
promote the deployment of advanced telecommunications services to all
Americans. Telecommunications carriers, led by the CLECs, are meeting
this need by deploying high-speed Internet access services, such as
digital subscribers lines (DSL), and are aggressively marketing these
services to residential and business customers nation-wide.
the role of the federal government
All of us at this table and the members of this Committee have been
privileged to be part of this unprecedented explosion in the
telecommunications and information industries since 1996. Indeed, I
think one of the most important lessons we can learn from this
experience is the enormous impact that a clear, forward-looking
national policy can have on these industries.
Each of the governmental bodies represented in this hearing--
legislative branch, executive branch, and expert independent agency--
has spent the last three years sending the same message to the American
business community. We will vigorously promulgate and enforce policies
that foster competition in the telecommunications and information
industries and ultimately permit the complete deregulation of local
telecommunications markets.
Indeed, the leadership of this Committee, Chairman DeWine and
Senator Kohl, almost two years ago made one of the most important
contributions to the goals of competition and deregulation. At that
time, the press was full of stories about merger discussions that were
taking place between AT&T and a Bell Operating Company. In my opinion,
if those discussions had produced an agreement, the resulting merger
would have completely undermined Congress's plan for bringing the
benefits of competition to consumers in local telecommunications
markets. Instead, Chairman DeWine and Senator Kohl courageously stepped
forward and encouraged the FCC to take a position on that impending
merger. In the wake of that letter, the merger talks collapsed and the
AT&T was forced to pursue a new strategy. The recently approved merger
AT&T and TCI is, in my view, a direct result of the earlier
intervention by Chairman DeWine and Senator Kohl. That merger is right
for all of the reasons that the earlier merger was wrong. The
acquisition of TCI will enable AT&T to offer to residential consumers a
facilities-based, high-speed data alternative to the offerings of
incumbents. Absent facilities-based competition for residential
customers, complete deregulation of local markets will never be
achieved.
The timely action of Chairman DeWine and Senator Kohl underscores
another point about introducing competition and deregulation into
monopoly markets previously protected by government franchises. Prompt,
effective governmental action is necessary from time to time in order
to dismantle historic hindrances to competition and to prevent new ones
from being erected.
The growth of wireless services and Internet usage demonstrates the
benefits that a fully deregulated market for local telecommunications
services can offer to consumers. The elimination of retail price
regulation for wireless services combined with the entry of new
competitors has led to the stunning growth in wireless usage that I
noted earlier. For consumers, deregulated wireless services today offer
a mind-boggling array of features and pricing plans. The Internet
likewise has flourished in a completely free market, stimulated by
continuing declines in the prices of personal computers and Internet
access together with the incredible growth in service providers and the
services available over the Internet. The Telecommunication Act of 1996
is designed to deliver the same benefits of lower prices and more
choices in the local telecommunications market.
Competition and deregulation also will benefit incumbent telephone
companies enormously. These changes will free incumbents from the
pricing and other controls that governmental agencies exercise over
their operations. Incumbents will compete vigorously with newer
providers to serve the growing demand for high-speed data and other
innovative services. Incumbents are already benefiting from the growth
in demand for Internet access and other data services. The CEA report
noted that the number of American households with more than one
telephone line rose from 8.8 million in 1993 (9.4 percent of
residences) to 15.7 million in 1996 (16.5 percent).\12\ Local
competition also will mean that the Bell Companies will be free to
offer long distance service in the areas in which they provide local
telephone service. We learned during the transformation of the long
distance industry from monopoly to competition that as an incumbent
loses market share, its revenues nonetheless can continue to grow from
increased demand for new and more efficiently priced service offerings.
---------------------------------------------------------------------------
\12\ Progress Report at 35-36.
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bringing competition to local telecommunications markets
The dominant themes of the Telecommunications Act of 1996 can be
succinctly captured in two words: competition and deregulation. The
Congress, Department of Justice, FCC, and state regulatory commissions
all have made essential contributions to the successes to date in
moving toward accomplishment of these objectives. But, there is also
much to be done.
Congress set forth in the 1996 Act an extremely innovative plan for
achieving those goals. It gave new competitors in the
telecommunications industry the tools they need to enter the market
quickly and establish their presence. Congress also granted the
Commission both the authority to adopt rules to facilitate that entry
as well as the responsibility for eliminating those rules as soon as
competition rendered regulation unnecessary.\13\
---------------------------------------------------------------------------
\13\ See 47 U.S.C. Sec. 160.
---------------------------------------------------------------------------
Some provisions of the 1996 Act eliminate formal, legal limits on
entry into telecommunications markets. Section 253 of the
Communications Act, for example, bars any state or municipality from
adopting any requirements that ``may prohibit or have the effect of
prohibiting the ability of any entity to provide any interstate or
intrastate telecommunications service.'' \14\ And the Commission has
used that authority on several occasions to remove entry barriers that
threatening to foreclose new competitors from local telecommunications
market.
---------------------------------------------------------------------------
\14\ 47 U.S.C. Sec. 253.
---------------------------------------------------------------------------
Congress also recognized, however, that simply eliminating the
statutory and regulatory barriers to entry into local markets would not
immediately lead to effectively competitive markets and deregulation.
New competitors needed access to the incumbents' networks as the first
step in the development of competitive local markets. Congress,
therefore, required the incumbent telephone companies to interconnect
their networks with the networks of new entrants. In the absence of
such a requirement, the incumbents would have no incentive to do so. To
the contrary, incumbents would recognize that a new competitor would
find it impossible to market its service if its customers were unable
to place calls to, and receive calls from, customers on the incumbent's
network.
For the same reason, Congress ordered incumbents to provide access
to their networks for lease by new entrants. Requiring these new firms
to construct completely new networks that duplicated the incumbents'
networks would have ensured lengthy delays in the delivery of the
benefits of competition to consumers, especially residential consumers.
I want to emphasize that in my view, Congress intended unbundled
network elements to be a transitional stage in the evolution of
competitive local markets. Congress wisely understood that complete
deregulation of those markets would require the presence of facilities-
based alternatives to the incumbent providers. Otherwise, government
regulation of the prices of network elements would remain necessary.
Thus, although I regard CLEC access to unbundled network elements at
efficient prices as essential to the rapid emergence of local
competition, the ultimate success of the congressional plan for
competition and deregulation depends upon the deployment of alternative
facilities to serve consumers, and the sharing of facilities not likely
to be built redundantly.
The Department of Justice has pursued the same goals of competition
and deregulation through its antitrust and merger policies. As everyone
knows, the Department is currently involved in the trial of its
antitrust suit against Microsoft. At the risk of oversimplifying an
extremely complex case, Microsoft's operating system allegedly is
functionally similar to the local telephone loop. That is, Microsoft is
allegedly the dominant provider of operating systems for personal
computers. Those systems function as the interface between the consumer
and the vast array of software that is needed for the computer to
communicate with the Internet, obtain access to and download
information from millions of websites, send documents to printers and
perform thousands of other applications. Similarly, the local loop is
currently predominantly provided by a single firm and functions as the
interface between the consumer and the telecommunications
infrastructure. In both circumstances, the key to creating and
preserving effective competition is to ensure that the interface is
accessible by multiple providers--in the case of the Microsoft
operating system, software and peripheral equipment providers and in
the case of the local loop, competing providers of telecommunications
services.
Of course, concerns about a dominant firm in one market leveraging
its power to dominate a related market may be mitigated as its position
in the original market erodes. For example, the development of full,
facilities-based competition in local markets may reduce the unbundled
network elements that need to be provided.
The Department also contributed significantly to the commission's
review of the applications of two Bell Operating Companies to enter the
in-region long distance business, pursuant to section 271 of the
Act.\15\ In the cases of SBC's application to enter the Oklahoma long
distance market and Ameritech's application to enter the Michigan long
distance market, the Department submitted an extensive analysis of the
applicants' compliance with the requirements of section 271. The
Department's submissions formed a critical part of the record in those
proceedings on which the Commission relied in reaching its decision.
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\15\ 47 U.S.C. Sec. 271.
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And certainly the FCC has embraced the goals of competition and
deregulation in implementing the 1996 Act. Because Congress gave to the
FCC the tools necessary to open monopoly telecommunications markets to
competition, the Commission has been able to adopt rules that opened
each of the three paths of local entry mandated by the statute to new
firms. The unbundled network element rules, for example, enable new
competitors to enter local telecommunications markets by using the
incumbent provider's network to offer new services tailored to meet the
needs of nascent market segments. The Telecommunications Resellers
Association last year reported to the House Commerce Committee that
between 1995 and 1998 the percentage of its membership that provided
service over facilities the resellers owned or leased from incumbent
local exchange carriers rose from 34 percent to 54 percent, a
significant shift away from simply reselling the services offered by
incumbents.
Moreover, some of these new entrants have leased loops from the
incumbents in order to create services that are particularly attractive
to Internet service providers. Merrill Lynch has reported that CLECs
have become quite successful in competing with incumbents to provide
new lines to business customers. Internet service providers, as a
group, are responsible for a significant share of this constant demand
for new lines, because, at least in part, the CLECs are doing a better
job of serving this market segment than the incumbents.
CLECs today frequently offer to install new lines within 24 hours
at lower rates than the incumbent carriers offer. Consequently, many
CLECs have attracted Internet service providers as customers. Together,
these new entrants into the telecommunications and information
industries have made possible the rapid expansion of Internet access to
residential customers. Between 1997 and 1998, for example, retail sales
over the Internet more than doubled. Further, it has been estimated
that electronic commerce will total $300 billion by 2002.\16\
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\16\ See Progress Report at 37-38.
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Pursuant to its congressional mandate, the FCC also rejected
proposals that would have limited access to, and retarded use of, the
Internet. In particular, the Commission refused to permit incumbent
telephone companies to assess interstate access charges on calls that
consumers place to reach their Internet service providers. Had it
acceded to these requests, consumers using the Internet would have paid
per-minute-of-use charges. And, undoubtedly, the unbelievably explosive
demand for Internet access that we have witnessed in the past three
years would have suffered a devastating blow.
We don't have to speculate about what would have happened if the
Commission had not followed the pro-competition, pro-Internet policies
of the Congress and Administration. You only have to look around the
world at other countries to see what would have happened.
We all have seen instances where a foreign government has adopted
policies that are intended to discourage use of the Internet: high
access prices, limits on the types of traffic that may be carried.
Result: growth in electronic commerce in these countries has lagged far
behind the amazing rates that the United States has sustained year
after year. The CEA report, for example, notes that ``the United States
ranks far above Japan, Germany and the United Kingdom in public
participation in the Internet, as measured by the number of hosts per
capita.'' \17\ I also do not think it a coincidence that this nation's
economy as a whole has substantially outperformed the economies of
those countries in terms of annual economic growth, low inflation and
low unemployment.
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\17\ Progress Report at 36 (citing Atkinson, Robert D. Randolph H.
Court, 1998. New Economy Index: Understanding America's Economic
Transformation. Washington, D.C.: Progressive Policy Institute, at 30).
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A few years ago, some incumbent telephone companies discussed
deploying ISDN service in their territories in order to provide high-
speed data services to both residential and business consumers. But,
those incumbents were not highly motivated. The results were delayed
deployment; slow resolution of technical problems, which made
installation an ordeal for customers; and high prices, which made the
service unaffordable for most customers, including students. A better
policy is competition and deregulation, trusting that demand will drive
the deployment of high-speed data links.
the role of national telecommunications policy today
What lessons can we draw from the successes in telecommunications
since passage of the 1998 Act? Perhaps, the paramount lesson is the
vital importance of establishing and enforcing a national
telecommunications policy. Congress recognized this when it passed the
Act and gave the FCC the authority--indeed, the obligation--to
implement national rules to govern the development of fair and
effective competition in all telecommunications markets in all regions
of the country. And leaders from both parties and both chambers--
Senators Lott and Hollings and Congressmen Bliley and Markey--
emphasized the role of a national telecommunications policy in
accomplishing the goals of the 1996 Act in the brief they filed in the
Eighth Circuit in support of the FCC's interpretation of the statute.
Just a few weeks ago the Supreme Court endorsed the view expressed in
that brief.
Specifically, the Supreme Court held that Congress in passing the
Telecommunications Act of 1996 established a national
telecommunications policy. The FCC is responsible for adopting rules to
implement that policy and the state commissions are responsible
applying those rules in the arbitration proceedings they oversee. The
Act created a new partnership between the FCC and the state commissions
and the success of the Act depends directly on the strength of that
partnership.
What should be the focus of national telecommunications policy
today? In my view, the most important objective is the delivery of the
benefits of local telecommunications competition to residential
consumers. The data from the CEA report that I discussed above indicate
that many businesses in both large and small communities across the
country today have a choice for local telephone service. That progress
toward full and fair competition for business customers needs to be
sustained, but residential consumers, by contrast, to date have not
seen much of the tangible benefits of local competition.
I would like to suggest a few elements of a national policy that
would advance the interests of consumers.
National Rules Governing Non-Discriminatory Access to
Unbundled Network Elements--Currently, the incumbent telephone
companies control the only telecommunications networks linking
virtually all residential customers. Eventually, wireless
companies, cable systems, and CLECs likely will offer an
alternative means of access, but that will take time. The
ability of new entrants in the near term to use elements of the
incumbents' networks--including combinations of elements--to
offer service is the only realistic chance that residential
consumers have to realize significant, concrete benefits from
the 1996 Act.
Efficient, Pro-Competitive Prices for Network Elements--The Supreme
Court upheld the FCC's conclusion that the 1996 Act adopted a national
standard for the pricing of access to unbundled network elements.
Specifically, The Act authorized the Commission to promulgate rules
that would enable new entrants to obtain access to elements from any
Bell Company or other major carrier in the country at economically
efficient rates. To that end, the Commission adopted a pricing
methodology for state commissions to use in setting the network element
rates that incumbent telephone companies within their jurisdiction
would charge. The so-called TELRIC or Total Element Long Run
Incremental Cost methodology is designed to produce prices for each
carrier's network elements that approach the prices that would result
from a competitive market. The FCC's rules also require the unbundled
network element rates to be deaveraged geographically, with a minimum
of three areas. This requirement is intended to ensure that significant
variations in the cost of providing elements in different areas of a
state are reflected in the elements' prices, rather than obscured by
averaging the costs across the entire state. As Chairman Kennard
rightly stated in his remarks yesterday before the NARUC Winter
Meeting, deaveraged pricing of unbundled network elements ``is a
central tenet of [the FCC's] competition policy.'' Providing non-
discriminatory access to unbundled elements will not lead to
residential competition if the prices for those elements are wrong.
Improved Access to Advanced Services--Residential consumers require
access to high-speed data and other advanced services if they are to
take full advantage of the rapidly growing array of telecommunications
and information services. Carriers, incumbents and new entrants, should
have incentives to invest efficiently in new technologies to compete to
serve this market. And the Commission should ensure that incumbents
make network elements available to new competitors in a manner that
enables them to offer advanced services to residential customers.
Calling Party Pays for Wireless Carriers--As I mentioned above, we
are only beginning to see substitution for basic telephone service
between wireless service providers and incumbent telephone companies.
That process should be hastened by continuing declines in the charges
for wireless calls. I am doubtful, however, that truly effective
substitution between these providers will develop in the near term
unless the calling party on a wireless call begins to pay for calls,
rather than the called party as is typically the case today.
Prompt, Efficient Transfer of Customers--Vigorous, effective
competition for residential consumers did not really take hold in the
long distance business until the advent of ``1+'' access. Similarly,
residential consumers need the ability to change carriers quickly and
without disruption if new entrants are to be able to compete
effectively in this market.
Effective Enforcement--Rules that are designed to lead to broad-
based residential competition are unlikely to be successful without a
commitment to the swift and sure enforcement of those rules.
We have made significant progress in the last three years
dismantling the monopolies that historically have dominated the
provision of local telecommunications services in this country. Today,
there can be little doubt that consumers in cities and towns throughout
the nation, especially business customers, are reaping substantial
benefits from the work of the Congress, the Department of Justice and
the FCC since 1996. The challenge in the coming months is to make these
benefits available to all consumers.
I thank you again for your invitation to appear at this hearing
today. I would welcome the opportunity to respond to any questions you
may have.
Senator DeWine. Let me thank our panel very much for the
opening statements. Each one of you has--at least most of you
have described, I think, a fairly optimistic viewpoint of the
Telecommunications Act on its third anniversary. But you have
identified one problem and that has to do with local phone
residential service, and I would like for each one of you, if
you wish, to just comment on that a little bit. What do you say
to our constituents about that? What is wrong?
Mr. Pressler. I hope, as I said in my testimony, that we
get everybody into everybody else's business and we get
competition, and that we can find a way to have a clear path
for the RBOC's to get into long distance. And I think we are
making progress. Now, we didn't envisage that it would take
over 3 years to get this done. This has been the more difficult
area of the bill, as you say so well.
There was a belief that by the end of 3 years--at the end
of 3 years, the bill provides that the long distance people can
work together in their advertising and pool some of their
markets, and so forth, because it was kind of envisaged that
this would be resolved. And it has been a difficult issue, but
I believe that we are moving closer and I hope that the FCC and
the courts will clearly tell the RBOC's what they have to do so
that within 1 year or 2 we can have everybody in everybody
else's markets.
Senator DeWine. Senator Pressler, as the author of the
bill, are you disappointed at where we are in regard to
residential, 3 years into it?
Mr. Pressler. Well, it is a difficult thing to pull
together. I think it is coming.
Mr. Kennard. Mr. Chairman, if I might address that
question?
Senator DeWine. Sure.
Mr. Kennard. It is really a quibble that I will take with
Senator Pressler. RBOC entry into long distance is not the end
in itself, and we shouldn't judge the success or failure of
this piece of legislation as to whether and when the RBOC's get
into long distance. The key is: Are those markets open to
competition because when the market is open to competition,
then the RBOC's will get in?
And you gave us, I think, a very good road map in this Act
on how the FCC is to evaluate the question of RBOC entry. But
let's not forget that the law that you laid down doesn't just
give the RBOC the discretion of when it wants to decide to open
markets so that it can get into long distance. The law requires
that the markets be open, whether or not the RBOC decides to
get into long distance.
And the important thing for the FCC to do at this point is
to have, first, the independence and the power to enforce the
provisions of law that you gave us. That is why we are
deploying many more of our resources to the enforcement side so
that we can make sure that the law is complied with.
Senator DeWine. Mr. Klein.
Mr. Klein. I essentially agree with Chairman Kennard. I
would add the following. I think part of the reason this gets
slowed down is because the incumbents who have the last
monopoly decided to fight rather than to implement the statute.
You know, I think when Reed was chairman, they had to put down
an order under the rules imposed by the statute in remarkably
short order. The Commission geared up. It got an order done
that was remarkable in its breadth, its scope, its detail, and
people decided that they would rather take that to court than
to go ahead and do the hard work of opening up markets. I think
that is understandable in some respects, even if unfortunate,
but that slowed us down.
Second, we have to work through some of the hard issues
which the Commission continues to work on on universal service.
A system that has dimensions of cross-subsidization within it
is going to take some time to shake out as well.
And, third, and finally, what you ought to tell to all of
those consumers is two things. Right now, even for them good
things are happening. Rates are beginning to come down in long
distance. They have many more options. They are beginning to
see nibbling around the edges, and over time this technological
innovation that Reed talked about, this burgeoning sort of
sense in America today that there will be not one, but several
different ways to access the home, is going to give people
combinations and opportunities that are not even fully imagined
today. And that is not so very far away.
And so for all those reasons, while I would have like to
have seen more done by now, and while we certainly need to
redouble our efforts at the Commission and at the Justice
Department to get more done in the years ahead, I still think
that the basic story here is a success story, Mr. Chairman.
Senator DeWine. Mr. Hundt.
Mr. Hundt. Senator, you are absolutely right that the
residential telephone market is the key area where we need to
do better and where government policy needs to be very focused.
Ultimately, what is the holy grail in this respect? It is to
totally deregulate in the residential market. It is to not have
a reason even for State public utility commissions to continue
to regulate prices. That seems very far-fetched to many people,
but it is absolutely important that we remain very constant in
our focus on the fact that that is the ultimate goal.
And in order to do that, and at the same time feel
comfortable that consumers will be able to have choice and a
fair price, not just find themselves at the mercy of an
unregulated monopoly--in order to do that, it is absolutely
critical that, No. 1, there be a national policy implemented by
the FCC. Only 1 month ago did the FCC, after 3 years, get the
power to do that. And, No. 2, it is absolutely critical that
very large companies be guided, if you will, by a merger policy
to make the commitment to compete instead of merge in the local
market.
And I particularly want to remind the two Senators here,
Senator Kohl and Senator DeWine, that you stood up at the time
that there was a national discussion about AT&T possibly
merging with a telephone company and you publicly said you
didn't think that was that great an idea and you would love it
if you thought AT&T thought again about it. And they did think
again about it.
There were a few changes, some policy changes in their
management, but there is a direct relationship between your
stand on that position and the fact that AT&T subsequently
invested in cable and is now committed to using the cable
facility on a national basis, in time, with billions of dollars
yet to be spent, to be able to provide that choice in the
residential market. That is great and is a great example of
necessary intervention by government to shape a result that
will lead not to more regulation, but ultimately to
deregulation.
It is absolutely critical that the wireless industry not be
allowed to over-consolidate and be forced to be very, very
competitive so that prices will continue to drop in wireless.
And ultimately, in the fullness of time, we will see that
wireless communications is, for the average consumer, an
alternative to wire communications because the price will
really be substitutable. The products will really be
interchangeable. And we actually see this as something that can
very well happen within the next several years.
Now, this ultimate goal of deregulating the local market
and having no reason for State or Federal commission regulation
in that particular area--that is something we have to strive
for. So we want cable to compete against telephony and we want
wireless to be a substitute for wire, and it is going to take
continued government monitoring and continued government action
to force those results. But if we shape the market in that way,
we will ultimately, in a much faster period of time, maybe 4 or
5 years, get to this goal and then be able to deliver on the
final result that we are supposed to deliver on, complete and
total deregulation in the communications sector.
You know, it would be like the computer sector. You would
never think of regulating it. You know, you would never think
of having the FCC establish those kinds of rules in other
sectors, and you wouldn't do it in this sector either.
Senator DeWine. Senator Kohl.
Senator Kohl. Thank you, Senator DeWine.
Mr. Pressler and Mr. Hundt, you obviously were the
architects of the Telecom Act. As you sit here today and
reflect back, if you could do one thing differently, one major
thing differently to have enacted a better law in view of what
has happened since it was enacted, what would you do? Mr.
Pressler--Senator Pressler?
Mr. Pressler. Thank you very much. Of course, this is
awfully hard to say. The bill was negotiated so long, and
actually the bill had been around in some form since Lionel Van
Derlin and Barry Goldwater introduced one. I guess we had the
1934 Act and we were struggling to catch up a little bit. And I
still think that government is about 20 years behind
technology, usually, and we probably are still struggling with
that today in different areas.
Originally, the bill we had drafted was struggling to try
to find a way, I suppose, to find a date certain that everybody
could compete and then the antitrust laws would take over. And,
ideally, if we could have done that--but that was impossible to
pass, and so I suppose if we could have found a way that we
could have resolved the local competition/long distance thing
within a definite period of time, that might have been one
change that I would make.
But it is very hard to say because over a period of almost
2 years that the bill was up, we had about 30 to 40 staffers
every weekend who worked on it on a bipartisan basis,
negotiating out words, and so forth. So I guess I have just
never really--there are lots of things I might like to change,
but we had to work with a lot of people.
Senator Kohl. OK, Senator Pressler.
Mr. Hundt, anything major that you think you could have
done better?
Mr. Hundt. Well, there are a lot of things that we could
have done better. But the Supreme Court decision, actually
making it clear that the FCC has the power to write the
national rules and to oblige States to implement them--you
know, it did take us nearly 3 years to get that particular
result, and there is no doubt whatsoever that that is the
single most important reason why competition has been slowed in
the residential market.
I suppose, in retrospect, I wish we had a law that had so
explicitly directed the courts on this subject that they
couldn't have avoided the result that the Supreme Court
ultimately found to be actually written fairly clear. So I am
not sure we should be criticizing here, except for the
intervening process. Let's put it that way.
Senator Kohl. OK; Mr. Klein, Mr. Kennard, how could we have
done it better in a significant way? Mr. Kennard.
Mr. Kennard. Well, as you well know, Senator, when the FCC
proceeded to implement the Act, virtually every major
rulemaking that was adopted was almost immediately challenged
in the courts, and not just by the incumbents. Everybody was
challenging these orders, and what happened is that lawyers
tried to exploit every conceivable little ambiguity in the law.
There is a certain inevitability about this, but I think
that with 3 years' hindsight we can all look back and wish
that, gee, if there had just been a word here or a word there,
we might have avoided some of this litigation. But I think that
ultimately what we learned is that perhaps it might have been
better if all of the litigation had been consolidated perhaps
in a single appellate court and put on an expedited track so
that we wouldn't have lost 3 years in the implementation of
this Act.
It does concern me somewhat that the Act was written in a
way that balkanizes the judicial review of State decisions. For
example, we have these arbitrations that are decided in the
various States and then they are decided ultimately in the
Federal district courts. That is a somewhat cumbersome process.
But nothing that I am suggesting here should be construed
as my advocacy for any change in the Act. I think we are
getting to a point of stability. We need to let things settle
out. The market-
place is crying for certainty here. When I talk to people on
Wall Street, all they want to know is when are things going to
settle out so that we know how to make investment decisions.
And so I think that we are at a point now where things are
settling down and we just need to stay the course and proceed
ahead and implement the law that you gave us.
Senator Kohl. Mr. Klein.
Mr. Klein. I essentially agree with Reed and Chairman
Kennard. I think that with the benefit of hindsight, after you
go through a litigation you say why didn't you write this
statute this way, or maybe we should have put it this way. But
I am convinced, with the number of lawyers and the amount of
money involved, no matter what statutory draftsman you
employed, there would have been litigation challenging these
efforts to slow down the process.
So it seems to me it is easy with the benefit of hindsight
to say you should have made this a little clearer or we should
have done this a little bit more carefully. But I think this is
a predictable shake-out process and I think that for
legislation that needed as many different constituents and
interest groups supporting it that had the widespread
bipartisan support that this had, it actually is a strong piece
that has stood up well.
Senator Kohl. Is there something we could have done to do a
better job in keeping cable rates more competitive than they
are today? Mr. Hundt.
Mr. Hundt. I think that it is imperative--and you mentioned
this earlier; some of the Senators referenced this earlier--it
is imperative that Congress pass a law that permits the
satellites to, in fact, deliver truly competitive
interchangeable packages with cable. You will never see
competition in this particular area until a law like that is
passed.
It is just technologically not the case that there is any
other contestant to the cable pipe that has the same capability
to deliver multichannel packages. But right now, as we know
from the recent troubles with respect to a couple million cable
subscribers who are going to lose broadcast signals, the
fundamental problem is we don't have a serviceable national
policy about the way that satellites can pick up local
broadcasts and send them back down. Until we have that, we are
always going to be disappointed about the lack of choice in the
video market.
Senator Kohl. OK; anybody else want to comment on that? The
Satellite Home Viewer Act, in effect--do you think that will be
very significant in reducing cable rates?
Mr. Kennard. Yes; I agree with what Reed said. The
litigation is unfortunate because there are a lot of consumers
out there, particularly in rural areas, that are scared to
death that they are going to lose their television service. But
if there is any silver lining in this dark cloud of litigation,
it is that it is prompting, I think, a very healthy debate
about how we can update our laws to make sure that the
copyright laws and the Communications Act are relevant in a
time when you do have a vibrant direct broadcast satellite
industry. So I agree with Reed. That is the single most
important thing that the Congress could do to spur competition
and constrain rates.
Senator Kohl. OK; Senator Pressler.
Mr. Pressler. I would certainly concur in the concept that
anything that can be done to get more competition--we live on
Capitol Hill over here and I am always trying to get a little
better service out of D.C. Cable. Hopefully, we will get some
alternatives.
Senator DeWine. That got a few smiles in the audience. You
can't see that.
Mr. Pressler. The AT&T merger with TCI, which I think is
overall a positive thing in the sense that it should bring us
more of that type of competition--I have been somewhat troubled
that things like the SBC-Ameritech merger are not viewed as
synergistic in the press, but they might be. Of course, that is
a fact-intensive question. But the point is it is going to take
some of those companies working together.
And, in fact, I believe that AT&T's alliance with cable
operators, coupled with its ownership of the TCI systems, means
that AT&T will pass more homes than it did in 1983, the year
before the divestiture of the local phone companies. So the
point is I don't know what the fact-intensive objections to
some mergers are and why others are approved, but I am of the
feeling that if we can get more synergistic competition, we are
better off.
Senator Kohl. OK; there are some who would do away with the
FCC's role in reviewing mergers. They claim that the Department
of Justice should be the sole analyst of whether these deals
meet the general antitrust standards.
Mr. Kennard, you have said that your agency plays a crucial
role by ensuring that mergers serve the public interest. So, in
your opinion, what would be the pros and cons of abolishing the
FCC's merger review authority and deferring entirely to the
Department of Justice?
Mr. Kennard. I think it would be a very bad idea because
the analysis that we undertake is very different from that
which the Department of Justice undertakes. The FCC's mandate
is to determine whether any merger is in the public interest,
and that means reconciling the merger proposal with our ability
to administer the Communications Act in a way that protects
consumers. And when we do that, we look at the transaction in
different ways than the Department of Justice does which is
charged with enforcing the antitrust laws.
The AT&T/TCI merger is a good example. When the FCC
considered that merger, we looked at things like its effect on
our program access rules, its effect on cable rates, its effect
on competition in the provision of broadband, universal service
issues like how these services would be deployed to make sure
that all Americans have access to these services. This is a
fundamentally important part of our review of these
transactions. And to suggest that the FCC should not have a
role or that that role is somehow irrelevant in this day and
age just doesn't make any sense to me.
Senator Kohl. Well, Mr. Kennard, as you know, the FCC has
been criticized across the board for sitting back on merger
applications, waiting until others rule on a deal before the
Commission itself makes up its mind. You said recently that the
cost of delay is great and the marketplace needs certainty. So,
in view of this, what is your opinion for having so often a
wait-and-see approach?
Mr. Kennard. Well, first of all, let me say that I
enthusiastically share your concern that we have got to make
the merger review process work, and work well. And I think that
if you look at the number of mergers that the FCC has looked at
in the wake of the 1996 Act, it is a huge number of
transactions, ones that have been dealt with since I have been
chairman and under Reed's chairmanship.
And I took a look at the time within which the FCC deals
with most mergers and most mergers--the routine mergers get
dealt with in about 6 months. The very routine ones, the
noncontested ones, go through as quickly as 2 months. The ones
that involve more delay are the extraordinarily complex ones,
the ones that involve overarching issues of policy, difficult
issues of market structure. And I think that there, we have to
be sensitive to a couple of things.
First of all, we have to recognize that because the FCC's
mandate is to evaluate whether these mergers are in the public
interest, the public has to be involved. That is why when we
look at a complex merger, we make sure that we are consulting
with all of the stakeholders. We bring consumer groups in, we
bring State and local regulators in. And, of course, all the
competitors come in. And we have a robust, comprehensive debate
about these mergers. And I think that that is our job and that
is the right role for the FCC.
We also have to be mindful of the interrelationship between
our decisionmaking and other jurisdictions, State approvals,
approvals of DOJ, in some cases approvals of foreign
governments like the EU. All of these things impact on the
timing and complexity of our decisionmaking.
At the end of the day, we have to write an order that
funnels together all of the inputs from the public, addresses
all of the arguments in a way that is true to the
Administrative Procedures Act and that will be upheld in court.
In a complex merger, this is a complex task and it takes time
to get it done. I am looking forward to working with you on
your legislation to find ways that we can improve the process,
but I hope that you will be mindful, as you proceed, of some of
the factors that I have pointed out here.
Senator Kohl. Thank you, Mr. Chairman.
Mr. Pressler. Could I comment briefly?
Senator Kohl. Yes, Senator Pressler.
Mr. Pressler. I believe that the long-run goal should be to
have the Justice Department determine antitrust matters, and
that this is the case with other industries in our economy. And
I have felt, as has been pointed out, that the FCC hasn't moved
as quickly as we might hope in some of these areas and I
commend you for your legislation to get a time certain.
But I think that we have to have a goal. Certainly, the FCC
has a role in many areas, but in terms of the long-term goal of
what antitrust law should be, I think that the Justice
Department should be the center for it. And so I would have to
be respectfully in disagreement on that point.
I might also point out that a lot of things happen in the
marketplace that government doesn't foresee, and that
government shouldn't really be picking winners and losers. For
example, when I was a young man, everybody thought IBM was
going to dominate the world forever, and along came Bill Gates
and lots of other people, which was a surprise, and government
regulation was not needed.
The Harvard study I have pointed out says that about over
half the mergers prove to be unwise business decisions. But so
be it, and there is either a setback or increasingly
stockholders are questioning certain mergers. So what I am
saying here is that having an additional layer of government
approval, essentially, even though they are supposed to be
looking at other issues, is unnecessary, in my view. And in the
long run, the Justice Department should decide mergers.
Mr. Hundt. May I offer a comment on this?
Senator Kohl. Yes.
Mr. Hundt. I would like to suggest that the procedural
changes that have been discussed, in fact, would operate as
substantive changes in practice, in my experience. I mean the
following. The well-announced but essentially informal policy
between the FCC and the Department of Justice that I was party
to and that historically pretty much everyone has been party to
has been this, that the Department of Justice would go first,
that the FCC would follow, and that the FCC would follow very,
very expeditiously. And without ever writing it down, we always
tried to have it be that it was not more than 1 to 2 months
after the Department of Justice decision that the FCC would
make its decision.
Why did we do it this way? First, because the Department of
Justice has much, much more ample and effective powers to
engage in discovery. They can obtain documents, they can treat
them confidentially, they can keep them confidential. They do
keep them confidential. They have got a great record. They have
got staff, they have got people. The FCC statutorily and in
terms of staff really doesn't have that capability and cannot
really rationally be expected to go in front of the Department
of Justice.
So if a procedural change is made that would put the FCC
decision in front of the Department of Justice, in effect, it
won't be able to be a substantive decision. Really, you
question why there is any need for it at all. But if the FCC
comes after the Department of Justice, then here is what
happens. The Department of Justice, of course, if it has
rejected the merger, that is the end of it. If it has approved
the merger, then what goes to the FCC is the following.
The Department of Justice has the important and interesting
documents. It has isolating them, it has narrowed them down. It
shares them with the staff at the FCC and they look at the
following issues. No. 1, are there any regulatory changes that
we can make or should make that are necessary in light of the
approval of this merger? In other words, we at the FCC who have
the regulatory power, then, in light of the approval of a
merger, may say, you know, this was probably a close question
for them. Maybe if we write this rule this way or attach this
condition which comes out of our regulatory power that way, we
actually can make sure that we have a kind of belt-and-
suspenders approach to their approval.
That is, in practice, the way it worked, and that is the
way it worked on the Bell Atlantic-NYNEX merger, just to give
you a very specific example, where the FCC did echo the
Department of Justice in approving the merger. But because we
were able to come later and stand on their shoulders and look
at their documents and use their work, we were also able to add
a couple of regulatory conditions that they do not have the
power to add in the same particular manner. Instead, they have
to go a consent decree route, which has its own complexities.
And quite understandably, in that case they chose not to go
that route.
So, in practice, what happens is there isn't a lot of delay
due to this informal understanding. And, second, the FCC stands
on the shoulders of DOJ and does something that it and only it
can do, and that is it considers regulatory changes as it
considers whether to fundamentally echo the Department of
Justice.
I don't know of a case where the FCC has flatly forbidden a
merger that the DOJ has approved. I don't know that that has
ever happened. What has happened is what I have said, which is
where the FCC makes regulatory changes that it thinks are wise
even if the merger is going to go through. That is the
substance here. And so I would suggest to you that the
procedure really shouldn't be changed because the substance
works fine. And changes in the procedure that would change the
timing and change the interaction really wouldn't work very
well.
Thanks for listening.
Senator Kohl. OK; thank you very much, Mr. Chairman.
Senator DeWine. A question for Mr. Kennard and Mr. Klein.
We have had hearings recently where SBC and Ameritech, and also
GTE and Bell Atlantic, testified before this subcommittee and
they told us that they needed to get bigger so that they could
compete on a national scale. Justice and the FCC recently
approved the AT&T/TCI deal, which appears to have the potential
to bring competition to local phone markets, as well as video
and data, in a large number of markets around the country.
How does the AT&T/TCI merger affect your analysis of the
SBC/Ameritech and the GTE/Bell Atlantic deals? And are those
companies correct when they tell us that they need to be bigger
to compete with AT&T?
Mr. Kennard. Well, Senator, they are very different
mergers. The AT&T merger is an example of a company aggregating
capital, a long-distance company joining together with a cable
company to pool their resources and to compete in a new market,
the local phone market. That is why I was able to vote for this
merger because I think it fundamentally has the potential to be
a very procompetitive merger.
The merger of the local exchange carriers that you
mentioned are different and more complex in this respect. The
legislation that you passed in 1996 is all about competition,
ensuring that the companies that control those local markets
open up to competition. We are now presented with mergers of
companies who want to extend their market reach, but they have
not yet demonstrated that their markets are open to
competitors. They have not received 271 relief.
I don't believe that those companies are in compliance with
sections 251 and 252. That makes this a much more complex
determination for us. I would much prefer these companies to be
focusing more on what they are doing in their own regions to
promote competition, as opposed to discussing what the merger
will produce out of region. That is important, too, but let's
have a discussion first about how they are going to comply with
the law and open their markets to competition. That is my view.
Senator DeWine. Mr. Klein.
Mr. Klein. Yes. Mr. Chairman, I want to be exceptionally
careful in answering this because both of those mergers are
currently pending before us.
Senator DeWine. I understand.
Mr. Klein. But let me just say that I think each of these
mergers has to be looked at in terms of its competitive impact
and not its size. And I think if we go down the path of just
simply saying you need to be bigger to compete more effectively
as a sort of rule of thumb, I think we are going to make a
very, very bad mistake, a mistake sometimes made, frankly, in
antitrust enforcement in the 1960's.
And one example, and I don't want to take sides on any side
of the example, but is the example that Reed gave just a few
moments ago when he was faced with the proposed merger of AT&T
and one of the local RBOC's. He early on said--I think the word
was it was unthinkable, and I suppose he would not have
thought, had he been where Bill Kennard is today, that the
merger of AT&T and TCI is unthinkable. So it is not a question
of size. It is a question of markets and competitive impact,
and that is one of the reasons we need to do the hard work that
sometimes does take time in this merger review process.
Senator DeWine. Mr. Pressler or Mr. Hundt, do either one of
you want to comment on that?
Mr. Pressler. I might just say that, you know, like US
West--I am not familiar with all their operations, although
they were in the State I represented. But a lot of people are
not interested in competing in some of their residential and
rural and smaller-city areas. And it has been my feeling that
sometimes in this whole thing the RBOC's get, let's say, bad
press compared to some of the newer companies. The RBOC's
provide the basic facilities in many areas and they are there
and I guess they are easy to criticize. But the point is there
isn't too much interest in a lot of the more remote or lesser
populated residential areas.
Now, the critics of the SBC/Ameritech merger often try to
characterize the alliance as a recreation of the old Ma Bell.
And I have already pointed out that the AT&T/TCI merger was
viewed sort of in the national press, and so forth, as being so
synergistic, et cetera. But, actually, this is going to be
bigger possibly than the old Ma Bell before 1983. So it depends
on how you look at this, and I am sincerely hopeful that in
reviewing these mergers that Justice Learned Hand's standards
will be used, that we are seeking to help the consumer or to
protect the consumer.
Senator DeWine. Mr. Hundt.
Mr. Hundt. Well, I totally agree with the comments that
have been made in advance. Let me just say that one major
question that has yet to be answered and one major issue that,
in my view, has yet to be taken into account--the question that
has yet to be answered is really what is the maximum percentage
ownership in the local telephone market or in the cable market
that we as a country want to have right now. What is the
maximum?
We don't have an answer yet, and that's what these mergers
are all about. And I am not saying I have got the number in my
pocket and don't want to share it, but that is why Joel is
exactly right to say this requires a lot of deliberation. These
are fundamentally the questions that are being looked at, the
consolidation questions.
The issue that has yet to be taken into account, because I
think none of us necessarily know quite how to do it and we are
all working on it in our different capacities, is this, and
that is the issue of convergence. As we try to think about
these markets and think of what really constitutes the local
telephone market, do we take wireless into account or don't we?
Do we take the potential of cable to offer telephone service
into account or don't we?
The fantastic and fascinating and complexifying thing about
the communications sector is--as Senator Pressler said, his
goal was to have everybody into everybody else's business. In
time, but not right today, that will happen. So what is the
right merger policy? Should we consider what we think might
happen in the future and reason backward from that? And how
exactly do we have that balance between wanting to encourage
the convergence versus being quite prudent and conservative and
assuming it will show up when it hasn't?
Here is a case where it hasn't showed up--video over cable.
That convergence hasn't happened, so we know that you can't
just snap your fingers and say I really need those satellites
to be offering a competitive service today. We also know that,
as we said before, if the right laws are passed, in time,
satellites can offer a competitive service. So this convergence
issue has yet to be, in my judgment, fully articulated by even
the best of antitrust experts, and that certainly--I don't mean
myself, but others--has yet to be fully explicated.
Mr. Pressler. If I may add a footnote to that on Senator
Kohl's earlier question as to what we would do differently, I
don't think we envisaged how fast the Internet convergence
issues were coming. That has come much faster than we
anticipated, which is another example of trying to legislate
for some of these things, you get out of date before--we had
cellular phones available in the late 1950's, but it took
government 20 years to figure out a way to allocate the
spectrum in regard to them.
But this is why this nirvana in this whole area will be
when we have reached a stage when everybody is in everybody
else's business and this subcommittee oversees antitrust laws
that oversee everything.
Senator DeWine. Mr. Klein and Mr. Kennard, the SBC/
Ameritech merger was announced in May. GTE/Bell Atlantic was
announced in September. I certainly understand and I support
the need for a thorough review of such important deals, but it
would seem that at a certain point we all begin to wonder why
these investigations take so long. The SBC/Ameritech merger, in
particular, has been in limbo for a long time. Can you give us
some idea of when you think you will complete your review of
these deals?
Mr. Klein. Sure. I think certainly I am comfortable telling
you that in the next, I would suspect, month to two we will be
finished with the SBC matter. And I suspect not long after that
we will be finished with the Bell Atlantic/GTE merger.
Senator DeWine. Mr. Kennard.
Mr. Kennard. We are still actively developing a record in
both those proceedings. I can't give you an exact date, but I
will say that both of those proceedings are on the front
burner. We are actively engaged with not only the parties, but
all the parties to that proceeding, and I am hopeful that we
will be able to resolve it in the near future.
Senator DeWine. Mr. Kennard, on December 12, 1998, the Wall
Street Journal published an article entitled ``U.S. Could Try
and Halt Bell Atlantic and SBC Deals.'' In this article, there
were several FCC officials who spoke on background about
impending mergers before the Commission. This article had an
immediate and negative impact on stock prices. Moreover, and
most disturbing, it appears that the Commission appears to be
announcing its merger policies through the press. I personally
find this disturbing. I know that Senator McCain wrote to you
about this matter.
What actions have you taken in the wake of this article to
address the problem?
Mr. Kennard. Well, we may differ somewhat, Mr. Chairman, on
the import of that article. I am very familiar with it, and
basically what the article said is essentially what the
Commission's merger review process is all about. And basically
you have three options when you are considering a merger. To
boil it down, you can grant it, you can deny it, or you can
grant it with conditions.
This is very essential information, and I think information
that the public has every right to know about. We want our
processes to be transparent. We want more public participation
in our merger review. We want all the stakeholders at the table
so that they can tell us what they think about these important
mergers. And so I don't feel that the mere fact that we talk
publicly about the process and how it works is necessarily a
bad thing.
Now, what we are not going to do is forecast exactly what
our decision is because nobody knows what that is until we have
developed a record and come to a decision. But these mergers
are vitally important. They will dictate the structure of this
telecommunications market for a lot of years, and I think that
we ought to have an open and transparent process.
Senator DeWine. Mr. Klein, does your office background the
press on issues like this?
Mr. Klein. I have no idea about the facts of what happened
with the Commission. The Department's view is on any merger
that is pending before it; we will not comment other than
before this committee, on occasion, we have said obviously that
will get careful scrutiny. But we do not comment on the
substance of any merger before us.
Senator DeWine. Senator Kohl.
Senator Kohl. Thank you. For all, one question. Is Internet
access going to drive local telephone competition, and when
will we see local telephone competition? When will we move from
the end of the beginning, as you have called it, to the
beginning of the end? Senator Pressler.
Mr. Pressler. Well, I will just briefly say that I hope we
have more local competition. I think it is coming. I still have
a farm and a home at Humboldt, SD, and there is nobody
scrambling out there to--local competition is not very great.
Hopefully, Internet competition will increase that.
But we do have 140 CLEC's that have sprung up, and they
have gotten financing and done their IPO's and are out there.
So it is coming. Most of those are seeking urban markets or
business markets. The lesser populated residential and rural
areas are left to be the responsibility of the traditional
RBOC's, and there aren't too many people out there competing.
But I am hopeful that the Internet competition will join in
the increase for local competition, and I see those 140 new
CLEC's and the others that are doing their financing now and
their IPO's. I think the bill is working and I think we will
have substantial local competition.
Senator Kohl. When is that going to happen?
Mr. Pressler. Well, I think within 1 year or 2. It is
happening. We have 140 CLEC's now, and I think we will have
double that number in 1 year or 2.
Mr. Kennard. Senator, we compared the increase in
competition in the long distance marketplace in the wake of the
divestiture of AT&T with the status of progress in local
telephony competition today, and we found that 3 years after
the divestiture there was far less long distance competition
than we have today in local telephony. Now, granted, a lot of
that is in the business side, but recall that competition in
the long distance market also began on the business side. This
gives me some cause for optimism. I can't tell you exactly when
it is going to happen, but I do know that the conditions are
developing and coming together so that we will have competition
if we continue to have a strong procompetitive policy that
promotes it.
Mr. Hundt. Senator, the Internet creates new value
propositions for customers. Customers want new telephone lines.
They want high-speed lines. They want to do E-commerce over the
Internet. They want to buy their books over the Internet. It
means that customers are willing to spend more, and so it means
that people are more eager to compete to offer services to
those customers.
The number one problem we have right now is that for
residential communities there is only one way to get the
Internet to the home and that is over the local telephone line.
And unless that line on the residential side can be borrowed or
leased by a competitor at a fair price, then there is no way to
have that competition really break out, no matter how eager the
residential consumer is to get to the Internet.
Now, it is writing the rules that set fair prices for those
lines in the residential market--that is what the FCC was not
allowed to do until last month and that is what it now can do.
It basically means deaveraging--that is the term--because the
prices in the residential market and the prices in the business
market and in the rural market, those three geographic zones,
need to be different.
Illinois has three different prices, and if you have
different prices, you get the competition. Illinois has it. New
York only has two zones. South Dakota only has one zone, I
believe. Until you get deaveraged pricing, you really cannot
see competition in that residential market.
Senator Kohl. That is FCC's job?
Mr. Hundt. Yes, and that was part of the 1996 order that
was enjoined until 1 month ago.
Senator Kohl. So you think it is urgent that they get on
about that business?
Mr. Hundt. Yes, sir.
Senator Kohl. Do you agree with that, Mr. Kennard?
Mr. Kennard. Yes, absolutely. Earlier this week, I gave a
speech to the National Association of Regulatory Utility
Commissioners in which I indicated that deaveraging, the issue
that Reed was just talking about, is a central tenet of our
competition policy.
Unfortunately, with the litigation causing a lot of
confusion in the marketplace, some of the States didn't go
forward as quickly as everyone had hoped to deaverage these
rates. But we are working with the State commissions and I
think we are getting things back on track to put the pieces of
our competition policy back together.
Senator Kohl. Does that mean that we can expect to see
deaveraging proceed very quickly or very slowly?
Mr. Kennard. Hopefully, fairly quickly. It is probably
going to vary State by State to some extent, but we have got to
sit down and work with the State commissions, get a better
sense of what their timetables are, and make sure that we
continue the forward thrust toward deaveraging.
Senator Kohl. Is deaveraging the key to local competition?
Mr. Hundt. It is a process that, as the chairman said,
every State needs to do. And, yes, it is absolutely key. It
will also drive States to take on their own other steps. I
won't go into the details, but it really is the driver because
it permits the State commissions to set frameworks so that
every business that wants to compete can actually know the
prices in the different geographic zones and define the markets
they want to go after.
It is hard work. It is almost an accounting kind of work.
The FCC, in 1996, wanted the States to get to that work right
away. As my successor said, they didn't have to. It was hard.
The court protected them, so they didn't really do it. Now,
they have to do it if we want this competition in the
residential market.
Senator Kohl. Do you agree with that, Mr. Kennard?
Mr. Kennard. Absolutely.
Senator Kohl. Thank you, Mr. Chairman.
Senator DeWine. Mr. Kennard, this week the Ohio Public
Utilities Commission reached a tentative agreement on the SBC/
Ameritech merger in which significant concessions were made by
Ameritech and SBC that hopefully will open the local
residential phone market.
I would like your comments on this agreement, and
specifically do you believe these concessions represent
significant progress in opening the local phone markets? As you
may know, the agreement called for steep discounts in resale
prices to stimulate residential competition, low lease rates
for network elements, and fines up to $90 million for failing
to meet these commitments. I wonder if you have any comment on
that.
Mr. Kennard. I haven't studied that proposal in detail, but
I do think it is encouraging in this respect. I think that it
refocuses the debate about this merger back to what is
happening in-region, what those companies are doing to open up
their markets for competition so that the vision that you wrote
in the Act can be realized. I can't comment beyond that because
I haven't studied it in any detail.
Senator DeWine. I appreciate that very much. Mr. Kennard,
one of the goals of the Act that has not received a lot of
attention lately was to encourage phone service from electric
utilities. This has been an area where we have seen really
relatively little activity. Specifically, some States have even
passed laws prohibiting municipal electric utilities from the
provision of that service. Do you have any concerns about those
limitations?
Mr. Kennard. I certainly do. I think that we should do
everything we can to facilitate the provision of
telecommunications services by the electric utilities. Frankly,
there are three wires into the home today, in most American
homes. There is the telephone wire, the cable wire, and the
electric wire, and we ought to do everything we can to make
sure that every one of those wires is a vehicle for competition
in telecommunications.
I am discouraged that there have been some problems in the
courts that haven't allowed some of these municipal utilities
to provide these services. But I think that we ought to
continue to work hard to open up every competitive avenue we
can, including from this industry.
Mr. Pressler. I would just comment on that. That was a key
part of the Telecommunications Act of 1996, letting the
electric utilities in, and maybe that part of it has not come
to fruition as much. I was recently in Japan, and Tokyo Power
and Electric has--I guess they have different kinds of
transformers, but on some of their low-voltage lines they can
bring certain telecommunications signals into the home, and
this may be a way to have additional competition. Now, the
electric industry has been frozen in this deregulation struggle
on a Federal level. They have done some of it on the State
level, but I would expect that they would provide more and more
competition in the future.
Senator DeWine. Let me conclude with one last question to
all of you. There has been some concern that rural America may
be last in line when it comes to getting telecommunications
services, especially the advanced services. And Senator
Pressler has addressed this a little bit already.
As you survey the competitive landscape, do you think this
is a major problem, and what can Justice, what can the FCC, and
what can Congress do to address this if it is a concern?
Mr. Pressler. Well, I might just say a word or two. The
local telephone cooperatives made out very well with the
universal service in the bill and some of them have become
worth quite a bit. The two places in the world where I live
more or less, Capitol Hill, in the Nation's Capital, a few
blocks from the Library of Congress, and a farm in Humboldt,
SD--in both places, I would love to speed up my computer when I
am trying to go on the Internet, and in both places I am told
it is going to be pretty hard to do it.
But, certainly, if we leave our inner cities and rural
America--those would seem to be the two places--out of the
telecommunications revolution, we will regret it very much. I
am very concerned that where there is not a large market--this
new competition we are talking about is very good, but we do
have to continue to look very carefully at the services
provided. I know that our rural cooperatives do a good job in
some areas. In Humboldt, SD, we don't have a rural cooperative.
We are big enough that we are sort of in between and we are
kind of left out, but so are we right behind the Supreme Court.
Senator DeWine. Mr. Hundt.
Mr. Hundt. Congress in the 1996 Telecom Act ordered the FCC
to develop the means by which the Internet could be put into
every classroom in the United States and into every rural
healthcare clinic. This is tremendously important. It is
actually very expensive to put the Internet in every classroom
because you have to build networks inside schools. And in rural
areas it is even more expensive because you often have to build
to old schools that are not necessarily being constructed brand
new. Larry's elementary school is still around in South Dakota.
And, you know, as young as we all are, that wasn't just built
yesterday.
So here is the good news. Ninety percent of all the school
districts in the United States applied for money under this
program over the last 12 months. And Chairman Kennard ought to
be very proud, and I am sure he is very, very proud, that he is
able to actually preside over this system that Congress asked
him to create and send those checks out and get the Internet
into every classroom, every public library--I shouldn't have
forgotten them--and every rural healthcare clinic.
Now, in terms of the residences in rural America, there is
a technological problem. It is very expensive to provide the
high-speed connections that Senator Pressler was talking about.
And we cannot overcome that, but what we can do at the minimum
and right away in all of these public locations in rural
America is get high-speed Internet access for every library,
every healthcare clinic, and every classroom.
Senator DeWine. Mr. Kennard.
Mr. Kennard. I agree with the comments that have been made
already. I think that this is going to be a principal challenge
of the information age to make sure that everybody comes along.
And we do have a problem in this country, a challenge in this
country to make sure that we bring everybody along,
particularly people in rural areas.
And when we talk about rural areas, let's not forget Native
Americans on Indian reservations. That is the most distressed
population when it comes to telephone penetration. I have
personally visited Indian reservations where only 20 percent of
people have access to a telephone. We are not talking about
high-speed Internet access. We are talking about access to
basic dial tone services.
I think we have to recognize that in order to serve those
folks, there is going to have to be some subsidy system in
place. And you gave us the tools to do that in the
Telecommunications Act of 1996. Not only did you ask us to
promote competition, but also preserve universal service, and
that means that we have got to have a safety net for those
people who are not otherwise able to get service through the
competitive market at affordable rates.
And as we move ahead to reform universal service, as you
directed us to do and as we are doing, I think it is important
that we do it in a way that promotes new technologies. I have
visited rural areas where I am certain that there are wireless
solutions to bringing service to folks, or services from
satellites. And we have got to reform universal service in a
way that gets that subsidy money, a very scarce resource, to
the most efficient, effective provider. And I think that that
can be at least in part the answer to bringing advanced
services to rural America.
Senator DeWine. Mr. Klein.
Mr. Klein. Well, the question is really outside of my
expertise in antitrust enforcement and the role of markets. But
as a citizen, I would like to associate myself with Chairman
Kennard's remarks because I think he has got it exactly right.
Senator DeWine. Let me thank all of our witnesses for their
appearance before the subcommittee today. We appreciate it very
much. It has been very helpful, and I think it is a very
unusually knowledgeable panel of witnesses. The testimony we
have received today will be very helpful as we continue our
efforts to bring competition to a variety of telecommunications
markets.
We still have a long way to go, as we all know. I must
admit, though, that after the hearing today I am a little more
inclined to be optimistic. We are making progress and we will
continue to make progress as long as we stay the course and
keep plugging away to make competition a reality in local phone
markets.
The legislation that we have introduced today is just one
part of that effort, and we will consult with all interested
parties and take steps to mark it up as soon as possible. In
addition, we will continue to look for other ways to promote
competition, competition in residential service and video
delivery and in broadband services.
We look forward to working with the FCC, with the Justice
Department, and all of the interested parties in the
telecommunications industry to ensure that business and
consumers reap the full benefits of the Telecommunications Act
just as we all intended.
Again, I want to thank our very distinguished panel for
your time. Thank you.
[Whereupon, at 3:50 p.m., the subcommittee was adjourned.]
A P P E N D I X
----------
Additional Submission for the Record
----------
Prepared Statement of the National Coalition for Competitive Choice in
Telecommunications
The National Coalition for Competitive Choice in Telecommunications
(NCCCT) is a grassroots coalition working to ensure that all Americans
have choices in their telecommunications services. The coalition is
concerned about recent trends to erect barriers to entry for certain
types of providers, particularly municipal utilities.
the telecommunications act of 1996
The Telecommunications Act of 1996 promised better services, lower
rates and expanding innovations in the telecommunications market.
Competition was the impetus for such change and the law sought to
reduce barriers to entry and encourage vigorous competition in the
market. The intent was to provide more choices to all Americans,
regardless of their residence. Congress recognized the potential for
barriers to entry and provided the remedy set forth in Section 253:
Section 253 of the Act states:
(a) No State or local statute or regulation, or other State
or local legal requirement, may prohibit or have the effect of
prohibiting the ability of any entity to provide any interstate
or intrastate telecommunications service.
If States erect such barriers, the FCC is directed to preempt any
State law or regulation that prohibits any entity from providing
telecommunications services. The law does not make distinctions among
types of entities or forms of ownership.
(d) Preemption--If, after notice and an opportunity for
public comment, the Commission determines that a State or local
government has permitted or imposed any statute, regulation, or
legal requirement that violates subsection (a) or (b), the
Commission shall preempt the enforcement of such statute
regulation or legal requirement to the extent necessary to
correct such violation or inconsistency.
barriers to entry have not been overturned by the fcc
Recently, the plain meaning of the ``any entity'' language of
Section 253 has come into question as incumbent telecommunications
providers work at the state level to prohibit municipal utilities from
providing telecommunication services to their customers. In a recent
decision, the Federal Communications Commission (FCC) missed an
opportunity to uphold Congressional intent. The FCC chose not to
preempt a Texas law that prohibited municipalities from providing
telecommunications services. The Commission said that it did not want
to ``insert this Commission into the relationship between the state of
Texas and its political subdivisions in a manner that was not intended
by section 253.'' A recent D.C. District Court decision upheld the
FCC's position, claiming that ``we are dealing with the written word
and we have no way of knowing what intonation Congress wanted readers
to use.''
NCCCT believes that Congress' intent was clear: maximize consumers'
choices by maximizing the number of entities offering
telecommunications services. Lawmakers clearly understood that in an
extremely capital intensive industry, there would be few companies
ready and able to commit millions for high speed data infrastructure.
Moreover, municipal electric utilities have communications systems,
including fiber optic cable for their own communications and load
control functions which can be utilized for other non-utility
communications purposes. They did, however, understand that municipal
utilities, many already servicing government functions with telephone,
electric, and other services, would be able to provide such
infrastructure. In the Senate conference report lawmakers explained.
``In addition to consumers of telecommunications services, the
conferees intend that this includes the consumers of electric, gas,
water or steam utilities, to the extent such utilities choose to
provide telecommunications services * * * explicit prohibitions on
entry by a utility into telecommunications are preempted under this
section.''\1\
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\1\ Senate Report 104-230 2nd Session 104th Congress, February 1,
1996.
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Since the FCC decision, several States have passed laws to prohibit
or restrict municipal entry into the telecom business, leaving many
residents with no options other than their incumbent provider. Because
of such actions, NCCCT is concerned that some communities are in effect
still controlled by a monopoly provider and do not have access to
advanced telecommunications services. This seems to be particularly
true for rural areas and small towns.
barriers to entry hurt communities
Barring and restricting any entity's entry into telecommunications
hurts communities for several reasons:
1. Incumbents are not investing in facility upgrades and are
selling many local exchanges in remote and rural areas. Citizens in
these areas wait longer, receive fewer choices and fewer services
instead of the numerous options promised by the Telecommunications Act.
As a matter of fact, we know of some communities that lose up to 25
percent of their telecommunications capacity simply when it rains. That
is surely not what the law intended.
2. If communities are prohibited from using every tool to their
discretion--including their existing utility infrastructure--they are
left with no bargaining power to negotiate lower rates or better
services with their incumbent providers. These people are then at a
double disadvantage: not only are they prohibited from providing their
own services, they cannot even threaten to do so to negotiate lower
rates or better services. For example, the City of Lynchburg, Virginia
asked its incumbent provider for high speed/high volume data
transmission service for its Emergency 911 center. When quoted a price
of $1200 per month the city discussed building its own connection and
the incumbent dropped the price to only $400 per month. Virginia has
since passed legislation that prohibits any governmental entity from
offering telecommunications equipment, infrastructure or services. Now
the citizens of Virginia are stranded.
3. Without advanced communications systems, communities--
particularly those in sparsely populated and rural areas--cannot
attract new business and new jobs. The current rhetoric of ``linking
every school and hospital'' to the rest of the world through advanced
telecommunications is moot for rural areas that do not have access to
such infrastructure.
Such basic telecommunications services are types of advancements
promised by the Telecommunications Act and made possible by
competition. Without competition, communities are left at the mercy of
their incumbent providers--virtual monopolists that control vast areas
with no viable competitors.
We urge the Committee and the Federal Communications Commission to
consider fully the implications of erecting barriers to entry on rural
and remote areas and to take all appropriate steps to ensure that the
intent of the law is followed. Help assure that all Americans benefit
from the technology revolution.