[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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

        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.
---------------------------------------------------------------------------
    \15\ 47 U.S.C. Sec. 271.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \16\ See Progress Report at 37-38.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \1\ Senate Report 104-230 2nd Session 104th Congress, February 1, 
1996.
---------------------------------------------------------------------------
    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.
  

                                  
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