[Senate Hearing 106-1100]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 106-1100
 
                   BROADBAND ACCESS IN RURAL AMERICA

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

                                HEARING

                               before the

                     SUBCOMMITTEE ON COMMUNICATIONS

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 28, 2000

                               __________

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


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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

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

                     SUBCOMMITTEE ON COMMUNICATIONS

                    CONRAD BURNS, Montana, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
SLADE GORTON, Washington             DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi              JOHN F. KERRY, Massachusetts
JOHN ASHCROFT, Missouri              JOHN B. BREAUX, Louisiana
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
SPENCER ABRAHAM, Michigan                Virginia
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SAM BROWNBACK, Kansas                RON WYDEN, Oregon
                                     MAX CLELAND, Georgia





                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 28, 2000...................................     1
Statement of Senator Burns.......................................     1
Statement of Senator Breaux......................................     3
Statement of Senator Brownback...................................     5
Statement of Senator Cleland.....................................    41
Statement of Senator Dorgan......................................     7
Statement of Senator Gorton......................................     8
Statement Senator Kerry..........................................     5
Prepared Statement of Senator Lott...............................     3
Statement of Senator Stevens.....................................     3

                               Witnesses

Fitzpatrick, John S., Executive Director of Mergers and 
  Acquisitions, Touch America, Inc...............................    51
    Prepared statement...........................................    53
Gray, Stephen C., President and Chief Operating Officer, 
  McLeodUSA......................................................    58
    Prepared statement...........................................    59
Neel, Roy, President and Chief Executive Officer, United States 
  Telecom Association............................................    34
    Prepared statement...........................................    37
Regan, Timothy J., Vice President and Director of Federal 
  Affairs, Corning, Inc..........................................    43
    Prepared statement...........................................    45
Rowe, Bob, President, National Association of Regulatory 
  Utilities Commissioners, and Member, Montana Public Service 
  Commission.....................................................    16
    Prepared statement...........................................    19
Tauzin, Hon. W.J. ``Billy,'' U.S. Representative from Louisiana..     8
    Prepared statement...........................................    14
Woodrow, David M., Executive Vice President, New Business 
  Development, Cox Communications, Inc...........................    63
    Prepared statement...........................................    65

                                Appendix

American Public Power Association, Washington, DC, letter dated 
  April 11, 2000, to Hon. Conrad Burns...........................    83
American Public Power Association, prepared statement............    83


                   BROADBAND ACCESS IN RURAL AMERICA

                              ----------                              


                        TUESDAY, MARCH 28, 2000

                                       U.S. Senate,
                            Subcommittee on Communications,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:35 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Conrad Burns, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. We will call the Subcommittee to order this 
morning. The topic of today's hearing is critical for, I think, 
the future of the country. This is the Subcommittee on 
Communications. We are going to look into the possibility of 
how to speed up the deployment of broadband technology across 
rural America.
    In a few years, the Internet has grown exponentially to 
become the mass medium used daily by over 100 million people 
worldwide. I think 5 years ago had we thrown those figures out 
there they would have laughed at us. But the explosion in the 
information technology has created opportunities undreamed of 
by previous generations. In my home State of Montana, companies 
such as HealthDirectory.com and Vans.com are taking advantage 
of global markets made possible by the stunning reach of the 
Internet.
    The pace of broadband deployment in rural America must be 
accelerated for electronic commerce to meet its full potential, 
however. Broadband access is as important to our small 
businesses in Montana as water is to agribusiness. I am 
convinced that the proper use of section 706 of the 
Telecommunications Act can help bring these advanced data 
services to underserved areas. I authored 706 during the 
crafting of the act to allow the FCC to provide deregulatory 
incentives so that telecommunications firms would invest in 
broadband technologies.
    Yet, in its report on broadband deployment last year the 
Commission refused to use its 706 authority, citing the spread 
of broadband technologies across the Nation even though only 2 
percent of Americans had broadband access. I will not allow 706 
to be dismantled through FCC inaction.
    I am aware of all the recent discussions regarding the 
digital divide and I am very concerned that the pace of 
broadband deployment is greater in urban areas rather than in 
rural areas. However, there is some positive and exciting news 
on this front as well. The reality on the ground shows that 
some of the gloom and doom scenarios are far from the case. In 
Montana, just 2 weeks ago, Excite At Home deployed cable modem 
service in Billings and announced its intention to expand to 
other areas around the State.
    Also, by pooling their limited resources, Montana 
independent and cooperative telephone companies are doing great 
things. A group of ten of these small companies has formed the 
Montana Advanced Information Network, known as MAIN, M-A-I-N. 
MAIN has a 1,000-mile fiber loop around the State, providing 
circuits for applications such as Internet, long distance, 
telemedicine, distance learning, videoconferencing, and data 
networking.
    A group of five telephone cooperatives has formed a company 
called Vision Net that provides high speed Internet services to 
communities throughout Montana. Vision Net has 67 sophisticated 
interactive videoconferencing studios across the State, 
including 40 sites in public schools and sites in all 7 of the 
State's tribal colleges on the reservations.
    A group of three telephone cooperatives and three electric 
cooperatives have joined forces to form Skyland Technologies. 
Skyland has built a fiber hotel in Billings. The fiber hotel 
provides a place for incumbent and competitive 
telecommunications providers, Internet service providers, 
Internet and e-commerce-based businesses, and others to locate 
their equipment without having to go to the time and expense of 
constructing their own facilities.
    Tenants can select from a variety of fiber networks that 
terminate in the hotel to choose the best price routing 
solutions for transport of their telecommunications traffic to 
locations of their choosing, including the Internet backbone 
locations in major metropolitan areas.
    Just last week, I met with an organization called the 
Montana Independent Telecommunications System, which is working 
to design and construct Montana's first true Internet network 
access point. This would provide a high speed on-ramp to one of 
the more national Internet backbone networks.
    Another reason for optimism is the critical area of 
tremendous work done by our witness today, and that is Bob 
Rowe. Bob is President of the National Association of 
Regulatory Utility Commissioners and a Montana Public Service 
Commissioner, as well as a member of the Universal Service 
Joint Board. Bob has recently convened the first joint 
conference of the FCC and the State public service 
commissioners to study how 706 can be used to bring high speed 
communications to rural areas. Frankly, I do not know how he 
gets it all done, but he is one of the most dedicated public 
servants I have ever known and a great asset to the State of 
Montana.
    I would also like to extend a special welcome to John 
Fitzpatrick, who is representing Touch America here today. 
Touch America is a subsidiary of Montana Power Company that is 
headquartered in Butte, Montana, and it operates a huge 
nationwide fiber optic network that will reach 26,000 miles in 
the next year or so, and I look forward to hearing from him.
    With that, I would ask if--Senator Breaux, you are the 
first one on that side of the aisle. Do you have an opening 
statement?

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

    Senator Breaux. I will just be brief. I want to welcome our 
colleague from Louisiana who has done so much work on the 
broadband issue and so many of the other telecommunications 
areas that he has been involved. We are delighted to have him 
over here, and we are anxious to hear his comments.
    I am still trying to catch up with narrowband, so broadband 
is way ahead of me. Even so, it is important, and we need to 
figure out how we are going to encourage it and encourage its 
use. We have some bills that will do that, and we are 
interested in hearing about it.
    Thank you.
    Senator Burns. Thank you.
    Senator Stevens.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Mr. Chairman, thanks for holding the 
hearing.
    I want to ask your consent and the consent of the committee 
to place in the record before my comments the statement of 
Senator Lott, our Majority Leader. I find myself in total 
agreement with his remarks and I hope the press will receive a 
copy of them. We share the view that the Telecommunications Act 
is working.
    I am going to ask that you put my full statement in the 
record. Let me just make these two remarks.
    Senator Burns. Without objection, that will happen.
    Senator Stevens. I am pleased that Alaska will be the site 
of a Federal-State conference on advanced services on April 
17th. While many of our large cities are beginning to receive 
advanced services, our 227 rural villages scattered across a 
land mass one-fifth the size of the United States have a long 
way to go to catch up.
    A giant leap toward solving that problem would be for the 
Commission to wrap up the universal service proceeding. The 
States and the carriers need to know what level of support 
there will be. A solid universal service system will allow us 
to plan for the future and the portability of the subsidy would 
allow competition to flourish.
    My full statement and the Leader's statement will be in the 
record, please.
    [The prepared statement of Senator Stevens follows:] *
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    [The prepared statement of Senator Lott follows:]

  Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
    I want to thank my good friend and colleague, Senator Conrad Burns 
for holding this hearing today on the Telecommunications Act of 1996, 
particularly Section 706 regarding the deployment of advanced services.
    Just four years ago, Congress passed this landmark measure. Many of 
my colleagues here and in the House can attest to the years of hard 
work and compromise that went into passing the final version.
    Telecommunications today is credited with being the driving force 
in our growing economy, and without question the Act has been, in part, 
cause for that success.
    Despite languishing in the courts for far too long, the Act has 
already spiraled our economy to unparalleled levels, and spurred the 
creation of thousands of jobs and billions of dollars in investment.
    A number of delicate balances were struck to provide incentives to 
open new markets to competition. While I admit I would like to see more 
competition in the local markets, these choices, I believe, are heading 
our way.
    Well over one hundred private companies are competing in the local 
telephone market today. Many of these companies did not even exist when 
the Act became law. Many of these companies are facilities-based 
competitors, investing in their own switches. So, we are seeing 
progress.
    In addition, just a few months ago, the first 271 application for 
an incumbent phone company to enter the long distance market was 
approved and granted to Bell Atlantic. This historic decision was 
encouraging. I believe it was the right decision, at the right time.
    The decision was not only important to the state of New York, but 
to the Nation as a whole, by laying out a blueprint that will help 
provide a better understanding for other incumbents that want to follow 
suit and compete to offer long distance services.
    Competition and choice must come to this part of the network, and 
safeguarding the incentive-based nature of Section 271 is the best way 
to break the monopoly over the last mile to the consumer's home or 
business. This is the foundation of the 1996 Act and must remain so.
    The Act also addressed the availability of advanced services in 
Section 706. This is extremely important as well as the world of voice 
transitions to a world of data, which now makes up the majority of 
traffic on the phone network today.
    There has been a great deal of discussion during this Congress 
about the urgent need to have high-speed Internet access available to 
consumers across America.
    I understand the concerns that some of my fellow colleagues from 
rural states may have about their constituents' access to such 
services. I have those same concerns, but on this front, I also believe 
that significant headway is being made.
    There are some who say that the Internet and its services are 
hampered by the Act, but I disagree. In fact, resistance to the 
competition-enhancing aspects of Sections 271 and 251 has hampered the 
achievement of the ultimate goal of the 1996 Act: competition at all 
levels of telecommunications.
    Despite this resistance, increased competition is helping to spread 
the Internet across the country and spur investment in broadband 
technologies.
    If anything, it appears to me that the network is being readied for 
high-bandwidth Internet services, and deployment of high-speed Internet 
access is accelerating.
    Today, approximately 99 percent of American households can reach 
the Internet with a local telephone call, and most of these households 
can choose from among at least 4 Internet Service Providers.
    This is nearly universal availability of Internet access. Granted, 
this access is not all high speed . . . yet. But that will change.
    Incumbent phone companies are already offering digital subscriber 
line, or DSL, technology to millions of businesses and households. New 
entrants in the local phone market are offering high-speed Internet 
services. Cable television companies are aggressively rolling out their 
high-speed Internet services. Promising wireless technologies such as 
MMDS are being advanced and deployed--technologies that may very well 
be the best shot at reaching rural areas where other types of 
technologies may be limited.
    This deployment is happening not despite of the Act, but because of 
the Act--and it is a course of competition from which we should not 
deviate.
    I appreciate all of the witnesses who have taken the time to come 
and testify before the Subcommittee this morning.
    I am certainly open to creative ideas in the deployment of advanced 
services. But it is my hope that those who support reopening the Act 
with modifications to Section 271 or Section 251 will reconsider.
    The Act is coming of age and finally being given a chance to 
succeed where it is most important for consumers--in the marketplace.

    Senator Burns. Without objection.
    Senator Kerry.

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Mr. Chairman, thank you very much. Just very 
briefly, thank you for having this hearing. This is obviously a 
critical issue to a lot of communities in the country.
    Recently in western Massachusetts, which many people would 
not think of automatically as that rural, but it is, we had a 
significant issue about the----
    Senator Dorgan. Rural?
    Senator Kerry. Absolutely, you better believe it.
    Senator Dorgan. Western Massachusetts?
    Senator Kerry. Well, come there one day and I will show 
you.
    Senator Dorgan. Western Massachusetts.
    Senator Kerry. We got a group of businesses together and 
created sort of an aggregated purchasing power in order to try 
to attract the capacity to develop broadband, and it worked 
very effectively. We were able to attract seven or eight 
bidders and finally wound up with one entity that at an 
affordable price is going to provide that kind of access. But 
many communities have not been able to do that.
    I think there are two principles that ought to guide us as 
we go through this. One is not to do any harm to the 
competitive structure that we have spent an awful lot of time 
trying to create. I will listen carefully to Congressman Tauzin 
and others, but I am not convinced yet that lifting the inter-
LATA restrictions is somehow going to promote large-scale 
deployment of broadband services, and that is really the issue.
    The second principle, though, is that we need to take 
appropriate measures to guarantee that all Americans are going 
to benefit from this new economy and from the advances in 
medicine and education that come with it. I think there are 
some ways to do that, not the least of which is to try to 
provide an economic incentive. Senator Rockefeller has been 
working on the question of a specific rural incentive. Senator 
Moynihan and I have been working on a more generalized one 
which we will be introducing, I think next week, and it is 
fundamentally providing an economic incentive for the more 
rapid deployment to areas that need to be met.
    So I hope colleagues obviously will keep their minds open 
as to what may be the best way to not interfere with a lot of 
energy and effort we have expended to create appropriate 
competition at the same time as we do encourage the rapid 
distribution of this critical technology.
    Senator Burns. Thank you very much, Senator Kerry.
    Senator Brownback.

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

    Senator Brownback. Thank you very much, Mr. Chairman, and 
thanks for holding this hearing.
    I look at the proper incentivizing of the deployment of 
broadband services into rural areas as perhaps one of the key 
issues, if not the single most important telecommunications 
issues, that we will face this Congress. What we are finding 
taking place is that some areas are hooking into broadband 
services and having it and some are not, and it is generally 
the rural areas that are not having the access to this new 
economy. It is providing a whole new economy.
    We have a history in this country of making sure that we 
all kind of develop together. We have done it with rural 
electrification, we did it with rural telephony. Now we are 
going into another area of broadband services that we need to 
make sure the rural areas have access to this technology, to 
this new economy.
    If we do not, we are going to leave a lot of our folks 
behind. We have never done that in the past and we should not 
do it now. This I think is an important hearing where we talk 
about how do we keep the rural areas of Kansas and of 
Massachusetts hooked up to the new economy and how do we move 
this on forward.
    Mr. Chairman, I just want to go at the situation we have in 
Kansas if I can. With few exceptions, broadband deployment is 
not occurring in rural areas in my State or to my knowledge in 
any States across this country in a timely fashion. It is not a 
cynical plot, I do not think, to exclude rural areas from 
receiving broadband services. I think the reality is that it 
costs a lot of money to deploy broadband in rural areas and you 
run a much greater risk that you will not recover your 
investment, at least not for a very long period of time.
    So how do we incentivize it? There are different plans that 
are floating around. The one that I have put forward is a 
deregulatory plan. Rather than a government subsidy plan, it is 
a deregulatory system, where we would provide deregulation for 
the ILEC's to be able to invest in rural areas and to recoup on 
that investment.
    I think this is wholly appropriate and proper for them to 
be able to do. I think it is the right way to go. In the past 
where we--and I am sensitive to Senator Kerry's comment about 
we have worked hard to create a competitive regulatory system 
here and to try to get competition to kick in and we do not 
want to hurt that. But we are going into a new economy area in 
broadband. It is going to require new equipment, not equipment 
that has been paid for under a monopolistic system. We are 
going into high cost areas with this bill. This will be rural 
areas where you are going to have a disparate or a widely 
dispersed population that needs to have access to this if they 
are going to keep competitive.
    I think our only truly effective way of being able to go 
forward with this without breaking the bank here in a subsidy 
system is a deregulatory type of system that incentivizes and 
allows people to invest in these rural areas. I really think as 
we examine this issue we are going to find that is our only 
true option, and it is one we ought to do, and I do not think 
it is one we can sit around a whole long time thinking about 
whether we should or should not do it, because otherwise this 
economy is going to take off on people and the people in the 
urban areas are going to have it and the people in the rural 
areas are not going to have it and the die will be cast for the 
next 50 years in the economy.
    So I think this is a very important subject. I have got a 
full statement I would like to submit into the record on this 
and ask that it be accepted.
    [The prepared statement of Senator Brownback follows:] *
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
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    Senator Burns. Without objection, it will be.
    Senator Dorgan.

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

    Senator Dorgan. Mr. Chairman, thank you. Again, thank you 
for holding the hearing.
    Let me agree with Senator Stevens. I think the 
Telecommunications Act worked. I do think we need more action 
from the FCC on the Universal Service Fund that needs to be 
developed properly. The Universal Service Fund must be attached 
to advanced telecommunications services, which we anticipated 
and wrote into the Act. If we can connect those two, then that 
is going to be very helpful, but that has not been done to 
date.
    I am going to be introducing a piece of legislation dealing 
with a kind of broadband REA program. I feel exactly the same 
way as Mr. Brownback does about all the problems, but I come at 
it from a different perspective. I think with respect to 
electricity and telephones the only way we saw the buildout out 
into the rural reaches of the country was with a broad national 
incentive program, the REA program being an example.
    I am going to be introducing today a Rural Broadband 
Enhancement Act, which is essentially a broadband REA program 
providing low interest loans and anticipating the connection of 
the Universal Service Fund to that advanced service as well in 
the buildout where those loans have been used.
    The question is in my home town and in the home towns of 
many others: Will we be able to participate in the new economy? 
The answer is no, unless we have universal buildout. If we do 
not have the buildout of advanced services, we will have a 
digital divide. My home town of 268 people will be left, as 
will so many other rural areas in the country.
    So there are a series of ideas that are being developed. 
Senator Rockefeller has one that I am attracted to. I hope he 
is attracted to mine as well. There are a series of ideas that 
we ought to evaluate because we must do something. Doing 
nothing is not an option at this point. Doing nothing means 
that those areas with robust income streams will attract a very 
aggressive buildout of advanced services, and those areas that 
do not have that kind of income stream will essentially be left 
until last and perhaps never unless we do something to provide 
for it.
    That is the purpose of my offering, and I will be 
introducing today in the Senate, the proposal called the Rural 
Broadband Enhancement Act, which is effectively a broadband REA 
program.
    Mr. Chairman, I will describe that further at some point. 
But I know Representative Tauzin is here. We seldom ever have 
the opportunity for a House member to listen at some length to 
Senators and so these introductory comments I hope have been 
very valuable to Congressman Tauzin. I am very pleased that he 
has come to join us.
    Senator Kerry. Could I just make one tiny observation, if I 
may?
    Senator Burns. Yes.
    Senator Kerry. The makeup of our committees, both in the 
House and the Senate, tend to be rural-dominated, and it is 
reflected in all the concern about rural distribution. Maybe I 
am the sole member of the urban caucus here, but I just want to 
underscore: The same problem exists in low income inner cities 
all across the country. We cannot think of this as exclusively 
a rural issue. It is really low income, revenue producing, and 
what the infrastructure costs versus what people can pay. We 
have to be attentive to both.
    Senator Burns. I think you are correct on that, because 
whenever we start looking at the challenges we had in rural 
America, where we have got a lot of dirt between lightbulbs, we 
also had the same problem in the inner cities about access to 
modern services.
    I was in--I am glad the weather has changed to be normal in 
Seattle. I was there all day yesterday and, Senator, it rained 
all day, which is pretty normal and pretty green and wonderful 
in wonderful Seattle. So, Senator Gorton.
    Senator Gorton. It did here as well, Mr. Chairman.
    I do not think Congressman Tauzin needs a speech on this 
subject from me. I would agree with members on both sides of 
the political divide here that by and large our basic act is 
working well, but that we do need to see that the benefits it 
was designed to create are available to all.
    Senator Burns. We are joined today by, and appreciate him 
coming over here, Congressman Tauzin of Louisiana. By the way, 
just as a--oh, I am sorry. Senator Rockefeller, our local 
titan. See how many people have read that book? Do you not have 
a statement or anything?
    Senator Rockefeller. At this point, Mr. Chairman, I look 
forward to hearing from other witnesses.
    Senator Burns. I think to his credit, Congressman Tauzin, 
one of the most significant pieces of legislation that he 
worked on and get very little ink and very little notice was 
the E-911 bill that he shepherded through Congress and has 
probably done as much for public safety and standardizing 911 
as a public safety measure. I congratulate him on that. I had 
not done that publicly, as I have in the forum today 
Congressman. But I thank you for your work on that because it 
was really a good piece of work.
    We welcome you here today, Congressman Tauzin.

           STATEMENT OF HON. W.J. ``BILLY'' TAUZIN, 
               U.S. REPRESENTATIVE FROM LOUISIANA

    Mr. Tauzin. Thank you, Mr. Chairman. Let me also thank you 
for the incredible work the Senate did on that bill. I think it 
is a tribute to the way we do work together on telcom matters.
    I also want to take a moment to congratulate Senator 
Stevens. I understand he was selected just last Saturday as the 
Alaskan Man of the Century. So congratulations to you, Ted.
    Senator Burns. Which century?
    [Laughter.]
    Mr. Tauzin. Which century? Alaska was careful not to say. I 
think it was pretty interesting. I think he has got a lot of 
potential, is what they are saying.
    I also want to--Byron and all of you, I want to thank you 
for the comments this morning, because it does reflect somewhat 
of a political divide that still exists on this incredibly 
important issue. But as an example of why it is rising to the 
top, if you will, of our political discussions, the fact that 
so many bills are being introduced here on the Senate side to 
deal with it.
    Byron, your bill providing loan guarantees to rural 
buildouts, and Rockefeller, Kerry and Snowe, a bill dealing 
with again rural buildouts, Roth-Moynihan looking at tax 
incentives for broadband buildouts, the Brownback bill that 
deals with loosening regulations on some of the advanced 
services, the McCain bill deregulating high speed Internet 
services--all combining to indicate a great deal of Senate 
interest in this subject and perhaps an interest in closing 
what has become a political divide, which I think is helping to 
create a digital divide out there.
    I think it is so important that we close the political 
divide as rapidly as we can. On the House side we are trying to 
do that. On the House side, Senator--rather, Congressman John 
Dingell and I, from Michigan, have joined together and we now 
have 180 co-sponsors behind a bill to deregulate these advanced 
services in order to get the buildout done as quickly as 
possible before we address the need for whatever subsidies we 
might have to provide for those areas that are still not 
served, whether they be in an urban center or a rural district.
    Let me point out, Senator Kerry, that among the 180 co-
sponsors on the House side is a sizable support from the black, 
Hispanic, rural, and western caucuses, illustrating again that 
it is the combination of both inner city problems and rural 
district problems that we are presented with when we talk about 
this digital divide.
    It is also important to talk about why this digital divide 
is so harmful if we do not close it rapidly, as quickly as we 
can. It is harmful because we are not talking about a slow 
speed revolution in the economy. We are talking about a high 
speed revolution, because the high speed technologies are like 
a fast train leaving the station, and if communities and areas 
of Massachusetts or Louisiana are going to get left out they 
are going to get left out far behind.
    The other odd thing about this revolution is that it is a 
lowest common denominator revolution. If I am connected to high 
speed but you are not, if you are on low speed, and I connect 
to you, I am on your speed. So who will want to connect to 
areas of our country who only have low speed services when they 
degrade their systems to do so?
    It means that if you live in an area that may even have 
high speed services in a community, but does not have the four-
lane highway to connect to the big superstructures, the 
backbones of the Internet, you are going to have high speed in 
your community all right, but you will not be able to connect 
to the broad national high speed network and therefore, you 
will be out of business, unless you move, unless you move to a 
center where those broadband connects can be accommodated.
    Now, what is the problem with that? It is a timing problem. 
There are lots of folks out there--you will hear from some 
today, some CLEC's, Montana Power, others--who are trying to 
build out systems right now. But the question we ask on the 
House side, and I hope you ask it on the Senate side, is a 
simple question: Where you already have an extensive network of 
fiber already laid, dormant, ready to go to work, why would you 
maintain restrictions in the law, in the regulations, that 
prevent those networks from being used to connect all those 
small communities of America, the inner cities, and the rest of 
this country on the high speed?
    Why would you tell some companies in America, you cannot 
utilize your own assets to begin delivering these services to 
citizens? Why do we have to start addressing tax subsidies 
before we loosen the regulations and let it happen in the 
marketplace?
    I am not against tax subsidies. We are handling a bill on 
rural satellites in my committee right now to deal with the 
very last segments of America that are going to get left out of 
local television. And that is what we ought to do when we find 
segments that are totally left out. But the first ought to be, 
as we did in SHIVA: remove the regulations and let the 
companies deploy, let them use their assets.
    Now, I brought a few posters with me today to demonstrate 
the problem I think very clearly. In front of me is a picture 
that represents the places in America where the high speed 
trunks are located with points of presence for broadband 
connections. There are a lot of trunks in America. A lot of 
these high speed superhighways. But many of them pass right 
through Louisiana, for example, without having a point of 
presence for a high speed connection. If you do not have a POP, 
point of presence, and you are not within 50 miles of one, you 
either got to buy a T1 line to your community or you may be out 
of business on the high speed connect.
    Now, what you see in front of you is an example of where 
those POP's exist. Now, you see in the western States there are 
very few of them.
    Now, if you will, Teddy, why do you not flip that card over 
and I will give an example of the problem in America when it 
comes to high speed connects. If you look at this chart, you 
will see that the average number of points of presence per 
State in some of our States, in the top ten, is 33, but the 
average in many of our States is down to 2.3. It is like 
Louisiana is a two-point State.
    Now, that means that if you live in a State without a large 
number of POP's an awful lot of your people may have high speed 
connect in their communities because somebody is deploying a 
DSL system or a CLEC is providing a system or somebody else is 
providing some high speed connect in your community, but you 
cannot get from that community to the high speed trunk lines 
because the four-lane highways are not being used.
    Now, who owns and where are the four-lane highways that 
exist today? Well, let us flip that chart if you will, Ted, to 
the next chart and we will get a look at Louisiana, John, and I 
think that will give you a good example of what is true all 
over the country.
    Here is Louisiana's POP's, two of them, one in Baton Rouge 
and one in New Orleans. Around those POP's is a circle drawn 
around 50 miles. You notice Thibodaux and Houma are not in 
those circles, John, my home towns, the communities where I 
grew up in. If you are not in those circles, you are out of the 
connect to the POP. You can have all the high speed you want in 
your community, you just cannot connect to the POP's, the point 
of presence to the trunk lines.
    Now, Ted, if you will flip the next chart, I will show you 
what exists today on the ground, in the ground, ready to go to 
work, if we simply deregulate. Here is the fiber that already 
exists ready to go to work for Louisiana in the ground, that is 
prohibited from delivering high speed services to the 
communities of my State. The fiber is represented by the red 
lines that you see.
    If you look, you will also see some blue lines across the 
State. Those are the old long distance LATA lines. Those are 
the lines drawn by the court to separate local and long 
distance. Those LATA lines are currently being used to prevent 
through regulation the delivery of broadband services across 
those red lines, the four-lane highways that are already in the 
ground, ready to serve constituents in my State, but cannot be 
used because of the LATA line restrictions that still exist to 
protect local competition in long distance and local services 
of telephone only.
    Now, I want to disabuse, hopefully, all the listeners about 
our bill. Our bill does not lift the 271 restrictions on 
crossing those LATA lines for phone service. It does not. It, 
in fact, prohibits anyone who owns those red lines, the Bell 
companies, from delivering phone service across those LATA 
lines until they have met the 271 process. It makes no changes 
in the 1996 Act regarding that.
    It simply says that as far as advance services are 
concerned, these broadband Internet services that are going to 
be critical to the new economy, that these systems can be used 
to serve our people, to accommodate the connects that are going 
to be extremely important if people in my State and your State 
are going to have access to this new economy, or they will have 
to wait 2, 3, 4, 5 years while the high speed train leaves the 
station and they find out that businesses have dried up or they 
have to move to accommodate to a city that has it.
    Now, I also have--I ask you to pass this around--a map of 
the US WEST broadband network out West, Senator Burns, that 
gives you an idea of how extensive, in blue lines here, the 
fiber in the ground is available today. In the West the LATA 
lines are represented by State lines. The State boundaries 
become the LATA lines, and without the capacity to cross those 
LATA lines with advanced services many of the people out West 
cannot connect to a point of presence, therefore are locked out 
of the broadband future for our country.
    Now, it is this simple. It just boils down to this. Are we 
going to stick our hand in the sand and continue to have a 
political divide that allows this digital divide to develop in 
America, so that we have to come in with a financial rescue, 
that we have to have a big subsidy program to get these 
services out because we did not use the systems that were 
available? Or will we be smart enough to let these systems go 
to work for Americans and will we be smart enough to do 
regulatory relief first and then come forward with whatever 
subsidy program is necessary to make sure the last pockets are 
served, whether they be in an inner city, Senator Kerry, or a 
rural community, Senator Dorgan?
    The point I am making is that we have before us the 
opportunity to do something we did not have in 1996. We did not 
even know about advanced services in 1996. The Internet is 
barely mentioned in the 1996 Act. The browser, remember, was on 
the market in 1995, just a year before. Advanced services are a 
whole new category of service.
    To hold the rest of America hostage to the old regulations 
that affect long distance and local while they wait for long 
distance connect is just not fair to too many Americans. It 
leaves out too many in our society.
    If I can make a final pitch to you, we need, we need to 
think about time. Sooner or later, rural America is going to 
get connected. Sooner or later, urban America, the center 
cities are going to get connected. But if they have to wait 2, 
3, 4, 5 years--and the Legg Mason report indicates that fully a 
quarter of America will not have service 3 years from now, a 
half of America will have a single competitor--what will we be 
doing 3, 4, 5 years from now?
    We will be passing extensive tax subsidies to get it out 
there. We will be trying to regulate the sole providers because 
we do not like monopoly providers in America. We will be back 
debating these old regulatory arguments, instead of watching 
America get served by the infrastructure that currently exists.
    As a final thought, I am not interested in picking winners 
and losers in that marketplace. I do not care what company wins 
or loses in the struggle to provide broadband services. That 
ought not be out business. Our business ought to be that 
Americans are winners, that every American, whether they live 
on a bayou in Louisiana or whether they live on a mountaintop 
somewhere in the West or whether they live in an inner city 
somewhere in the East, that every American have the advantages 
of this new economy, because it is going to mean health care, 
it is going to mean education, it is going to mean jobs, it is 
going to mean a future that is prosperous for people, or it is 
going to mean that people in this country are denied those 
opportunities and they have to move to the center cities again, 
to the places where these POP's exist, in order to be a part of 
this new economy.
    Now, nobody ought to be relegated to that in our society. 
The best way to start this process and get it on track high 
speed is deregulation first and then whatever subsidies we need 
second.
    Thank you very much, Mr. Chairman.
    Senator Burns. Thank you, Congressman.
    Any members of the committee have any questions for the 
Congressman?
    Senator Stevens. Could I ask one?
    Senator Burns. Yes, sir. You can do anything you want. Man 
of the Year or Man of the Century can do anything he wants to.
    Senator Stevens. My great friend, I have got one problem 
with your comments. I think that is a very good map, but you 
handed out the US WEST map. US WEST sold off or is in the 
process of selling off nearly 600 smaller exchanges in the 14-
State operating region. That includes 500,000 access lines in 
10 of the 14 States.
    Now, 271 says neither a Bell operating company nor any 
affiliate of a Bell operating company may provide inter-LATA 
services except as provided in this section. It is not 
telephony we are talking about, it is all services. So your 
bill does amend 271.
    Mr. Tauzin. Well, if I can respond, Mr. Stevens, if you go 
back to the debates we had in 1995 and 1994 and 1993 leading up 
to 1996, we were not talking about advanced services. We were 
talking about telephone services. If you look at the heart and 
soul of the Act in 1996, it was about several things. It was 
about cable services, to try to get more competition in cable, 
let everybody get in that business, telephone companies, 
satellite companies, everything, and it was also about trying 
to break up the local loops and creating competition in the 
local loops for telephone service.
    Now, make no mistake about it, the big sizable revenues are 
still in long distance. That is the big fight. That big fight 
goes on whether our bill on the House side passes or not. We 
preserve the 14-point checklist, we preserve the 271 process. 
We forbid the Bells from entering long distance until they 
qualify under 271 under our bill on the House side, and I would 
encourage you, if you do a bill on this side, to do the same 
thing.
    We do not want to upset what we did in 1996 when it comes 
to telephone service.
    Senator Stevens. Billy, they tell me that by 2003, 90 
percent of the traffic is going to be data. Your bill takes 90 
percent of the traffic and lets them loose from 271.
    Mr. Tauzin. The problem, Senator Stevens, is that if in 
fact data becomes the critical component, do you really want 
folks in your State not to be part of that world because we are 
waiting on somebody else to ride in and build these systems 
that currently exist?
    My suggestion to you, sir, is that if you have a system 
already in the ground and our great country says to this system 
it cannot be used to serve our citizens, we have to wait for 
somebody else to come along, that that is not a good solution 
for Alaskans, certainly not for Louisianans.
    Senator Stevens. Well, but you have got to look at the 
other side of the coin. Your bill continues to lock out the 
long distance companies from competition because these other 
people have not opened theirs to competition.
    Mr. Tauzin. No, sir, it does not. Let me say it again. We 
keep the 271 process in place.
    Senator Stevens. Not for data, you do not.
    Mr. Tauzin. Not for data.
    Senator Stevens. But everybody is in data now, Billy.
    Mr. Tauzin. We do it for telephony, and if anybody believes 
that there are not huge dollar fights over telephony income 
today and over the next 3 to 5 years, you are kidding yourself. 
That is why this 271 process is dragging on so long. If I am a 
long distance company, I want to keep the Bells out as long as 
I can, and if I am a Bell company I want to keep the local 
competition down as much as I can.
    That fight is going to continue. We have not solved that. 
That goes on at the FCC. And there are huge dollars at stake 
there. We do not touch that fight. We simply say that we should 
not let that fight stand in the way of Americans getting data 
services, because data is going to become more important to us 
than a mere telephone call.
    Senator Stevens. I understand you and I am trying to better 
understand you. But my good friend behind me here, my chief of 
staff, points out that DSL will not serve rural Alaska. You 
have to be within three miles, three to five miles of the 
switch. What we are interested in is preserving something for 
rural America.
    I find it difficult to believe that these inter-LATA 
operating companies are friendly to rural America when they are 
selling off all their rural exchanges. So this is a tough 
fight, but I think 271 meant what it said: all services, if 
they want in the inter-LATA, they must deregulate.
    Mr. Tauzin. Well, if we wait for the FCC to complete a 271 
process for every State in America before we allow these 
systems to be used for data services, Senator Stevens, I am 
afraid we are condemning an awful lot of people in America to 
being left out. That is my only concern. Again, I do not care 
whether the Bell company serves customers in Louisiana or a 
CLEC or a satellite or a terrestrial wireless system. I do not 
care.
    I simply do not want the citizens in Thibodaux, Louisiana, 
to have to move to New Orleans because that is their only 
choice.
    Senator Stevens. I understand that.
    Mr. Tauzin. And businesses are dead in Louisiana if they 
are not connected.
    Senator Stevens. I understand that, and you are doing a 
very good job representing your people. But the trouble is that 
people that come from the West, they want to come into the 
Twenty-first century with everyone else, and we are going to be 
isolated if we are not included. The inclusion comes from 
putting in long distance into the same pocket. If you do an 
Internet in Alaska, you are on long distance.
    I have taken too long now. I will not take any time later. 
But I do thank you for coming over, and I think you have 
highlighted the problem.
    Mr. Tauzin. Thank you, sir.
    Senator Burns. I have no other comment other than the fact 
that, Congressman, you know when we even started the debate on 
the 1996 Act we were--some of us were shocked to hear from our 
local RBOC companies saying that half of their business at that 
time was data rather than voice. So we could see the trend.
    Now it is much higher than that and how we balance that out 
of course will have to take a very high profile in the debate 
that comes up.
    I have no further questions. I congratulate you on your 
efforts and would hope that we can find a balance in that.
    Mr. Tauzin. Thank you very much, Mr. Chairman.
    Senator Burns. Thank you for coming this morning. We 
appreciate that.
    [The prepared statement of Mr. Tauzin follows:]

           Prepared Statement of Hon. W.J. ``Billy'' Tauzin, 
                   U.S. Representative from Louisiana
    Good morning, and thank you, Mr. Chairman, for inviting me to 
testify before your Subcommittee on Communications.
    Broadband, or rather the lack thereof, is an issue that not many 
are talking about right now. Most of what we hear is that the Act is 
working--so leave it alone. The fact is, however, that the Act was 
never intended to address Broadband deployment except in the most 
general terms--i.e. that advanced services should be deployed and that 
the FCC should forbear when necessary.
    Despite this, a huge sector of our nation is not receiving . . . or 
even capable of receiving true high speed Broadband services. The 
reason is because hundreds of communities are not near any of the hubs 
that enable access to Internet backbones--the real super highways.
    Very few companies are building high speed gathering lines all the 
way from the backbone points of access to the rural communities because 
it is expensive. While some are, like Montana Power and utility 
consortiums, their lines will not extend to many rural areas. Put 
simply, it will be a long, long time before these towns and rural areas 
are adequately served the way that urban areas are.
    There is, however, an alternative to making our constituents wait. 
We can adopt a coherent broadband policy that gives all willing players 
equal treatment under the law and regulations, just as Congress 
intended when it added Section 706 to the '96 Act.
    Broadband is an all new communications medium, and to quote the FCC 
``. . . it is operationally and technologically distinct . . .'' from 
plain old telephone or cable service--or satellite or cellular for that 
matter, even though it can be delivered over some of the same 
infrastructure.
    While all companies can compete for local customers, including the 
RBOCs, only one segment of the telecom industry is prohibited from 
engaging in deployment of the high speed broadband gathering lines 
needed to connect our rural communities to Internet backbones: The 
RBOCs.
    Despite that these companies already have fiber in the ground 
connecting most of these rural communities to hub cities where backbone 
infrastructure exists, the Bells are still prohibited from hauling any 
data traffic because the FCC--not an act of Congress--has said that 
RBOCs are prohibited from sending any traffic across those 20th Century 
LATA lines drawn by the Courts almost 20 years ago. Those regulations 
and LATA boundaries were implemented to separate local and long 
distance calling areas for purposes of regulating VOICE TELEPHONY--not 
the new high speed Broadband data that is revolutionizing American 
communications.
    Nonetheless, the FCC and many of the new competitors created by the 
Act, see the data-LATA restriction as an effective club to use to force 
the RBOCs to agree to market opening conditions that were never 
contemplated by the Act. These parties are not concerned about the fact 
that many of our constituents, yours and mine, are being left out of 
the Broadband revolution.
    While these parties are out aggressively deploying high speed 
gathering lines and laying new backbone infrastructure, they don't want 
any competition for their business models because the status quo under 
FCC regulations gives them greater leverage to negotiate higher 
carriage rates if local customers can't get to the backbones any other 
way.
    So, the bottom line is this: rural consumers and communities are 
the ones being left behind while the FCC continues its regulatory 
gamesmanship.
    The Bill I have introduced, along with Mr. Dingell, in the House 
would change all of this. It enjoys the sponsorship of 180 members of 
the House, and is gaining momentum.
    The Bill would:

          1. Promote the deployment of broadband services by providing 
        an incentive for all companies to develop and deliver advanced 
        telecommunications services. Senator Burns has estimated that 
        less than 2 percent of Americans who are online have access to 
        cable modem or digital subscriber line (DSL) technologies.
          2. Create more consumer choice by allowing both existing 
        wires into the home--telephone and cable--to compete head-to-
        head in the delivery of broadband services.
          3. Grant ISPs the right to collocate and interconnect with 
        Bell company high-speed data networks so that consumers are 
        guaranteed freedom of choice, and all ISPs have access to at 
        least one broadband pipe.

    My legislation would NOT:

          1. Allow any Bell Company to carry any voice long-distance 
        service over any high-speed, packet-switched network until the 
        Bell company is authorized by the FCC to enter that business.
          2. Deny states from regulating core telecommunications 
        services. A telecommunications service would continue to be 
        regulated as a telecommunications service, whether carried over 
        a circuit- or packet-switched network.
          3. Alter the Legal Obligation of RBOCs to fully comply with 
        the open market requirements of the 1996 Act, including the 14 
        point checklist requirements of Section 271.

    Thank you, and I yield back any time that I might have remaining.

    Senator Burns. We now have a gentleman who has 
distinguished himself in the National Association of Regulatory 
Utility Commissioners, and he also serves on the Montana Public 
Service Commission. Ever since he has held that position and 
ever since we have worked together trying to address these 
issues of spines and broadband to rural areas--and actually 
Montana cannot even be classified as rural. I think we are 
classified as frontier in other settings.
    But we welcome him this morning and look forward to his 
testimony, Bob Rowe, who is on the Montana Public Service 
Commission. Thank you for coming in this morning, Commissioner.

   STATEMENT OF BOB ROWE, PRESIDENT, NATIONAL ASSOCIATION OF 
REGULATORY UTILITIES COMMISSIONERS, AND MEMBER, MONTANA PUBLIC 
                       SERVICE COMMISSION

    Mr. Rowe. Mr. Chairman, I am Bob Rowe. I am a Montana 
Public Service Commissioner, and I am speaking here today on my 
own behalf.
    I want to start by thanking all of the Members of this 
Committee for your very thoughtful approach to competition, 
universal service, and technology deployment. Mr. Chairman, I 
particularly want to commend you for your vision and for your 
leadership. I very distinctly remember meeting with you long 
before the Act passed, when you were working on what became 
section 706, and you challenged me then very directly that we 
have to do more than just provide good quality voice-grade 
service to Montana and America. In fact, you talked about 
specific towns in Montana.
    You were thinking about high speed Internet access and 
other advanced services back then, and you got it, as the 
techies say. And your current work on the Digital Dozen and 
your continued work on competition, universal service, and 
technology deployment confirm that you still get it. I am 
honored to be here in front of you today.
    The act is a cooperative Federalist document and you 
appreciate the role of States as partners implementing your 
vision, and you gave us tall orders. Indeed, in section 706 you 
instructed both the FCC and State commissions to take action.
    Fortunately, in addition to your tall orders, Congress gave 
us good tools. I will summarize some of those tools. I will 
start by suggesting that there are many digital divides, not 
just one. I will describe some of the good work in Montana and 
then I will describe the tools in the Telecommunications Act 
toolbox, especially the section 706 tools.
    Let me start by saying that there really are many digital 
divides and they often occur where you least expect them. Based 
on what I have learned so far from talking to individual 
customers in Montana, I think of the digital divide on a couple 
of axes. On the vertical axis, you can look at it by layers of 
the network, from the network access point down to the 
transport level, to the loop, and right down to the customer.
    On the other layer, the horizontal layer, I think of it by 
the kinds of problems that customers complained to me about: 
absence of facilities, price to use facilities, and quality 
issues. All of these have been described to me by customers who 
use the phrase ``the digital divide,'' customers complaining to 
me about the digital divide. There are all kinds of different 
strategies to get at these different digital divide problems.
    Another way to think of this is in terms of the 
relationship between density and demand, and there are areas 
where facilities are dense and demand is high and that is where 
the market is going to do exactly the job that the market was 
designed to do. There are the situations, such as urban areas 
in Washington, D.C., other large cities, where the density may 
be high, but the demand is not high, and that is where you use 
a different set of strategies, the urban neighborhoods that you 
already discussed this morning.
    The bad news from looking at things this way is that there 
is not any one strategy that is going to work across the board. 
You need to use multiple strategies. The good news is that 
there are all kinds of different approaches that do work, and 
the good news is that we can work together to solve these real 
problems.
    The next section of my testimony tries to describe some of 
the good news from Big Sky Country. Mr. Chairman, you really 
did a great job of summarizing my testimony, and that 
demonstrates to me that you do have your finger right on the 
pulse of Montana.
    As you described----
    Senator Burns. I am cheating.
    Mr. Rowe. I very much doubt that. In fact, I know that you 
met with some of the folks that I am going to talk about last 
week and over the weekend. And there are Montanans who are 
excited about the technology, that are using it, and they want 
better and more robust access. As you mentioned, Streaming 
Solutions in Cut Bank, HealthDirectory.com in Missoula, Stream 
International up in Kalispell, and then the community networks, 
such as the KooteNet in Libby, where you have been doing so 
much work, and the Dillon-Net in Dillon.
    The carriers in Montana that do not get enough attention 
are the ones that you described, the folks who are building the 
MAIN network that is outlined on this map, the two-way video 
studios that are being developed by Vision-Net. What is 
exciting about MAIN and Vision-Net, if you look at the map of 
Montana, the population is over in the West, but a lot of those 
facilities are over in the East. As you said, they are serving 
Indian reservations, they are serving small Montana 
communities. They are doing exactly, I think, what we need them 
to do.
    As you also described, that same group of small companies 
is now trying to develop ways to get traffic back to the 
Internet backbone faster and cheaper, and again that is a very, 
very important task. Many of the small Montana companies are 
beginning to deploy DSL. My testimony includes an example of 
the relatively low capital cost of deploying DSL, for example 
in the Jordan exchange, if you are near the central office. It 
is about $38 per customer for the total capital cost. As soon 
as you go outside of that central exchange, you fall off the 
cliff and at that point the average cost for DSL, just the 
capital cost, not the monthly cost, is about $31,000 per 
customer. That is a big hurdle to jump over.
    Well, those successes raise some questions and these are 
the questions we need to answer. What kind of support do those 
good efforts need to succeed? How can they be replicated in 
other areas and how can we build on or better those 
accomplishments?
    Next I talk about the competition tools, and you did give 
us good tools that will work to promote technology deployment 
in rural areas. I am quite confident that in the next year we 
will see Montana-based companies providing competitive DSL 
service.
    The challenge, as the dissent said in the Iowa versus FCC 
case, is that competition distinguishes itself in the unshared, 
not in the shared, portion of the enterprise. So as we strike 
the balance between the competitors and the so-called 
incumbents, that balance is going to change over time.
    Well, section 271 is another good tool that you gave us, 
and commissions, including New York and Texas, have done an 
outstanding job working through that 271 process, using that 
good tool. I would be happy to talk more about those State 
efforts in response to questions.
    Out West the challenge is to figure out how to make section 
271 work for rural States. We have pulled together 13 States in 
the US WEST region in a multi-state collaborative. In March 
NARUC, my national organization, passed a resolution affirming 
its support for the 1996 Act and opposing legislation that 
would permit the Bell operating companies to provide data 
service across LATA boundaries without first fully opening 
their market to competition as Congress required in 1996.
    State commissions took this action because we do believe 
section 271 is a valuable tool to open markets and to promote 
deployment of advanced services.
    My testimony also describes the universal service tools. I 
am delighted to be coming onto the Federal-State Joint Board 
just as our focus will move to the crucial area of providing 
rural service.
    Then finally, the section 706 tools. As I said, you spoke 
to the FCC and the State commissions, and in section 706 
Congress demonstrated how truly far-sighted it was. Its 
champions, again including you, Mr. Chairman, told us: Do more, 
do not be satisfied. Two years ago NARUC passed a resolution 
saying that section 706 is an opportunity to grab the brass 
ring of new technology, not just an invitation to pick the low-
lying fruit.
    With your active support, Mr. Chairman, NARUC prepared a 
proposal last summer for a section 706 joint conference between 
the FCC and the States. Our proposal outlined actions, 
including monitoring deployment through regional hearings, 
studies, and other efforts, activating stakeholders, 
coordinating efforts, disseminating information to those best 
able to use it. We also put forward the proposal for what we 
called section 706 zones, where you would target all of those 
efforts.
    In October the FCC did create the section 706 joint 
conference. Its success in my opinion is going to depend on the 
continued involvement of providers, users, and potential users 
down at the community level. We will be holding regional field 
hearings. Those hearings will be chaired jointly by a member of 
the FCC and by a State commissioner. We will not have all the 
answers and we should not, but the hope is that the joint 
conference will bring together those people, those parties, who 
can assemble the right pieces in creative new ways.
    We will be holding hearings. The first hearing was in 
Washington, D.C., earlier this month and that included a site 
visit to an inner city neighborhood. There will be a hearing on 
April 17th in Anchorage co-chaired by Chairman Nan Thompson of 
the Alaska Commission, also a hearing in April in Sioux City, 
Nebraska, in May in Lowell, Massachusetts, in June in Miami, 
Florida, and on June 23rd in Cheyenne, Wyoming, with a Montana 
segment on June 21st, and we are exploring the possibility of 
telecasting that hearing over the Vision-Net system and 
possibly streaming it over Streaming Solutions.
    While the joint conference is an exciting project, I hope 
it will help us move beyond the telewars that the armies of 
lawyers and advocates have been fighting in front of me, in 
front of you, and focus instead on what we can accomplish 
together.
    The most exciting and important work, however, will not 
occur in public hearings, including the hearings that we will 
be holding. That is going to take place in the big cities, in 
the small towns, and on the frontiers, as you said, as we in 
Montana like to say, where people really are working diligently 
and creatively to solve real problems.
    Mr. Chairman, that is where you were focused at the start 
of this whole process many years ago and I am proud that that 
is where you are still focused.
    Thank you very much.
    [The prepared statement of Mr. Rowe follows:]

  Prepared Statement of Bob Rowe, President, National Association of 
Regulatory Utilities Commissioners, and Member, Montana Public Service 
                               Commission
I. Introduction--The Telecommunications Act Toolbox

Mr. Chairman, Members of the Committee:

    I am Bob Rowe. I am a Montana Public Service Commissioner and 
President of the National Association of Regulatory Utility 
Commissioners. I serve on the Federal-State Joint Board on Universal 
Service, the Federal-State Joint Conference on Broadband Access (which 
I will describe), and as Chairman of the thirteen-state Operations 
Support System Collaborative now working with US WEST and a wide range 
of competitive providers. Until last November I chaired NARUC's 
Telecommunications Committee. I am here today speaking on my own 
behalf.
    I thank the Members of this Committee for your thoughtful approach 
to competition, universal service, and technology deployment. I am 
sincerely honored to be here today.
    Senator Burns, I particularly commend you for your vision and for 
your leadership. I distinctly remember meeting with you in 1995 when 
you first described to me your vision for what would become Section 
706. You challenged me that we must do more than provide good quality 
voice grade service to Montana and America. You were thinking about 
high speed Internet access and other services. You ``got it'' (as the 
techies say). Your current work on the ``Digital Dozen'' bills, as well 
as your continued work on competition, universal service, and 
technology deployment confirms that you still ``get it.''
    The Telecommunications Act is a cooperative federalist document. 
You appreciate the crucial role of states as partners implementing your 
vision, and you gave us tall orders. I am pleased to report that state 
commissions and the FCC have forged a better, more productive 
partnership than existed several years ago. You helped make that 
happen. For example, tomorrow the FCC and NARUC are cosponsoring a 
workshop on consumer-friendly billing practices that will involve a 
wide range of providers and consumers. Technology deployment is another 
key area for Federal-state cooperation.
    State commissions and state governments are using many strategies 
to promoting access to advanced technology. Attachment 1* is an 
article, ``Strategies to Promote Advanced Telecommunications 
Capabilities,'' published in the Federal Communications Law Journal in 
March. The article outlines why these issues are so important to State 
economic and community development. It also summarizes some approaches 
states are taking and the basis for the ``cooperative federalist'' 
approach I will describe today.
---------------------------------------------------------------------------
    * Attachment 1 has been retained in the Committee files.
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    Fortunately, in addition to tall orders Congress gave us good 
tools. I will start by suggesting that there are many digital divides, 
not just one. I will then describe the good work of Montana's rural 
cooperatives and independent telecommunications companies, which give 
us examples of strategies that are currently working and the barriers 
they face. Then I will describe the tools in the Telecommunications Act 
toolbox. I will focus on Section 706, but will also mention the 
competition and universal service tools in the toolbox.
II. Not One Divide But Many
    Over the last several years, I've become convinced there is no one 
``Digital Divide.'' Rather, there are many digital divides, and they 
may occur where least expected. The Section 706 Joint Conference will 
help us understand the specific nature of the broadband access problems 
in communities all across the country.
    Based on what I've learned so far, I look at the ``digital 
divides'' on two axes: First, by layer of the network (from Network 
Access Points all the way down to the customer). In a particular 
situation, is the concern backbone or transport facilities? Internet 
points of presence? Is it switching? Is it loop facilities (of whatever 
type)? What are the relationships between layers of the network 
(switching and backhaul, for example), or the trade offs between 
investing in improved signal processing and investing in new 
distribution plant?
    On the customer level, is the problem access to customer premises 
equipment or other network devices? Is it absence of appropriate 
applications? Or is it a question of human capital, possibly 
addressable through technical support?
    On the other axis, I think about the types of problems faced at the 
particular network layer. Is the concern the physical absence of 
facilities in a particular layer? This is certainly an issue in some 
areas. Is the problem congestion or exhaustion of facilities? Is the 
problem the price to use existing facilities? This is a real problem in 
some areas--distance still costs money. Or, is the concern quality? 
(For example, outages, slow or incorrect provisioning, difficulty 
handling a complex order, or insufficient technical support.) Quality 
problems are big concerns in some areas, and for some customers. They 
can directly affect investment decisions by businesses considering 
where to locate or whether to expand. All the disparate issues I just 
summarized have been described to me by customers complaining 
specifically about what they (not me) labeled as the ``digital 
divide.''




    It may also be useful to think of digital divide issues based on 
the density of the customer base and the level of demand for advanced 
services. In a high-density area with high demand (for example a 
commercial core), competition solutions may solve any problems quickly. 
If a good business opportunity exists, the market will respond.
    In a high-density/low-demand area (perhaps a lower income urban 
neighborhood) community and economic development strategies may make 
the most sense. These might include community access points, training 
programs, or even loaning laptops to schoolchildren, as has been done 
successfully.
    In a low-density/high-demand area (possibly a rural area with a 
high level of dial-up Internet use) universal service, aggregation 
(taking advantage of competitive opportunities), and new technology may 
all help solve the problems. Perhaps something like an Agricultural 
Extension Service for technology could help overcome demand-side 
barriers.
    In a low-density/low-demand area the full panoply of strategies 
might be required. Education and other creative approaches may be 
needed to promote demand in order to justify expensive deployments in 
some areas.

                             DENSITY/DEMAND
------------------------------------------------------------------------

------------------------------------------------------------------------
HIGH DENSITY/HIGH DEMAND             HIGH DENSITY/LOW DEMAND
Competition/market solutions         Economic and community development
------------------------------------------------------------------------
LOW DENSITY/HIGH DEMAND              LOW DENSITY/LOW DEMAND
Universal service, aggregation,      ``Throw the book at `em'''
 technology
------------------------------------------------------------------------


    The bad news is that there is no one strategy that will bridge all 
the digital divides.
    The good news is that there are a multitude of approaches, each 
appropriate to address specific problems, and--in combination--to 
bridge the many digital divides. The good news is that there are 
enormous opportunities for creativity. The good news is that we can 
work together to solve real problems in real communities.
III. Successes on Which to Build--Some Stories from Big Sky Country
    Montanans are excited about advanced technology. They're using what 
they have, and eager for faster and more robust access. Investment in 
telecommunications infrastructure, it is now agreed, leads to greater 
economic activity generally.\1\
---------------------------------------------------------------------------
    \1\ See, Edwin Parker, et al., Electronic Byways: State Policies 
for Rural Development Through Telecommunications, 2nd ed., (Aspen 
Institute, 1995), chapter 6, for a summary of the literature.

   Streaming Solutions, Inc. (www.ss-i.com), based in Cut Bank, 
        is a premiere provider of audio and video streaming systems. It 
        has developed a range of strategic partnerships, and is eager 
        to pursue global opportunities that will require good 
        connections to the rest of the world.
   Based in Missoula, HealthDirectory.com (http://
        healthdirectory.com) provides the nation's fastest growing 
        database of Medical Society members' web pages, and provides 
        innovative web-based health information to consumers around the 
        nation.
   Stream International, which provides Internet and voice-
        based customer support services for world-class technology 
        companies and e-businesses, recently opened a customer and 
        technical support center in Kalispell that may eventually 
        employ 500 people. Their decision was based in significant part 
        on the quality of telecommunications available from Century 
        Tel, which will provide redundant Sonet Ring technology and two 
        way access out of the Flathead Valley. (http://www.stream.com/
        Stream.nsf/18ab8bd0d1e8cf818525663c001342ed/
        0d72dfc5c007ec93852568ab004e9304?OpenDocument).
   Dynamic community-based networks include the KooteNet in 
        Libby (http://www.libby.org) and Dillon-Net (http://www.dillon-
        net.org/), both of which play valuable roles in these rural 
        communities.

    At each level of the network, it's possible to point to tremendous 
successes. Those successes should be our models. I will focus on the 
good work of Montana's rural telephone cooperatives and companies, 
which don't get their story told often enough. I'm pleased that 
Montana-based Touch America will be participating in today's hearing. 
They also have a great story to tell. US WEST has all digital switches 
and interoffice facilities, and has deployed Frame Relay. It has also 
deployed DSL in Helena. AT&T has begun providing high-speed cable 
service in Billings. Several national carriers, including Avista and 
PSINet are also providing service in Montana.\2\
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    \2\ Consistent with Section 706, retail provision of pure data 
service is not regulated in Montana. This presents the challenge and 
the opportunity of working with providers in different ways to promote 
access. Of course, to the degree wholesale networks are open to 
competition and firms are competing at the retail level, traditional 
retail regulation is less important.
---------------------------------------------------------------------------
    Montana's rural providers have massively rebuilt their local 
networks, with crucial support from universal service mechanisms and, 
in some cases, Rural Utility Service loans. These networks are of 
sufficient quality to support provision of wide-band for those 
customers close enough to be directly served from the central office. 
Almost all Montanans now have dial up Internet access.
    A Montana consortium of rural cooperatives and small telcos has 
built the ATM-based MAIN (Montana's Advanced Information Network) 
network, which will finish looping most of Montana this year. Together, 
these companies have deployed over 5,000 miles of fiber. (Attachment 2* 
is a map of the MAIN network.) A related consortium, Vision Net,\3\ 
connects approximately ninety switched video studios, mainly in rural 
Montana and including a number of studios on Indian Reservations. 
(Attachment 3* includes video studios connected to the Vision Net 
network.) Many rural providers are committed to providing DSL and other 
services to their members over the coming year. These efforts are 
important, but may be risky. And, the further out access is deployed, 
the more expensive and therefore risky it becomes.
---------------------------------------------------------------------------
    \3\ MAIN and Vision Net's sponsors are generally members of either 
the Montana Telecommunications Association or Montana Independent 
Telephone Systems.
    * Attachments 2 and 3 have been retained in the Committee files.
---------------------------------------------------------------------------
    For example, the Jordan exchange, served by Mid-Rivers Telephone 
Cooperative, includes 790 access lines in an area of 4025 square miles. 
The capital cost of providing DSL to the 397 customers served directly 
from the central office will be only $38 per customer, and Mid-Rivers 
will make this investment. In cold contrast, the average capital cost 
to provide DSL to the 390 customers too far away to be served directly 
from the central office is nearly $32,000 per customer. It is 
impossible to make a business case to recover all of these costs.




    Once high-speed service is deployed locally, that traffic must be 
carried to the backbone network. A high-speed information side street 
is of little value if it connects to a washboard-surfaced country road 
at the edge of town. The presence of good capacity networks such as 
MAIN is essential to complete the link. Vision Net is also developing 
ways to provide cost-effective Network Access Point (NAP) connections 
using a combination of existing and new facilities. Skyland 
Technologies, Inc., also a consortium project recently opened a ``fiber 
hotel'' in Billings. The facility provides high-quality interconnection 
(caged or cageless) with redundant access to multiple networks, for a 
variety of national and regional carriers. Attachment 4, provided by 
Montana Independent Telephone Systems, describes MAIN, Vision Net, the 
Network Access Point peering proposal, the Skyland fiber hotel, and 
also several carriers' work to provide DSL and to improve service on 
the Crow Indian Reservation.
    These examples raise questions:

   What kind of support do successful efforts need to thrive?
   How can they be replicated in other areas?
   How can we build on or better these accomplishments?
IV. The Competition Tools
    The competition tools involve opening up local networks (I think of 
them as ``hub networks'') through tools such as interconnection under 
Sections 251 and 252. It has been a challenge for the FCC, state 
commissions, and (unfortunately) the courts to set the right balance 
between incumbents and competitors over the past four years. As Justice 
Stephen Breyer remarked, ``It is in the unshared, not in the shared, 
portions of the enterprise that meaningful competition would likely 
emerge.'' \4\ I am pleased to report that ``line sharing,'' through 
which a competitor can lease the unused high frequency of a local loop 
to provide Digital Subscriber Loop (DSL) will be a successful 
competitive tool in Montana. US WEST and competitive providers are 
currently negotiating a multi-state DSL agreement, that I expect to be 
finalized soon. Competitive providers, especially including Montana-
based companies, will use their own DSL facilities over shared lines to 
provide DSL in several Montana towns. This will likely trigger a 
healthy competitive response from US WEST. That's just how competition 
is supposed to work, and just what Congress intended in opening local 
markets.
---------------------------------------------------------------------------
    \4\ Separate Opinion of Justice Breyer, concurring in part and 
dissenting in part. AT&T Corporation v. Iowa Utilities Board, 525 U.S. 
366, 429; 119 S. Ct. 721, 754; 1999 U.S. LEXIS 903, 102-103 (S.Ct. 
1999).
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    Section 271 is another critical competition tool you gave us. The 
nuts and bolts of opening markets, which you laid out in the 
competitive checklist, are not an easy task for anyone. Success 
requires absolute commitment and focus. Fortunately, four years after 
the Act passed, parties on both sides have moved past the posturing and 
are hard at work to succeed. The structure of Section 271 creates two 
especially important roles for state commissions: developing a thorough 
record, and--especially--working with the Bell Operating Company and 
its competitors to solve problems and implement systems that work. 
State commissions including New York and Texas have devoted substantial 
resources (including lots of creativity) to using the Section 271 tool 
to construct the framework for competitive local markets in their 
states. Where that tool is used well, as in New York and Texas, the FCC 
should give especially great weight to state commission decisions. That 
is what occurred in New York. That is what should occur in Texas.
    Thirteen commissions in states served by US WEST are working 
together on 
a collaborative effort to conduct independent, third party testing of 
the Opera-
tions Support Systems (OSS) that are critical to the success of local 
competition. 
That process is open to all competitors, with all documents available 
on the Web 
(http://www.nrri.ohio-state.edu/oss.htm). Both US WEST and the 
competitors are working together seriously and in good faith. Issues 
associated with the ability of competitors to provide DSL are an 
important part of the Regional OSS Collaborative. (While the pending US 
WEST-Qwest merger presents many serious issues now being examined by 
state commissions including Montana's, it is my personal belief that 
one result of the merger has been to focus US WEST much more clearly on 
opening its local market.)
    In March, NARUC adopted a resolution affirming its support for the 
1996 Act; opposing legislation that would permit the Bell Operating 
Companies to provide data services across LATA boundaries without first 
fully opening their local markets to competition as required under the 
1996 Act; or, that would limit the ability of public utility 
commissions to fulfill their obligation to regulate core 
telecommunications facilities used to provide both voice and data 
services and to promote deployment of advanced telecommunications 
capabilities. We took this action because Section 271 is a valuable 
tool that states are using effectively to open markets, which in turn 
is helping to spur deployment of new services.
V. The Universal Service Tools
    I was recently appointed by FCC Chairman Kennard to the Federal-
State Joint Board on Universal Service. (Attachment 5 is my statement 
at the March 6, 2000 Joint Board meeting.) Over the next year, the 
Joint Board will be considering an appropriate high cost fund mechanism 
for the hundreds of small companies that provide generally excellent 
service throughout rural America. We will be paying particular 
attention to the reports and recommendations of the Rural Task Force.
    In Section 254(b)(2) you instructed us that, ``Access to advanced 
telecommunications and information services should be provided in all 
regions of the Nation.'' In Section 254(b)(3) you declared that 
residents of rural and insular areas should have access to ``reasonably 
comparable'' services, including advanced services, at prices that are 
reasonably comparable to those in urban areas. In Section 254(c)(1) you 
directed us to consider the ``evolving level'' of universal service, 
taking into account whether services are ``subscribed to by a 
substantial majority of residential customers.'' I hope the Joint Board 
will be considering all these issues. Additional FCC proceedings, 
including those concerning the cap on the size of the high cost fund 
for rural providers \5\ and the consideration of bandwidth that will be 
supported by high cost fund \6\ are also relevant. These present 
complex questions with often conflicting objectives among parties. The 
outcomes, however, will directly affect the provision of high quality 
basic and advanced services to many parts of this country. I will not 
comment on whether ``Eligible Telecommunications Carriers'' should be 
required to provide all customers advanced services in order to receive 
high cost fund support. However, it is significant that perhaps as many 
as seventy percent of all customers are within 18,000 feet of the 
central office, which is currently considered the maximum reasonable 
distance for most DSL service. It has been estimated that as much as 
eighty percent of the loop enhancements necessary to provide DSL could 
be funded under the current system but for the high cost fund cap.
---------------------------------------------------------------------------
    \5\ See Comments of the Montana Telecommunications Association 
Regarding Rural Telephone Companies Seeking Removal of Individual Caps 
Placed on High Cost Loop Support (February 11, 2000), In the Matter of 
Federal-State Joint Board on Universal Service, CC Docket No. 96-45. 
MTA suggests that modifying or removing the overall cap on universal 
service support for high cost rural providers would be a key step in 
expanding access to higher speed services in rural areas.
    \6\ See Comments of Rural Utilities Service, In the Matter of 
Common Carrier Bureau Seeks Comment on Requests to Redefine ``Voice 
Grade Access'' for Purposes of Federal Universal Service Support, CC 
Docket 96-45. RUS suggests that the FCC should redefine voice grade 
access to require bandwidth comparable to the real level of performance 
of urban voice grade service, specifically 3400 Hertz; that voice grade 
access service should include the requirement to provide 28.8 Kb/s 
modem connection to the substantial majority of rural customers, since 
the substantial majority of urban customers receive this performance; 
and, that states should be authorized to ``grandfather'' ETCs who 
cannot provide this service. Based on its experience implementing the 
Rural Electrification and Loan Restructuring Act of 1993, RUS believes 
these plant improvements ``cost little if work is done at the time of a 
plant rebuild that is otherwise necessary.''
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VI. The Section 706 Tools
    Section 706 demonstrates how far sighted Congress truly was. Its 
champions, especially including Senator Burns, told us ``do more, don't 
be satisfied.'' NARUC passed a resolution two years ago saying Section 
706 is an opportunity to ``grab the brass ring of new technology,'' not 
an ``invitation to pick the low-lying fruit.''
    Last Summer NARUC submitted to the FCC a detailed proposal for a 
Section 706 Joint Conference. Specific functions set out in the NARUC 
proposal included monitoring deployment through regional hearings, 
studies, and other efforts; activating stakeholders; coordinating 
efforts by seeking synergies, removing barriers, and transferring 
implementation to stakeholders; and disseminating information to those 
best able to use it. The proposal also discussed coordinated 
deployment, for example through ``Section 706 zones.''
    As we developed the Section 706 Joint Conference proposal last 
year, we particularly benefited from the efforts of the Alliance for 
Public Technology, which proposed a Section 706 Joint Board two years 
ago. The Joint Conference's success, in my opinion, will depend on the 
continued involvement of citizens' organizations, providers, users and 
potential users at the community level. Through the regional field 
hearings, site visits and other efforts, I hope we will emphasize the 
importance of these direct contributions.
    Depending on the location, the customer, and the specific 
circumstances, a particular Digital Divide issue may have a competition 
answer, a universal service answer, or an answer that involves 
supporting state and local economic development efforts, for example 
through training efforts. The Rural Utility Service and NTIA also have 
important contributions to make.
    As Federal and State commissioners, we don't have all the answers, 
the resources, or the legislative direction to answer all these 
questions. And we shouldn't! I hope through the Joint Conference we 
will be able to assist in bringing together the parties who can help 
assemble the pieces in the kinds of creative, new combinations that are 
the essence of entrepreneurialism.
    Within the constraints of Federal law, the FCC worked hard to be 
faithful to the NARUC proposal. Created in October, the Federal State 
Joint Conference on Broadband Services is intended as a forum to:

   examine how to accelerate deployment of affordable advanced 
        services to rural and under-served citizens;
   conduct an on-going cooperative dialogue regarding 
        deployment of advanced services;
   promote an exchange of information between and among state 
        and federal jurisdictions; and,
   explore regulatory and deregulatory mechanisms that will 
        facilitate the widespread availability of advanced services.

    Chairman Kennard and his four fellow commissioners will all 
participate in the Joint Conference. Each will join with State 
commission members \7\ as co-hosts of regional field hearings. The 
opening hearing, held in Washington on March 8, included a very lively 
kickoff and also a site visit focusing on broadband deployment in inner 
cities. An April 17th hearing in Anchorage will focus on the 
relationship between advanced services deployment and economic 
development. An April 19th hearing in Sioux City, Nebraska, will 
emphasize cable and fixed wireless deployment and rural deployment. A 
May 22nd hearing in Lowell, Massachusetts, will concern public/private 
partnerships, deployment in remote areas, and data gathering 
initiatives. On June 9th, a hearing in Miami will focus on deployment 
to rural and urban multicultural communities, fixed wireless 
deployment, and public/private partnerships. On June 23rd, a hearing in 
Cheyenne, Wyoming (with a Montana segment on June 21st) \8\ will focus 
on speeding deployment via community demand aggregation, deployment in 
rural areas and Indian Territory, and data gathering initiatives. 
Information about the Joint Conference is available at its web page, 
www.fcc.gov/jointconference.
---------------------------------------------------------------------------
    \7\Chairman Nanette Thompson of Alaska, Jo Anne Sanford of North 
Carolina, Brett Perlman of Texas, Irma Muse Dixon of Louisiana, Furtney 
of Wyoming, and Bob Rowe (ex officio).
    \8\We are exploring the possibility of holding the hearing over the 
Vision Net System, and of streaming it over Streaming Solutions.
---------------------------------------------------------------------------
    The Joint Conference is an exciting project. It will help move us 
beyond the ``Telewars'' the armies of lawyers and advocates have been 
fighting, and focus us instead on what we can accomplish together. The 
most exciting and important work, however, will not occur in public 
hearings. It will take place in the big cities, in the small towns, and 
on the ``frontiers'' (as we say in Montana), where people are working 
diligently and creatively to solve real problems.
     attachment 4--partial summary of key small company initiatives
DSL Services:
 Nemont and its Subsidiaries
    Valley Telecommunications has just installed its first equipment 
and is already offering DSL services to more than 30 customers in 
Glasgow. Equipment has been ordered (some has already been delivered) 
and will be installed this spring in six other exchanges operated by 
Valley, Nemont Telephone Cooperative, and Project Telephone Company. By 
mid-summer, 9,151 of the three companies' combined 19,582 access lines 
will be able to access DSL--this amounts to a 47% penetration rate as 
far as access goes. Of the 9,151 lines, 4,133 will be on the Fort Peck 
and Crow Indian Reservations. The three companies are now looking at 
new HDSL technology that can be repeated and therefore has a range of 
28,000 feet that will allow a broader roll-out of DSL service in the 
next phase. Unfortunately, there will still be some customers who 
simply live too far out to be accessible via existing DSL technologies. 
Therefore, the companies are continuously exploring new technologies 
with various vendors and equipment manufacturers and will extend the 
reach of their broadband services farther and farther out as new 
solutions become available.
 Triangle and Central Montana Communications
    While Triangle and CMC have not yet begun selling DSL, they have 
selected an equipment vendor and anticipate rolling out DSL in their 
four largest exchanges by the end of July. Their goal is to roll out 
DSL service in another 10-12 exchanges by the end of 2000. As with the 
Nemont companies, they will continue to look at developments that will 
allow the service to be pushed further out into the more remote 
locations in their service areas.
Project Telephone Company Service to the Crow Reservation:
    Project serves more than 1700 access lines on the Crow Reservation 
in four exchanges, Crow Agency, Lodge Grass, Wyola and Fort Smith. 
Since 1994, when the exchanges were acquired from US WEST, Project has 
invested $1,869,054 to improve and expand the exchanges. These 
improvements, which included the installation of digital switches and 
fiber optics, allowed the provision of equal access and custom calling 
services. Dial-up Internet access on a toll-free basis has been 
available to all subscribers since 1997.
    Contrary to recent allegations by Western Wireless, Project's 
facilities are available to more than 99% of the homes and businesses 
on the Crow Reservation and more than 72% of the residential homes on 
the reservation currently subscribe to Project's service.
    Project is also in the first year of an $800,000 network upgrade 
for the two most populous exchanges on the Reservation. On completion 
of this project, high speed Internet access and other DSL-based 
services will be available.
    Project has also worked closely with Vision Net to bring increased 
educational opportunities to the Crow Reservation. Vision Net currently 
has several interactive video education studios on the Reservation, 
including one at the Little Big Horn College in Crow Agency, Dull Knife 
Community College in Lame Deer, and at Lodge Grass. One of the studios, 
installed at the Pryor high school, is not yet fully operational 
because unfortunately, the Pryor exchange is served by U S WEST and U S 
WEST has only one high-speed line (a T1) into the town. Instead of 
paying U S WEST the more than $444,600 they require to install a second 
T1 into town, Project Telephone Company will likely bypass US WEST and 
install a microwave DS-1 facility into Pryor to get the school's 
studio.
MAIN, Inc.:
    Montana's Advanced Information Network, or MAIN is a joint venture 
of Montana independent telephone companies and cooperatives. MAIN 
combines the companies' smaller networks across Montana into a state-
wide digital fiber network that stretches from North Dakota to the 
Idaho border. The MAIN network is capable of bringing state-of-the-art 
telecommunications to vast areas of Montana and can provide circuits at 
the T1, DS-3 and OC-N levels for applications such as Internet, long 
distance, tele-medicine, distance learning, video conferencing and data 
networking. The MAIN network also ties to other networks in the U.S. 
and Canada to allow access to major metropolitan areas such as Denver, 
Spokane, Seattle, Dallas, Chicago, Calgary, etc.
Vision Net, Inc.:
    Vision Net, a joint venture of five Montana telephone cooperatives, 
was started in 1995 to provide two-way interactive video to rural 
schools in the state. The goal of the company is to provide 
technologically advanced services, and support for community, 
educational and business development in rural and urban communities 
throughout Montana. Vision Net utilizes asynchronous transfer mode 
(ATM) technology, a strong development team and existing fiber networks 
such as the MAIN network to bring interactive video business and 
education conferencing, Internet services, Wide Area Networks and 
broadband transport services to communities throughout Montana. Vision 
Net has 67 interactive video conferencing studios throughout Montana 
including studios in over 40 public schools, and studios in many of the 
state's colleges, including all 7 of the state's tribal colleges.
    I have included a map of Vision Net's system in your materials. In 
addition to the studios pictured on the map, sites have been 
constructed in Lodge Grass, Crow Agency, Pryor, and Lame Deer on the 
Crow Indian Reservation. Additionally, the equipment has been ordered 
to install a new telemedicine network with sites in the hospitals/
clinics in Plentywood, Scobey, Poplar, Glasgow, and Malta.
Vision Net's Network Access Point and Peering Concept:
    Vision Net currently provides peering on its own network to 
maximize the efficiency and bandwidth utilization for Internet circuit 
providers and others on the network and is working out a plan to expand 
this arrangement to include expanded broadband links to and peering 
relationships with one or more major Internet backbone providers.
    Vision Net currently maintains 2 DS-3 circuits to the Internet 
backbone. One circuit is provided by Shaw Fiberlink of Calgary, 
Alberta, and the other by Global Crossing, Inc. Both circuits have been 
negotiated with an easy upgrade path to 
OC-3 and higher connectivity. Vision Net also has a multiple T1 
connection with Cable and Wireless, that is being upgraded to a DS-3.
    Vision Net is working with several of Montana's rural telephone 
companies, and Montana's university system to develop one or more 
network access points in Montana, and is in the process of upgrading 
its peering routers and expanding its BGP-4 peering relationships with 
its major bandwidth providers. The company is well positioned to 
provide cost effective statewide peering and NAP services to multiple 
customers, including local, state and Federal governmental entities, 
educational and healthcare institutions and ISPs.
Skyland Technologies, Inc.:
    Skyland Technologies is a consortium of Montana and North Dakota 
telephone and electric cooperatives that have constructed a ``Neutral 
Collocation and Network Connection Center'' commonly referred to as a 
fiber hotel. The location of the fiber hotel is in Billings, Montana 
and offers ILECs, CLECs, IXCs, ISPs and other telecommunications 
providers the opportunity to physically locate their telecommunications 
equipment in a clean, professionally engineered and managed, controlled 
temperature environment with abundant, conditioned redundant power 
supplies.
    Each tenant can locate equipment inside secured-entry ``cages'' if 
desired, or on a leased equipment rack. Tenants will be able to 
install, maintain, operate, replace and remove their equipment just as 
if the equipment were located inside their own premises. Although the 
facility will be secure, tenants will have access to the premises seven 
days a week, 24 hours a day.
    This facility also serves as a physical and virtual meet-me point 
allowing inter-connectivity between tenants and other carriers. This 
allows them to share and supply emerging technologies, bandwidth, 
transit services, and peering arrangements all under one roof in a 
secure, scalable, non-congested environment. Redundant access to 
multiple fiber transit networks is readily available. One major 
advantage of the multiple-carrier environment is that it allows tenants 
to shop for the best rates and services among competing carriers in a 
single location. Other services provided by Skyland include equipment 
installation, maintenance, network monitoring, and diagnostic 
assistance.
    The facility is designed to get carriers up and running quickly 
(almost ``plug and play''), and since the conditioned space, power, 
etc. is readily available, the carriers will greatly reduce their up-
front capital expenditures. Tenants can also ``get connected'' quickly 
and inexpensively because their links to other carriers are handled 
within a single building.
    This facility will likely become the site of Montana's first 
network access point, providing an aggregation and peering hub for 
Internet-related data traffic.
 attachment 5--statement of bob rowe, universal service joint board en 
                                  banc
     I have great respect for the work of the Universal Service Joint 
Board, for its members and hardworking staff, and also for the Joint 
Board process. I have been participating in universal service matters 
referred to the Joint Board for many years, and am honored now to be 
member. The Joint Board referral process can be slow and sometimes 
frustrating (like democracy), but allows for thorough consideration of 
matters that are truly fundamental. Formal referral is not appropriate 
in every case, of course, and is not always required for the non-
Federal Joint Board members' views to be considered.
    Over the coming months, Job Number One will be ensuring that rural 
customers continue to receive excellent telecommunications service. 
Members of this Board have correctly endorsed ``do no harm'' as a 
guiding principle. The Rural Task Force is documenting the ways in 
which rural providers truly are different, as well as the key role of 
high quality telecommunications service in rural community and economic 
development. Each report the Task Force produces leads to a more 
complete understanding, and ultimately will allow us to do our job 
better.
    I also look forward to considering the relationship between 
Congressional direction in Section 254, concerning universal service, 
and Section 706, directing the FCC and State commissions to promote 
deployment of advanced telecommunications capabilities. The Section 706 
Joint Conference will convene its first face-to-face meeting Wednesday, 
and will be working hard over the coming months. The FCC will issue its 
next Section 706 report in the coming months. Informed by both efforts, 
I hope this Board will be able to consider Section 254(b)(2), which 
states, ``Access to advanced telecommunications and information 
services should be provided in all regions of the Nation,'' and also 
Section 254(b)(3) which provides that ``reasonably comparable'' 
service, including advanced services, should be available to residents 
of rural and insular areas. Congress, of course, has directed us to 
consider the ``evolving level'' of Universal Service under Section 
254(c)(1).\9\ I take that charge 
seriously.
---------------------------------------------------------------------------
    \9\ The evolving universal service definition, the cap on the size 
of the fund for rural providers, and consideration of required 
bandwidth are related to one another, and must eventually be 
reconciled.
---------------------------------------------------------------------------
    Starting from scratch, I would not necessarily endorse a cost 
modeling approach. Some criticisms of cost modeling as a basis for 
universal service support have been trenchant. At this late date, 
however, the cost model has been implemented for non-rural companies. 
That model is still very much a work in progress. Formally or 
informally, I hope this Board will work to improve both inputs and the 
model itself. Obviously, a model should not be applied to rural 
carriers unless it demonstrably preserves and advances consumers' 
access to high quality telecommunications services.
    Section 254(b)(3) requires reasonable comparability of both rates 
and service. I hope we will be able to consider more directly what 
``reasonable comparability'' means, especially as we address rural 
providers later this year.
    I am committed to support efficient implementation of the Rural 
Health Care and Schools and Libraries programs. In Montana, we have 
worked closely with the USAC, Congressional offices and especially with 
program participants to ensure these programs are as effective as 
possible, and that they continue to improve. It is truly exciting to 
see what is now being accomplished in rural health care delivery, and 
also by geographically isolated schools and libraries. It is 
particularly important to support efforts, currently underway, to 
maximize effectiveness of the rural health care program.
    Finally, let me introduce my Joint Board staff member, Joel 
Shifman, Senior Telecommunications Advisor to the Maine Public 
Utilities Commission. Maine and Montana, it turns out, have a lot in 
common. There's a lot of dirt between phones. Mr. Shifman is intimately 
familiar with strengths and limitations of various cost models, played 
a key role helping higher-average cost and lower-average cost states 
understand one another's concerns, and knows an enormous amount about 
the technical and arcane topics with which this Board deals. Name a 
rural telco almost anywhere in the country, and he'll tell you more 
than you want to know about it. He and I share a commitment, as do all 
of you, to doing the right thing for the citizens universal service is 
designed to benefit.
    Commissioner Ness and Commissioner Schoenfelder, I commend you for 
your leadership on this Board. I appreciate your dedication and hard 
work, along with that of the other Joint Board members and--
especially--the great work of the Federal and State staff.
    I am delighted to be a member of the team!

    Senator Burns. Thank you, Commissioner.
    I just have one question, and I think it is kind of 
parochial of you and I in the State of Montana. It seems like 
that more of the aggressive companies are offering broadband on 
the assumption that if you build it they will come. Mid-Rivers 
is an example of that. They are offering DSL services or will 
be pretty quick in eight rural Montana counties.
    Tell me in your own assessment, how do you assess the 
demand for broadband in Montana? Is the demand there?
    Mr. Rowe. There is demand. My view is that we want people 
to get as much value out of the network as possible. There are 
areas where people are not connected in the way that we would 
like. I talk a lot about work that we have done up in Libby, 
Montana. A few years ago, basically folks up there just wanted 
to be able to get a rapid verification of a charge card. Well, 
at the community level people in KooteNet went out and showed 
everyone else how to use that system. The level of demand went 
up and up and up, and you have got towns like Libby who are 
always kind of one step out ahead of me and two steps out ahead 
of the local phone company up there. That is because they are 
seeing the value.
    So that is a good example of how things such as the Burns 
Center at Montana State University can go out, work with 
communities to push them up that learning curve.
    Senator Burns. Tell me--and I also would enjoy your 
comments--and by the way, as a result of your March 8th meeting 
here you had the resolution. Senator Stevens has asked that the 
resolution be made a part of this record and I think it should 
be, and without objection it will be.
    [The material referred to follows:]

        National Association of Regulatory Utility Commissioners
                               RESOLUTION
               Resolution Regarding Broadband Legislation
                         In the 106th Congress

WHEREAS, The stated goal of the Telecommunications Act of 1996 (1996 
Act) is to provide for a pro-competitive, deregulatory framework 
``designed to accelerate private sector deployment of advanced 
telecommunications and information technologies and services to all 
Americans by opening all telecommunications markets to competition;'' 
and

WHEREAS, Several bills being considered in Congress would amend the 
1996 Act to allow the Bell Operating Companies (BOCs) to provide in-
region, interLATA data services without first having to comply with the 
market-opening requirements of the 1996 Act, including the fourteen 
point ``competitive checklist'' requirements of Section 271; and

WHEREAS, Some of these bills also contain provisions that would limit 
State commissions from enforcing the market-opening requirements of 
Section 251 for data and advanced services, thereby denying States from 
fulfilling their obligations to regulate core telecommunications 
facilities used to provide both voice and data services, and to promote 
deployment of advanced telecommunications capabilities; and

WHEREAS, Soon the majority of traffic carried over the public switched 
network will be sent over packet-switched networks, and as such, 
technical distinctions between voice and data will become less 
relevant; and

WHEREAS, State commissions have been at the forefront of implementing 
and enforcing the market-opening requirements of the 1996 Act and in 
working with the BOCs and competitive local exchange carriers to 
advance BOC progress towards compliance with those requirements; and

WHEREAS, In approving Bell Atlantic's application to provide in-region, 
interLATA services in New York, the FCC made it clear that it will rely 
heavily on the factual record developed by State commissions and the 
States' rigorous analysis of the evidence in considering whether to 
grant future 271 applications; and

WHEREAS, The FCC also stated that it will work in concert with the 
States to monitor post-interLATA entry compliance by the BOCs; and

WHEREAS, Southwestern Bell recently filed its Section 271 application 
with the FCC, following an extensive review by the Texas Public Utility 
Commission, and several other States presently are reviewing BOG 
compliance with Section 271 requirements; and

WHEREAS, In addition to the coordinated effort on Section 271, the 
States and the FCC have established a joint conference to cooperatively 
address the numerous and complex issues associated with the development 
and deployment of advanced telecommunications capabilities to all 
Americans, consistent with the objectives outlined in Section 706 of 
the 1996 Act; and

WHEREAS, This unprecedented level of coordination and cooperation by 
State and Federal regulators to (1) implement the market-opening 
requirements of the Act, (2) promote and ensure BOG compliance with 
Section 271, and (3) foster the deployment of advanced 
telecommunications capabilities to all Americans, demonstrates that the 
1996 Act is working as Congress intended; now therefore be it

RESOLVED, That the Board of Directors of the National Association of 
Regulatory Utility Commissioners (NARUC), convened in its March 2000 
Winter Meeting in Washington, D.C., reaffirms its support for the 1996 
Act; and be it further

RESOLVED, That the NARUC opposes Federal legislation that would permit 
the Bell Operating Companies to provide data services across LATA 
boundaries without first fully opening their local markets to 
competition as currently required under the 1996 Act; and be it further

RESOLVED, That the NARUC further opposes Federal legislation that would 
limit the ability of State public utility commissions from exercising 
their authority and resources to fulfill their obligation to regulate 
core telecommunications facilities used to provide both voice and data 
services and to promote deployment of advanced telecommunications 
capabilities.

Sponsored by the Committees on Telecommunications and Finance and 
Technology Adopted by the NARUC Board of Directors, March 8, 2000

    Senator Burns. I would like your assessment right now as 
far as our State is concerned on the US WEST-Qwest proposed 
merger.
    Mr. Rowe. Sure. We held a hearing, Mr. Chairman, last week 
at the commission on the US WEST-Qwest merger. A number of 
parties said that that merger should be conditioned in a number 
of ways, primarily focusing on service quality, opening 
markets. Qwest and US WEST said there should not be conditions 
on the merger.
    I will say that in my opinion one benefit of the merger 
right off the bat is that US WEST has become extremely focused 
on the section 271 process. When the merger was announced, US 
WEST became very interested in and now is very committed to the 
regional collaborative. So I think that there are some 
potential very positive elements of the merger. I expect those 
will be reflected in the commission's order approving the 
merger. But I think we do need to do a good job paying 
attention to the service quality issues and the competition 
issues.
    Senator Burns. Senator Breaux.
    Senator Breaux. Since I do not speak Montanan, I think I 
will just yield my time.
    Senator Burns. We do not speak Louisianan, either.
    Senator Breaux. Thank you.
    Senator Burns. Senator Stevens.
    Senator Stevens. Thank you very much, and I apologize for 
talking to my colleague while you were speaking. But I 
appreciate the way you are working with the Alaskans on this 
issue.
    Thank you very much.
    Mr. Rowe. Thank you very much.
    Senator Burns. Senator Dorgan.
    Senator Dorgan. Mr. Chairman, let me just thank Mr. Rowe. 
He has distinguished himself in many ways on these issues and 
as a national leader in State utility regulator circles, and 
let me thank him for coming today.
    Mr. Rowe. Thank you very much.
    Senator Burns. Senator Brownback.
    Senator Brownback. No questions for the witness.
    Senator Burns. Senator Rockefeller.
    Senator Rockefeller. Good morning. Thank you, Mr. Chairman. 
It is your favorite titan speaking here.
    Bob, what percentage today and what percentage 5 years from 
now of transmission is going to be data as opposed to voice? 
Those are 2 questions, today and let us say 5 years from now.
    Mr. Rowe. Mr. Chairman, Senator, clearly the trend is 
moving rapidly toward data. I think most people would say that 
a significant majority of traffic is data now and that that 
majority will increase over time. My preference would be to 
see----
    Senator Rockefeller. What do you mean by ``significant''? 
Just give me a vague number?
    Mr. Rowe. Certainly well over half.
    Senator Rockefeller. That is today?
    Mr. Rowe. Yes.
    Senator Rockefeller. That is today, so in 5 years, it might 
be 80 percent?
    Mr. Rowe. Certainly. You have heard a number of numbers 
suggested. My own experience is 100 to 200 e-mails a day, only 
3 or 4 voicemails a day. So you can generalize from that. I do 
not think my experience is unique at all.
    Senator Rockefeller. Now, let me ask you the same question 
on broadband with accelerated services, today, 5 years from 
now, voice, data?
    Mr. Rowe. In terms of on the broadband network, how much of 
the traffic on the broadband network is voice, how much is 
data?
    Senator Rockefeller. Yes. Today there is relatively little 
of it out there, but let us say today and 5 years from now.
    Mr. Rowe. Most people expect that over time voice will 
increasingly be carried over what we would now call the data or 
the broadband network.
    Senator Rockefeller. The people that have data could then 
slip voice into that?
    Mr. Rowe. That is correct, and I think there is from an 
engineering point of view--I think most experts would prefer to 
see the network evolve as an integrated network capable of 
carrying digitized information of any form.
    Senator Rockefeller. All of this except in some urban areas 
excludes, still leaves separate, the last mile, does it not? 
All of the Congressman's discussion, etcetera, he never 
mentioned the last mile. The last mile is still very much at 
stake, is it not?
    Mr. Rowe. Mr. Chairman, Senator, as I suggested in my 
written testimony, there are digital divide issues at every 
layer of the network right down to the last mile loop, which is 
crucial in many areas. There are different technologies to get 
at each of these different issues. You can go further, right 
down to the customer level, and I think that is what the 
chairman was asking about.
    Senator Rockefeller. Now, I have seen maps of what Bell 
Atlantic's plan for broadband in West Virginia is and, just as 
Representative Tauzin showed Louisiana, it is sort of the same 
thing in West Virginia. When you look at their map and when you 
look at a couple of others who are thinking of doing business 
in there, their map includes today actually only two cities, 
Charleston and Huntington. In several years, they would include 
5 of the 55 counties of the State. That is not only true of 
Bell Atlantic, but another company which is coming in thinking 
of doing competition against them.
    Pennsylvania recently gave a rather large public service 
something, financial break, to Bell Atlantic to get them to 
extend outwards into rural areas. Bell Atlantic got the 
financial break and Paul Margie, who works with me, said that 
as of his last reading they had done virtually nothing to 
extend services out into rural areas.
    It is obvious that the telephone and communications 
companies want to bypass all of this and not worry about inter-
LATA data or anything else. If we did what Senator Brownback 
and Congressman Tauzin and others want, would they in fact 
build out?
    It is a genuine question because, as Senator Stevens says, 
it still takes a long time. If you are, what is it, 18,000 feet 
away from something, the DSL does not do you any good. So my 
question is why would I have confidence? They are here in such 
force, standing all the way around the room. It is like a 
Staggers Act hearing, only you never see the room so full. And 
they want complete freedom.
    They were the ones that asked for the law in 1996. I did 
not get any telephone calls, any postcards, any conversation 
from any constituents in West Virginia saying let us deregulate 
telecommunications, not once, not once, except from all the 
companies that wanted it. So now they want to claim that the 
Internet was not really thought of then, but enhanced services, 
whatever the phrase is, were included, so all of that was 
anticipated, and they want a free ride.
    But they want a free ride bypassing--and he says, well, we 
will not bypass the 14 points, but the 14 points would be, I am 
thinking he is thinking, really for voice more than for data. 
And in any event, even if they get all of it, what is the 
assumption that I can make that they will go ahead and do it?
    Mr. Rowe. Mr. Chairman, Senator, I am not going to suggest 
good motives or bad motives. I am not going to suggest bad 
motives on the part of anyone. My belief is that there is 
plenty of opportunity, plenty of challenge for all of the 
different kinds of players in the telecommunications industry. 
We need all of them to be focused. And I have seen good 
examples of good work by everyone from the biggest Bell 
operating company or ATT right down to the very smallest 
carriers that Chairman Burns described.
    My interest is in using the tools that Congress gave us, 
keeping everyone focused laser-like on opening up the local 
market. That is the reason that we have put a tremendous amount 
of energy into making the 271 process work in the rural West. 
If we do that, the first result will be that competitors will 
be able to come in and provide all kinds of services from voice 
up to the particularly exciting value added services, and I 
expect to see Montana-based companies doing that. That is the 
first result.
    The second result then will be that the Bell operating 
companies will be able to use their networks end to end, and 
that is a very important goal.
    The third result and the most important, though, is that 
customers, if we are successful, will have more choices of 
providers, more choices of services, and more choices of 
quality. When we get through that, then Congress also gave us a 
very important tool in section 10, which is the ability to 
forebear from regulation that is no longer needed, and Congress 
was very specific in crafting the forbearance provision.
    So that is the sequence that I would like to see.
    Senator Rockefeller. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Burns. Thank you.
    Building on what Senator Rockefeller was talking about with 
the Bell Atlantic 271 approval in New York, I think the focus 
now shifts to Texas and SBC. Would you have any thoughts on 
that application there?
    Mr. Rowe. Mr. Chairman, as we were scoping the multi-state 
effort in the West we looked very closely at New York and at 
Texas. As part of that we spent time interviewing essentially 
Department of Justice representatives, FCC representatives. So 
I do have some familiarity with the Texas process.
    The Texas Commission did an extraordinarily intensive job. 
They used collaboratives. They had approximately 30 face to 
face meetings between the Bell company and the different 
competitors, including all kinds of different CLEC's. They used 
actual loads to test the operations support systems that are so 
critical. They addressed all of the issues from co-location 
through provision of DSL services, on and on and on.
    So the Texas product was very, very high quality. It was 
like New York in that it was an open, collaborative process 
that used a third party tester. It was different from New York 
in that, instead of having a pseudo-CLEC, they were able to use 
actual loads. The Texas process also includes very aggressive 
post-entry conditioning, which of course became an issue in the 
Bell Atlantic situation in New York several weeks ago.
    So it is a very, very high quality product. When a State 
commission does the kind of work that New York did or that 
Texas did, I think that that work product should be entitled to 
very, very great weight by the FCC, and I certainly hope to see 
that.
    Senator Burns. Thank you very much.
    Senator Dorgan, do you have a question?
    Senator Dorgan. Mr. Rowe, just one question. If the 
incumbent LEC wants to meet the checklist, obviously all the 
questions that were raised by Mr. Tauzin today evaporate. I 
mean, if they meet the checklist that infrastructure then is 
available for the movement of data inter-LATA, right?
    Mr. Rowe. Correct.
    Senator Dorgan. First of all, a number of the incumbents, 
the Bell companies, have not applied to meet the checklist. 
Some have. One has been approved, another is pending. I guess 
the question I ask you as a regulator is this. If you were 
running a regional Bell company and you decided as a CEO, look, 
the position of our company is we are going to go meet that 
checklist, we are going to do it as quickly as we can and as 
completely as we can. We are going to be open for competition 
because we want to go into long distance, if a company makes 
that determination is it likely that they will be able to move 
through this 271 process in a reasonable time?
    Mr. Rowe. Mr. Chairman, Senator, I am back at the part of 
the question where you made me a CEO of a Bell company.
    The 271 process is tough.
    Senator Dorgan. Well, get over it.
    [Laughter.]
    Mr. Rowe. I am awake again.
    The 271 process is tough for everyone. The competitors and 
the incumbents, have to be focused on getting through that 
process. They have to be acting in good faith. They cannot be 
gaming it.
    The State commissions have I think been enormously creative 
in trying to put together ways to get all the parties through 
that process. I think we know how and I think you can do it.
    Senator Dorgan. Is it tough if the culture of your company 
as established by the CEO is, this is something we want to do, 
we want to do it expeditiously because it is part of our 
company's plan to do this? Is it tough in those circumstances?
    Mr. Rowe. It is hard work, it is intensive work, but it is 
important work and it can be done.
    Senator Burns. Thank you very much, Commissioner Rowe. We 
appreciate you coming this morning and sharing your thoughts on 
this very important part of our communications work here. We 
look forward, and there again your resolution has been made and 
your full statement will be made a part of the record, and we 
appreciate your good work on this. Bob, thank you for coming 
from Montana.
    Senator Rockefeller. Mr. Chairman, Mr. Chairman.
    Senator Burns. Yes.
    Senator Rockefeller. Could I just ask a quick question as 
he is pulling away?
    Senator Burns. Yes.
    Senator Rockefeller. I thank you for that.
    In answering my question, I had a vaguely uncomfortable 
feeling that you were not dodging me, but that you were being 
very careful in your words. The resolution that NARUC passed 
was not vague. There was nothing vague about it. You did talk 
about that, and in the resolution, you basically said that a 
deregulatory approach is not something that we contemplate as 
being in the public interest, did you not?
    Mr. Rowe. Mr. Chairman, Senator, the resolution did say 
specifically that the section 271 procedure should be complied 
with and that it should be complied with for all services, that 
data should not be separated out.
    Senator Rockefeller. So the answer is yes?
    Mr. Rowe. Yes.
    Senator Rockefeller. Thank you.
    Senator Burns. Thank you, Commissioner. Thank you, and 
thank you for coming and sharing your thoughts.
    We will call the next panel to the table, please. We have: 
Mr. Roy Neel, President and CEO, United States Telecom 
Association; John Fitzpatrick, Executive Director of Mergers 
and Acquisitions for Touch America out of Helena, Montana; Tim 
Regan, who is Vice President and Director of Federal Affairs 
for Corning; Mr. Steve Gray, President and Chief Operating 
Officer, McLeodUSA, Technology Park in Cedar Rapids, Iowa; and 
David Woodrow, Executive Vice President, Cox Communications.
    Gentlemen, we appreciate you coming. I do not know, you may 
want to take that down. We are going to cover up old John here. 
We do not want to cover him up.
    We are going to start this morning with Mr. Roy Neel, who 
is President and CEO of the United States Telecom Association, 
and of course no stranger to these digs. Mr. Neel, we welcome 
you this morning and look forward to your testimony.

          STATEMENT OF ROY NEEL, PRESIDENT AND CHIEF 
      EXECUTIVE OFFICER, UNITED STATES TELECOM ASSOCIATION

    Mr. Neel. Thank you, Mr. Chairman. We are particularly glad 
that you have scheduled this hearing. It is a critical issue, 
of course. The digital divide has not only been in front of 
policymakers but the general public now. It has become a very 
popular issue and there is some considerable misunderstanding.
    I think it is important to point out that I represent not 
only the Bell operating companies, but more than a thousand 
smaller independent phone companies, many of whom operate in 
your States.
    What I am here about today is to call on you to act now. A 
number of you have either introduced bills or are contemplating 
introducing bills that would extend this technology out into 
rural areas, underserved areas, low income areas, and so on. 
These are all good ideas. But the critical thing is to act now. 
A year in the Internet economy is a lifetime. We cannot afford 
to wait for another year, much less several years.
    I want to address some of these issues in terms of 
reopening the 1996 Act. Frankly, when the 1996 Act was signed 
into law 4 years ago the situation was totally different, and 
that is many light years ago. So that really should not be the 
issue. Whether or not we are reopening the 1996 Act or changing 
section 271 is not the issue.
    The issue is how are you going to eliminate this digital 
divide and do what everyone wants to do? We have a view that is 
not too far from what Congressman Tauzin was stating. Critical 
to that is going to be the relaxation of inter-LATA 
restrictions on data, and whether or not data has some de 
minimis parts of it dedicated to Internet-based telephony or 
old-fashioned telephone service, voice service, should not be 
the issue. That begins to sacrifice the good for the perfect. 
So the issue should not be the trees, but the forest here. How 
do you want to get this digital divide resolved?
    We have in front of us here another copy of the map that 
Congressman Tauzin was using in terms of where the Internet 
hubs are in this country. This is a dramatic illustration of 
the digital divide, especially for small and medium-sized 
businesses, especially for small businesses in rural areas, and 
some not so rural. I do not think the citizens of North Dakota 
consider Fargo all that rural. I mean, it is a major city in 
North Dakota, and it is not served.
    So it is critical that you attack these problems whether or 
not there is an issue with section 271. Whether you amend it or 
not, it has got to be changed if you are going to create the 
incentives to extend this service out.
    There are several digital divides, as we have all been 
talking. There is rich and poor, there is rural, there is 
urban. In the example here there is also big business, small 
business. If you are a big user of data services, Citibank or 
something like that, you can go anywhere in the country and you 
can spend hundreds of millions of dollars and you can build a 
dedicated fiber pipe to the nearest Internet access. But if you 
are a small business operator, you cannot do that. You might be 
able to buy a T1 line--and that is the extent of my technical 
knowledge here, Mr. Chairman. You can do that, but it is not 
going to be all that good, and it is not going to be fast 
enough to make you competitive with your big business 
competitors.
    So if you live in rural Montana or Kansas or anywhere in 
West Virginia or in rural Georgia and certainly North Dakota 
and Kansas and so on, you have no real on-ramp to the Internet 
for high speed data that allows your business to be 
competitive. Let me restate that: You have no effective 
competitive on-ramp to the Internet for your data services.
    Now, there may be a lot of ways to solve this, but the 
first way to solve it is to provide some regulatory incentives 
to the companies that are already there. If you look at this 
map, the big red dots, they cover not only where local 
telephone is served, but this is primarily the CLEC community. 
They are doing a real good job in those areas. They are taking 
away customers from the local phone companies like crazy. You 
know about their Internet activities and their stock prices and 
the zillions of dollars they have been putting into that 
market.
    But who serves that area covered by blue? Those are served 
by the local telephone companies. And as Congressman Tauzin 
pointed out certainly better than I can, the reason that those 
local phone companies cannot expand those yellow circles is 
because of the arbitrary LATA boundaries over which they cannot 
cross to provide these data services.
    Let me give you two anecdotes that are really, really 
dramatic. This relates to economic development in all of your 
States. It could be a nightmare that was faced in Minnesota. 
Land's End, big company, data-rich, they were forced to move 
their entire corporate headquarters from Dodgeville, Wisconsin, 
which has only about 4200 people, to Madison, which is 45 miles 
away, because they could not get high speed Internet access to 
serve their customers. Land's End had to have that. They had to 
move, take those jobs out of that little town.
    Here is another dramatic example. Memorial Hospital in 
Cortez, Colorado, serves part of Colorado, Utah, and New 
Mexico. It wanted to serve Farmington, New Mexico, which is 80 
miles away, but it had to send its data more than 1,000 miles 
in a circuitous route instead of the 80 miles that US WEST 
could provide, simply because of those arbitrary LATA lines. 
Now, that cost Memorial Hospital money and time and made it 
less able to serve.
    There are just hundreds of examples. You may have read in 
the Washington Post today about a little town in Texas, Earth, 
Texas. Read that. That could be the Internet story of the 
future, and if you do not want a lot of towns in your States to 
turn into Earth, Texas, then by all means you have got to 
provide the incentives for the companies that are there now and 
are willing and able to serve, and those are the local phone 
companies, the Bell companies and more than a thousand 
independent companies.
    We are not saying the CLEC's are doing anything bad. They 
are doing a great job, making a lot of money. But if you want 
to get the Internet access and high speed access out to these 
areas covered by blue, then you have got to provide that 
relief.
    Senator Rockefeller, to your last question, it is not going 
to guarantee that Bell Atlantic is going to build those 
services all through West Virginia, but they are the only ones 
that are positioned to do that and may do that, given the 
incentives, because you can bet that these competitive services 
are not going to be building out there. That is not where the 
money is.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Neel follows:]

Prepared Statement of Roy Neel, President and Chief Executive Officer, 
                   United States Telecom Association
    Thank you, Mr. Chairman, for giving me the opportunity to testify. 
I am the President and Chief Executive Officer of the United States 
Telecom Association (USTA). I am here today on behalf of the over 1100 
incumbent local exchange carriers throughout the nation that USTA 
represents. We appreciate your conducting this vital and timely hearing 
because our members are on the front lines of the Internet and the 
thrust of my testimony today is that the current Internet regulatory 
environment must be reformed.
    We need to pass legislation this year that deregulates the offering 
of DSL and provides interLATA relief for the RBOCs with respect to data 
services. We must level the playing field with cable modem service.
    This relief is not only for the RBOCs but for the over 1000 mid and 
small companies that USTA represents that offer DSL and are burdened by 
regulations not faced by their direct competitors--cable modem service.
    We are at a critical stage in this country in that we already face 
a series of digital divides. A great deal of attention has already been 
paid to the digital divide and separating affluent consumers from poor 
and middle income consumers. The growing divide between white and 
minority populations has also been addressed. There are two additional 
types of digital divides that I am going to focus on today. The first 
is a digital divide between large businesses and small businesses. The 
second is the digital divide between urban/rural.
    I commend Senators McCain, Brownback, Dorgan, Kerry, Snowe, and 
Rockefeller for all recognizing the crisis that this country faces with 
respect to high speed access and the Internet and for taking the lead 
and introducing their respective bills.
I. High Speed Internet Access--Another Digital Divide
    Today, high speed Internet access is made available on an 
economically feasible basis three ways. First, there is fiber optic 
cable. This is being provided primarily by Competitive Local Exchange 
Carriers (CLECs). The laying of these fiber optic cable is the reason 
why you see the city streets being torn up time and again, but CLECs 
are not deploying fiber in rural areas.
    The second way is Digital Subscriber Line service (DSL). DSL is a 
service that incumbent telephone companies (ILECs) and others provide. 
By adding advanced equipment and conditioned local telephone lines, 
high speed Internet access by means of DSL can be provided over the 
same copper wires used for plain old telephone services. Data Local 
Exchange Carriers (DLECs) also offer DSL service, but it is almost an 
entirely derivative service, as DLECs are able to provide their service 
only by collocating their equipment in the ILEC's central telephone 
office and by making use of the ILECs local telephone wires, which 
ILECs are required by law to provide to DLECs at very low rates. DSL 
deployment in all areas, but especially in rural areas is being 
constrained by the lack of regulatory relief for these advanced 
services.
    Third, cable operators provide high-speed access to the Internet by 
means of high capacity (broadband) cable wires. This is called cable 
modem service and is primarily a residential service.
    What then is the Digital Divide? The CLECs provision of high speed 
access is almost exclusively limited to business customers located in 
downtown business areas or in an edge city. In Washington, for 
instance, that means the K Street corridor and Tysons Corner. Cable 
operators because of their historical provision of cable television 
service are located and provide service to primarily residential 
customers. So, if your area business is not located downtown or in an 
edge city, your only real possibility for high-speed Internet access is 
DSL, and unfortunately DSL is the only one of these three approaches 
subject to significant regulatory constraints and requirements. DSL 
service only exists in some areas, even in urban areas, because 
pervasive regulation is retarding deployment. It is, thus, not 
available everywhere.
    If you are either a business or residential customer in a rural 
area where their exists limited Internet backbone facilities and little 
or no high speed access you are doubly burdened in your ability to 
obtain high speed Internet access, as you will have neither local nor 
long haul Internet access. If you are business customer located in a 
downtown business district and you want a competitor to the CLEC 
service, DSL is your only option, because again cable modem service is 
primarily located in the residential areas. To see the benefits of 
competition in the high-speed access market, we need to encourage the 
deployment of DSL, not hamper its deployment by unnecessary government 
regulation.
    Before continuing, let me summarize what we consider to be the 
current factors limiting the future development of the Internet, 
especially for rural, residential and small and medium business 
customers. First, there is the fact that DSL is pervasively regulated 
while other high speed Internet access services are unregulated. 
Second, especially in rural areas, but also generally everywhere, the 
restriction on the BOCs, which limits their ability to transmit data 
across LATA (local access and transport area) lines, limits the 
opportunity to expand the Internet backbone. The 1996 Act provisions 
that were intended to ameliorate this situation have not proven 
effective and the interLATA relief contemplated by the 1996 Act has 
produced to date authority to cross LATA lines in only one state. These 
LATA lines are the product of the 1982 AT&T breakup, so they were 
clearly not drawn with the Internet in mind, but these 1982 lines are 
frustrating the development of the Internet, especially in rural areas.
Internet Regulatory Freedom
Section 706
    Section 706 required the Federal Communications Commission (FCC) to 
initiate within 30 months of enactment of the 1996 Act an inquiry 
concerning the availability of advanced telecommunications capability. 
The FCC commenced the inquiry in August 1998. The purpose of that 
inquiry was to determine whether ``advanced telecommunications 
capability'' was being made available to ``all Americans in a 
reasonable and timely fashion.'' Section 706 defined advanced 
telecommunications capability as ``high speed switched broadband 
telecommunications capability.'' If the FCC found that this goal was 
not being achieved, Section 706 required it to ``take immediate action 
to accelerate deployment.'' One of the principal means that Congress 
intended and provided to be used if this goal was not being achieved 
was ``regulatory forbearance.''
FCC Section 706 Report (February 28, 1999--CC Docket 98-146)
    After studying the matter for six months, the FCC concluded on 
January 28, 1999 that reasonable and timely deployment of ``high speed 
switched broadband capability'' was occurring so no ``immediate 
action'' of any consequence was required. At that time, the FCC said 
that high speed Internet access penetration was an acceptable .4%. Even 
this low figure was an overstatement of the actual penetration in that 
the FCC appears to have measured penetration based upon the number of 
high speed access customers as a percentage of residential households--
not residential households and businesses. Adding businesses to this 
calculation would have produced an even lower penetration number. 
Today, 14 months after the FCC Reports and using the FCC's same 
methodology there is only 1.45% high speed access penetration.
    Section 706, thus, was intended to address some of the very 
problems that I have identified. If regulatory requirements were 
constraining the deployment of advanced telecommunications in a 
reasonable and timely manner, Section 706 instructed the FCC to 
eliminate them. The FCC, however, has interpreted Section 706 so 
narrowly as to virtually write Section 706 out of the Act. Section 706 
was intended, in our view, to be stand alone authority to deal with 
this specific problem. The FCC, however, determined that Section 706 
was constrained by other provisions of the 1996 Act dealing with voice 
telephone matters. Since the FCC refuses to acknowledge that the 
statistics show that deployment of advanced services is not happening 
in a reasonable and timely manner, I believe the Congress must act 
again in a manner that has no such statutory interpretation 
limitations.
There Is a Digital Divide and it Continues
    My testimony today is that there are multiple digital divides. The 
digital divide exists at the local level for both access generally and 
for high speed Internet access and on the long distance level for 
Internet backbone. I would reiterate and emphasize once again that one 
of the primary reasons for this failure to close the high speed access 
digital divide and Internet backbone divide is regulatory constraints 
which add cost, time, effort and lack of flexibility to services being 
offered in a market that one considers to be a monopoly.
    FCC Chairman Kennard even refers to this market a ``no-opoly'' 
market. DSL (Digital Subscriber Line) service offered by incumbent 
local exchange carriers is pervasively regulated, everything from 
tariffs to depreciation to annual reports to rate regulation. I brought 
this regulatory disparity situation to the Committee's attention last 
November in my testimony. Things have not changed since then. Services 
functionally equivalent to DSL are not subject to any significant 
regulation, with cable modem services being the classic example--cable 
operators call this a cable service.
    Not surprisingly, cable modem service is growing at a faster rate 
than DSL. The net effect is that major telecommunications providers, 
the ILECs, who would do more, could do more and want to do more are 
frustrated by a regulatory regime designed to regulate two-way voice 
service in the monopoly service era of 1934! I believe the prevailing 
Congressional wisdom is that the Internet should not be regulated. When 
these DSL services are subject to regulation, government regulation has 
been extended and applied to the Internet--make no mistake about it.
Business Customers
    For the residential customer, high-speed Internet access is a way 
to avoid the ``world-wide wait.'' To the business customer, high-speed 
access may be essential, even for many businesses that we ordinarily do 
not consider to be part of the new economy. If your business is located 
in the downtown area of a major city or in an edge city (e.g., Tysons 
Corner), you have a plethora of high speed access service providers and 
service options and more are coming all of the time. If you are a small 
or medium size business outside those limited geographic areas, your 
high-speed Internet access options are very limited--if they exist at 
all.
    Since 1992, our industry has contracted with iMapData.com to 
evaluate and map for us where competitive local exchange carriers 
(CLECs) are deploying their fiber optic lines in order to provide 
broadband service. During this eight-year period of study, what we 
learn each year from these studies is that the CLECs just continue to 
build one on top of the other, in the same geographic areas to service 
business customers. The only real significant difference from year-to-
year is that we have more CLECs digging up the same streets to provide 
service to the same class of business customers. Those of us who live 
and or work in Washington have been personally observing this pattern. 
The story about the digging up of the Washington D.C. streets has been 
a hot topic in the local media for two weeks now. One carrier digs up 
the streets, fills it in and then the next carrier comes along and digs 
it up again and then the next and the next. Multiple fiber-based CLECs 
are going after business customers in a limited geographic area.
    Washington is not unique in this respect. I am attaching to my 
testimony maps of 15 cities, Washington and 14 others that we have 
studied and analyzed over this eight-year period. * These 15 cities are 
mature ones, with established downtown business districts. As you can 
see from each of these maps, the fiber being installed by CLECs is 
being installed almost exclusively in these downtown areas or edge 
cities. The areas shown in gray are in the city, but they have no CLEC 
fiber optic service. So, if you are a business or residential customer 
located in the areas depicted in gray on these maps, you will have no 
access to these fiber facilities or service from these CLEC providers. 
As you can see on the maps, the great preponderance of these very large 
cities is not being served by these CLECs.
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
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    Who serves in the gray areas on these maps? That is simple. If you 
are a business, you will have only one effective choice, DSL service, 
and then only if it is available in your area. You either receive the 
service from your ILEC or a DLEC, with the DLEC providing, as I have 
pointed out, service through collocation in the incumbent's central 
office and through the use of the incumbent's DSL conditioned loops. 
Business customers located in these gray areas are also unlikely to 
have access to cable modem service from cable operators, because for 
the present and the foreseeable future cable will be providing 
residential broadband service. This is not just my view. The investment 
community concurs. Scott Cleland of The Precursor Group said the 
following in his February 8, 2000 Research Report on this subject:

          (1) ``Most of all the CLECs built out to serve the same high-
        end customers, which met two criteria; high average customer 
        revenue and geographic density. Despite industry pledges to 
        offer broadband universally, it probably won't happen because 
        it will be uneconomic. . . .''
          (2) ``In the next three to four years, TPG projects that up 
        to 20% of the country may have a choice of three to four 
        different broadband facilities, roughly 30% of the country may 
        have the choice of two and half of the country may have only 
        one or no broadband facility to choose from.''
          (3) ``TPG expects cable to remain the primary residential 
        broadband facility for the foreseeable future.''
          (4) ``TPG expects DSL to remain the secondary broadband 
        infrastructure for the foreseeable future.''

    Who are these businesses that cannot receive high-speed Internet 
access or access from only DSL service. In Washington D.C., they are, 
for instance, doctors, clinics and single family home, construction 
companies. Why do businesses of this type need high speed access? Our 
iMapData.com study shows as follows:

   The need for current availabilities of goods, products, 
        services, supplies, etc.;
   The need for current prices;
   The need to place orders fast;
   The ability to bid for different supplies at different 
        prices and thereby reduce costs;
   The need for speedy downloading of bulky documents (e.g., 
        multiple real estate listing, building codes, patient records, 
        insurance forms);
   The need for speedy downloading and uploading of pictorial 
        documents (e.g., photographs of supplies, furnishings, houses, 
        floor plans);
   The need for speedy downloading and uploading of data-dense 
        schematics (e.g., architectural blueprints, engineering 
        schematics, design schematics, CAD files, X-rays, Cat scans, 
        MRIs).

    Medical facilities and physicians are a special case according to 
our study by iMapData.com as doctors split their time between their 
offices/clinics and their hospitals. They rely on high speed Internet 
transmission of X-rays, CAT scans, MRIs and all the schematic tools of 
their trade. Downloading and uploading of data-dense schematics are 
almost impossible at standard modem speeds.
Rural Areas
    If you are on the wrong side of the digital divide, such as in 
rural areas, your continued survival and prosperity may just depend on 
the ability to obtain affordable high-speed access just as in the past 
these areas depended upon highways, waterways and railroads. The added 
costs and limitations caused by government regulation merely exacerbate 
an already bad situation. Small towns and rural areas without high 
speed Internet access will continue to find it even more difficult to 
attract jobs and industry.
Advanced ILEC Services Should Be Deregulated
    If the Congress or the FCC, for that matter, wants to accelerate 
broadband deployment, they can do so by deregulating these services. 
All of the major broadband bills currently before the Congress move 
positively in this direction: Senator McCain (S-1043), Senator 
Brownback (S. 877), Congressmen Tauzin and Dingell (HR 2420), 
Congressman Goodlatte (HR 1686) and Congressman Boucher (HR 1685). All 
of these bills would create an incentive for ILECs to deploy broadband 
capability.
    Before considering other ideas and approaches to this problem, such 
as tax incentives and universal service subsidies, we urge you to 
eliminate the regulatory constraints first. After deregulation, you can 
then evaluate what occurs in a deregulated environment. You as 
policymakers can then with more precision target the areas that should 
really be the beneficiaries of such tax credits or regulatory 
subsidies.
II. Internet Backbone--Still Another Digital Divide
    Attached to my testimony and on the chart behind me is a map of the 
United States which you may have seen before. * I use it in conjunction 
with my testimony, because it compellingly shows the need and 
justification for interLATA data relief. It also shows the rural 
digital divide. Can anyone deny it after looking at this map? The map 
shows the location of Internet backbone POPs (points of presence) also 
called Internet hubs. A POP or hub is a high speed ramp using a highway 
analogy. It is the place where you get on the Internet backbone 
network. If you are a long distance from a POP, your service will be 
more costly and in many cases you will suffer service degradation.
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    Look, for instance, at the Upper Tier of States running West from 
Minnesota to Washington. There just are not any POPs. In these states, 
you have a very long way to go just to get connected to the Internet 
much less on a high speed basis. As you can further see, however, there 
are areas just like this in the regions of every Bell operating company 
(BOC), not just US West.
    The Internet POPs depicted on these maps are like train stations 
using a rail analogy and the Internet backbone can be analogized to the 
rail network connecting the cites. You need to be able if you are an 
ISP to get to this POP (hub) in order to participate in the Internet 
and all of its e-functions. The greater the distance from a town to an 
Internet hub (POP), the more expensive the service, the constrained the 
speed of the service, and the more limited the service offerings. These 
towns can get on the slower, narrowband Internet, but cannot acquire 
high speed broadband connectivity at a reasonable price, if at all.
    The broadband Internet is fast becoming an essential infrastructure 
for business. Broadband e-commerce applications are providing enormous 
choice, value, and benefit to users, and e-business is quickly becoming 
an essential tool for the manufacturing, service, and agricultural 
sectors. Communities not served by Internet backbone hubs risk losing 
critical industries to connected cities, and their citizens risk 
missing out on the full educational and commercial benefits of the 
Internet.
    The backbone hubs necessary for providing such benefits, however, 
are to a large extent available only in the country's largest 
metropolitan areas. Smaller cities and non-metropolitan areas do not 
have the same access to these high-speed connection to a backbone hub, 
and while over one thousand hubs (POPs) have been put in place, less 
than one hundred are in non-metropolitan areas. In fact, 60.7 percent 
of all metropolitan areas do not have a connection to a Internet 
backbone hub (POP). Therefore, the vast majority of Americans do not 
have direct access to the Internet backbone in their own communities.
    Network economics and the nature of telecom markets give strong 
incentives to deploy networks in densely populated and high-income 
areas. In addition, regulations affecting investment, markets, and 
suppliers also impact backbone deployment. The RBOCs are uniquely 
positioned to address this problem and are the only ones prevented from 
doing so.
    Let me not fail to mention one additional thought: The Internet 
backbone is being increasingly concentrated in a few hands--evidence 
the merge of MCI WorldCom and Sprint. For competitive reasons, BOCs 
entry into this market will go a long way causing this concern to 
evaporate.
Myths about InterLATA Data Relief
    I would like to take a moment to clarify some confusion regarding 
the implications of the deregulatory relief I have suggested.
    First, critics claim the Internet deregulations I'm suggesting will 
undo reforms of the 1996 telecommunications act. Not true. In 1995, the 
commercial Internet was still in its infancy. The Internet deregulation 
I am proposing would leave the current telephone regulation intact.
    Second, critics contend that this deregulation removes the Bell's 
incentives to satisfy Section 271 of the Telecom Act which requires the 
companies to open their local markets to competition before entering 
long distance. Not true. These bills do not change voice regulation. 
The BOCs cannot offer voice long distance until they get Section 271 
approval from the FCC. About 80 cents of every dollar for long distance 
service is for voice service. This presents quite a market incentive.
Conclusion
    Congress needs to address the digital divide issue this year. 
Clearly, we are beyond debating whether there really is a digital 
divide or a problem that needs to be addressed--with five bills 
introduced or about to be introduced that address high speed Internet 
access and deployment to rural areas everyone acknowledges that there 
is a problem. We support all of the Senators that have taken the lead 
on this issue and strongly urge that any legislative solution to 
address the digital divide deregulate the offering of DSL and provide 
interLATA relief to the RBOCs for data.

    Senator Burns. Thank you, Mr. Neel.
    I have got to apologize to my colleague from Georgia. I 
wanted to ask him if he had an opening statement before we 
started this panel, and we will do that at this time. I am 
sorry, Senator. You know, what else can I say.

                STATEMENT OF HON. MAX CLELAND, 
                   U.S. SENATOR FROM GEORGIA

    Senator Cleland. I am just glad to be here, Mr. Chairman.
    Senator Burns. If you have any opening statement or 
comment----
    Senator Cleland. I do.
    Following right on the discussion of the morning, and that 
is overcoming the digital divide, I note with interest the map, 
the map particularly of Georgia. Where those two bright circles 
interact, there is a little bitty piece down there of Georgia 
in the western portion of our State that is not served near the 
Alabama line, that is not served by Internet services.
    What I have to report to you today, Mr. Chairman, is action 
by a small community in rural America, in this case rural 
Georgia, is taking action on its own to overcome the digital 
divide. That is LaGrange, Georgia, a town of 27,000. It is 
fighting the digital divide. LaGrange, which is not large 
enough to have most telecommunications providers to upgrade 
their service, has made it a goal to ensure each citizen--each 
citizen--has access to the Internet.
    This was purely a partnership between the city and 
something called Charter Communications. No State or Federal 
assistance was provided. LaGrange officials in the 1990's, 
early 1990's, deployed a fiber optic network because they 
recognized that the local exchange carrier was not preparing 
their community adequately for the coming information age and 
they saw the advantages of such an investment.
    This foundation led to the development of a two-way hybrid 
fiber-coax cable network that supports cable modems and 
Internet access for the twenty first century. Last week, city 
officials announced the city's intent to provide Internet 
access for all of its residents who are cable customers at no 
additional cost to consumers--all residents.
    Already, about 85 percent of the households in LaGrange 
have cable. The city council is committed to find a mechanism 
to pay for the Internet browser for those who do not have one 
because of hardship. Children, who are at the most 
impressionable time in their lives, will have the Internet at 
their fingertips and will be training themselves for the world 
and work force of the future. Parents and adults will develop a 
familiarity and comfort level with computers they might not 
otherwise ever experience.
    Mr. Chairman, I would like to submit for the record some 
articles on the difference access to information has made in 
this little down in the lives of some of these citizens in 
LaGrange. * LaGrange is not only providing the foundation 
itself for this network, but is also investing heavily in 
technology.
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    I find this fascinating, Mr. Chairman. They are not waiting 
on the Congress. They are not waiting on changes in rules and 
regulations. They are not waiting on a merger. They are taking 
this on as their own project.
    This program will cost the city about $300,000 annually to 
operate. The capital investment will be about $120,000. 
Additionally, the city will finance about $2 million during the 
first project year for Worldgate equipment and settop boxes 
which will allow e-mail and Internet access through the 
household's television via a wireless keyboard. These figures 
may seem like a large investment for a city the size of 
LaGrange, but I believe that the manifold return on this 
investment will offer strong vindication in the years to come.
    Well, what impact is this having? By having each household 
wired, the Mayor, Jeff Luken, is hopeful that the community 
will be brought closer together as well. He says this: ``One of 
the benefits we anticipate is a community-wide communications 
network that will allow citizens to communicate on a variety of 
topics, including school assignments and activities, postings 
for civic meetings and job openings, and other community 
events, sports, entertainment and the arts, as well as local e-
commerce.''
    While because of its size LaGrange, Georgia, is not the 
first town to wire basic technology into itself, it shows the 
influence, though, that smaller towns themselves and more rural 
areas can have over companies, and it is a model I hope can be 
replicated elsewhere. Bridging the digital divide is vital and 
I will be following LaGrange efforts to see the exciting 
results of this investment in the future.
    I thought that was an interesting story, Mr. Chairman, 
where communities out there see it in their own interest to 
invest, invest capital, invest in a citywide fiber optic 
network to create a network among all of its residents to 
communicate with itself. I think this is absolutely powerful, 
and to think they are the ones in the blue. They are the ones 
not served currently.
    So I think if we can get more and more of our country on 
the right side of the digital divide it will have mammoth 
positive impacts for our State and our Nation.
    This is an important hearing, Mr. Chairman. I am looking 
forward to hearing the testimony of our witnesses. Thank you 
very much.
    Senator Burns. Thank you, Senator Cleland.
    Now we will hear from Mr. Timothy Regan, Vice President and 
Director of Federal Affairs for Corning, Incorporated. Thank 
you very much for coming this morning. We look forward to your 
testimony.

 STATEMENT OF TIMOTHY J. REGAN, VICE PRESIDENT AND DIRECTOR OF 
                 FEDERAL AFFAIRS, CORNING, INC.

    Mr. Regan. Thank you, Mr. Chairman.
    My name is Tim Regan. I am a Vice President from Corning. 
We are the inventors of optical fiber and as such I would like 
to speak from the position of a technologist, not a 
telecommunications warrior. I want to make two points.
    First of all, broadband as it was conceived in the 
chairman's section 706 is not being deployed in urban and rural 
or in suburban America in residential markets. It is being 
deployed in business markets, but it is not being deployed in 
residential markets.
    Secondly, I want to point out that there are both financial 
and regulatory changes have to be made if we want to accelerate 
deployment.
    First of all, I want to commend the chairman. 706 was 
really far-reaching. It was conceived before the time when the 
Internet was a popular word in households. The notion was we 
wanted to give everybody in America access to two-way high 
quality voice, data, and video.
    Now, unfortunately, the notion of broadband and the notion 
of section 706 have been diluted. The FCC has defined section 
706 capability as 200 kilobits. Now, let me use an example to 
demonstrate how low that is. When you turn on your computer in 
your office you are operating on what is called Ethernet. 
Ethernet was devised by IBM in the 1970's. It is 10 million 
bits per second, 10 million bits.
    Now, the computer industry has decided that is not enough, 
so they have upgraded that and now when you buy a line card for 
your computer, an Ethernet line card, it can do 10 million and 
it can do 100 million. So what the computer industry has said 
is that we need a lot more transmission competition between 
these islands of intelligence.
    Now, I am not condemning the technologies that folks are 
deploying, ADSL and cable modems. They are wonderful 
technologies. But they are really better characterized as 
higher bit rate technologies, higher data speed technologies, 
and they provide a wonderful transition to the future of true 
broadband. But the notion that Senator Burns had in his bill is 
really not being achieved in terms of those technologies. We 
need to look to the next generation.
    Now, we have actually commissioned some recent research to 
try to figure out how we get there, because we really do have 
this odd situation right now in America where incumbent local 
telephone companies are investing in copper wire for new 
customers, new builds, and rehabs, and we wondered, why is 
that. So we asked two top-flight economists to take a look at 
this.
    They came back with two answers: No. 1, they are acting 
very, very rationally, given the financial and the regulatory 
incentives that they face. On the financial side, when you are 
in a situation when you face technology uncertainty, when you 
have low levels of competition, as you do in the telephone 
market for residential service, and when you face the situation 
of what is called the sunk costs, you actually get higher 
returns if you delay investing in next generation technology. 
You do not get returns sufficient to be able to justify the 
investment.
    On the regulatory side, the FCC has come up with a scheme 
for pricing called TELRIC which we believe does not provide 
sufficient incentive, financial incentive, to get carriers to 
go to the next generation.
    So in closing, Mr. Chairman, what I would like to say is 
that the analogy that we have had about the superhighway 
connecting people on off-ramps is really the wrong analogy. 
What we ought to be thinking about is the network being a 
series of islands, islands of intelligence, and on each island 
you have the ability to store and to process hundreds of 
millions of bits of information. What the future network is 
going to be is bridges between these islands.
    So now we have connected these bridges with 56,000 bit 
capability. That is what you can do on a copper wire. And we 
have realized tremendous economic benefit from that. But you 
can imagine what is going to happen when we can connect these 
bridges the way our offices are connected with local area 
networks, with 10 million bits. The benefit for the economic is 
going to be enormous.
    So what I would suggest is that we need to think 
creatively, we need to move forward with both financial and 
regulatory changes to get there. I heard someone earlier talk 
about the notion of subsidies. You know, I do not call targeted 
tax cuts a subsidy. You know, frankly that says I am not going 
to hit you as hard if you do something, and that does not 
constitute a subsidy in my mind.
    So I think we need to be creative. I think there are ways 
to move forward to both do the current generation technology, 
ADSL and cable modems, and to proceed to do the next generation 
technology for new builds and for rehabs, so that we move along 
on parallel paths.
    With that, Mr. Chairman, I would be glad to answer any 
questions you might have.
    [The prepared statement of Mr. Regan follows:]

                Prepared Statement of Timothy J. Regan, 
     Vice President and Director of Federal Affairs, Corning, Inc.
Introduction
    Mr. Chairman, my name is Tim Regan. I am a Vice President of 
Corning Incorporated.
    I understand that today's hearing is about the deployment of 
broadband to rural America. Obviously, this is of great interest to me 
as a representative of Corning. We are the original inventors of 
optical fiber, and of course, are anxious to see the technology 
deployed to all Americans, especially those in rural America.
    But, I think it is important to address the question of broadband 
deployment to rural America in the context of the deployment to the 
nation as a whole. My argument is very simple. Broadband is not being 
deployed to residential customers in America, regardless of whether 
they are located in urban, suburban, or rural America. Business 
customers are getting it, but residences are not.
    I know that you might find this statement somewhat astounding 
because you hear a lot about the so-called broadband deployment. Cable 
modem service, ADSL service (i.e., asynchronous subscriber line), and 
various wireless data services all claim by some, most notably the FCC, 
to be broadband. Without getting into semantics, I will argue in my 
testimony that these capabilities are more properly described as 
higher-speed data service, not broadband service.
    I will also describe in my testimony recent economic research that 
Corning has commissioned to determine why broadband capability is not 
being deployed to residential customers. In short, the study identifies 
both financial and regulatory barriers to deployment.
    Regulation changes alone are insufficient to get the job done.
What's Broadband
    The first issue, of course, is the question of what is broadband. 
The answer is not obvious.
    Oddly enough, the term ``broadband'' really comes from an older 
age--the analog age. In the analog age, the information-carrying 
capacity of a network was defined by the width of the band of spectrum 
used to carry a signal. The wider the band, the greater the 
information-carrying capacity. Thus, the term ``broadband'' was used to 
characterize a system capable of carrying a considerable volume of 
information.
    In the analog world, a standard television video signal that 
requires 6 megahertz per channel was considered to be broadband. Voice 
at 4 kilohertz was thought to be narrowband.
    In the digital world, the notion of broadband really doesn't apply. 
The information carrying capacity of a digital network is described as 
a bit transfer rate. As you know, digital signals are represented by a 
series of on and off signals that are characterized by pulses of 
electrons or photons. Transmissions in the digital world appear more 
like Morse code.
    If we use standard television video as a service to characterize 
broadband, as 
we have done in the analog world, a bit transfer rate of 4 million to 
90 million bits per second would define broadband. An uncompressed 
standard television video 
signal requires 90 million bits of information per second to transmit. 
It can, however, be compressed to 4 million to 6 million bits per 
second using what is called MPEG-2.
    Data has become a very important form of information in the digital 
world. Remember that computers were originally called data processing 
machines. In the computer data world, the connections between computers 
are quite robust. A standard has evolved known as Ethernet, developed 
by IBM over two decades ago. It provides for the transmission of 10 
million bits per second between computers on a local area network. 
Today, the Ethernet standard has been upgraded to a 100 million bits 
per second.
    Frankly, I think the term broadband is so imprecise, it is probably 
useless at this point.
    I think the better way of engaging the public debate is to identify 
bit transfer rates Americans will need to gain access to audio, video, 
and data applications. Table 1 below, which was taken from an article 
written by a Microsoft official, describes the transmission speeds 
necessary to gain access to a variety of applications.

  Table 1. Network Transmission Speed Requirements for Real Time Audio,
                      Video, and Data Applications
------------------------------------------------------------------------
         Applications             Downstream Speed      Upstream Speed
------------------------------------------------------------------------
Audio
 CD Quality Sound       256 kbps \1\         --
 Broadcast Quality      48 kbps to 64 kbps   --
 Plain Old Telephone    64 kbps              64 kbps
 Service

Video
 Broadcast HDTV         20 mbps \2\/channel  --
 (compressed)                    \3\
 Broadcast Standard TV  4-6 mbps/channel    ...................
    (MPEG-2 compressed)
 Videoconferencing      64 kbps-2 mbps       64 kbps-2 mbps

Data
 File Transfer          10 mbps              10 mbps
 (Ethernet)
 Web Browsing           240 kbps             240 kbps
 Network Games          80 kbps              80 kbps
------------------------------------------------------------------------
Source: Timothy C. Kwok, Microsoft Corporation, ``Residential Broadband
  Internet Services and Applications Requirements,'' IEEE Communication
  Magazine June 1997, Tables 3 and 4, p. 80-81.
Notes:
\1\ 1 kbps is one thousand bits per second.
\2\ 1 mbps is one million bits per second.
\3\ Each television or multi-media device must have a dedicated channel.

    If you think that Americans will need access to information in all 
its forms--audio, video, and data--it is easy from Table 1 to see that 
a capability in excess of 20 million bits per second downstream and 10 
million bits per second upstream, even using the most advanced 
compression technology, is necessary. Let me explain with some examples 
of the bit transfer speeds necessary to do audio, video, and data:

   Plain old telephone service requires 64 thousand bits per 
        second both upstream and downstream.
   Standard television using MPEG-2 compression technology uses 
        4 million to 6 million bits per second per channel downstream. 
        Since there are on average 2\1/2\ television sets in every 
        household in America, three channels at 4-6 million bits per 
        second each is needed.
   HDTV using the most advanced compression technology requires 
        20 million bits per second downstream.
   And, 10 million bits per second both upstream and 
        downstream--the so-called 10 Base-T Ethernet standard--is 
        required to give people the same data speeds at home that they 
        get at work in order to facilitate telecommuting.

    I realize that my bit transfer speed prescription sounds like a 
lot. But, I believe it is what will be needed.
    Let me clarify one point though. My comments about broadband should 
not be construed as criticism of ADSL or cable modem service. These are 
wonderful technologies. They enable the delivery of data at 
substantially higher speeds over the existing infrastructure that has 
been deployed by ILECs and cable operators. These services provide a 
useful transition to full broadband.
    The FCC has stated in its Section 706 proceeding that broadband is 
200 thousand bits per second--or 1% of my prescription. I do not see 
how the FCC can defend such a low standard in light of the speeds 
described in Table 1 above as necessary to transmit the applications we 
know of today, never mind the limitless array of new ones that will be 
created once the infrastructure is deployed.
    The FCC and others have defined broadband at such a low level 
because they fundamentally misunderstand the nature of the future 
network. It has been described by the FCC as a superhighway. And, 
consistent with this analogy, the connections to the home are simply 
narrow on and off ramps.
    This is the wrong analogy. The network of tomorrow, which will be 
dominated by data not voice, is not a highway. It is a series of 
bridges. The bridges connect islands of intelligence--computers. After 
all, this is what the Internet is. It is a network of computers, and 
each computer has the capacity to store and process hundreds of 
millions of bits of information.
    Today, these islands of intelligence are for the most part 
connected by very narrow bridges, a copper pair that can transmit only 
56 thousand bits. Even with these very narrow bridges, we have been 
able to realize tremendous economic benefit from connecting these 
islands of intelligence.
    Fed Chairman Alan Greenspan best characterized the impact of this 
connectedness in October last year before the Business Council when he 
said:

        ``Your focus on technology--particularly the Internet and its 
        implications--is most timely . . . The veritable avalanche of 
        real-time data has facilitated a marked reduction in the hours 
        of work required per unit of output and a broad expansion of 
        newer products whose output has absorbed the work force no 
        longer needed to sustain the previous level and composition of 
        production. The result during the last five years has been a 
        major acceleration in productivity and, as a consequence, a 
        marked increase in the standards of living for the average 
        American household  (emphasis added).'' \1\
---------------------------------------------------------------------------
    \1\ Remarks by Alan Greenspan, Information, Productivity, and 
Capital Investment, Before the Business Council, Boca Raton, Florida, 
October 28, 1999.

    Tremendous economic prosperity has been realized over bridges that 
connect the computers at 56 thousand bits per second. Can you imagine 
what will happen when we can connect these islands of intelligence by 
bridges that can carry over 10 million or 20 million bits per second?
    The question before us is how to build these bridges as soon as 
possible. The problem for rural America is particularly acute because 
the cost of building these bridges is 2-3 times higher than it is for 
the rest of the country.
How Do We Build the Bridges?
    Obviously, to deploy this new technology will require considerable 
investment on the part of all telecommunications carriers. The problem 
is, the dynamics to finance this investment have not been unleashed.
    In fact, we have witnessed some unusual behavior. Incumbent local 
exchange carriers (ILECs) continue to deploy copper wire rather than 
new technology like fiber optics to provide service to new residential 
customers (i.e., ``new builds'') and to rehabilitate deteriorated plant 
that is serving existing customers (i.e., ``rehabs''). They are 
spending approximately $9 billion deploying copper to serve new builds 
and rehabs in the residential market.
    This reality was evidenced in a recent article in The Wall Street 
Journal which stated:

        ``Global sales of communications wire, from fiber-optic and 
        coaxial cable to old-fashioned copper, rose 6% to $14 billion 
        last year . . . Here's the most surprising part: The bulk of 
        the industry's sales continues to come from the same type of 
        wire Alexander Graham Bell developed in 1879 to transmit voice 
        signals--copper (emphasis added).'' \2\
---------------------------------------------------------------------------
    \2\ Mark Tatge, ``Wire Makers Thrive Despite Advent of Wireless 
Phone,'' The Wall Street Journal, February 16, 2000, p. B-4.

    The fiber optics industry is somewhat puzzled by this investment 
behavior because fiber optic systems solutions today are at relative 
cost parity with copper. The cost parity between fiber optic and copper 
solutions for residential customers is well established. Last August, 
Matthew Flanagan, President, Telecommunications Industry Association, 
submitted comments to the FCC attesting to this fact. As evidence, he 
submitted sworn affidavits from four different telecommunications 
engineering experts who all supported the cost parity claim.\3\
---------------------------------------------------------------------------
    \3\ Matthew J. Flanagan, re: Implementation of the Local 
Competition Provisions in the Telecommunications Act of 1996, CC Docket 
No. 96-98, Telecommunications Industry Association, letter to Federal 
Communications Commission, August 2, 1999, which states at p. 6-7 that 
``In his Declaration, Mr. Cannata from Marconi Communications, 
demonstrates that POTS can be provided over a fiber-to-the-curb 
(``FTTC'') system at 98 percent to 103 percent of the cost of providing 
POTS over a copper system using a digital loop carrier (``DLC/
copper''). He notes further that the FTTC system can be upgraded to 
provide high-speed data (i.e., 10/100 Base T) by incurring a 16 percent 
incremental cost compared to a 40 percent to 50 percent incremental 
cost to upgrade DLC/copper to provide Digital Subscriber Line (xDSL) 
service. Finally, he demonstrates how a further upgrade to provide VHS-
quality broadcast video can be deployed for an incremental cost of 44 
percent over FTTC for POTS, which again compares favorably to the 40 
percent to 50 percent incremental cost associated with the xDSL 
solution.
    Mr. Jacobs from Corning Incorporated shows in his Declaration 
similar results with respect to broadband solutions. His analysis shows 
that an Ethernet fiber-to-the-home system (``EFTTH'') using multimode 
fiber can be deployed at 7 percent less than ADSL over copper, and 
EFTTH is substantially more capable. The EFTTH system can deliver POTS, 
10/100 Base T data, and VHS-quality broadcast video, which cannot be 
done on an ADSL system.
    Mr. Tuhy from Next Level Communications states in his Declaration 
that ``fiber-based narrowband solutions for local access serving 
residential end-users can be deployed at cost parity with copper-based 
solutions as measured on an installed first cost basis for newly 
constructed or totally rehabilitated outside plant.'' He makes a 
similar statement with respect to broadband. He notes that Next Level 
Communication's FTTC system ``can be deployed to provide integrated 
voice, data, and video for the same cost as a copper-based solution 
with an ADSL overlay for high-speed data.'' This assumes new builds or 
total rehabs as well as first installed cost comparison.
    Finally, Mr. Sheffer from Corning Incorporated addresses the rural 
deployment issue in his Declaration. He cites a proprietary Bellcore 
(now Telcordia Technologies) study prepared for Corning showing that 
the cost of narrowband fiber-to-the-home (``FTTH'') at $2,370 per home 
passed beats narrowband DLC/copper at $2,827 per home passed. In other 
words, narrowband FTTH is 16.2 percent less costly than DLC/copper in a 
rural setting.
    More surprisingly, broadband FTTH also beats narrowband DLC/copper 
by 7.5 percent (i.e., $2,616 per home passed for broadband versus 
$2,827 per home passed for narrowband). Again, this analysis was based 
on new builds and total rehabs and the cost comparisons were done on an 
installed first cost basis.
---------------------------------------------------------------------------
    Because we are somewhat puzzled by this investment behavior, we 
commissioned a study by three Ph.D. economists, Drs. Kevin Hassett and 
J. Gregory Sidak, who are associated with the American Enterprise 
Institute for Public Policy Research, and Dr. Hal Singer who is 
associated with Criterion Economics. The study concluded that the ILECs 
and the CLECs are acting very rationally in delaying their decision to 
invest in new technology to serve residential customers. They 
identified both financial and regulatory explanations for the delayed 
investment behaviors.
    From a financial perspective, this delayed investment behavior is 
explained by a rather new model for explaining investment behavior 
known as the Dixit-Pindyck model. This model shows that when faced with 
certain conditions, a prudent investor will maximize his return by 
delaying investment in next generation technology. These conditions 
include a sunk cost investment, a high degree of market or technology 
uncertainty, and the absence of robust competition. Under these three 
conditions, which are all prevalent in the residential telephone 
market, a carrier is better off delaying a decision to invest in new 
technology. Since ILECs are required to provide telephone service, they 
invest in copper solutions which are suited for just plain old 
telephone service. See Kevin A. Hassett, J. Gregory Sidak, and Hal J. 
Singer, An Investment Tax Credit to Accelerate Deployment of New 
Generation Capability, February 28, 2000, p. 7, which states: ``A 
simple example can make the point more intuitive. The traditional view 
is that one should invest in any project that has a positive net 
present value of cash flows. Recent advances in economic theory have 
shown, however, that this rule is not always correct. On the contrary, 
it is often better to wait if at all possible until some uncertainty is 
resolved and cost reduction can be achieved. Consider, for example, a 
firm that traditionally offers telecommunications services through 
copper wire. The firm must decide whether to install a new advanced 
broadband line that costs, say, $100 today but has an uncertain return 
tomorrow. Suppose that, if the demand for high-bandwidth services is 
high, the firm stands to make $400 profit. If, on the other hand, there 
is a bad outcome and the demand for the new services is low, then the 
new ``pipe'' will be underutilized, and the firm will gain nothing from 
owning it. If the probability of either outcome is 0.5, then the 
expected net present value of laying the new broadband line is, 
ignoring discounting, calculated as follows: (0.5  $400) + 
(0.5  $0) - $100 = $100. We can summarize this simple decision 
problem in the following table.

 Scenario 1: The expected profit if firm installs a NGi fiber-optic cable that costs $100  and has an uncertain
                                                return tomorrow.
----------------------------------------------------------------------------------------------------------------
    Today                                     Tomorrow
-------------------------------------------------------------------------------------               Net Expected
    Invest         Invest                   Good Outcome                Bad Outcome                    Return
----------------------------------------------------------------------------------------------------------------
-$100          $0             +            (0.5  $400)                    e> $0)
----------------------------------------------------------------------------------------------------------------

    Because the project has a positive expected cash flow, one might 
think it optimal to install the cable today. But it is not. If the firm 
delays making the investment, it can reduce the risk by observing the 
experience of others and capturing the gains associated with deploying 
reducing-cost technology later. The value of waiting is that the firm 
can decide not to make the investment if the bad state occurs. We can 
summarize this subtler decision problem in the following table:

                                             Scenario 2: Expected profit if firm waits and decides tomorrow.
--------------------------------------------------------------------------------------------------------------------------------------------------------
      Today                                                    Tomorrow
---------------------------------------------------------------------------------------------------------------------                     Net Expected
     Invest            Invest                                Good Outcome                             Bad Outcome                            Return
--------------------------------------------------------------------------------------------------------------------------------------------------------
$0                $0                +                0.5  ($400-$100)    +                (0.5      =                $150
                                                                                                    $0)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    By waiting, the firm would increase its expected return by $50. If 
the firm invests today, it gives up an option to invest tomorrow that 
is worth $50. The firm is better off waiting because it can avoid the 
loss of $100 by not purchasing the new cable in the bad state. Note 
that the two examples would have the same expected return if the firm 
were allowed to resell the advanced broadband line at the original 
purchase price if there is bad news. But that salvage scenario is 
patently unrealistic for two reasons. First, many pieces of equipment 
are customized so that, once installed, they would have little or no 
value to anyone else. Second, if the demand for high-bandwidth services 
is indeed low, then the advanced broadband line would have little value 
to anyone else. For these reasons, the investment in the equipment is 
``irreversible'' or sunk in the sense that it has virtually no value in 
an alternative use.
    The study goes on to conclude that the incentive to delay for ILECs 
is intensified by the so-called unbundling rules which require 
incumbents to allow their competitors to use parts of the incumbents' 
network at a regulated rate. This rate does not provide a sufficient 
return on investment to justify investment is new technology.
    The parts of an ILEC's network that must be unbundled and resold to 
competitors are known as unbundled network elements, or ``UNEs.'' The 
FCC has defined the price for the sale of these UNEs as TELRIC, or 
total element long run incremental cost. TELRIC attempts to value the 
various network elements based upon their forward-looking costs. The 
FCC believes that TELRIC replicates how competitive markets actually 
operate by approximating what it would actually cost an efficient, 
competitive firm to produce UNEs.
    The study concludes that TELRIC pricing creates a disincentive to 
invest in new technology. It states:

        ``Most observers believe that mandatory unbundling [at TELRIC] 
        limits the upside potential of any new investment project and 
        that the expected return to investment in some projects may 
        fall below the firm's cost of capital. . . . This disincentive 
        to invest has been emphasized in the public debate over 
        telecommunications policy by both incumbent local exchange 
        carriers (ILECs) with respect to the local telephony networks, 
        and by AT&T with respect to proposals that unaffiliated 
        Internet service providers be given the legal right of 
        mandatory access to AT&T's cable-television networks.''\4\
---------------------------------------------------------------------------
    \4\ Id., p. 3-4

In other words, the rate of return provided for TELRIC pricing is 
inadequate to give carriers an incentive to invest in new technology.
    Other experts, including Kathleen Wallman, former Chief of the 
FCC's Common Carrier Bureau and Deputy White House Counsel as well as 
Supreme Court Justice Breyer, have observed this disincentive. Ms. 
Wallman stated in a speech to state regulators:

        ``Do we really mean to say that any carrier that is thinking of 
        building a new broadband network should count on being able to 
        recover, from day one of the operation, only the forward 
        looking cost of their brand new network? I don't think so. No 
        rational, efficient firm would take that deal. And that would 
        be our collective loss, not just theirs.'' \5\
---------------------------------------------------------------------------
    \5\ Remarks of Kathleen Wallman at the annual convention of the 
National Association of Regulatory Utility Commissioners, Boston, 
Mass., Nov. 11, 1997.

Similarly, Justice Breyer reinforced this observation last year when he 
noted that ``. . . a sharing requirement may diminish the original 
owner's incentive to keep up or to improve the property by depriving 
the owner of the fruits of value-creation investment, research, or 
labor.'' \6\
---------------------------------------------------------------------------
    \6\ AT&T Corp. v. Iowa Util. Bd., 119 S. Ct. 721, 753 (1999) 
(Breyer, J. concurring in part and dissenting in part) (citing 1.H. 
Demstez, Ownership, Control, and the Firm: The Organization of Economic 
Activity, 207 (1988)).
---------------------------------------------------------------------------
    The point is, the new economics as characterized by the Dixit-
Pindyck model combined with the unbundling rules at TELRIC create a 
powerful disincentive for ILECs to invest in new technology. This 
disincentive is reflected in the stock price of incumbents, including 
AT&T, when they make decisions to invest in infrastructure. Their stock 
price falls. In January, it was reported in The Wall Street Journal 
that the share prices of SBC, Bell Atlantic, and GTE fell when Paine 
Webber downgraded the firms because they ``. . . may have to make 
additional investments to deploy high-speed Internet-access services . 
. .'' \7\
---------------------------------------------------------------------------
    \7\ Stephanie H. Mehta, ``Local-Phone shares Fall Amid concern Over 
Firms' Need to Invest, Rising Rate,'' The Wall Street Journal, Jan. 13, 
2000, at B4.
---------------------------------------------------------------------------
    With this explanation, it is clear that both financial and 
regulatory changes are necessary to give carriers an incentive to 
invest in new technology, especially broadband technology. The 
important point to remember is that both financial and regulatory 
changes must be made.
    Both financial and regulatory changes have been proposed by Members 
of this Subcommittee. Senator Rockefeller recently proposed a bill to 
provide financial incentives for rural deployment of higher-speed data 
and broadband service. Senator Brownback has proposed a bill to 
eliminate the regulatory barriers to deployment of pocket-switched, 
higher-speed capability without repealing the inter-LATA restrictions 
or the unbundling requirement for the existing copper loop. Both 
proposals are necessary to get the ball rolling. I applaud their 
efforts.
Conclusion
    Mr. Chairman, in conclusion, I think my testimony can be summarized 
by two points: First, broadband is not happening. Second, to accelerate 
broadband technology deployment both financial and regulatory changes 
are necessary.
    Thank you for your time and attention. I stand ready to address any 
questions you may have.

    Senator Stevens. Mr. Chairman, I have got to leave.
    Mr. Regan, would you expand on this statement: ``Frankly, I 
think the term `broadband' is so imprecise it is probably 
useless at this point''?
    Mr. Regan. Yes, that is correct. Actually, the term 
``broadband'' really is an analog term. That came from another 
age. In the analog world the amount of information you can 
transmit depends upon the width of the spectrum band in which 
you transmit the information. The wider the band, the more 
information. So it was believed in the analog world when you 
transmit a video signal that uses a huge bandwidth, a band that 
is measured by six megahertz, that that is broadband.
    Obviously, in the computer world, in the data world, we are 
talking about data, we are talking about what is called bit 
rates. It is a wholly different concept. So really when we want 
to be precise in this debate what we need to be talking about 
is what kinds of applications are people going to need to be 
competitive in the next generation and how do we get networks 
built, bridges built, that will allow people to transmit at 
these speeds.
    As I said, Ethernet is 10 million. One channel of digital 
TV compressed using the most advanced compression technology is 
4 to 6 million bits. HDTV is 10 million bits. A telephone call 
is 64,000 bits. Add them up, it is a much bigger number than 
folks are talking about today.
    Senator Stevens. Is there another word for ``broadband'' 
that is coming into the jargon dealing with data?
    Mr. Regan. Well, I think that the better way to think about 
it is next generation Internet to the home.
    Senator Burns. ``High speed'' would not fit into that 
definition?
    Mr. Regan. I think that these generation technologies that 
folks are talking about doing and they are in fact doing--the 
telephone companies are doing a thing called ADSL, which is a 
wonderful technology that in fact can increase the speeds of 
copper wire by as much as a factor of ten. The solution that 
the cable guys are promoting, called cable modem service, which 
is also a wonderful technology--those are I think accurately 
described as higher speed data service.
    Broadband integrates this notion of data and video, and I 
think once you get to video it becomes a wholly different 
picture.
    Senator Burns. Thank you very much.
    John Fitzpatrick, who is the Executive Director of Mergers 
and Acquisitions for Touch America and operates out of Helena, 
Montana.

STATEMENT OF JOHN S. FITZPATRICK, EXECUTIVE DIRECTOR OF MERGERS 
     AND ACQUISITIONS, TOUCH AMERICA, INC., HELENA, MONTANA

    Mr. Fitzpatrick. Thank you, Senator Burns, Members of the 
Subcommittee.
    Senator Burns. You might want to pull that microphone up.
    Mr. Fitzpatrick. Members of the Subcommittee, thank you for 
the opportunity to be here.
    If I could, I would like to just look at this map for one 
second.
    [Pause.]
    Senator Burns. You mean that one down there? You are almost 
covered up over there.
    Mr. Fitzpatrick. Again, thank you for the opportunity to 
appear before the Subcommittee. I am with Touch America, which 
is the telecommunications subsidiary of the Montana Power 
Company. The company is headquartered in Butte and it operates 
one of the largest fiber optic networks in the country, a 
network that we expect to have expanded to 26,000 route miles 
by the end of 2001.
    Touch America is a company that was born in a rural area. 
It has grown to success in rural areas. We are a company that 
is focused on developing a retail strategy primarily with rural 
areas, and we believe that we know something about operating 
telecommunications services in rural areas.
    We are one of the companies that Representative Tauzin 
referred to this morning as building the four-lane highways. I 
want to tell you that we are not just building the four-lane 
highways, we are also building the off-ramps. One of the off-
ramps we have built is in Fargo, North Dakota, and we have 
built off-ramps in Casper, Wyoming, and in seven locations in 
Montana which are not shown on the map. We have the capacity 
today to provide broadband services in a number of communities 
that are alleged not to have access to advanced 
telecommunications services.
    One of the biggest problems is not that the broadband 
capacity does not currently exist, it is a problem with the 
local loop. For example, a business in Fargo, North Dakota, 
that wanted to get advanced or high speed data transmission 
through Touch America would still have to deal with the local 
loop from US WEST, and that can be expensive, but more often it 
is a time issue, waiting sometimes weeks, if not months, to get 
that service provisioned.
    Touch America is a relatively new company. We have been in 
business about 16 years. We started off building microwave 
systems, went to building fiber systems for other companies and 
for ourselves, and have moved into the retail market.
    There are a couple of major things I think that have 
happened within the telecommunications industry that have been 
very important to our company and we think very important to 
the future of telecommunications. First is the divestiture of 
ATT and the opening of the long distance business to 
competition. That was the phenomenon that provided an 
opportunity for companies like Touch America and others that 
primarily started as inter-exchange carriers to get into the 
business.
    But I think a second and probably more important phenomenon 
has been taking place in the last decade, and that is the 
systematic abandonment of rural America by the RBOC's and other 
large local incumbent carriers. As Director of Mergers and 
Acquisitions, I have had an opportunity to look at a number of 
potential wireline exchanges that have been offered for sale by 
the RBOC's. They do not want to be in rural America. They are 
focusing their energies at urban America and they have 
systematically sold off exchanges in those parts of their 
territories that are probably the most sparsely populated and 
offer lowest profit margin.
    But this has not been a loss for rural America. Quite 
frankly, it has been an opportunity, because the people buying 
these exchanges are committed to the rural markets. They have 
been making substantial new investments in telecommunications 
infrastructure and they have been providing advanced services. 
Just a couple of examples.
    The first company to deploy PCS services in the State of 
Montana was not US WEST or even Touch America. It was the Three 
Rivers Wireless Coop out of Fairfield. Mid-Rivers Telephone 
Cooperative, based in Circle, Montana, a community of about 
500, has announced plans to install DSL in eight Montana 
communities in the eastern part of the State. In a territory 
that would be approximately the size of the State of 
Massachusetts, they will be providing DSL services in four 
communities under 500 population.
    In contrast, Big Timber and Townsend, Montana, which are 
three and four times the size of places like Baker and Ekalaka 
and Circle and Jordan, there are no plans for DSL services, and 
from my personal guess it will probably be many years before 
they see it. What is the difference? Circle, Jordan, Ekalaka, 
Baker are provided services by the local telephone coop; Big 
Timber, Townsend get their services from US WEST.
    In the State of Iowa, a consortium of 122 coops and 
independent telcos formed a company called Iowa Network 
Services to provide long distance services and Internet in 
rural areas. We recently partnered with them to buy GTE's 
telephone exchanges, all of which would be classified as rural. 
The largest city in the 296 exchanges we are buying is Newton, 
with a population of about 15,000. The new company, Iowa 
Telecommunications Services, is already offering Internet 
services in communities that were not previously provided those 
services by GTE.
    The list of those types of examples can go on endlessly. 
There is success story after success story out in the rural 
West. In Montana, Touch America is employing LMBS services. It 
is the first commercial application of that technology. We have 
built it out in Billings and Butte, Montana; Casper, Wyoming; 
and Walla Walla, Washington, and are extending it to our other 
22 basic trading areas in the next 2 years. We are now involved 
in two joint ventures to provide PCS services, one with US 
WEST, which will provide an area of coverage from western 
Minnesota to the crest of the Cascade Mountains in Washington. 
A second, more recent investment was one made with a company 
called Wireless North, based in Minnesota, which will be 
providing PCS services in the rural parts of that State.
    At Touch America we do not see the digital divide as 
preeminently a geographic issue, but rather one that ultimately 
will prove to be cultural and socioeconomic in nature. There 
are great opportunities for telecommunications businesses 
serving rural areas and when you have companies that are 
interested in serving those areas, like the small telcos, the 
coops, and companies like Touch America, the job gets done.
    We think that the Telecommunications Act of 1996 is working 
effectively. It does take time to employ and deploy new 
technologies. The lead times for switches and base stations for 
radio equipment can be months. You cannot expect these types of 
systems to be built overnight. But frankly, in our judgment it 
is much too early to be thinking about revisiting the act to 
make major changes, and particularly to make major changes in 
the area of data transmission.
    Thank you.
    [The prepared statement of Mr. Fitzpatrick follows:]

   Prepared Statement of John S. Fitzpatrick, Executive Director of 
             Mergers and Acquisitions, Touch America, Inc.
Introduction
    I am Dr. John S. Fitzpatrick. I am Executive Director of Mergers 
and Acquisitions for Touch America, Inc.
    Touch America, Inc. is headquartered in Butte, Montana. It is a 
wholly owned telecommunications subsidiary of the Montana Power 
Company. Touch America, Inc. operates one of the largest fiber optic 
networks in the country with 12,000 route miles of fiber currently 
completed, a figure that is projected to increase to 26,000 miles by 
the close of 2001. Much of our network is located in sparsely 
populated, rural areas of the Rocky Mountain and Great Plains states. 
Exhibit 1 shows the company's fiber routes as they currently exist and 
how they are projected to grow during the next several months. *
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    * The information referred to was not available at the time this 
hearing went to press.
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    Touch America's principal lines of business include:

          1. Serving as a wholesale provider of transport services to 
        other telecommunication companies from small rural cooperatives 
        to the largest, investor owned interexchange carriers.
          2. Providing retail telecommunications services to 
        residential and commercial customers including:
                a. Long Distance
                b. Private Line ATM, Frame Relay
                c. Internet
                d. Calling Card, and
                e. 800/888 inbound services
          3. Serving as a supplier of telecommunication equipment for 
        commercial applications (e.g. PBX and Centrex Systems) in 
        several Northwestern States.
          4. Providing fiber optic construction services for other 
        telecommunication companies. Touch America, Inc. is currently 
        overseeing the construction of six major fiber routes for AT&T.
          5. The company recently started to provide local access 
        services as a competitive Local Exchange Carrier in the state 
        of Montana. We are currently negotiating interconnect agreement 
        in the remaining 13 US West states.
          6. Touch America is currently installing LMDS networks in 25 
        cities in the Northwest and upper Midwest. The first of those 
        installations in Billings, Montana was the first commercial use 
        of this technology. Currently this service is in operation in 
        Billings and Butte Montana; Walla Walla, Washington and Casper, 
        Wyoming.
          7. Touch America is aggressively working to deploy PCS 
        service through a variety of business arrangements.

    Notwithstanding its location in the rural West, Touch America, Inc. 
has built a successful telecommunications business. Current annual 
revenues are projected to exceed $100 million in 2000 and the company 
is profitable. Touch America believes its success is directly related 
to its ability:

          1. To efficiently construct low cost telecommunications 
        network.
          2. To offer its customers a quality telecommunications 
        product at a competitive price.
          3. To establish cooperative supply and marketing 
        relationships with other carriers for the mutual benefit of the 
        carriers and their customers.

    During 1999, Touch America, decided to increase its focus on 
supplying retail telecommunication services and, to that end, has 
entered into a series of strategic partnerships, which will greatly 
enhance the delivery of the company's services particularly in rural 
areas. Those partnerships include:

          1. Touch America Colorado, a joint venture with New Century 
        Energies to provide telecommunication services in the Denver 
        Metropolitan Area.
          2. TW-Wireless, a joint venture with US West Wireless to 
        provide PCS services in 22 BTA's extending from the crest of 
        the Cascade Mountains in the State of Washington to Western 
        Minnesota, including the states of Idaho, Montana, Wyoming, 
        North and South Dakota.
          3. Taking an equity position in Wireless North, LLC, a PCS 
        company created by a consortium of Minnesota Telephone 
        Cooperatives and small Independent Telecommunication companies. 
        Wireless North's license areas are in the Dakotas, rural 
        western Wisconsin, and Minnesota outside the Twin Cities.
          4. Iowa Telecommunication Services (ITS), a joint venture 
        involving Touch America, Inc. and Iowa Network Services, 
        another consortium of cooperatives and Independent Telco's. It 
        is purchasing GTE's telephone exchanges in rural Iowa.
          5. MEDNET, a partnership between Touch America and St. 
        Patrick's Hospital in Missoula, Montana that is providing 
        telecommunications equipment and long distance and private line 
        services to hospitals and clinics in western Montana.

    On Thursday, March 16, 2000, Touch America, Inc. announced plans to 
acquire the long distance assets of Qwest Communications in the 14 
state region served by US West. Qwest is divesting itself of these 
assets as a condition to its proposed merger with US West. For Touch 
America, Inc., the proposed acquisition will greatly accelerate the 
growth of the company, and it will make us one of the larger suppliers 
of telecommunication services in the rural West.
 Section 706
    Section 706 of the Telecommunications Act of 1996 encourages

        ``The deployment on a reasonable and timely basis of advanced 
        telecommunications capability to all Americans . . .''

Where, advanced telecommunication capability is defined as

        ``A high-speed, switched broadhead telecommunications 
        capability that enables users to originate and receive high 
        quality voice, data, graphics, and video telecommunication, 
        using any technology.''

    Section 706 provides a great opportunity, as well as a great 
challenge to America's telecommunications industry. At Touch America, 
the emphasis is on the opportunity provided by Section 706, not the 
problems or challenges that may be encountered in providing advanced 
telecommunications services to all American's. If Congress will stay 
the course, and allow competition to develop and flourish within the 
telecommunication industry, companies like Touch America will help the 
nation achieve the goal set forth in Section 706.
Restructuring of the American Telecommunications Industry
    The divestiture of AT&T in 1982 completely restructured the 
American telecommunications industry. The responsibility for providing 
local access service was shifted to seven Regional Bell Operating 
Companies (RBOC) and the long distance business was opened to 
competition which, ultimately, provided consumers with more product 
choices and lower prices.
    More recently the industry has continued to restructure itself with 
the RBOC's entering into mergers with each other and with interexchange 
companies. At the same time, the RBOS's have divested themselves of 
large numbers of rural telephone exchanges in an effort to consolidate 
operations and focus on the large urban markets. For example, during 
the past five years, US West has offered 70 of its Montana rural 
exchanges for sale and has undertaken similar initiatives in the other 
states in its region. In late 1998, GTE announced a repositioning 
effort that included the sale of about 1.5 million access lines in the 
rural areas of 13 western, mid-western, and southern states.
    At first blush, these actions might be misconstrued as reducing 
telecommunication opportunities for rural residents and businesses. 
Actually, the opposite is the case, for two major reasons.

          1. In many cases, the RBOC's had neglected the rural 
        exchanges being sold. Equipment was obsolete and service levels 
        poor. The rural exchanges were seen as an obligation rather 
        than as an opportunity.
          2. While the RBOC's selling the exchanges did not want to be 
        in those areas, the sale of these exchanges provided real 
        growth opportunities for new companies interested in and 
        committed to serving rural customers. These companies have not 
        only purchased the exchanges, but have upgraded them, improved 
        service levels, and increased product/service offerings to 
        their customers.

    Examples of this commitment to rural customers include:

          1. In Montana, the Blackfoot Telephone Cooperative acquired 
        nine exchanges totaling 7,000 access lines from US West in 
        1994. Since then, Blackfoot has invested $17 million upgrading 
        switching equipment, installing fiber optics, and improving 
        service offerings. Five years ago, areas that did not have 
        access to 911, custom calling features, voice mail, ISDN, DSL, 
        or even simple dial-up access Internet, have them today.
          2. The Montana Advanced Information Network (MAIN), created 
        by the state's small independent companies and cooperatives, 
        provides fiber optic connectivity and transport throughout 
        Montana's rural areas. Vison Net, Mid-Rivers and Range 
        Cooperatives who use MAIN's Network provide interactive video 
        services to around 90 rural sites. (See Exhibit 2) *
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
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          3. Mid-Rivers Telephone Cooperative based in Circle Montana 
        plans to deploy DSL services in right exchanges during 2000, 
        including Circle, Jordan, Baker, and Ekalaka, Montana. These 
        communities are located in some of the most sparsely populated 
        territory in the continental United States. In contrast, US 
        West currently offers DSL in one Montana community, Helena, the 
        state capital and the Montana headquarters for US West.
          4. MEANS, standing for Minnesota Equal Access Network, 
        recently renamed Onvoy, was formed by a consortium of small 
        independent telephone companies and cooperatives to offer equal 
        access to rural telecommunications consumers. The company 
        provides long distance, Internet service on a wholesale and 
        retail basis throughout rural Minnesota.
          5. Iowa Network Services (INS) another consortium of rural 
        Telcos and Coops. It began operation as an equal access 
        provider and is now one of the largest suppliers of Internet 
        Services in Iowa. Partnered with Touch America is purchasing 
        GTE's rural telephone exchanges totaling over 280,000 access 
        lines, through a new company, Iowa Telecommunication Services 
        (ITS). ITS is already offering Internet services in communities 
        where it was not available through GTE.
The Digital Divide
    The concept ``Digital Divide'' refers to an alleged dividing line 
between that part of the population which has access to advanced 
telecommunication services, principally high speed Internet, and those 
who lack such access. The concept frequently emerges in discussions of 
economic development and it is typically tied to rural versus urban 
geography, with the distinct implication that rural areas are 
disadvantaged relative to the urban counterpoints because they do not 
or will not have access to advanced services.
    Touch America, Inc. would like to offer these thoughts about the 
Digital Divide:

          1. While broadband communication systems reach back over two 
        decades, it has been only recently that the technology has 
        advanced to the point that it can be employed at the small 
        business or individual consumer level. At that, the price is 
        still high when compared to services provided over conventional 
        copper wireline facilities. As the demand for advanced 
        telecommunication services accelerates and, if competition is 
        allowed to continue, prices will decrease and access to, and 
        the use of, such services will increase.
          Physically, the largest impediment to the provision of 
        advanced telecommunication services is the ``last mile 
        connection'' between the consumer and the telecom network. 
        There are several promising technological developments, 
        including hybrid co-axial cable/fiber systems, microwave 
        wireless systems, including PCS and LMDS applications, and, 
        ultimately, satellite systems that can close the last mile gap.
          On this issue, a certain amount of patience is required. 
        Remember that it took close to fifty years after its invention 
        before conventional telephone technology became a staple in 
        America's businesses and homes. Public policy has not failed 
        nor has America's telecommunication industry, because high 
        speed Internet access is not linked to the majority of the 
        nations computers, four years after the passage of the 
        Telecommunication Act.

          2. While this company is fundamentally suspect of the concept 
        of a Digital Divide, if such a phenomenon exists, we see it 
        primarily as a cultural or socioeconomic issue rather than one 
        based in geography. Such a divide ultimately will be between 
        those who want advanced telecommunication services and those 
        who do not; those who have the background and experience to use 
        such services and those who do not. In the near term, prices 
        may be somewhat of an issue, but telecommunication services are 
        becoming increasingly ``commoditized''. Prices in real terms 
        are dropping, and consumers will have access to advanced 
        services at reasonable rates. That has already occurred in the 
        long distance business and the Internet is not far behind.
          In public policy discussions about advanced telecommunication 
        services, there appears to be an assumption that a large, 
        unserved demand exists for these services.
          I recently visited with the manager of the Mid-Rivers Coop, 
        the firm that, as previously mentioned, plans to offer DSL 
        services in eight rural Montana communities this year. He 
        indicated that the company's DSL investment plans were somewhat 
        of a leap-of-faith in as much, it did not have a clear picture 
        of the degree of customer demand, in the short term. At Touch 
        America we don't see ``unserved telecommunication needs'' so 
        much as an ``emerging demand'' that will grow as businesses and 
        individuals become more skilled with and experience the utility 
        of advanced services.
          The phrase from the movie ``Field of Dreams,'' ``if you build 
        it they will come'' may be applicable to telecommunication 
        services though certain investors in failed technologies might 
        question that premise. But, from a public policy perspective, 
        it is equally important to ask over what time period and at 
        what cost. Again, reference to a more practical perspective and 
        patience is in order. There is not a uniform need in this 
        society for all entities to receive and transmit data at 
        gigabit speeds. The telecommunications needs of the country are 
        evolving as is the industry itself. And, while there are some 
        dislocations in the marketplace, they are neither large, nor 
        fatal, and they most certainly do not require a major 
        adjustment in public policy at this time.

          3. Telecommunication services are a tool not a panacea. The 
        immediate presence or absence of advanced services is not going 
        to make or break the economy of rural America. Economic 
        development or decline is rarely reducible to a single 
        variable. The invention of the telephone, which was readily 
        adopted by rural residents neither precipitated nor prevented 
        the decline of the family farm. Advanced telecommunication 
        services are not a miracle drug for rural economies. The rural 
        economy is primarily a resource extractive economy based on 
        agriculture, timber, and/or mineral production and the type of 
        telecommunication services available does not change that fact. 
        We readily acknowledge that advanced telecommunication services 
        can provide value to businesses, governmental institutions, 
        schools, and individuals and, further, that insuring widespread 
        access to such services is a desirable goal of public policy. 
        To be effective, public policy needs to be based on a realistic 
        understanding of its costs and benefits and not move forward 
        based upon hopes and promises.

          4. The Digital Divide is more of a political construct than a 
        real telecommunications phenomenon. It has been seized upon and 
        is being used as a springboard by governmental agencies seeking 
        to create a role for themselves within the telecommunications 
        industry and by certain groups and companies seeking to 
        undermine the requirements of Section 271 of the 
        Telecommunication Act.
          There seems to be no shortage public sector task forces 
        examining the feasibility of extending the ``benefits of 
        advanced telecommunication services to the underserved'' which 
        usually means small cities and towns in rural areas.
          As an example, the Bonneville Power Administration has 
        announced an initiative to add fiber optic cable to its 
        electric transmission system ostensibly to help provide 
        advanced telecommunication services to units of local 
        government, schools, and non-profit institutions in its service 
        territory. BPA's transmission lines, like those of investor-
        owned electric utilities, may run through the countryside, but 
        they connect cities because that's where the electric loads 
        exist. BPA's fiber optic plan of action, for itself, does 
        little more than duplicate, 
        the telecommunication networks of companies like Sprint, AT&T, 
        and Touch 
        America.
          BPA is not currently preparing to become a retail 
        telecommunication supplier. That likely would be done by the 
        Public Utility Districts and REA Coop's in direct competition 
        with the rural telephone cooperatives, small independents, and 
        other investor owned telecommunication companies.
          The program the BPA is developing leverages the Digital 
        Divide as a social program in an effort to support the BPA's 
        expansion into the competitive telecommunications markets. 
        Oddly enough while the BPA touts itself as the savior of rural 
        America, its current fiber optic plans call for construction of 
        fiber facilities along the I-5 corridor in some of the most 
        heavily populated areas of the Northwest.
          Another Trojan Horse in the Digital Divide discussion is the 
        notion that the RBOCs need relief from the requirements of 
        Section 271 to help provide advanced telecommunication 
        services. Actually, if the RBOCs want to provide advanced 
        services like DSL, they simply need to install the equipment on 
        their existing networks. They do not need to be in the long 
        distance business to accomplish that goal.
Closing
    The divestiture of AT&T started a process of both reorganizing 
America's telecommunications industry and opening it to competition, 
the benefits of which have been realized by virtually all citizens 
through improved communication services and/or lower prices. The 
Telecommunication Act of 1996 continued public policy emphasis on 
enhancing competition with the industry. Telecommunication companies 
are moving aggressively to upgrade their networks while improving and 
expanding service offerings for consumers. The goal of Section 706 is 
being met. It won't happen instantly, but it will happen provided 
competition is allowed to flourish.

    Senator Burns. Thank you, Mr. Fitzpatrick.
    We now have Mr. Steve Gray, President and Chief Operating 
Officer, McLeodUSA, Technology Park, from Cedar Rapids, Iowa.
    You got to get the corn market up out there, too.

  STATEMENT OF STEPHEN C. GRAY, PRESIDENT AND CHIEF OPERATING 
                       OFFICER, McLEODUSA

    Mr. Gray. We will try. We will certainly try.
    Senator Burns. Thank you for coming this morning.
    Mr. Gray. Good morning, Mr. Chairman, and good morning to 
the rest of you.
    Since 1994, McLeodUSA has been exploring quite a few 
opportunities in what is now referred to as the broadband 
digital age, and in fact we have had some success in investing 
in a lot of the markets that in fact the mega-Bells are 
abandoning. We have had success in offering our services to 
both small business and residential consumers. In fact, we are 
probably the antithetical of what most people perceive CLEC's 
to be, in that we are not tier one market players, cream-
skimming businesses. We are out there in tier two and tier 
three and tier four markets, focusing on bringing broadband 
services to both business and residential customers.
    In fact, one of the manifestations of those activities is 
highlighted by our $2 billion of capital that we have invested 
in 1999 and will invest in the year 2000. Most recently, in 
January of this year--and I would like to update this map--we 
acquired a company called Split Rock USA. Split Rock is capable 
of providing Internet services to 90 percent of the United 
States with a local phone call, with 350 of the most advanced 
Internet pops in the United States, trademarked by ATM to the 
Edge.
    Well, when you look at the 2.1 billion that we paid for 
Split Rock, plus the 2 billion of our capital expenditures, we 
will have invested over $4 billion of equity last year and this 
year. Which, parenthetically, is about 4 and a half times our 
1999 revenue--not our costs, but our revenues.
    Additional factoids with respect to McLeodUSA: 26,000 miles 
of operating fiber, 350 very sophisticated ATM frame relay and 
Internet pops, 300,000 customers, of which 60 percent are 
residential and the remainder almost exclusively small 
business. We are supporting over 250,000 Internet transactions 
per day, adding 25,000 subscribers per month to our advanced 
Internet network.
    In addition to that, we have created over 9,000 jobs in 
this telecom and technology space, while other companies in our 
areas have been downsizing or rightsizing, leading to 
employment in the State of Iowa of approximately 2 percent.
    What would I ask you gentlemen to do? One, support the 1996 
Telecommunications Act. This is not the Voice Act, it was the 
Telecommunications Act. To Senator Dorgan's point, any CEO that 
did not recognize the data opportunity in 1996 should have a 
big problem with their board. Because it was 50 percent of the 
traffic then. The major manufacturing companies had over 10,000 
products and services in design for this opportunity that we 
are now all trying to exploit.
    The second thing that I would ask you to strongly consider 
is making that 14-point checklist mandatory. Why? The 
consequences, I think, are very grave if you consider the 
following. Is competition good? If competition is good, I think 
what is more important is not how quickly we run the first 13 
miles of this race, but how we finish the race.
    What that will mean is if we move too quickly to deregulate 
these mega-Bells, I will assure you that you will knock out 
quite a few CLEC's and you will make quite a few of us very 
dizzy. The only thing--and I heard this when I testified 4 
years ago in North Dakota from one of the commissioners in 
North Dakota--the only thing worse than a regulated monopoly is 
a deregulated monopoly.
    And until we have effective, irreversible competition in 
place, if I were the CEO of a Bell company, I would say to my 
troops, focus on load coils, bridge taps, provisioning issues, 
electronic data interexchange, OSS, implementation standards, 
performance penalties, and providing great customer service to 
both my retail and my wholesale customers. This, Mr. Chairman, 
I believe is the essence of that 14-point checklist. The net 
net is if there is a will, there is a way for these mega-Bells 
to enter this data world sooner versus later.
    Thank you very much.
    [The prepared statement of Mr. Gray follows:]

 Prepared Statement of Stephen C. Gray, President and Chief Operating 
                 Officer, McLeodusa, Cedar Rapids, Iowa
Summary of Testimony
    McLeodUSA, headquartered in Cedar Rapids, Iowa, is a leading 
facilities-based Integrated Communications Provider serving both 
residential and business customers. We currently operate in 12 Midwest 
and Rocky Mountain states; nine additional states have been targeted 
for expansion. We have focused on serving customers in smaller markets 
(Tier 2, 3, 4), rather than in major metropolitan areas. The core 
business of McLeodUSA is to provide ``one-stop,'' integrated 
communications services including local, long distance, high-speed 
Internet access, voice mail and paging all from a single company on a 
single bill, tailored to the customer's needs. McLeodUSA, with 8,100 
employees, has currently deployed over 10,000 miles of fiber. The 
Company derives its revenues from the sale of telecommunications 
services and the publication of telephone directories. McLeodUSA 
Publishing will print and distribute more than 25 million directories 
in 23 states, reaching 43 million people, over the next 12 months.
    McLeodUSA strongly encourages Congress to resist any RBOC proposal 
for broadband data relief. The 1996 Telecommunications Act is working 
to bring competition to telecommunications consumers in all areas of 
the country. While that competition is not progressing as rapidly as 
many would hope or were led to believe in 1996, the delays have 
resulted not from inadequate legislation, but from a failure of the 
incumbent RBOCs to fulfill their duties under that legislation. 
Attempting to impose an artificial distinction between data and voice 
services will only serve to delay the deployment of advanced services 
and the development of competition in general. This result will 
disadvantage consumers, and delay the goal of providing faster, better, 
less expensive telecommunications services to all Americans.
    Finally, if high speed data services and facilities are 
deregulated, confusion about ultimate goals will not be limited to 
customers. McLeodUSA is acutely aware of the need to maintain investor 
confidence in the national goal of bringing competition to the 
telecommunications marketplace. That confidence has been bolstered by 
the clear commitment to the 1996 Telecommunications Act, and the 
efforts of the FCC, to reach that national goal. Legislation which 
would carve out data services from the pro-competitive goals of the Act 
would be seen in financial markets as a retreat from that national 
commitment. As a result, the ability of new entrants to raise the 
capital needed to bring true, facilities-based competition to all 
telecommunications markets could be placed in jeopardy. Thus, the drive 
toward competition could be slowed even though that is not what was 
intended by supporters of such ``data deregulation'' legislation.
    On behalf of McLeodUSA, I would like to thank the Subcommittee for 
the opportunity to talk with you today. I would like to accomplish 
three goals today: first, provide a high level overview of McLeodUSA; 
second, summarize our concerns with providing broadband data ``relief'' 
to the RBOCs; and third, emphasize Wall Street's predictable reaction 
to providing ``data relief'' to the RBOCs.
I. McLeodUSA Overview
    Clark McLeod and I formed McLeodUSA, headquartered in Cedar Rapids, 
Iowa, in 1992. This is not our first foray into telecommunications. In 
the early 1980s, Clark formed Teleconnect and built it into the fourth 
largest long distance company in the United States. In 1990, MCI 
purchased the company, then named TelecomUSA. McLeodUSA is a member of 
the major trade associations representing the competitive 
telecommunications industry, the Competitive Telecommunications 
Association (CompTel), and the Association for Local Telecommunications 
Services (ALTS).
    In 1992, desiring to bring competition to the local telephone 
industry, we formed what today is called McLeodUSA Incorporated. Our 
primary focus as a company has been to serve small business and 
residential customers in the Tier 2, 3, and 4 markets in our target 
states. As a result (as of January 1, 2000), we provided competitive 
local exchange services to over 280,000 telecommunications customers, 
in the 12 Midwest and Rocky Mountain states. (We have targeted an 
additional 9 states for expansion this year). Nearly 30 percent of the 
679,000 total access lines served by McLeodUSA are residential lines. 
Our average business customer subscribes to 5.5 lines.
    McLeodUSA's corporate team, with over 250 years of experience, is 
recognized as one of the strongest management groups in the telecom 
industry. Strong because of our breadth, and strong because of our 
depth.
    McLeodUSA has already become the leading facilities-based 
Integrated Communications Provider (ICP) in our market area, providing 
local, long distance and high-speed Internet services.
    McLeodUSA derives its revenues primarily from the sale of 
telecommunications services and the publication of telephone 
directories. McLeodUSA has developed one of the largest competitive 
white and yellow page directory companies in the United States. In 
fact, McLeodUSA Publishing will print and distribute more than 25 
million directories in 23 states, reaching 43 million people, over the 
next 12 months.
    The opportunity for our employees is incredible: one third of our 
stock ownership resides with employees. This is an important linkage 
for our investors, and gives our employees a major stake in our 
success.
    McLeodUSA's three-part phased execution is success based. First, 
building local line market share by resale and by leasing Bell 
facilities . . . concurrently expanding our brand presence.
    Second, building the platform, with inter-city fiber connecting 
regional gateways.
    And third, our current phase, migrating customer traffic on-switch/
on-net, which involves constructing intra-city fiber which connects our 
customers with our regional gateways.
    This execution allows us 100% access to build customer share, while 
capital is efficiently and effectively deployed.
    In our first phase of building customer share, we have leased RBOC 
central offices, which allows us to sell to 100% of the customers in 
our 592 cities. In addition to pervasive coverage, this service is 
relatively easy for the Bells to provision and is generally a 
transparent switch over. Once the switch has occurred, we control many 
of the features for the customers through on-line provisioning 
terminals.
    Our data strategy, with our recent acquisition of Splitrock 
Services, Inc. and the addition of industry veteran Roy Wilkens to our 
management team, will add new revenue opportunity from our collocations 
and XDSL technology. The Splitrock network includes 350 ATM 
(asynchronous transfer made) switches providing dial-up and dedicated 
data services to other competitive local exchange carriers (CLECs), 
Internet service providers (ISPs) and large multi-state business 
customers. Splitrock also has a 20-year irrevocable right of use (IRU) 
for up to 16 fibers in a 16,000-mile network. This broadband network is 
capable of carrying integrated voice, data and video signals to 90 
percent of the nation's population in 800 cities across all 50 states.
    Concurrent with building customer share, we have executed the 2nd 
phase of our strategy and deployed the most advanced platform in our 
region. Over 10,000 miles, both intra-city and inter-city, high-density 
fiber, SONET ring topology, with incredible capacity, is capable of 
supporting all our voice, data and video applications.
    For the last 5 years, McLeodUSA has been focused primarily on the 
voice market; however, the data opportunity is explosive. Data revenues 
will surpass voice revenues in 2009. And the bandwidth required to 
capture data will require companies to own or control high capacity 
networks. McLeodUSA is positioned for these opportunities in several 
key areas.
    First, the market position. Our customers conveniently have only 
one number to call for customer service, and one bill provides the best 
value proposition--one company, simple and complete.
    Second, our customer service is World Class. Our goal is to have a 
real person answering calls within 20 seconds, 24 hours a day, 7 days a 
week, with one call resolutions. Great people providing great service. 
McLeodUSA has proof. Since 1994, we have averaged 0.5% business 
customer churn, the lowest in the industry.
    Finally, from a platform position, we can pick the best solution 
for the customer and the company. Our collocations connect to local 
access rings, which connect to 500 mile backbone rings, which then 
attach to high capacity regional gateways. This design is a low cost 
way to serve 1st, 2nd and 3rd tier markets with one regional center, 
robust capacity, and functionality. It also allows us to use both our 
network and the Bell network to optimize the economics.
    Our results through end of year 1999 have been incredible.

    Directories:      1998: 14 million          1999: 21 million
    Local Lines:      1998: 400,000             1999: 679,000
    Network:          1998: over 7,000 miles    1999: over 9,000 miles
    Revenue:          1998: $600 million        1999: $909 million


II. Concerns about providing ``data relief'' to the RBOCs
    Based on the progress that McLeodUSA has made in bringing 
competition to its markets, it is tempting to conclude that all must be 
going well in the world of emerging telecommunications competition. 
This optimistic conclusion, however, ignores the reality faced by 
McLeodUSA every day: that the incumbent RBOCs upon whom we depend for 
inputs are doing everything in their power to limit our ability to 
serve our customers. Those companies, at every turn, make use of each 
opportunity to introduce delay, uncertainty, and unnecessary expense 
into our business relationship.
    This situation reveals an important fact about the relationship 
between emerging competitors like McLeodUSA and established incumbent 
RBOCs: the grossly unequal commercial power between those entities. 
Typically, when two companies negotiate a commercial agreement, both 
parties have something to gain and something to lose; and that 
situation leads both parties to seek a result where there is mutual 
benefit. In such a case, because either party can seek a better bargain 
elsewhere, both parties seek a compromise solution that maximizes their 
mutual gains. In contrast, our relationships with RBOCs show clearly 
that those companies believe they have nothing to gain by dealing with 
McLeodUSA. As a result, we typically find that compromise is not 
possible, and we are told that, if we disagree with an RBOC position, 
we will need to seek regulatory relief.
    An example of this type of conduct is instructive. We have had a 
dispute with an RBOC about the charges that we pay when we order 
unbundled loops; not the recurring ``monthly'' charge (which we also 
believe is generally too high), but simply the one-time charge to have 
the loop supplied at all. We are sometimes charged thousands of dollars 
when the RBOC supplies these loops, even though there is no charge at 
all when the same service is provided to the same location by the RBOC 
for its own end-user customer. We know that this is the case because, 
when these charges have made it financially impossible for use to serve 
the customer ourselves, that customer has ordered the same service from 
the RBOC and not been charged for such ``special construction.''
    Under the forward-looking TELRIC pricing standards used to 
determine rates for unbundled loops, we believe that loop costs should 
already include the ability to ``unbundle'' loops. Even if this were 
not the case, however, there is certainly no reason for competitive 
carriers to be charged by the RBOC when the RBOC would not charge its 
own end-users. We believe this situation is a clear example of 
discrimination against companies like McLeodUSA. At least two state 
commissions--the Michigan Public Service Commission and the Illinois 
Commerce Commission--have agreed, and have refused to allow such 
``special construction'' charges for unbundled loops.
    Of course, the RBOC is appealling those decisions to court; and 
when we have attempted to use the reasoning of those decisions in the 
RBOC's other states to convince them to change their position on this 
issue, the response we received was a flat ``no,'' with the notation 
that we were free to litigate before the other state commissions if we 
so desired.
    This result plays into the RBOC's long-term strategy in two ways. 
First, by requiring new competitors to expend their resources 
litigating issues multiple times before regulatory agencies and in 
subsequent court appeals, they are effectively diverting the 
competitor's resources away from the goal of providing competitive 
services to customers. Second, by simultaneously attempting to convince 
state legislatures and the Congress that regulatory oversight must be 
reduced, they are trying to close the only channel available to us to 
obtain fair treatment. And that brings us squarely to the subject 
before the Subcommittee today.
    It is clear to me in my job as President of McLeodUSA that the 
RBOCs with which we deal are not committed to allowing competitive 
markets to develop in their historical monopoly territories. Instead, 
it appears that these RBOCs are committed to finding a way to enter 
markets which are ``off limits'' under the Telecom Act while preserving 
their local exchange monopolies essentially intact. Deregulation of 
data services is an integral part of that strategy.
    News reports, industry analysts, and assorted pundits have all 
noted the ``convergence'' of voice and data technology in recent years. 
My company firmly believes in such convergence. Given this phenomenon, 
it is not at all clear why policymakers should spend the effort 
required in an attempt to develop separate legal frameworks for voice 
and data. The Telecommunications Act itself defines 
``telecommunications'' to include any ``information of the user's 
choosing.'' This definition on its face includes voice, data, video, 
and all other sources of ``information.'' If the data services were not 
to be included within the procompetitive framework of the Act, it would 
have been a simple matter to specify that telecommunications included 
only ``voice'' services; yet the Congress did not do that when the Act 
was passed in 1996. Existing law makes no artificial distinction 
between voice and data services; both are considered to be 
``telecommunications.'' This is a wise course, and it should be 
maintained.
    In fact, attempting to develop separate frameworks is bound to 
result in an artificial situation which is more complicated, less 
efficient, and ultimately does not serve the needs of our customers. In 
the long run, there will be no reasonable distinction that can be made 
between voice and data as it is carried over telecommunications 
networks. Even now, much of the voice traffic carried on existing 
telecommunications networks is carried in digital form. Since digital 
information is nothing more than a string of binary digits (carried 
either electronically or in optical form), there is no way to 
distinguish digital voice signals from other digital signals once the 
conversion to a digital signal is made. Thus, a legal distinction based 
on differences between ``voice'' and ``data'' is bound to fail.
    The only way this traffic can be practically separated is before 
digital conversion. Yet, we will increasingly see digital conversions 
taking place at the home, or within the telephone network prior to 
switching. As a result, by the time the digital signal is ready to be 
switched, it will already be in digital form, ready to be placed onto a 
packet-switched network. There will be no distinction to be made 
between voice and data in such a world.
    The structure of the Telecommunications Act is not based upon 
specific technologies or traffic patterns. Rather, that structure is 
based upon an immutable fact: for the foreseeable future, in most 
circumstances, new competitors will have no alternative but to use the 
existing loop distribution plant (the ``copper wires'') of the 
incumbent RBOCs. The Telecommunications Act makes those copper wires 
available for lease by competitors not because they are necessary to 
provide voice service, but because they are necessary to provide any 
service to the household served by them. Those wires constitute a 
bottleneck which the RBOCs will use to stifle the drive toward 
competitive local markets unless prevented by regulators and 
legislators from doing so. A drive to ``deregulate'' those bottleneck 
facilities simply because they are used for data transmission is 
exactly the wrong response if we want competitive markets to fully 
develop.
    RBOC control of that bottleneck will be just as damaging to the 
development of competition for data services as it has been for voice 
service, if control of the bottleneck facility is not held in check by 
regulatory oversight. Even if one attempts to distinguish between voice 
and data service, it is clear that those wires are just as necessary 
for data as they are for voice. Increasingly, consumers will use those 
copper wires to transmit both voice and data, with little distinction 
between the two. Constructing differing regulatory regimes for each 
will only confuse customers and hinder our pursuit of the ultimate goal 
of competition in all telecommunications markets.
III. Wall Street's predictable reaction to RBOC ``data relief'' 
        proposal
    Finally, if high speed data services and facilities are 
deregulated, confusion about ultimate goals will not be limited to 
customers. McLeodUSA is acutely aware of the need to maintain investor 
confidence in the national goal of bringing competition to the 
telecommunications marketplace. That confidence has been bolstered by 
the clear commitment to the 1996 Telecommunications Act, and the 
efforts of the FCC, to reach that national goal. Legislation which 
would carve out data services from the procompetitive goals of the Act 
would be seen in financial markets as a retreat from that national 
commitment. As a result, the ability of new entrants to raise the 
capital needed to bring true, facilities-based competition to all 
telecommunications markets could be placed in jeopardy. Thus, the drive 
toward competition could be slowed even though that is not what was 
intended by supporters of such ``data deregulation.''
Conclusion
    The 1996 Telecommunications Act is working to bring competition to 
telecommunications consumers in all areas of the country. While that 
competition is not progressing as rapidly as many would hope or were 
led to believe, the delays have resulted not from inadequate 
legislation, but from a failure of the incumbent RBOCs to fulfill their 
duties under that legislation. Attempting to impose an artificial 
distinction between data and voice services will only serve to delay 
the deployment of advanced services and the development of competition 
in general. This result will disadvantage consumers, and delay the goal 
of providing faster, better, less expensive telecommunications services 
to all Americans.
    Again, I thank the Subcommittee for the opportunity to appear 
before you today, and would welcome the opportunity to answer any 
questions that any of the Members might have.

    Senator Burns. Thank you, Mr. Gray.
    Now we have Mr. David Woodrow, the Executive Vice 
President, Cox Communications. And thank you for coming this 
morning.

         STATEMENT OF DAVID M. WOODROW, EXECUTIVE VICE 
             PRESIDENT, NEW BUSINESS DEVELOPMENT, 
                    COX COMMUNICATIONS, INC.

    Mr. Woodrow. Thank you, Mr. Chairman.
    Mr. Chairman and distinguished members of this committee, 
my name is David Woodrow. I am Executive Vice President of Cox 
Communications, and I am here on behalf of Cox and as a 
representative of the cable industry. I appreciate the 
opportunity to discuss the very important question as to 
whether broadband communication services are being made 
available to the American people and in a timely fashion and in 
a comprehensive basis.
    Although Cox is the fifth-largest cable MSO, it operates a 
substantial number of systems located, collectively, in Utah, 
Nevada, Idaho, Kansas, Oklahoma, Missouri, Texas, and Louisiana 
that serve fewer than 10,000 customers. Many of these small 
systems are less than 2,500 customers. Yet these subscribers 
will not be left behind. It is in Cox's interest to provide 
them with advanced services. Moreover, Cox and all other cable 
operators are prohibited by law from redlining or cream 
skimming.
    Mr. Chairman, you and the members of this committee are 
exactly right to focus your attention on this important 
subject, as financial analysts agree, the fabulous U.S. 
economic performance of the last decade rests on the foundation 
of technology driven information revolution, and the 
expeditious, widespread utilization of broadband 
notwithstanding and content applications is the promise that 
must be delivered to all Americans if our robust economy is to 
be sustained into the next decade. Your urgent desire to see 
this broadband promise spread to rich, poor, urban, and rural 
citizens alike could not be more appropriate as a national 
goal.
    So, how are we doing? Let us look, first, at some history. 
It took almost 30 years for the telephone network to grow from 
the first inter-city service between Boston and Lowell, 
Massachusetts, in 1879, to the intertwined Bell system of 1908. 
Cellular service was first offered to the public in 1983. And 6 
years later, in 1989, 2 million customers were activated. In 
1996, many, but not all, cellular licensees had extended their 
networks to serve their covered population.
    By contrast, interactive broadband network capability 
started from ground zero in 1997. Two years and tens of 
billions of investment dollars later, today broadband service 
is being delivered to more than 2 million subscribers. So 
broadband has grown three times faster than cellular to reach 
the same initial subscriber threshold.
    Mr. Chairman, the encouraging comparisons do not stop here. 
It has taken Cox roughly 2 years to be in the position to offer 
fully half of its customer base high-speed data service. 
Service to elementary and secondary schools is an important 
adjunct to this achievement. We already have wired more than 
3,400 schools with free monthly cable service.
    And now, as we have upgraded to offer high-speed Internet 
access, Cox is producing unique distance learning initiatives 
through its Line to Learning programs to these schools. This is 
our latest step in our ongoing commitment to enhancing 
educational tools. Line to Learning utilizes Cox's high-speed 
networks to provide useful content and curriculum via high-
speed Internet access.
    As an extension of its Cox@home service, Line to Learning 
takes advantage of Cox's superior digital fiber optic network, 
allowing more data to be transferred to down-street rates that 
are up to 50 times greater than rates achievable over standard 
56 kilobit per second telephone modems. Cox has also 
established Cox model technology schools, where advancements in 
technology can be employed as teaching tools. During the next 5 
years, not much more time than it took Congress to successfully 
write the 1996 Act, ushering in the era of interactive 
broadband deployment, virtually the entire Cox customer base of 
10 million homes passed will have access to broadband data 
service--rich, poor, urban, and rural alike.
    Mr. Chairman, Cox proudly has led the cable industry in 
this Herculean effort. We have spent about $5 billion already, 
and we will have spent about $10 billion when the job is 
finished in 2004. But the whole cable industry is right in step 
with us. Cable broadband infrastructure spending to date stands 
at $31 billion, and is steadily growing year to year.
    Independent industry analysts project that more than 40 
percent of all U.S. households will have access to cable modem 
service by year's end. And by 2004, 93 percent will be passed 
by broadband two-way networks. Since cable systems currently 
pass 97 percent of all U.S. households, in just a few years, 
high-speed cable Internet service will be available virtually 
anywhere in this country.
    Mr. Chairman, my comments have concentrated on the 
aggressive record of the cable industry to squash the digital 
divide. Of course, many other facilities based broadband 
players are rushing to provide competitive services to the 
American people. Telco DSL, third generation PCS and several 
flavors of microwave, satellite, electric utility and digital 
broadcast networks are in various stages of development and 
deployment.
    I have little doubt that within an amazingly short period 
of time every American will be able to secure high bandwidth 
access to the Internet. The equally good news is that these 
competitive services are deployed in the economics of scope and 
scale, together with ever-improving technology, will drive the 
costs to consumers down.
    I thank the committee for the opportunity to present these 
views, and I ask that the National Cable Television 
Association's filing in response to the congressionally 
mandated Section 706 survey for the year ending in 1999 be 
included in the Subcommittee record on this proceeding. That 
filing provides useful information and examples of high-speed 
data and Internet access services that are already being 
provided to rural and small communities. Of particular interest 
to the members of the Commerce Committee are service offerings 
in Arizona and Maine, Michigan and Mississippi, Missouri and 
Nevada, North Dakota, Georgia, Louisiana, Tennessee, West 
Virginia, Oregon and Washington, and Texas.
    Thank you, Mr. Chairman.
    [The prepared statement and information of Mr. Woodrow 
follows:]

   Prepared Statement of David M. Woodrow, Executive Vice President, 
           New Business Development, Cox Communications, Inc.
    Mr. Chairman and distinguished members of this Committee, my name 
is David Woodrow. I'm Executive Vice President of Cox Communications 
and I am here on behalf of Cox and as a representative of the cable 
industry. I appreciate the opportunity to discuss the very important 
question of whether broadband communication services are being made 
available to the American people in a timely way and on a comprehensive 
basis. Although Cox is the fifth largest cable MSO, it operates a 
substantial number of systems located collectively in Utah, Nevada, 
Idaho, Kansas, Oklahoma, Missouri, Texas and Louisiana that serve fewer 
than 10,000 customers. Many of these small systems serve fewer than 
2,500 customers. Yet these subscribers will not be left behind--it is 
in Cox's interest to provide them with advanced services. Moreover, Cox 
and all other cable operators are prohibited by law from red-lining or 
cream-skimming.
    Mr. Chairman, you and the members of this Committee are exactly 
right to focus your attention on this important subject. As financial 
analysts agree, the fabulous U.S. economic performance of the last 
decade rests on a foundation of the technology-driven information 
revolution. And the expeditious, widespread utilization of broadband 
networks and content applications is the promise that must be delivered 
to all Americans if our robust economy is to be sustained into the next 
decade. Your urgent desire to see this broadband promise spread to 
rich, poor, urban and rural citizens alike could not be more 
appropriate as a national goal.
    So how are we doing? Let's first look at some history. It took 
almost 30 years for the telephone network to grow from the first 
intercity service between Boston and Lowell, Massachusetts, in 1879 to 
the intertwined Bell System of 1908. Cellular service was first offered 
to the public in 1983. Six years later in 1989, two million customers 
were activated. In 1996, many, but not all, cellular licensees had 
extended their networks to serve their covered population. By contrast, 
interactive broadband network capability started from ground zero in 
1997. Two years and tens of billions of investment dollars later, today 
broadband service is being delivered to more than 2 million 
subscribers. So broadband has grown three times faster than cellular to 
reach the same initial subscriber threshold.
    Mr. Chairman, the encouraging comparisons don't stop here. It has 
taken Cox roughly two years to be in a position to offer fully one-half 
of its customer base high-speed data service. Service to elementary and 
secondary schools is an important adjunct to this achievement. We 
already have wired more than 3,400 schools with free monthly cable 
service, and now, where we have upgraded to offer high-speed Internet 
access, Cox is producing unique distance learning initiatives through 
its ``Line to Learning'' program. This is our latest step in our 
ongoing commitment to enhancing educational tools. Line to Learning 
utilizes Cox's high-capacity networks to provide useful content and 
curriculum via high-speed Internet access. As an extension of its 
Cox@Home service, Line to Learning takes advantage of Cox's superior 
digital fiber-optic network, allowing more data to be transferred at 
downstream rates that are up to 50 times greater than rates achievable 
over standard, 56 kilobit per second telephone modems. Cox also has 
established Cox Model Technology Schools, where advancements in 
technology can be employed as teaching tools.
    During the next five years . . . not much more time than it took 
Congress to successfully write the '96 Act ushering in the era of 
interactive broadband deployment . . . virtually the entire Cox 
customer base of 10 million households passed will have access to 
broadband data service--rich, poor, urban and rural alike.
    Mr. Chairman, Cox proudly has led the cable industry in this 
Herculean effort. We have spent about $5 billion already, and we will 
have spent about $10 billion when the job is finished in 2004. But the 
whole cable industry is right in step with us. Cable broadband 
infrastructure spending to date stands at $31 billion and is steadily 
growing year to year. Independent industry analysts project that more 
than 40% of all U.S. households will have access to cable modem service 
by year's end. And by 2004, 93% will be passed by broadband two-way 
networks. Since cable systems currently pass 97% of all U.S. 
households, in just a few years, high-speed cable Internet service will 
be available virtually everywhere in this country.
    Mr. Chairman, my comments have concentrated on the aggressive 
record of the cable industry to squash the digital divide. Of course, 
many other facilities-based broadband players are rushing to provide 
competitive services to the American people. Telco DSL, third 
generation PCS, several flavors of microwave, satellite, electric 
utility and digital broadcast networks are in various stages of 
development and deployment. I have little doubt that within an 
amazingly short period of time, every American will be able to secure 
high-bandwidth access to the Internet. The equally good news is that as 
these competitive services are deployed, the economics of scope and 
scale, together with ever-improving technology, will drive the costs to 
consumers down.
    I thank the Committee for the opportunity to present these views 
and I ask that the National Cable Television Association's filing in 
response to the Congressionally mandated Sec. 706 survey for the year 
ending 1999 be included in the Subcommittee record of this proceeding. 
That filing provides useful information and examples of high-speed data 
and Internet access services that are already being provided to rural 
and small communities. Of particular interest to the Members of the 
Commerce Committee are service offerings in Arizona, Maine, Michigan, 
Mississippi, Missouri, Nevada, North Dakota, Georgia, Louisiana, 
Tennessee, West Virginia, Oregon, Washington, and Texas.

    Senator Burns. Thank you, Mr. Woodrow. We appreciate your 
comments this morning.
    And I want to throw out a question here. And we have 
listened with interest to all of your statements. And the real 
purpose of this hearing is just to investigate ways that we may 
have to pursue in order to make sure that the buildout does 
occur. I would ask each of you to comment right now, and do it 
in a capsulated form, are there additional steps we should be 
taking with regard to 706, to help facilitate the deployment of 
so-called broadband, even though Mr. Regan says we are using 
the wrong term, which I believe that we are? Or do we maintain 
the status quo and let the natural evolution happen?
    Does anybody want to comment on that? We will just start 
the discussion right now.
    Mr. Neel?
    Mr. Neel. Mr. Chairman, we believe strongly that the most 
important remedy that you could come up with would be to 
totally deregulate enhanced services. And that means everything 
from the central office to the Internet backbone, to the home. 
And that means amending 706, if necessary, to do that.
    So regulators cannot put these huge burdens on companies 
that are now heavily regulated to provide these services. 
Because, as I pointed out, for many people--not all--and in 
fact, many of the companies here at this table, and 
particularly smaller local companies that have been referred 
to, are doing a great job out there--but to get access to the 
high-speed data network, you are going to have to deregulate 
these companies.
    So removing these interLATA restrictions on data--not voice 
but data--is absolutely critical, as well as all these other 
regulatory burdens. Because it is very insidious. Any 
regulatory burden on a local exchange provider--and they are 
the only ones that are really regulated--adds costs to 
operating that service, adds costs to those consumers and, in 
some cases, creates a huge disincentive for those companies to 
even invest in those services.
    So you have got to remove those regulatory burdens on all 
the companies, not just the RBOC's.
    Senator Burns. Mr. Gray?
    Mr. Gray. I think the first thing that I would like to 
suggest, Mr. Chairman, is that we narrow the argument. Because 
I believe, and subject to being corrected, that the only 
burden, if you will, are those imposed upon the mega-Bells. We 
are not talking about the companies, fine companies, like Touch 
America and the 150 independent telephone companies in Iowa. So 
I think the issue is the mega-Bells.
    My second and last comment is, I would look not to 706, 
but, quite frankly, back to 271. Because I still fundamentally 
do not understand why, to Senator Rockefeller and Senator 
Dorgan's question, why, if those Bell companies meet and exceed 
that 14-point checklist they cannot do what Mr. Neel wants to 
be done. And we cannot distinguish, in this kilobit world, what 
is voice and data. Things are going to move too quickly on this 
on ramp and on this off ramp to look and see who is in the car. 
Is that data or is it voice?
    And within the next several years--and we can talk about 
the metaphor of whether it is an island or an interstate, and 
we can pursue it either way--but the fact of the matter is we 
are talking a converging world that is going to become a 
kilobit-centric world, and we are going to debate whether you 
are using a microwave or a traditional convection oven. So 
letting these guys into the data business now in a totally 
deregulated fashion ensures that we will not have effective, 
irreversible competition long term.
    Senator Burns. Mr. Regan?
    Mr. Regan. At the risk of getting squashed between all my 
customers, because I sell stuff to all these guys----
    [Laughter.]
    Mr. Gray. We will remember that.
    Mr. Regan. We are an enabling technology for everybody.
    Senator Burns. They are taking notes.
    Mr. Regan. Yes, I know they are.
    I think the point is this. The Telecommunications Act was 
based upon the premise that we were going to enable 
competition, and that competition was going to drive 
technology. Now, when you step back 4 years later and you say, 
well, what is happening? Well, we have got lots of competition 
in the business market. The low-hanging fruit is getting 
picked. You just walk down the street of Washington, D.C., and 
you can see all the trenches.
    I think the problem that we have right now really not in 
the business market. The problem we have is really in the 
residential market. And, frankly, the kind of competition that 
we hope that would evolve in the residential market really did 
not evolve. And so now we have sort of an interesting 
situation. We have a market that is not robustly competitive, 
not necessarily ideal for the deployment of technology, because 
competitive markets are. And the question is, how do we advance 
technology in that, quite frankly, still highly regulated 
environment?
    That is why I move toward the notion of financial 
solutions. We have studied this thing. We need financial 
solutions. Regulatory solutions are interesting. They are part 
of the game. But you have got to have both out there. You 
cannot do one or you cannot do the other.
    Senator Burns. Yes, sir, Mr. Woodrow?
    Mr. Woodrow. Mr. Chairman and the committee, I would like 
to remind the gentleman from Corning that substantially more 
than half the fiber deployed in our networks goes to the 
residential neighborhoods. Our networks do not discriminate as 
to what customer you are. It is a broadband network that goes 
to virtually every single home pass that we serve. And we think 
that the Act is working extremely well.
    The reason that we are doing what we are doing is because 
we have invested over $5 billion in capital since the Act was 
passed to be able to enter into these new businesses. We spent 
more than $10 billion acquiring systems, enabling us to get 
larger in our industry so that we could go off and provide 
these services to every customer, regardless of whether they 
are a residential or a commercial establishment.
    In fact, the predominant growth that we have in terms of 
all the new services we have are in the residential 
marketplaces today. And it is for that reason that we are 
adding 20,000 to 30,000 new data customers a month. And those 
are to the residences predominantly. So we think the Act is 
working very well. We think it basically enabled us to come up 
and, on a competitive basis, to enter into all new forms of 
services, whether they be data or high-speed digital video or 
telephony. We are providing all of those services in the 
markets we are entering in today.
    Thank you, sir.
    Senator Burns. Mr. Fitzpatrick?
    Mr. Fitzpatrick. You know, if you pick up the telephone and 
call your banker to get the statement, and they read off and 
tell you that your balance is $1,200, the information that they 
provide--it is converted to bits of information and it is 
transmitted by light over the fiber optics system to your home. 
That is no different than the bank transmitting information 
from one bank to another.
    The notion that data is somehow different than voice only 
exists at the receiver level. Once it enters the black boxes, 
it is all data. So the distinction between long distance and 
data traffic is fundamentally artificial to begin with.
    Now, I am a very skeptical person by nature, and somehow I 
am having a hard time believing that the regional Bell 
operating companies are going to make a commitment to rural 
areas and provide them enhanced services if they could just get 
access to the data transmission from major cities. There is 
competitive service right now, supplying that data 
transmission, be it for Citibank or for General Motors. And I 
am not convinced that USWest or Ameritech necessarily bring 
anything to the table.
    But I do understand how they could try to leverage that 
issue as kind of a political tool for the purposes of saying 
that they are going to provide a commitment to rural areas that 
they have demonstrated in the last 5 years they do not have. In 
my judgment, the absolute worst thing you could do if you were 
interested in providing enhanced services to all Americans is 
to deregulate any further the conditions that exist in 271.
    Thank you.
    Senator Burns. Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman. And I thank the 
panel of witnesses for their testimony.
    Mr. Neel, elaborate further on what you think the problem 
is with Section 706. Because apparently, in the January 1999 
report by the FCC on 706, they really, I guess, determined that 
broadband services were being provided in a reasonable and 
timely fashion. And then I hear from most of the panel of 
witnesses today that they are doing all of that.
    Mr. Woodrow is spending tens of billions of dollars, 50 
percent of his customers have access to it. Mr. Fitzpatrick is 
involved in that. Touch America is doing it. Mr. Gray spoke to 
the question of billions of dollars being invested in broadband 
deployment. So it seems that the decision by the FCC that this 
is occurring in a reasonable and timely fashion, according to 
these gentlemen, is an accurate assessment. Why would you 
disagree with that?
    Mr. Neel. Senator, by the FCC's own studies, the 
penetration for high-speed Internet access today is only 1.45 
percent. Now, that means more than 98 percent of the American 
households do not have access to high-speed Internet.
    Senator Breaux. OK, let me ask that question then, because 
they are saying that it started off at .4 percent and now it is 
1.45 percent. We are spending billions of dollars and it is 
doubling, tripling. What would you say to that?
    Mr. Neel. Well, if you are willing to wait a long, long, 
long, long time, then this problem would be solved. But there 
is another issue here. Many of the CLEC's are basically serving 
the same customers. If you look at the maps--Congressman Tauzin 
had one, there are a number of others--if you look at urban 
areas, they are all building to serve the same customers. And 
those customers have a great deal. They can drive down costs 
and do that.
    But if you do not live along those routes of the CLEC's, 
then you are out of luck. And one problem with some of the 
local area fiber networks--and some of these small companies 
are doing a fantastic job of building in their own 
communities--but they have still got to get onto the on ramps. 
And that means carrying that stuff to Chicago, Kansas City and 
elsewhere. And that is not really happening.
    Senator Breaux. Well, let me ask this question then. Can 
any of the other gentleman comment to the proposition that 1.45 
percent penetration is certainly not reasonable and timely 
deployment?
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. First of all, I think that that is quite 
reasonable and that it has happened quite rapidly. But to get 
back to the heart of the issue----
    Senator Breaux. One percent is reasonable and rapid?
    Mr. Fitzpatrick. It is for, basically, a brand-new 
industry. But I think you get right back to the basic point: 
there may be a large number of customers that are not served 
with these services, and who serves them? Who takes care of 
them? The regional Bell companies. That is the vast majority.
    If you want to start providing high-speed services, they 
are the ones that need to make the commitment to do it with 
their own customers.
    Senator Breaux. Mr. Woodrow?
    Mr. Woodrow. Senator, if I recall, about 60 percent of U.S. 
households have PC's today. And of those, about 50 percent have 
access to an online service of some form--AOL, MindSpring, 
Cox@home or whatever. So about 40 to 50 percent of our homes 
passed have available services to them. Whether the subscribers 
elect to take those services or not certainly is at their 
choice. We are about 3 percent penetration on average today. We 
have areas that are as high as 8 or 9 percent penetration. The 
low is 1 percent penetration.
    We have been marketing these services for about 2 years 
aggressively in those marketplaces. So there is a difference 
between what the penetration is and what the availability is. 
These services are available to the consumers. It requires 
PC's. It requires a desire to have online services. It requires 
a desire by the consumer to be able to access those services.
    We think we have been doing very well. And we have been 
growing extremely well and trying to just serve the needs we 
have and the customers today. But at least 50 percent of the 
homes passed have the availability of those services if they 
want to take them.
    Senator Breaux. Mr. Neel, it sounds like the cable industry 
is going to leave you at the starting blocks.
    Mr. Neel. Well, we think the cable industry is doing a 
great job. They have got five times as many high-speed Internet 
customers as the local companies. But to this point here that 
the Bell companies and the local companies need to make a 
greater commitment to rural areas, they are prepared to do 
that. But they have endless regulatory restrictions that do not 
even allow them to do that, the foremost being that they cannot 
even cross LATA boundaries.
    So you cannot make a commitment if you cannot back it up 
legally, much less financially. Those companies are ready to 
serve. So yes, the cable modems, they are providing a huge 
competitive alternative. That alone should stimulate the 
Commission to release some of these regulations, to let some 
go, to declare these markets competitive. Because the cable 
companies are out there eating our lunch in some markets 
because we are not allowed to be there serving in the same way.
    Senator Breaux. What will be the incentive of the to RBOC's 
to in fact open up their local markets if in fact they get 
access to data, because some would argue that the long distance 
voice transmission is becoming almost insignificant?
    Mr. Neel. Well, I do not think it is becoming 
insignificant. It is true that it is indistinguishable in a 
digital era. But you want to go get the voice market, because 
you want to offer one-stop shopping. Any real competitive 
players are going to have to be able to do it all. And right 
now, the Bell companies, in particular, cannot offer long 
distance voice service. That is 80 percent, 80 cents of every 
dollar, of long distance traffic is voice still. They want to 
be in those markets, so they have got a huge incentive to meet 
those 271 requirements and that checklist.
    Senator Breaux. A final question. Your chart accurately 
points out, I think, all the regulatory requirements that you 
are faced with, and the cable operations have none, according 
to your chart. Some would argue that the cable people do not 
control the local areas, and that the reason why you have that 
is because people cannot get into your systems. Is that a 
justification? Give me some thought about that.
    Mr. Neel. I do not think so. We certainly would not want 
the cable companies to have to take on the same regulatory 
burdens that we have. We think you ought to level the playing 
field. We think that is what you were trying to do with the 
1996 Act is level the playing field, let everybody play in all 
of these markets so consumers will have choices. So I do not 
think that is an adequate reason to retain that regulation. It 
is not a reason to impose regulation on the cable carriers. We 
do not want that either.
    Senator Breaux. I just have one final comment. I am not 
sure we have a real broadband policy in this country. We are 
trying to adapt a 1996 Act to somehow find out what the 
broadband policy for this country is. And I do not remember a 
lot of discussion in 1995 and 1996 about what the broadband 
policy was going to be for this country.
    And what we are trying to do is to adapt the 1996 Act that 
sort of only in a minor way dealt with broadband policy and 
say, well, that somehow is going to be extrapolated into 
broadband policy for the 21st century, when I think it is so 
important that we ought to clearly and precisely spell out what 
the broadband policy for this country is going to be. I do not 
think you can find that in the 1996 Act, no matter how hard you 
look.
    Thank you, Mr. Chairman.
    Senator Burns. Senator, let me build on that just for a 
second and ask you this. We felt, in 1995 and 1996, that we 
were dealing with 1990's technology with a 1935 law, and that 
was not working. And the explosion in the technology really 
forced us to do something with regard to policy. I think this 
is pretty indicative of what we have heard today, is how fast 
that technology is growing and we could be in a position where 
we are behind the curve again. And that is what lends to this 
debate. But I know what the driving force was in 1995 and 1996.
    Senator Brownback.
    Senator Brownback. Thank you, Mr. Chairman. This has been a 
good panel and a good discussion.
    I want to first enter into the record the position of the 
Information Technology Industry Council on the bill that I have 
put in on deregulation. * I ask that it be submitted into the 
record if I could, Mr. Chairman, without objection.
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    * The information referred to was not available at the time this 
hearing went to press.
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    Senator Burns. Without objection.
    Senator Brownback. Thank you, Mr. Chairman.
    I want to focus the panel, if I could, back on the topic of 
the hearing. And it is a hearing on broadband access in rural 
areas. So we are talking about rural America with this. I know 
Senator Kerry and some others are concerned about the inner 
city, but we want to talk about rural areas.
    First, Mr. Neel, if de-regulatory relief is given to the 
RBOC's and they are allowed to recoup on new investment that 
they make into these areas, to that the high-speed access--to 
use the proper technology--high-speed access is available, will 
they deploy into many of these unserved areas now and rural 
areas?
    Mr. Neel. There is no question that they will. Now, they 
may not be able to serve every home and every household, but 
they are going to be out serving hundreds of thousands of 
families in highly rural areas that are not going to be or 
maybe never served by these new competitive carriers. If you 
look at situations certainly in Kansas, but a real dramatic 
case is a USWest issue in North Dakota, they have got fiber 
pipe laid between parts of the upper Midwest, right into 
Minneapolis, and they cannot even turn on that switch because 
of the interLATA restrictions.
    So there will be investment, because they have got 
facilities there, they can do it, it will be economical, and 
they will reduce costs for those consumers. They have every 
incentive to do it.
    Senator Brownback. Mr. Gray, you would rather we not do any 
deregulation for the Bells. And you argue strongly that this 
would be harmful to the overall intent of the Act and harmful 
to overall competition. But focusing on rural America, if we do 
not deregulate in rural areas and allow this investment to take 
place, how do you anticipate, over the next 3 years--I want to 
give you a short time horizon because I think we have a short 
time horizon to connect rural areas to this new economy--over 
the next 3 years, where will the money come from to connect 
rural areas to high-speed access?
    Mr. Gray. A great question, and I would be pleased to 
respond to that. The current source of cash in order to make 
these type of investments are, quite frankly, coming from 
investors, either the public markets or private venture funds. 
And in order for those people to make those bets, or 
investments if you will, they need to see public policy 
certainty.
    I want to once again disagree with Mr. Neel. I am not aware 
of very many of our colleagues that are profitable and have a 
lot of cash-flow. So to make the $1,000 to $1,500 per line 
investment that we would need to make in order to be where we 
want to be 3 years from now, that money is going to come from 
third party investors. And we need public policy certainty. And 
if I may, Senator, I think it really comes down to----
    Senator Brownback. I want you to focus in rural areas, 
because that is what we are talking about here. Do you think 
you will be able to get that sort of capital into rural areas?
    Mr. Gray. Once again, horizontally stratifying into the 
mega-Bell rural markets, those that we would operational define 
as populations 10,000 to 25,000, yes, I believe so.
    Senator Brownback. And so you think you will be able to 
fill in this map of all the disparity over the next 3 years?
    Mr. Gray. We have been moving as aggressively as we can in 
our 21-State serving territory. So, yes, sir.
    Senator Brownback. And you are doing that now, then, and 
providing high-speed connection into these areas? Because the 
map is pretty, and maybe you dispute the map, but the map is 
pretty checkered, with a lot of open areas, particularly in 
rural areas across the country. It strikes me that you are 
talking about a number of billions of dollars into rural areas, 
lesser-populated regions, where the low-lying fruit is not 
particularly there, it is up in the tree a ways. And you are 
going to put a lot of money to get that in the next 3 years?
    Mr. Gray. I would argue that, especially in the 3- to 5-
year time horizon, we are in the middle of a technology 
revolution. And there are a couple of things that I think we 
need to watch very carefully. One, the evolution of wireless, 
especially the UHF frequencies, 60 to 69 and 70 to 79, and some 
of the things that that will enable us to do much more 
pervasively and much more economically.
    The second dimension of the technology revolution is that 
hardware at the end of whatever the medium is, whether it is 
fiber, copper, coaxial, or wireless. And we are seeing things 
now called the collapse central office, or the soft switch, 
that are now the size of those college room refrigerators that 
we had that will now do what it takes a roomful of equipment to 
do.
    Senator Brownback. So you think it will come more from new 
technology or from satellite rather than from----
    Mr. Gray. Absolutely. I think those are two of the biggest 
drivers in this, bringing broadband to the home and business in 
the rural markets.
    Senator Brownback. Mr. Neel, I want to give you an 
opportunity to answer. Do you think the investment will come 
from that area in the next 3 years?
    Mr. Neel. Well, I think in some communities. And Mr. Gray's 
company has done a great job in going to some of those less 
urban areas. But still, as the CLEC's report to Wall Street, 
they are going to where the low fruit is. They are going where 
the money is.
    So if you look at large sections of this, maybe in some 
towns of 25,000, but that is a good-sized town, in Montana and 
in the rural West, that is not what I think of as real rural. 
And there is not going to be any incentive there for those 
folks to build those big pipes into rural areas.
    My point is that the investment is more likely to come from 
the local exchange company, and not just the Bell company, but 
all those independent companies, as well, to serve those 
customers. Because they are already serving those customers. 
They have a commitment to rural America right now and have had 
one for 100 years.
    They have an obligation, a Universal Service obligation, 
that they are prepared to extend to these new enhanced 
technologies, as well. But you have got to give them the 
regulatory relief. All these regulations we have pointed out 
here, or most of them, apply not only to the Bell companies but 
even to the smallest independent company, as well.
    Senator Brownback. Mr. Chairman, I do think it is important 
that we look at something that is a 3-year plan here. I do not 
think we can look at a 10-year proposal for filling in the 
blanks here. That is why I really continue to believe that our 
most likely opportunity if we are going to have any hope here 
is in more of a de-regulatory regime rather than betting either 
on us putting in billions of investment from government or Wall 
Street saying, we are going to invest in these areas that do 
not have as high a potential rate of return. I think, over the 
next 3 years, that is a pretty long shot.
    Senator Burns. Mr. Gray, building on the conversation you 
had with Senator Brownback, just one little comment. I have a 
belief I want to inject in here, because I am going to turn 
this hammer over to the leadership over here. I have got a very 
important appropriations meeting I have to go to in about 5 
minutes. The buildout, the investments made, is to attract new 
business out there. If the services are there, you are going to 
add population to that community. That has to be part of the 
master business plan.
    Mr. Gray. It is. And actually there are two phenomenas. 
One, I cannot remember which panelist described it, but we have 
got a situation in Pella, Iowa, now, where Pella Windows is 
saying, Steve, what can you do to help us with the broadband 
connection that we need t ship voice and data all over the 
United States, or we are going to need to move to Chicago?
    So we are actively building network to connect to either, 
A, existing large businesses in these communities, or, B, help 
the business dynamic to allow these communities specifically in 
these more rural States to attract or, more importantly, keep 
the college kids that are leaving at about 2x the rate that 
they are staying.
    Senator Burns. Senator Kerry.
    Senator Kerry. Thank you, Mr. Chairman.
    This is obviously a very, very interesting and important 
discussion for us. I find it a little bit disingenuous to 
suggest that, in 1996, we did not contemplate data transmission 
or different kinds of transmission other than voice. I think 
the definition itself says very specifically the term 
telecommunications means the transmission between or among 
points specified by the user of information of the user's 
choosing without change in the form or content of the 
information that is sent and received. And I think that, back 
then, there was a very significant proportion of transmission 
that was data of one form or another.
    Now, that said, obviously there has been a revolution since 
then in the possibilities that come with the new technologies 
that have lent just enormous scope to the capacity of that data 
and to its impact on our society. So I do not want to be frozen 
in time, and I think we have to be careful of that.
    But there are some other realities that we have to try to 
deal with here. Most of the people in this room are not 
attracted to this room because they have come here with some 
immense public commitment to seeing rural and underserved urban 
centers suddenly served. I think everybody knows that.
    This is a fight over who is going to get how much. Now, 
that fight was regulated, from 1984 to 1996, because we all 
understood there was a monopoly regulation structure. We 
liberated that in 1996. And we set up some pretty clear 
judgments about how we were going to say to those who had had 
that monopoly structure, OK, you can have at it.
    But we are still struggling with that. We have got a 
Justice Department telling us that some people should not get 
X, Y or Z today. We have got judges wrestling with the question 
of compliance with 271. We have got good friends of mine, who 
recently got a waiver in New York, but who subsequently were 
fined by the FCC for not complying in other areas.
    We all understand what this struggle is about, folks. And I 
do not think we should cloak it in some kind of false altruism 
or something. This is a fight over share, market share. And you 
are coming to us now and saying to us, we want some relief 
because we ought to get in there.
    Now, maybe there is some kind of relief. I am not saying 
no. Maybe there is something that can meet what I think is our 
overpowering responsibility, which is to guarantee a fair 
playing field, which is what we have always tried to do in this 
effort, competition, but second, to make sure that America gets 
this as fast as possible. That really is in our interest for a 
lot of different reasons.
    And it may be we have to think differently. Now, I do not 
have the answer yet. I am sort of thinking out loud. We have to 
think differently about what creates the fastest distribution. 
To that end, some of us are looking at the issue of tax 
credits. And not trying to pick winners and losers, but seeing 
if we cannot incentivize the system within a structure that is 
already created to have competition and see how that develops.
    Now, Mr. Regan, you think, I believe, that tax credits are 
the correct public policy at this time. And I would like to 
just engage that fight a little bit. Why do you feel that so 
strongly? And the second part of the question, Mr. Neel and 
others here, is what guarantee is there, given the experience 
that we have all been through, that if suddenly there were an 
unregulated atmosphere and you were going at it, that--I gather 
Senator Stevens earlier asked some of the questions I wanted to 
about the selling that is taking place of the local systems--
what guarantee is there that suddenly they are going to go 
where they have not wanted to go and are not today?
    And I am sort of balancing the economic incentives versus 
what you might get in this unregulated atmosphere otherwise. Do 
you want to address that, Mr. Regan?
    Mr. Regan. Sure. First of all, I think that we took a look 
at this situation. We hired some economists and we said, can 
you take a look at the local market, the residential market? 
Because that is the one where the problems lie. We do not see a 
robust, competitive market out there. I have got one telephone 
company and I have got one cable company. I think most people 
are in that situation.
    And we may see some competition come for these higher-speed 
data services. And that will be great. But when you look down 
the line you say, I will guarantee you, the 1.5 megabits that 
people are talking about today will look like chicken feed in 3 
years. And so we are saying, how can we give people, everybody 
at this table, an incentive to move forward, without engaging 
in this endless debate over regulation?
    Because it is very complex. And the local market is highly 
regulated. We have Universal Service. And on top of Universal 
Service we have a system now of unbundling and resale. And, God 
knows, other kinds of regulation. And this all creates, if you 
will, an inhibition. And it has suppressed telephone rates to 
the point where, sir, there are pockets of competition for 
telephone service, but not a lot. And so the market mechanisms 
have been disrupted.
    So what we are saying is let us think bigger. Let us look 
to the next generation of technology and ask ourselves, what is 
it going to take to give everybody in the country 10 or 20 
megabits? Because when you think about what is going on in the 
computer world, that is what they are getting. They are getting 
10 megabits. They are going to get 100 megabits soon. And the 
Internet really, like I said, it is a collection of computers. 
It is a network of computers. So we have to think in the 
computer world.
    So our thought was, let us come up with a way to create an 
incentive, through a targeted tax reduction, that would apply 
to all carriers and to all technology, that would move us into 
the next generation, in a parallel fashion with the things that 
are now going on with cable modem service and with ADSL 
service. I think any technologist will tell you that ADSL and 
cable modems are wonderful technologies, but they are a 
transition technology, and that there is another one out there 
that is going to be coming.
    And so what we are saying is let us get out of the mud over 
these regulatory issues. Let us create a financial incentive 
for everybody, for all technologies and for all classes of 
carriers. And let us move on.
    Senator Kerry. Just a quick question before I turn to Mr. 
Neel to counter that point. What kind of services do you 
envision when you talk about Next Generation Internet?
    Mr. Regan. Let me give you a simple example. When you turn 
on your computer in your office, you are operating at 10 
megabits. Now, the kinds of services you can get at 10 
megabits, you can get video services. You can get new kinds of 
what they call video applications, which, frankly, have not 
been invented yet because there is no way to transmit them. The 
systems that we get today, the kinds of information you get 
over the Internet today is largely characters and numbers, 
because that is what you can get.
    And I think that in the future, as we get more capacity out 
there on these data networks, we are going to be able to 
transmit video files which will enable people to interact in 
the video domain.
    Senator Kerry. And your specific objection to the relief 
that is being requested or advocated by some is that it is 
overregulated, it is one-industry-specific, and does not 
provide for the same kind of incentive to everybody?
    Mr. Regan. Essentially, yes, that is correct. The fact of 
the matter is we have got a very highly regulated market. 
Without passing judgment on that regulation, we are saying, let 
us just move on.
    Senator Kerry. And, Mr. Neel, why is that neither fair nor 
workable?
    Mr. Neel. My view on the tax credits as an alternative to 
deregulation is that you should use the spending of taxpayers' 
money--which a tax credit is just like a public expenditure, 
frankly--as a last resort, if the free market cannot do it, if 
the private markets cannot do it. You ran through this years 
ago. I know the chairman of the committee and my former boss 
worked on this 8 years ago in deploying fiber to the home. It 
is great technology, but it is very expensive. And you need to 
let the public switch network and the private markets try to 
take care of this first.
    Our view is simply this. The one sector of the larger 
telecommunications industry that is best able to extend these 
technologies to everyone, wherever they live, is the sector 
that has been doing it for 100 years for plain, old telephone 
service. And so you ought to try to relieve that regulation 
first before you spend taxpayers' money to deploy, and that 
much of that regulation is obsolete, in many respects, for all 
the carriers, not just the Bell companies. And it does not cost 
you, the taxpayers, one thin dime to do that.
    Senator Kerry. But what is the guarantee, No. 1, that it 
would be done in those areas where it needs to be done, where 
there is no indication to date of a willingness to do it? And, 
No. 2, what is the guarantee that you do not go back and upset 
the very competitive structure you have tried to create and 
simply recreate a dominant entity, and crush, incidentally, 
some of the innovation and competition that we have tried to 
create?
    Mr. Neel. There are a lot of questions embedded in that. 
One part of your first question implies that they have shown no 
interest or willingness to do this now. That is not true. They 
are unable to do this legally because of the arbitrary 
restrictions, primarily on crossing LATA boundaries, but also 
for all these other regulatory reasons. There is an intense 
willingness to do it. In fact, just look at some of the small 
independent companies that Mr. Gray and Mr. Fitzpatrick have 
referred to that are out there building those networks, those 
fiber networks. And they are doing it because they are putting 
their money where their customers are.
    And you mentioned earlier about the companies selling off 
lines. That is not an abandonment of consumers, because other 
local telephone companies are taking those over and doing a 
really good job and, in many cases, a better job.
    So the same industry is providing that service and they 
still have too much regulation. But we should not look at US 
WEST or GTE selling rural access lines to other local carriers 
as necessarily a bad thing. There is every willingness to do 
it. But in the case of those companies, there is no incentive 
to build out those broadband services into those highly rural 
areas because they are not going to recover their costs, they 
are going to have to unbundle them and go through a labyrinth 
of FCC pricing and regulatory procedures to do it. So it is 
crazy to spend that money on doing it.
    The smaller companies may be able to do it. So there is no 
absolute guarantee, but you can bet if you do not give them 
some incentive through deregulation, not tax credits or public 
expenditures, if you do not give them some incentive through 
deregulation, then virtually no one is going to do it.
    So it seems to me it is worth rolling the dice a little 
bit, taking a small risk, even if it means adapting section 271 
or section 706 to make this happen.
    Senator Burns. Senator Rockefeller.
    Senator Rockefeller. Mr. Neel, our experience in West 
Virginia, and I think in most rural places, is that no matter 
where you look, whether it is deregulation of railroads, 
deregulation of airlines, whatever, that it goes exactly 
counter to what you are saying, and that is that deregulation 
almost guarantees the lack of competition. In fact, the 
deregulation that we have been through explicitly, painfully 
has guaranteed the lack of competition, even though that is the 
reason that deregulation is often proffered, that it will 
create competition.
    Now, I will not posit that. I am just warming up with that. 
I am torn on this, I am torn on this issue sometimes, because 
I--and with Paul Margie, whom I work with on this issue--we 
have these arguments in which I say: Look, and some of the same 
arguments that you have given; if we wait and we do not 
deregulate or we do not let the RBOC's or Bell Atlantic in our 
case get what they want, which would then in many ways sort of 
cede the whole question of the last mile and all of that, which 
is huge in the 1996 Act, that we will just be nowhere 5 years 
from now or 10 years from now.
    I have those thoughts. I have those thoughts. And Paul and 
I have had those discussions, in which I say--sometimes I just 
come roaring out of my office and say: What is the moral value, 
what is the moral value of holding onto a pristine, we have got 
to have that 14-point checklist, we have got to have these 
conditions met because in 1996 that is what we said? And on the 
other hand, what is the morality of that if on the other hand 
the people that I represent, who are fiftieth in the Nation per 
capita income, have no broadband service?
    Then I can turn quite around just as easily and on the same 
theory that--Mr. Crane I thought made a really interesting and 
a very, very important point when he said that those people who 
keep saying, oh, we did not have any idea about broadband, 
etcetera--and John Kerry made it by reading from the act.
    But the even more important point, what you said, sir, and 
that is that 50 percent of all the companies, they already had 
plans. If we were not thinking about it because we were 
computer illiterate in 1996, which we certainly were--I am not 
even sure if we had an Internet service in 1996 in the Senate; 
if we did, it was 1 year before that--the companies certainly 
were thinking about it. They were thinking way out, because 
they do. That is their sole preoccupation. We have many 
preoccupations here.
    So I would come back to you, Mr. Neel, with the question 
of, using DSL and their inability to be able to go out beyond 
18,000 feet from the central office because of the cost 
involved, you say deregulation solves. I say to you, take the 
DSL example, it will not mean anything to them because they 
cannot spend the money.
    Or I go back to my original thing, that Bell Atlantic rolls 
out their plan and it includes 5 of the 55 counties in West 
Virginia. Covad rolls out theirs and it is about the same, it 
is about the same.
    So you deregulate--I have absolutely no sense of confidence 
that they will, as John Kerry brilliantly put it, that they 
will in fact spend any money, because it is much more expensive 
money. Just as Mr. Crane, and then I will turn against his 
argument for a second, said: Oh, we are doing it. Well, you 
know, maybe he is, but in how many places, because it becomes 
so expensive the more rural it gets. And you do not have to be 
in Montana to get very rural, rugged places. You can be in West 
Virginia, which is 96 percent mountains and where you can be 
driving underneath a tower, a transmission tower, and still not 
be able to get cellular service. I mean, you can be looking at 
it and driving underneath and you cannot get it.
    So the question I would put to you is, again you say, I 
cannot guarantee, but if you are going to say, oh, I am not 
interested in tax credits--and I agree with what Tim Regan 
said, as I always do, that it has got to be a mixture of both. 
I mean, I think there is nothing wrong with tax credits. I do 
not know--you wanted the law from the Congress and now you do 
not want the Congress to give up any of the American people's 
money.
    But you do want the services out there. Olympia Snow and I 
are doing a thing that gets some tax credits out there, which 
will help. Will it solve the problem? No. Will it do all 55 
counties? No. But it will help. It will start, it will get it 
going. It will probably guarantee that certain things will 
happen, maybe give Mr. Crane a better chance, Mr. Fitzpatrick a 
better chance to do what they are doing, you all, the 
conflicting interests that you represent to do more of that.
    But all I know now is nothing is happening, that there seem 
to be no plans for really anything to happen. You are all 
saying, oh, let us get deregulated and we will do it, which is 
so easy to say. But when the economics is, when we give it to 
you the economics then come into play, we are out of the 
picture, and then you have got to live with your economics, and 
your economics do not favor taking it out into rural areas.
    I am tremendously troubled by that. That is one reason why 
I am very comforted by a tax credit approach, which I think--
and Mr. Regan, if you will speak to that, I want you to. But 
Roy, that is my dilemma. I do not want West Virginia to be left 
behind. I do not want Montana's good folks out there, I do not 
want them to be left behind. I really do not. I really fear.
    We are having all kinds of new economy meetings in West 
Virginia, pulling our people together to figure out how we can 
do more venture capital, all kinds of things. I do not want us 
to be left barren because I got so hung up on a deregulation 
airline problem or a deregulation railroad problem which has 
absolutely ruined the State, particularly the railroads, that I 
hurt my own people through an anti-deregulatory approach, 
unless I have real confidence that once you have got it you are 
going to make something happen with it, and I do not have that 
confidence.
    Now, you try to satisfy me. And then, Tim, if you would 
just say why you think that, if you do, that the tax credit, 
that the both approach type thing makes some sense.
    Mr. Neel. Well, first of all, I am not saying the tax 
credit is a bad idea. I am just saying it should not come first 
and it should not be a substitute for deregulation first.
    Senator Rockefeller. But you are saying that, because if we 
do a tax credit that takes a little bit of pressure off, and I 
think that you want to keep the pressure at a very high level 
for deregulation. Anything that decreases the pressure for 
deregulation is something which should be troublesome to you.
    Mr. Neel. Well, you said it, not me.
    Senator Rockefeller. Yes.
    Mr. Neel. So in that case yes, if it is that or 
deregulation, we would prefer deregulation. But I would make 
this observation. You are the godfather of the schools and 
libraries and wiring rural health care facilities. I mean, that 
is your deal and it was magnificent, and you and Senator Snowe 
deserve huge amounts of credit for making that happen.
    But I have to say that getting all those schools wired with 
whatever speed and capacity they may have in their community or 
their school district is not going to do much for them if they 
cannot hook into research centers all around the country. So 
until you solve the problem that is demonstrated by this map, 
the schools and libraries program is not going to be worth what 
you want it to be.
    So all I can say again is that there is no absolute 
guarantee, but there is an absolute certainty that nothing will 
be done unless you do at least let those local companies take a 
shot at it.
    Senator Rockefeller. But do you not understand how you 
cannot lose by giving that argument? I agree with on the E-
rate. You do it K through 12, it is terrific, but they cannot 
access everything they need to. In Wayne County, West Virginia, 
they cannot access it. They are cutoff from the original intent 
of all of this. And of course it is a great start and it is the 
right thing to do.
    But you see, the reason you cannot ever lose in your 
argument is because you say, but if we do not do it how will we 
know. But if we do do it and there ends up being no 
competition, there is no way back, and that is our experience 
on railroads. We have railroad companies, two in West Virginia 
now, two in the East Coast now, who basically tell all of our 
companies exactly what they will pay who are captive shippers, 
and that is 80 percent of our chemical companies, and there is 
no redress. There is no redress whatsoever.
    It is killing us. It is flat out killing us because of the 
deregulation. So I cannot come back once I give you 
deregulation. I mean, I cannot come back and say, oh now, will 
you not please do this and that.
    Mr. Neel. Well, but the analogy between railroad 
deregulation and telecommunications deregulation does not 
really work for a whole bunch of reasons. The telecom economy 
is very nimble and mobile, and the very existence of the CLEC 
industry is good evidence of that. I do not think you could see 
that.
    First of all, no matter what you do with section 271 or 
section 706 on data, you are not going to be able to put that 
horse back into the barn on the fundamental pro-competitive 
parts of the 1996 Act, which is the requirement that the local 
phone companies allow interconnection that is 
nondiscriminatory. That is absolutely the law and that will not 
be changed. So you cannot go back to that.
    It is important to point out that there is no real monopoly 
for business services for these kinds of data services we have 
been talking about. If you live in--if there is a monopoly in a 
rural area, it is only because a new competitive carrier does 
not want to spend its money to go there. So you do not have a 
monopoly in those areas now.
    Just look at Washington, D.C., and see what is being done 
with the trenches and all the different carriers.
    Senator Rockefeller. Do my DSL 18,000 feet from the central 
office?
    Mr. Neel. Excuse me?
    Senator Rockefeller. Do my DSL 18,000 feet from the central 
office? It just does not work. What comfort is that to me?
    Mr. Neel. Well, when DSL gets into your neighborhood you 
will have access to the cable modem and that, and you may have 
some wireless data service down the line. If you live in an 
urban area like you do, you will have lots of choices.
    Senator Rockefeller. Yes, but I do not live in an urban 
neighborhood. I happen to on a temporary basis. But where I 
live there are no choices. Look, we do not even have any--we do 
not have any--we have two health plans in West Virginia. I 
mean, I am dead serious about this. I am not into some kind of 
a polemic here. They talk about health plans and then you shop 
around and get the best deal and pick all your plans. We do 
not. And one is going broke, so we only have one.
    We do not have any choices about anything in West Virginia. 
So on the one hand that says, well, gee, I want to go with Roy 
Neel because that means that Dennis Bowen and Bell Atlantic 
will all of a sudden start doing all kinds of magnificent 
things in West Virginia for rural areas, which--Maine and West 
Virginia are the two most rural States in the Nation, with all 
due respect to your excellency--that nothing is going to 
happen.
    I go back to the broadband and Bell Atlantic's plans and 
Covad's plans, and it excludes virtually everything in West 
Virginia because there is no money to be made and it does not 
from a business point make sense for them to do it.
    Mr. Neel. But there is a heck of a lot better chance that 
they will be doing it if you give them some regulatory relief.
    Senator Rockefeller. Well, but yes--and I will stop on this 
because the chairman has been more than forbearing. The 
argument that there is more of a chance in deregulation, it is 
a good polemic, Roy. The question is, in West Virginia we do 
not have margins, in Montana they do not have margins, in Maine 
they probably do not have margins. A lot of places just do not 
have margins. There is no more chance for failure.
    Paul and I are working on the new economy like crazy to try 
and change the whole way people look at things in that State. 
We cannot fail. So you say there is a better chance for 
deregulation.
    Let me just ask Tim--and then I am finished, Mr. Chairman--
to say why he does not think that the tax credit idea, if he 
does not feel that way, is a bad idea.
    Mr. Regan. On the contrary, I think it is a wonderful idea. 
First of all, I think we ought to change----
    Senator Rockefeller. To get something going, to get 
something going.
    Mr. Regan. Yes. Great minds are on the same wavelength, as 
we say in the lightwave world.
    First of all, I think we ought to change the name, because 
we have heard a lot of people say about giving people the 
taxpayers' money. It is not the taxpayers' money. What you are 
saying is you are saying to someone: We are not going to tax 
you as much if you do this. In other words, we are not going to 
take as much away from you if you do this. So I think we ought 
to call it a targeted tax cut.
    But the notion--and I will address just the financial issue 
because I do think there is both a regulatory and a financial 
issue. But I will address the financial issue because I think 
that is the topic of your question. Rural areas are from a 
networking point of view simple economics. They have longer 
runs. Because they have longer runs, they are more costly to 
serve.
    Now, the universal service system took care of this problem 
by having what they call rate averaging, which says you charge 
some customers more than you charge other customers--I mean, 
you charge customers the same regardless of the cost, but you 
charge a rate that is high enough so that you earn enough from 
your low-cost customers to be able to subsidize your higher 
cost customers.
    Of course, that results in real weird things, like rich 
people who live in rural areas essentially get subsidized. That 
is why tax credit is so much better, a targeted tax cut, 
because it is really designed to try to focus on getting a 
technology out the door, make it available to everybody so 
everybody can compete for that opportunity.
    In your case, you have targeted toward rural America, which 
is the area which frankly is going to have the biggest problem 
because of the long runs. It is costly, No. 1; and No. 2, 
because it is costly, the margins are going to be slimmer and 
you are less likely to get competition that would drive 
technology. That is the simple logic of it.
    Senator Burns. Thank you, Senator Rockefeller.
    I want to thank the panel this morning. It has been a great 
discussion. The way I think the discussion was structured, we 
learn a lot more up here, I know I do in this respect--and if 
there is further questions for this panel, why, this record 
will be open for the next couple of weeks.
    We thank you for coming this morning, and these proceedings 
are closed.
    [Whereupon, at 12:12 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                         American Public Power Association,
                                     Washington, DC, April 11, 2000
Hon. Conrad Burns,
Chairman, Subcommittee on Communications,
227 Hart Senate Office Building,
Washington, DC,
Attn: Kevin Krufky, Research Assistant

Dear Chairman Burns:

    Thank you for providing the opportunity for the American Public 
Power Association to submit comments to the Subcommittee in conjunction 
with its hearing on the provision of Internet services to rural 
America. Following this cover letter is a copy of APPA's statement for 
the record.
    Public power systems, many of which serve small communities of 
5,000 people or less, are actively engaged in providing a broad range 
of telecommunications services to their citizens. Representative 
examples are provided in our statement. However, many more municipal 
utilities desire to overcome the digital divide, but are thwarted by 
state statutory barriers to entry.
    Our statement suggests Congress should amend Section 253(a) of the 
Telecommunications Act of 1996 to declare in still clearer terms that 
the FCC must preempt state legislation that prevents municipalities and 
municipal utilities from offering telecommunications services. Further, 
Congress should review the definition of ``telecommunications 
services'' in the Act to ensure that Section 253(a) will cover all 
advanced communications services. And finally, Congress should 
recognize the important role municipal governments can and do play in 
deploying advanced telecommunications services and encourage them to do 
more.
        Sincerely,
                                        Alan H. Richardson,
                                                 Executive Director
                                 ______
                                 
      Prepared Statement of the American Public Power Association
     Deployment of High Speed Internet Technologies in Rural Areas
    The American Public Power Association (APPA) is the national 
service organization representing the interests of the nations nearly 
2000 publicly owned, locally controlled, electric utilities, providing 
electric service to nearly 40 million Americans. But electric service 
is not the only utility service APPA members provide. Over 267 
municipal electric utilities are now providing, establishing or 
planning for the provision of Internet, high-speed data service, broad-
band resale, dark fiber leasing or cable television.
    About 75 percent of public power utilities in the U.S. are located 
in cities with less than 10,000 residents. Many of these municipal 
electric utilities developed largely due to the failure of private 
utilities to provide electrical service in many rural areas because 
they were viewed as unprofitable. In these cases, communities formed 
municipal electric utilities to do for themselves what they viewed to 
be of vital importance to their quality of life and future economic 
prosperity. For more than a century, public power utilities have played 
a vital role in furnishing essential real competition in the electric 
power industry.
    A century later, public power utilities are meeting the demands of 
their constituent owners and communities by providing 
telecommunications infrastructure and telecommunications services where 
there are none and facilitating competition where it is inadequate. Set 
out in Attachment A* are representative examples of some public power 
utility communications activities. These communities and others don't 
want to be on the wrong side of the digital divide; they are taking 
matters into their own hands.
---------------------------------------------------------------------------
    * Attachments A, B, and C, were not available at the time this 
hearing went to press.
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The Problem
    Yet, these local governmental efforts to provide telecommunications 
services within their own communities are being thwarted in some 
states, and with renewed efforts in others, by incumbent cable 
television and local telephone interests. These incumbent interests are 
utilizing their vast resources and long-standing relationships with 
state legislatures to inhibit the development of competition at the 
state level. In an effort to achieve in the states what they could not 
obtain at the federal level, they have successfully pushed legislation 
in eight states to create barriers to entry for municipal utilities 
that want to make available communications infrastructure and services. 
A summary of the state legislative barriers to municipalities and 
municipal utilities providing communications services and 
infrastructure is set out in Attachment B.* This unfortunate trend of 
restrictive state legislation is expected to grow unless Congress makes 
it clearer that such state laws are out of step with the intent and 
language of the Telecommunications Act of 1996. The Act was meant to 
ensure competition from any and all entities that were willing to 
participate in the marketplace.
    Unfortunately, the FCC, in The Matter of the Public Utility 
Commission of Texas, FCC 97-346, petition for review denied, City of 
Abilene v. FCC, 164 F. 3d 49 (D.C. Cir. 1999), concluded that Section 
253(a) of the Telecommunications Act of 1996 was not clear enough to 
require preemption of the Texas statute denying municipal provision of 
telecom services, despite the broad language of Section 253(a). That 
provision reads:

        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. (Emphasis added)

Yet despite the inclusive language and legislative history, the FCC and 
the D.C. Circuit Court of Appeals concluded that ``Congress in using 
the word `entity' in Sec. 253(a) had not expressed itself with 
sufficient clarity to warrant federal interference with a state's 
regulation of its political subdivisions.''
    In enacting Section 253(a), Congress was well aware of the vital 
role that public power utilities could play in bringing competition to 
telecommunications markets, and took steps to include explicit language 
in the Act's Conference Committee agreement that reaffirmed the 
drafters' intention that all utilities be free from state barriers to 
entry. The Conference Committee agreement specifically noted the 
Conferees' clear understanding that ``electric, gas, water or steam 
utilities `might' choose to provide telecommunications service,'' and 
they confirmed their understanding and intent that ``explicit 
prohibitions on entry by a utility into telecommunications are 
preempted under this section [Sec. 253(a)].'' In essence, Congress was 
deregulating to broaden the opportunities so every entity could 
compete.
    Several recent Congressional letters to the FCC from members of 
Congress have reaffirmed that Section 253(a) was intended to ensure 
that municipal utilities were not to be prohibited by states from 
providing telecommunications services and infrastructure. They are set 
forth in Attachment C.*
Importance of Municipal Utility Role
    Why is it important to ensure that municipalities and their 
utilities are permitted to offer communications services and 
infrastructures? Municipal government participation in providing 
advanced communications services can effectively advance the goals of 
universal services, deployment of advanced services and competition in 
rural and distressed urban areas.
    First, many municipal electric utilities already have the 
infrastructure and experience to deploy advanced communications 
services and infrastructure. To maintain their core business of 
providing electric power in the 21st century, municipally owned 
electric utilities have constructed, or will construct, highly 
sophisticated broadband telecommunications facilities. In many 
instances, existing facilities can readily support the provision of 
voice, video, data and other advanced communications services to the 
customer base already being provided electricity and to an expanded set 
of customers, either by the public power utilities themselves or by 
other entities. Public power utilities also have more than a century of 
experience in bringing high quality service and competition to the 
communities they serve. They have skilled work forces that are 
accustomed to dealing with complex technologies. They have access to 
poles, conduits, ducts, rights of way and direct connections to their 
customers. They know how to help customers and provide prompt and 
efficient customer support. They also have a long and rich tradition of 
universal service and community involvement. As low cost, not-for-
profit providers, public power utilities are positioned to offer 
advanced telecommunications capabilities even where the costs of 
providing service outweigh the profit potential.
    Second, municipal utilities already have significant 
telecommunications experience in supporting their electricity business. 
They employ telecommunications networks, which consist of fiber optic 
systems, point-to-point microwave facilities, point-to-multi-point 
multiple address systems, and two-way land mobile radio systems. Their 
uses include: protective relaying; system control and data acquisition; 
the interconnection of substations, pumping stations and generating 
plants; interconnection of personnel by use of mobile radio base 
stations and hack haul service restoration dispatch; and automated 
plant security and alarm systems. These utilities are also implementing 
advanced information and communications technology strategies to revamp 
both the supply side and demand side of their operations.
    Third, municipal utilities employ telecommunications strategies 
that best meet the market needs of their communities. The simplest 
option--and the one most frequently used--is to lease dark fiber or 
bulk telecommunications capacity to new or competing private telephone 
companies, cable operatives, Internet providers, or other 
telecommunications carriers. The second option is to enter into 
creative partnerships with telecommunications providers, customers or 
other entities, including schools, universities, hospitals or 
libraries. And the third option is for the municipal utilities to 
become full-fledged providers of advanced telecommunications services 
to the public.
    And fourth, municipal utilities want to overcome the digital divide 
and meet the needs of their own rural or urban distressed ccommunities 
when private, profit-maximizing firms will not provide advanced 
telecommunications to all Americans. Unlike private, incumbent 
communications providers, municipal governments have a central mandate 
for universal service.
Private Communications Providers Give Low Priority to Underserved Areas
    Last year in comments to the FCC in response to its inquiry on 
implementation of Section 706 of the Telecommunications Act of 1996, a 
number of representatives of private industry indicated why it was 
unlikely they would be providing advanced telecommunications services 
to rural areas any time soon. The Association of Local 
Telecommunications Service argued that the FCC ``must recognize that 
any advanced telecommunications technology or service is likely to 
appeal and be marketed first to businesses and, after being proven in 
that market, introduced to residential consumers.'' GTE maintained that 
``it is to be expected'' that service providers ``are deploying 
advances telecommunications capability solely or predominantly in urban 
areas. It can be expensive to invest in the infrastructure needed to 
provide such service. Accordingly, it is rational to build the 
infrastructures first in areas where demand is likely to be greatest 
and unit losses are likely to decline most quickly. Once economies of 
scale and scope are captured, infrastructure can be extended to less 
densely populated locations.'' Similarly, SBC Communications stated, 
``Even where advanced telecommunications capability is available, that 
would technically and operationally be deployed, the expected demand 
and associated costs may make the deployment uneconomical, particularly 
in rural areas.'' And the National Telecommunications Cooperative 
Association (NTCA) put it in even starker terms. NTCA noted that, in 
its opinion, in rural communities, ``there will always be areas where 
cost of providing services outweighs the profit potential.''
Municipal Utilities as Providers
    Simply put, municipalities and their utilities should be enabled to 
provide, not prevented from providing, advanced telecommunication 
services. Even where the private sector determines the investment costs 
are too high and the returns are too low, municipal governments may be 
able and willing to act. Even if in rural and distressed urban areas 
such services are available, the cost to consumers may be high, or the 
service may be limited or of poor quality. In those cases, municipal 
utilities can and do provide competition to incumbent 
telecommunications carriers, serving as a threat of or actual 
competition to the incumbents, or as a yardstick against which to 
measure their performance.
Recommendations for Congressional Action
What should Congress do?
    First, Congress should indicate in even clearer terms that it 
intends for the FCC to preempt any and all state laws that create 
barriers to municipalities and municipal utilities providing any kind 
of telecommunication services. Accordingly, Congress should amend 
Section 253(a) of the Telecommunications Act of 1996 with express 
language.
    Second, Congress should review the definition of 
``telecommunication services'' to ensure that Section 253(a) covers 
state statutory barriers to voice, video, data, and other advanced 
telecommunications services, whether provided in analogue, digitized, 
or packetized formats.
    And third, the Congress should recognize the important role 
municipalities and municipal utilities can and do play in the 
deployment of advanced telecommunications services and infrastructure 
in rural and urban distressed areas and find ways to encourage further 
municipal involvement.
    APPA appreciates the opportunity to provide you with these 
comments.

                                
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