[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




                  SMALL BUSINESS ACCESS TO COMPETITIVE
                      TELECOMMUNICATIONS SERVICES

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

                                HEARING

                               before the

            SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                    WASHINGTON, DC, NOVEMBER 1, 2001

                               __________

                           Serial No. 107-34

                               __________

         Printed for the use of the Committee on Small Business

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
76-759                     WASHINGTON : 2001


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                      COMMITTEE ON SMALL BUSINESS

                  DONALD MANZULLO, Illinois, Chairman 
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
ROSCOE G. BARTLETT, Maryland             California
FRANK A. LoBIONDO, New Jersey        DANNY K. DAVIS, Illinois
SUE W. KELLY, New York               BILL PASCRELL, Jr., New Jersey
STEVE CHABOT, Ohio                   DONNA M. CHRISTENSEN, Virgin 
PATRICK J. TOOMEY, Pennsylvania          Islands
JIM DeMINT, South Carolina           ROBERT A. BRADY, Pennsylvania
JOHN R. THUNE, South Dakota          TOM UDALL, New Mexico
MICHAEL PENCE, Indiana               STEPHANIE TUBBS JONES, Ohio
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California          DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri                 GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia          BRIAN BAIRD, Washington
FELIX J. GRUCCI, Jr., New York       MARK UDALL, Colorado
TODD W. AKIN, Missouri               JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania           BRAD CARSON, Oklahoma
                                     ANIBAL ACEVEDO-VILA, Puerto Rico
                      Doug Thomas, Staff Director 
                 Phil Eskeland, Deputy Staff Director 
                 Michael Day, Minority Staff Director 
                                 ------                                

            Subcommittee on Regulatory Reform and Oversight

                     MIKE PENCE, Indiana, Chairman 
LARRY COMBEST, Texas                 ROBERT BRADY, Pennsylvania
SUE KELLY, New York                  BILL PASCRELL, Jr., New Jersey
SAM GRAVES, Missouri                 CHARLES GONZALEZ, Texas
ROSCOE BARTLETT, Maryland            DAVID D. PHELPS, Illinois
TODD AKIN, Missouri                  JAMES R. LANGEVIN, Rhode Island
PAT TOOMEY, Pennsylvania             ANIBAL ACEVEDO-VILA, Puerto Rico
               Barry Pineles, Professional Staff Member 
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 1, 2001.................................     1

                               Witnesses

Gregori, Joseph A., CEO, InfoHighway Communications Corp.........     3
Burk, Richard E., President and CEO, NII Communications..........     6
Curtis, Robert A., President, Z-Tel Network Services, Inc........     7
May, Laurence, Partner, Angel & Frankel..........................     9

                                Appendix

Opening statement: Pence, Hon. Mike..............................    16
Prepared statements:
    Gregori, Joseph A............................................    20
    Burk, Richard E..............................................    27
    Curtis, Robert A.............................................    36
    May, Laurence................................................    52
Additional Material:
    Letter to Committee from ALTS................................    59

 
    SMALL BUSINESS ACCESS TO COMPETITIVE TELECOMMUNICATIONS SERVICES

                              ----------                              


                       THURSDAY, NOVEMBER 1, 2001

                  House of Representatives,
                       Committee on Small Business,
           Subcommittee on Regulatory Reform and Oversight,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 2:15 p.m. in 
room 2360, Rayburn House Office Building, Hon. Mike Pence 
(chairman of the subcommittee) presiding.
    Chairman Pence. I would like to welcome everyone, 
especially our witnesses, to this fourth in a series of 
hearings on telecommunications which is being conducted by the 
Subcommittee on Regulatory Reform and Oversight of the 
Committee on Small Business here in the House of 
Representatives.
    This hearing is on the subject of small business access to 
competitive telecommunications services, and I will welcome 
each of the witnesses individually. I thank you very much for 
being here and for your interest in participating in the public 
process.
    I will alert you as a housekeeping matter that we have 
votes that are expected to imminent, and in the event there are 
votes, we will adjourn and the Chair and any of the other 
members that are present will simply recess and return in the 
hopes of not inconveniencing any of our witnesses or those in 
attendance any further. Let me also say for those of you that 
are aware of the anthrax contamination in my office that I am 
confident the attending physician has urged me that I am not 
contagious in any way, in any way carrying any airborne 
antibodies with me, so those of you in the back of the room can 
move forward and make yourself comfortable.
    Five years ago the Telecommunications Act of 1996 was 
signed into law. When it was enacted, promises from 
congressional leaders, the President and industry was that the 
legislation would create a revolution in the provision of 
telecommunications services.
    A revolution certainly has occurred and an entirely new 
economy based on the Internet has developed in the past five 
years. Hundreds of new companies have been formed to break into 
what was once perceived as an impenetrable monopoly, the local 
telephone market, unfettered competition in the 
telecommunications market, and the benefits of lower prices and 
better services, particularly for small business owners 
throughout the country, remains a distant goal, not a near-term 
reality.
    Some experts believe that the competitive goals in the '96 
Act will not be met without facilities-based competition. There 
is no doubt that facilities-based competition will play a key 
role in providing competition to the incumbent local telephone 
companies, yet facilities-based competition is not the only 
option.
    As the Supreme Court noted in AT&T v. Iowa Utilities Board, 
the 1996 Act ``imposes no such limitation; if anything, it 
suggests the opposite.''
    Three of the witnesses today are competitors of incumbent 
local telephone companies that started after the enactment of 
the 1996 Act. Their business models are based on the fact that 
the facilities-based competition is not mandated by the act. 
They will explain how they purchase unbundled network elements 
that constitute the foundation of local telephone service from 
incumbent local telephone companies, reassemble those elements 
along with elements that they provide themselves, and sell that 
package to provide competitive local telephone service.
    A key component of providing local telephone service is 
access to switching so that telephone calls can be routed 
properly. In its initial order implementing the 1996 Act, the 
Commission designated switching as an unbundled network element 
that incumbents must sell to competitors should they so request 
it.
    The Supreme Court determined that the Commission 
misinterpreted the '96 Act and forced the agency to develop a 
new list of unbundled network elements. The Commission did 
that, and determined that incumbents would no longer be 
required to sell switching as an unbundled network element to 
competitors who wish to serve customers with more than four 
telephone lines. The Commission determined that switching 
service was sufficiently available from sources other than 
incumbents for all customers except small businesses and 
residents.
    The decision violated the Small Business Act, plainly put, 
and the Regulatory Flexibility Act, as was pointed out in a 
detailed letter by a predecessor in this subcommittee, and the 
immediate past chairman of the Small Business Committee, the 
Honorable Jim Talent.
    The Commission failed to follow the Small Business Act when 
it determined that small businesses were only those businesses 
that have fewer than four telephone lines, nor did the 
Commission properly assess the economic impact of the decision 
on small competitors, and whether there were any potential 
alternatives that might be less burdensome on them.
    The telecommunications companies will explain how their 
businesses are dramatically and adversely affected by the 
Commission's decision, and how they have been now waiting for 
nearly two years to get a decision on the reconsideration of 
the issue.
    During the pendency of this proceeding, they have been 
unable to expand because the rules governing their businesses 
remain in flux. In turn, this harms the ability of these 
companies to provide service to many small businesses. More 
importantly, if the Commission decides to extend its current 
rules to all areas of the country rather than the central 
business districts of the 50 largest cities, it could prevent 
competition from flourishing in many smaller cities like Muncie 
and Anderson, that represent hubs of the congressional district 
that I serve.
    The final witness will explain to us that the needs of a 
small law firm or any other small business do not necessarily 
comport with those of larger businesses or residential 
customers. That conclusion appears to be obvious to everyone 
but the Commission, which historically fails to distinguish 
between small businesses and residential customers. The 
proceeding at issue here simply continues that illogical and 
unsupported precedent.
    A bit of a personal word. There has been some concern 
expressed to this committee in the days preceding this hearing 
that this hearing may turn into an opportunity to attack the 
RBOCs. Allow me to say that this is not a hearing held for that 
purpose. It is not held for the purpose of allowing competitors 
of RBOCs to do that. Rather, this hearing is specifically and 
exclusively about the regulatory actions of the FCC.
    The Commission as of today should be on notice that this 
Chairman and this subcommittee expect the laws of this Congress 
to be obeyed. If the Commission fails, the commissioners can 
expect that they will be explaining their decision to this 
subcommittee in the near future.
    Let me thank the witnesses again for taking time out of 
their busy schedules and making a trek to Washington, D.C. 
under these unusual circumstances and during this unusual time 
in our history. And with that, I will introduce our first 
witness who will be recognized for five minutes, and I believe 
it is Gregori, I always ask.
    You activate your microphone, Mr. Gregori, on the pad, and 
the lights in front of you, by way of housekeeping, will notify 
you when you get within about 30 seconds of finishing with the 
yellow and the red. It does not mean immediately stop. It means 
you can wrap up your comments in an orderly way.
    Joseph Gregori is the chief executive officer of 
InfoHighway Communications Corporation, which is an integrated 
communications provider, offering voice data and end 
communication services to primarily small and medium-sized 
business customers. The company offers competitively priced, 
high quality one-stop shopping for local and long distance 
telephone services, high speed data, and network design and 
wiring services.
    Prior to joining InfoHighway in September of 1998, Mr. 
Gregori was the chief operating office for Price Cellular 
Corporation, a publicly traded wireless communications provider 
with operations in over 20 markets throughout the United States 
of America.
    Mr. Gregori is a CPA, and an honors graduate of Adelphi 
University. He began his professional career in public 
accounting, and was employed in the audit division of Deloitte 
& Touche.
    And Mr. Gregori, you are most welcome and are recognized 
for five minutes.

   STATEMENT OF JOSEPH A. GREGORI, CHIEF EXECUTIVE OFFICER, 
                INFOHIGHWAY COMMUNICATIONS CORP.

    Mr. Gregori. Thank you. Good afternoon.
    You now know I am Joseph Gregori and I am the CEO of 
InfoHighway Communications. I would like to thank the Chairman 
and other members of the committee for allowing me the 
opportunity to speak with you today.
    Our company is one of the many CLECs that provide 
telecommunications alternatives to the small business 
community. The FCC currently has rules in place that limit our 
ability to serve the small business market, and worse, is 
considering new rules that could further limit our ability to 
compete for small businesses. This limitation will in fact 
threaten our entire industry's existence as a competitive 
alternative for the small business community.
    A quick further overview of our company. As you heard, we 
provide telecommunications services, primarily in the 
northeastern part of the country, from Massachusetts down 
through New York, New Jersey, Pennsylvania, Baltimore, 
Washington and right here in the D.C. area.
    According to the New York State Public Service Local 
Competition Report for the year ended December 2000, 
InfoHighway Communications was the twenty-third largest 
competitive provider in New York State, out of over 100 
responding companies. Currently we have in excess of 5,000 
customers that are mostly small businesses. Our typical 
customer might be the local print shop, the neighborhood travel 
agency, or your doctor's office.
    Our strategy has been to bundle together local and long 
distance voice services while we slowly and deliberately build 
out our own data network to deliver high speed internet access 
utilizing digital subscriber line technology, also known as 
DSL.
    This smart build approach allows us to build market share 
and cash flow while making the necessary long-term investment 
in building networks. To date, we have invested over $7 million 
in network facilities.
    Our company does not have the resources to build a 
ubiquitous voice and data network to compete with the 
incumbents. Those companies, as you know, have had over 100 
years to build that, most of the time protected by regulation 
from any competition.
    We now hear from the likes of Verizon that they welcome 
competition--but only from competitors their own size, those 
companies able and willing to duplicate their network. Of 
course, no company can do that, especially in today's 
environment.
    Further, Wall Street and the private equity markets have no 
appetite today for ``Field of Dreams'' type builds, build new 
data networks, build new voice networks and we will finance 
them. That era is gone.
    The FCC needs to hear from you and others concerned about 
the state of, or lack of, competition in the local markets, 
particularly for the small business customer.
    We lease facilities from Verizon and utilize unbundled 
network elements, commonly referred to as UNEs, combining UNEs 
in what is referred to as the unbundled network element 
platform, or UNE-P. These offerings are expressly provided for 
in the 1996 Act and time and time again state and federal 
regulatory bodies have ruled they must be offered to 
competitors.
    Let me share with you a little bit about the state of 
competition in New York which has many times been showcased as 
the success story for local competition.
    My view is that New York State probably is the most 
competitive state in the nation. However, if you examine the 
facts and put them together, rather than look at them just 
simply as statistics, and consider especially the huge role of 
UNEs and UNE-P, you come away with a very different 
perspective.
    The New York State PSC issued this yearly report titled 
``Analysis of Local Exchange Competition.'' On the surface, the 
report looks encouraging, but closer examination, coupled with 
the state of our economy, tell us competition is in trouble.
    The report indicates, as you would expect, Verizon-New York 
still accounts for most of the local revenues; in fact, $5.1 
billion or 82 percent, and AT&T ranks number two. No surprise. 
However, what is startling is that AT&T is a distant second 
with $168 million or approximately 2.7 percent of the total 
revenues in that market. In over five years, AT&T has less than 
three percent share of the New York local telecom market.
    If a company the size of AT&T with its resources and brand 
recognition cannot obtain more than 2.7 percent, one has got to 
ask why.
    By contrast, the same report indicates that Verizon-New 
York has now captured 20 percent of the long distance 
residential market in the first year since it entered that 
market. Are they that good at marketing and everyone else so 
inept?
    The irony is that what is pointed to as competition from 
the CLECs in New York has resulted primarily from the use of 
leased facilities from Verizon. Approximately 80 percent of all 
the competitive lines in New York use leased facilities, and 
this is precisely the option that the FCC is foreclosing.
    I implore you to take up our case. Thank you. I appreciate 
your time.
    [Mr. Gregori's statement may be found in the appendix.]
    Chairman Pence. Thank you, Mr. Gregori, and we will hold 
any questions about your testimony until after we have heard 
from all of the witnesses.
    Richard Burk is also with us today. Mr. Burk began his 
telecommunications career with Southwestern Bell in 1978 as an 
account executive in Southwestern Bell's marketing group. In 
1984, Mr. Burk joined Value Line of Longview, a competitive 
long distance company. As president there, he honed the skills 
of technical operations, regulatory affairs, accounting, 
finance, marketing and other aspects of operating a competitive 
small business.
    From Longview, Mr. Burk went on to become vice president of 
operations for American Telco, a Houston, Texas-based privately 
held regional long distance provider. While there, henegotiated 
the first post-telecommunications act local interconnection agreement 
with a Bell Company.
    In 1996, Mr. Burk joined USLD Communications in San 
Antonio, Texas, which is a Texas-based long distance provider. 
As vice president of strategic development, he oversaw the 
company's pursuit of authority to enter local markets in 22 
states and negotiated interconnection agreements with 
Southwestern Bell, Pacific Bell and others. Under Mr. Burk's 
direction USLD purchased and implemented a state-of-the-art 
local switch and was in the process of developing a strategy to 
convert its resale customers to UNE-P when it was acquired by 
Qwest.
    After leaving Qwest in 1998, Mr. Burk started Network 
Intelligence, Incorporated, the company known today as NII 
Communications. He is the president and chief executive officer 
of NII, which is a competitive local exchange carrier serving 
nearly 7,000 small business customers throughout the State of 
Texas.
    And Mr. Burk is most welcome to the subcommittee and is 
recognized for five minutes.

     STATEMENT OF RICHARD E. BURK, PRESIDENT AND CEO, NII 
                         COMMUNICATIONS

    Mr. Burk. Thank you very much, Mr. Chairman. I appreciate 
the opportunity to speak to the subcommittee.
    I have been characterized as a veteran of the industry. I 
have been around it a long time. But in 1999, my wife and I 
invested our life savings in starting NII, which is really a 
small business still today, probably one of the smaller 
companies up here. We are going to do about $20 million in 
revenue this year. We are real proud of that. But relative to 
telecom companies, that is not real big.
    But I also think we are probably, as of the last few 
months, kind of operating on a break-even basis. We are not 
losing money, and that is also fairly unique in the telecom 
business, and we are real proud of that as well. And one of the 
reasons that is the case is that UNE-P has been offered in 
Texas on pretty much an unfettered basis as a result of the 271 
negotiations and what is known as the T2A. However, that is in 
jeopardy now. Some time limitations have expired and the 
commission there is considering whether or not it should now 
adopt the restrictions placed on it by the FCC.
    And those restrictions are very onerous to us. They cloud 
your ability to go into the major markets, and we are very 
concerned that they may spread to all markets.
    Our 7,000 customers are spread across approximately 250 
small towns in Texas. I have a lot of customers and employees 
in the districts of Representative Combest and Representative 
Gonzalez, who are on your subcommittee, and it matters to them.
    Rather than reiterate all of my testimony, attached to my 
testimony is letters from 22 of our customers which we did not 
spend a lot of time obtaining; we just asked some of them what 
they thought, but I want to read you some excerpts out of three 
of them because I think they really speak to the issue.
    Mr. Jim Gerab, who is the president of Prestige Home Health 
Care wrote me this letter, it is handwritten, and it is in your 
testimony. It says, ``Dear Richard: As you know how important 
competition is, I wanted to take out the time to thank you. NII 
has allowed my company enough savings to be able to put in 
place a health care package for our employees. Keep up the good 
work. Thank you.''
    Drew Longmeyer of Longmeyer Plumbing in Abilene, Texas, 
just part of their letter says, ``Well, the second bill of NII 
is in and you are not right about the savings. We saved even 
more than you said we would. Spending 70 to 80 dollars more a 
month might not seem significant to a larger company, but it 
makes a big difference to our small company. In our case, it is 
the payment for equipment we have needed but could not 
afford.'' And he goes on to talk about some other aspects of 
our service.
    And in these letters you will find the customers like us to 
varying degrees, but a common thread among all of these 
customers is that they are very adamant and appreciative of the 
fact that they have had a choice as a result of what is going 
on. In fact, John Timms, the president of Isabelle's European 
Day Spa, Inc. says, ``As an owner and operator of two 
successful Day Spas, I tip my hat to whoever has made it 
possible to finally get out from underneath the thumb of 
Southwestern Bell.'' And he says some other things.
    But those are just example--I really recommend that you 
read all of those letters because it really speaks to what is 
going on out there. The reality is that the economic model that 
produces the benefits for the small business today is UNE-P.
    Now, my company offers a fully integrated set of services. 
We provide local service, long distance, and dial-up internet 
access in places where many other companies do not provide it. 
We also offer broad-band DSL, web hosting and web site design. 
So it is a complete package for small businesses, but the fact 
of the matter is they do not really have a choice absent what 
the UNE-P providers are providing.
    The statistics that Mr. Gregori quoted awhile ago relative 
to the long distance penetration in local competition in Texas 
are very similar to what they are in New York, and these are 
the two best markets in the country for competition.
    Our plan was to be in a number of states other than Texas, 
and we have had to rethink those plans based on the 
availability of capital and that capital is restricted by the 
regulatory cloud that hangs over our industry, particularly if 
you are using the UNE-P strategy.
    So thank you for hearing us, and I will be glad to answer 
questions when it is time.
    [Mr. Burk's statement may be found in the appendix.]
    Chairman Pence. Thank you, Mr. Burk.
    And we will enter all the correspondence into the record 
without objection.
    Mr. Burk. It is attached to the testimony.
    Chairman Pence. Mr. Robert Curtis is with us. He is 
currently president of Z-Tel Network Services, and has served 
as senior vice president, strategic planning, since July 1999. 
From May 1998 to June 1999, Mr. Curtis was vice president for 
business development and legal affairs at Z-Tel. From September 
of 1995 to April of 1998, he was an attorney at the Houston 
office of Fulbright & Jaworski, L.L.P., where he specialized in 
antitrust and complex federal litigation. Mr. Curtis graduated 
from Duke University School of Law in 1995, and like the 
Chairman, started his career in the legal profession, but then 
got an honest job. At least in Mr. Curtis' case, that is true. 
[Laughter.]
    Mr. Curtis, you are recognized for five minutes.

    STATEMENT OF ROBERT A. CURTIS, PRESIDENT, Z-TEL NETWORK 
                         SERVICES, INC.

    Mr. Curtis. Thank you, Mr. Chairman, for the opportunity to 
testify today.
    I would like to talk today about an FCC rule that denies 
small businesses access to serviceswhich, if they were 
available, would increase their efficiency, profitability, and the 
service quality they are able to provide their customers.
    Z-Tel is one of the largest competitive providers in the 
telecommunications industry. We have 250,000 subscribers today. 
We are in 35 states. In the last two years, we have grown our 
revenue from about zero to $300 million a year.
    We are a child of the Telecom Act of '96. Although we began 
life as a software development company, with the goal of 
developing and providing innovative software applications to 
end users, we quickly discovered that the best way to do that 
was to provide contact with our software to the end users' 
telephone. So we are really a company that tries to combine two 
worlds; existing telephone with new and creative software 
applications.
    Consequently, we have invested over $100 million in 
software investment, and employ about 85 software development 
engineers in our offices in Atlanta.
    But that business plan could not exist without something 
like the unbundled network element platform. There are two ways 
that a telecom company can choose to deploy capital today. It 
can either choose to rebuild an existing legacy network, which 
is a fine business strategy, but not Z-Tel's.
    Or you can choose to take that same capital, deploy it in a 
different way, try to create innovative things, whether it is 
an innovative billing system, whether it is a different data 
network, or whether, in our case, there is simply innovative 
software applications to ride on top of the existing network, 
and that is really the method we have chosen to take.
    So Z-Tel is here to explain how this ill-conceived FCC rule 
harms and discriminates against small businesses, because the 
rule prohibits these small businesses from receiving our 
services.
    First of all, this rule arbitrarily denies access to some 
of Z-Tel's services simply based on how many lines they have, 
whether it is three or more, or whether they are in some areas 
but not others. Consequently some small businesses have access 
to applications that we think would enhance their businesses 
while others do not through, as far as we can tell, arbitrary 
factors. We think that is discriminatory.
    But there are also some breeds of service that Z-Tel has on 
the drawing board, applications that we more or less have 
working in our development shops that we cannot deploy right 
now. One of the things we really want to try to solve is the 
problem with many branch offices in disparate parts of the 
country. Because we have a footprint in 35 states, we would be 
able to connect insurance branch offices with a voice 
recognition platform so that insurance agents could be reached 
by intelligent messaging capabilities, by voice recognition 
communicate with themselves, and communicate with different 
insurance branches. But we are not able to offer a ubiquitous 
solution to the insurance agent industry--State Farm would be 
an example--because some of those branch offices have more than 
four lines in the top 50 MSAs, so we cannot offer a ubiquitous 
solution.
    Same sort of thing with the banking industry. We would love 
to take our software and deploy an application that would send 
a message to every person who receives their social security 
check on the day that check clears the bank. But to do that we 
have got to offer the application to the entire industry, not 
just the small branch bank that happens to be in Waco. That is 
where a tremendous amount of our advantage could come from, 
offering ubiquitous service in small towns where other 
companies are not deploying any facilities at all. But to make 
this work at all, you have got to be able to provide the 
service to all business of that type, whether it is in Waco or 
whether it is in downtown Manhattan, and the existing FCC rule 
completely prohibits the roll-out of that service.
    It also prohibits the growth of a company like Z-Tel 
because telecom is very much an economies of scale business. If 
we are required to develop a product which we can only hope to 
offer to a subset of the small business market, it really 
decreases our incentive for developing products that would be 
good for businesses wherever they are and however many lines 
they have. It also, frankly, is a scary thing for a company 
like Z-Tel to have to consider selling phone service to a 
company who may actually grow because if we sell phone service 
today to someone who is in Manhattan and they have three lines, 
we actually would have to give them back to Bell Atlantic or to 
Verizon when they got their fourth line. That is what the FCC 
rule requires. It certainly does not promote us competing for 
small business customers in New York.
    So we think this rule is bad policy, it discriminates 
against small businesses, and it precludes companies like ours 
from being even more aggressive in our development of 
innovative services for those businesses.
    Thank you for your time.
    [Mr. Curtis's statement may be found in the appendix.]
    Chairman Pence. Thank you, Mr. Curtis.
    Our final witness on this panel before the Chair has some 
questions for our witnesses is Laurence May who graduated from 
Franklin Marshall College in 1972 with a B.A. in government, 
Phi Beta Kappa. He is a 1975 graduate of New York University 
School of Law where he was business editor of the New York 
University Law Review.
    And for the past 14 years, 12 as a member of the firm, Mr. 
May has been associated with Angel & Frankel, P.C. It is a 
boutique law firm located in New York City which specializes in 
business reorganizations, and creditor and debtor rights.
    Mr. May has served on various committees, including the 
committee to review civil procedures for the United States 
District Court for the Eastern District of New York, and has 
widely lectured on bankruptcy-related topics.
    And it is delightful to have you here, Mr. May, and you are 
recognized for five minutes.

      STATEMENT OF LAURENCE MAY, PARTNER, ANGEL & FRANKEL

    Mr. May. Thank you, Mr. Chairman. I am still searching for 
my honest job, but I would like to thank you, Mr. Chairman, and 
members of the committee for offering me this opportunity to 
speak to you this afternoon.
    Our firm is a small business operating in New York City. We 
employ approximately 20 people, including the attorneys on 
staff, and we have four partners, and I am one of the four 
partners.
    Our local telephone service is now being provided through 
16 or 17 local business lines by InfoHighway Communications, 
Mr. Gregori's company. In addition, InfoHighway Communications 
provides us with our high speed internet access and our e-mail 
service as well. And we anticipate that when our long distance 
contract expires next month we will probably transfer our long 
distance service to InfoHighway as well.
    InfoHighway also provides us with credit card service on 
long distance calling which has been rather important for us in 
the fact that we have been doing a lot of traveling in our 
practice recently, and at rates that we were never offered by 
any other carrier.
    As a small law firm with, I think, a fairly sophisticated 
practice in the area of business reorganization and debtor and 
creditor rights, we find ourselves competing constantly with 
much larger firms. We have to distinguish ourselves based upon 
our pricing and the service that we can provide to our clients, 
and in fact, we use that as a test to the vendors that we hire 
to provideservices to us.
    Prior to InfoHighway, local telephone service had been 
provided to us by Verizon or one of its pre-merger 
predecessors. We generally had the sense that our account, we 
thought fairly sizeable, was of insufficient size to be of 
particular importance to such a large company. When InfoHighway 
approached us to provide local phone services to us, it took 
the time to understand our business, to explain how we can 
control our costs. It took the time to prepare a very detailed 
cost analysis for us, and met with me and members of our firm 
and people on our staff to explain how our services could be 
enhanced and how we could have services provided to us at a 
lower rate.
    Our firsthand experience with InfoHighway led us thereafter 
to transfer our data services to the company. I have no 
recollection in all the years that we have been dealing with 
various phone providers of any other representatives coming to 
us and discussing our account or suggesting ways in which we 
could better manage our costs.
    We really did not think we had a viable alternative in 
local service until we met InfoHighway, and we are pleased that 
they are around to offer us this alternative.
    We find it convenient, moreover, and efficient to deal with 
one representative telecom vendor, one who can handle all of 
our various requirements. I think other small businesses need 
and want the same kind of services that we now enjoy from 
InfoHighway. We do not have the resources and I suspect others 
in our situation have the same issue, or the staff to deal with 
telecom communication issues which would arise and do arise 
when we have multiple vendors. We have less influence, 
obviously, than larger firms, so it is important that we have 
vendors who are attuned to our problems and help us compete in 
the legal marketplace.
    When we have questions or when there is a service problem, 
we have over the past several months and years found 
InfoHighway's response to be the best of any provider that we 
have experienced either before or since.
    Let me give you an example of one way in which InfoHighway 
has helped us save money. Our local calling plan has line fees 
which are a lot less than we previously were paying with our 
other providers. Our prior calling plan incorporated three-
minute requirements which InfoHighway does not.
    Given that we are a law firm that does thousands of phone 
calls each year, many of which are less than one minute in 
time, the fact that we are able to be billed on a minute-by-
minute basis rather than the three-minute minimum saves us 
substantial amounts of money.
    With InfoHighway, we have a choice as to local phone 
service providers. But it is equally important to us that we 
can look to InfoHighway for high speed data services through 
its DSL lines. As you may or may not be aware, the United 
States Bankruptcy Court for the Southern District of New York 
is a pioneer in the electronic filing of documents. Much of our 
practice is with that court, and it is critical for us that we 
have access to reliable and reasonably priced high speed data 
services so that we can file and retrieve documents and keep 
apprised of developments in cases in which we are involved. 
InfoHighway has admirably addressed our needs in this respect.
    I do not claim, Mr. Chairman, to understand all of the 
issues before this committee, but I do know that as a small 
business having a choice for local phone service has proved 
important to us. I encourage you and the members of this 
committee to take the necessary action to be sure that in the 
future there is more, not less, competition in this 
marketplace.
    Thank you, Mr. Chairman.
    [Mr. May's statement may be found in the appendix.]
    Chairman Pence. Thank you. The Chair very much appreciates 
Mr. May's presentation, and especially his sense of humor. Let 
me begin with some questions for our last witness, except I 
have a series of questions for some of the competitive 
providers that are here to help me understand this a bit 
better.
    But from a practical standpoint, how did you come to find 
out about InfoHighway at your firm.
    Mr. May. Well, I had known Mr. Gregori before he was with 
InfoHighway. I believe we had used some of his services at 
Price Cellular. And through that connection and prior 
connections, he came to us and explained to us what he could 
offer with InfoHighway.
    Chairman Pence. Just as a curiosity, when you told Verizon 
that you were planning on switching, did they--in the economic 
model that you are operating in, did they respond in a 
competitive way? Did they offer any of the incentives that were 
on the table with InfoHighway?
    Mr. May. Not that I can recall, Mr. Chairman.
    Chairman Pence. How many law firms that you deal with in 
your practice have more than three telephone lines?
    Mr. May. I imagine almost every one; the substantial 
majority of the firms have multiple, multiple lines; even 
smaller firms.
    Chairman Pence. Would you characterize those nonetheless as 
small law firms, small businesses?
    Mr. May. Well, we deal quite frequently with large firms, 
but firms that I am familiar with of our size and small firms 
of say five to 30 lawyers, which I would clearly characterize 
as small business firms, have multiple lines, and most of them 
which do bankruptcy work in the Southern District also require 
the high speed DSL services as well, and have multiple lines as 
well.
    Chairman Pence. Well, so by inference, I sense that you 
would answer affirmative to the necessity of DSL services and 
this kind of service to be in the business you are in?
    Mr. May. Yes, it is essential.
    Chairman Pence. Thank you.
    To Mr. Gregori, a very broad question, and I may pose this 
to some of the other competitive providers that are here, if 
the FCC maintains the current restrictions on the availability 
of switching as a UNE, how would it affect the plans of UNE-P 
carriers to expand?
    Mr. Gregori. Well, I am going to hone in on the last 
phrase. To expand?
    The industry today is struggling to survive. So under the 
current guidelines, the current rules, we are hanging on. The 
people before you are very experienced, seasoned individuals 
that have been through it before, and we are executing at the 
very, very basic levels to struggle through it and give life. 
We need relief in this area.
    Any further restrictions, candidly, we close up shop.
    Chairman Pence. Same question to Mr. Burk, and feel free to 
elaborate.
    Mr. Burk. Well, a lot of our customers are outside the top 
50 MSAs, although we do have customers in--quite a few in San 
Antonio, Houston and Dallas, but a large percentage of our 
customers are outside that area.
    And having a significant portion of the lines in those 
areas not available to us makes it very difficult to market 
there. We market with a direct sales force and it is hard to 
tell a salesman you can sell the guy on this side of the 
street, but not on that side of the street. If a guy has got 
three dry cleaners, you can say, I can provide service in two 
of them, but not in the third one it is nonsensical to the 
customer, and it makes it very difficult to market in those 
areas.
    But from a cost standpoint, our costs are de-averaged, so 
our costs for UNEs are lowest in those largest markets and 
highest in those smallest markets. And like the RBOC, the 
revenuesthat you get in the largest markets help you to be able 
to provide service in the smallest markets.
    So the net effect of it is that we have had to restrict our 
marketing into the smallest towns in Texas because of the cloud 
over our ability to provide service in the largest towns. We do 
not want to get what I would call exposed by adverse selection 
in the cost model, because the retail pricing works exactly the 
opposite. The lowest rates are in the smallest towns, and the 
highest rates are in the biggest towns.
    So it kind of puts you in a bind, and so what I would say 
is if you wanted to do away with barber shops, you do not have 
to outlaw barber shops, you just have to tax scissors. And so 
what happens here is that marginal difficulties in providing 
this service impact the overall business model.
    As you can see in my experience, I have done resale, and 
there is not enough margins to sustain that in the competitive 
business, and I have done facility-based competition. And 
facility-based competition is a great idea, but it does not 
work for all customers because it does not have any ubiquity 
that was spoke of by some of our competitors. Regardless of the 
size of town, there is no economic model that I have been able 
to look at, and I have looked at a bunch of them, that says you 
can provide service to small businesses on your own switch no 
matter what city you are in if you are providing just analog 
telephone services, which is what most businesses still need 
primarily.
    Hopefully, we will have a broad-band solution that allows 
us to provide this service economically on a broad scale, but 
you need competitors and a market for the technologists to 
build that equipment for. If the competitors go away, that 
technology is never coming on line.
    Chairman Pence. Mr. Curtis.
    Mr. Burk. Long answer to a short question.
    Chairman Pence. It is a good answer. Thank you.
    Mr. Curtis. Same question?
    Chairman Pence. Please. Would you like me to restate it?
    Mr. Curtis. No. No, thank you.
    We would probably focus on the residential market, which we 
are already in. We would probably either completely rethink our 
business strategy in most states, again because our product is 
set and the way we approach a problem really requires ubiquity 
at the moment.
    There are a few states where state legislators appear to 
have been taking, and state PSCs--have been taking, a lead. 
Illinois recently passed a wonderful telecom bill which removes 
the restriction.
    As I think Richard had mentioned earlier, Texas, at least 
until recently, had no restriction. That is a bit in doubt. And 
while there is some restriction, it is modest in New York. So 
we could focus on states that are taking a leading role instead 
of having to depend on the FCC.
    But if the FCC restriction stays in place, we would not be 
able to offer the kinds of services that customers have asked 
us to provide, and it would dramatically curtail a plan to 
expand in to the business market.
    Chairman Pence. My question to Mr. Gregori would be how has 
the delay--specifically the delay in the FCC's decision-making 
affected your business plans?
    Mr. Gregori. Well, the uncertainty of the decision, which 
way is it going to go, has a direct impact on the capital 
markets. There are specialty lenders into our group who 
understand exactly what the limitations are and are kind of 
waiting in the wings to determine what is the outcome. Should 
they continue to support and lend into this sector to help grow 
the marketplace, or should they kind of curtail now their 
lending and stand on the sidelines until it is resolved?
    It also impacts the amount of dollars we are willing to 
commit to marketing, and just how fast we could grow the 
business. We think we deliver a really terrific set of value 
proposition to our small business customers, both in terms of 
price and service, and at the end of the day we think we could 
win provided the restrictions were lifted.
    Chairman Pence. I know we have a vote imminent, and we will 
adjourn the hearing a few minutes after that call comes.
    But let me ask Mr. Curtis for starters, but anyone of the 
providers can grab at this. What evidence does the FCC have 
that you are aware of, if any, to demonstrate that small 
businesses are only those with less than four telephone lines? 
Can you inform the Chair of the Commission's view of this?
    Mr. Curtis. Be happy to take a swing at it, Mr. Chairman.
    First of all, let me say that whatever was the case in 
1999, when this rule was imposed, I think most of us can agree 
that the world is a dramatically different place for telecom 
providers in the winter of 2001 than it was in 1999.
    Let me also say the best evidence I have seen and the most 
thorough study of what constitutes in the telecom world a small 
business, and there are differences based on the sort of 
circuit that one provides, or the number of lines that one 
would provide, things like that, the best evidence I have seen 
is in a document filed by the PACE Coalition that argues for 24 
lines, which is the digital level. I think that is 
overwhelmingly the strong evidence in the record, and I would 
encourage you to take a look at that.
    Chairman Pence. Mr. Burk, same question.
    Mr. Burk. Yes, I would agree. As well as belonging to PACE, 
I have been actively involved in this for quite awhile, and I 
am unaware of any substantial evidence that supports the three-
line restriction.
    The one piece of evidence that I would also like to point 
to that I think we would all agree with, given the state of 
competition today, I cannot understand the rationale for 
limiting access to any UNEs anywhere. There is no real basis to 
do that. I would like to know just exactly where it is that we 
have too much competition.
    Mr. Gregori. If I could state----
    Chairman Pence. Please.
    Mr. Gregori [continuing]. What I perceive to be the 
obvious. I have three children. I have an internet line at 
home, a fax line, and three phone lines. I have already 
exceeded as an individual the limitations imposed by the FCC 
for small businesses. I do not think they make any sense in 
today's world.
    Chairman Pence. Well, judging from the buzzers our time has 
passed very quickly. I do want to make a formal note that any 
of the witnesses or any interested parties, that this hearing 
record will be open for 14 days after the hearing to submit 
additional remarks, and witnesses and interested parties are 
encouraged to do so.
    I am extremely grateful to the competitive providers and to 
Mr. May for all of your practical experience in this regard. 
Though a freshman in Congress, I follow in the footsteps not 
only of the former Chairman of the Committee on Small Business, 
Jim Talent, who had a passion and a burden for seeing to it 
that small businesses could compete in the regulatory morass 
that this city tends to create, but also I follow in the 
footsteps of Congressman David McIntosh, who was Chairman of 
the Regulatory Reform and Oversight Subcommittee of the House 
Government Reform and Oversight Committee, and I want to assure 
you that we are going to proceed with the very simple business 
of making sure that the Commission is held accountable, that 
they respondto former Chairman Talent's inquiry, and that we 
move this process along to the extent that it is within our power to 
encourage that happening.
    Your testimony today has contributed very significantly to 
my understanding and appreciation of that. It is important that 
you all know that I am a real believer in the free market. I 
greatly admire all four of the entrepreneurs that are 
represented here, having started a small business in my 
basement 10 years ago, with more than three phone lines. I 
appreciate what you do, and particularly Mr. Burk, you sharing 
those heartfelt comments from your customers. I know the value 
of that to you, it was very meaningful. It was meaningful to 
me.
    But know that in this competitive marketplace, I do not see 
good guys and bad guys, apart from the government. And what I 
want to make sure is that the government does not become the 
bad guy but lives up to the obligations of the law, and you 
have assisted us in very meaningful ways today to see to it 
that the FCC does just that.
    So thank you very much for being here, and this hearing of 
the Subcommittee on Regulatory Reform and Oversight stands 
adjourned.
    [Whereupon, at 3:30 p.m., the subcommittee was adjourned.]
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