[Senate Hearing 107-275]
[From the U.S. Government Printing Office]
S. Hrg. 107-275
THE TELECOM ACT FIVE YEARS LATER: IS IT PROMOTING COMPETITION?
SUBCOMMITTEE ON ANTITRUST,
BUSINESS RIGHTS, AND COMPETITION
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
MAY 2, 2001
Serial No. J-107-14
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky RICHARD J. DURBIN, Illinois
MARIA CANTWELL, Washington
Sharon Prost, Chief Counsel
Makan Delrahim, Staff Director
Bruce Cohen, Minority Chief Counsel and Staff Director
Subcommittee on Antitrust, Business Rights, and Competition
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania PATRICK J. LEAHY, Vermont
STROM THURMOND, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
MARIA CANTWELL, Washington
Peter Levitas, Majority Chief Counsel
Victoria Bassetti, Minority Chief Counsel
C O N T E N T S
STATEMENTS OF COMMITTEE MEMBERS
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 3
Dorman, David, President, American Telephone and Telegraph....... 24
Ellis, James D., Senior Executive Vice President and General
Counsel,SBC Telecommunications, Inc............................ 43
Herda, Larissa, President and Chief Executive Officer, Time
Warner Telecom................................................. 35
Hundt, Reed E., Senior Advisor, McKinsey & Company, and former
Chairman, Federal Communications Commission.................... 14
Robbins, James, President and Chief Executive Officer, Cox
Wood, Patrick Henry, III, Chairman, Public Utility Commission of
THE TELECOM ACT FIVE YEARS LATER: IS IT PROMOTING COMPETITION?
WEDNESDAY, MAY 2, 2001
Subcommittee on Antitrust, Business Rights and
Committee on the Judiciary,
The Subcommittee met, pursuant to notice, at 2 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine
(Chairman of the Subcommittee) presiding.
Present: Senators DeWine and Kohl.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Chairman DeWine. Good afternoon. Let me welcome all of you
to the Antitrust Subcommittee hearing on the state of local
telephone competition 5 years after the implementation of the
1996 Telecommunications Act.
Our Subcommittee has examined the competitive status of
this industry on numerous occasions since 1996. Over that time,
we have seen some improvement in the competitive environment as
a result of the Act. However, we still have a long way to go.
Candidly, after 5 years, growth in competition among local
carriers has been disappointing. Though no one expected
immediate miracles upon the Act's implementation, competition
is far from where it could and should be.
On the positive side, the most recent FCC data available
shows that between the end of 1999 and June, 2000, the
competitive local exchange carriers increased their market
share from 4.4 percent of local telephone lines to 6.7 percent.
This competition is particularly strong in the local business
sector, where the competitive local exchange carriers have
gained 17.5 percent of the market.
We also have seen some progress under section 271 of the
Telecom Act. The Bell companies now have satisfied FCC and
Justice Department conditions for opening their local markets
in five States, including three since the beginning of this
Another positive trend is the movement among some cable
companies to begin providing residential phone service over
their cable systems. As many of you know, one of the guiding
principles behind the Telecom Act was that cable would serve as
a so-called ``second wire'' into the home, providing
facilities-based competition to the local phone companies. It
is encouraging to see promising developments in this area.
At the same time, however, there are many reasons for
concern. Incumbent telephone providers still have over 93
percent of the overall local market, and the competitive
picture in the local residential market is even worse. The
competitive local exchange carriers have only 3.2 percent of
the residential market. With competitive providers serving just
over 3 percent of these residential customers, it seems fair to
say that most residential phone customers continue to have
really only one choice, one choice, for local service.
Now, we must be careful, however, not to consider market
share as the exclusive indicator of whether or not competition
actually exists. The Act does not set market-share benchmarks
because it recognizes that sometimes even markets that are open
will be dominated by one company. Nevertheless, after 5 years,
it is hard to argue that a 3-percent market share by
competitive carriers in local residential markets is an
Even worse, many of the companies that have tried to
provide competitive service have suffered financial setbacks.
We already have seen some go out of business as the capital
markets begin to reevaluate the financial prospects of the
market for competitive telecommunications services. If this
trend continues, competition and consumers will suffer.
Some within the industry argue that the struggles
competitive providers have suffered recently are part of a
natural market evolution. Others argue that many of the
problems have resulted because the 1996 Telecom Act has not
been properly enforced. These are issues we need to discuss
with our witnesses today.
Further, while we see many competitive providers
struggling, there are some that believe the Act should be
reopened to allow the Bell companies to begin immediately
providing long distance data services. It is not my intention
to focus on this specific legislative proposal during our
However, that specific issue is related to the broader
question of whether we need to revisit the Telecom Act to
provide a different balance between the incumbent and
competitive providers of local telephone service. For example,
some have suggested we should consider additional legislation
to improve the access of local providers to residential
buildings. This is one of the important policy issues that we
will discuss here today.
Let me say I look forward to our examination of these very
complicated issues, and I remain committed to ensuring a
competitive environment in this very important industry.
Before I turn to Ranking Member Herb Kohl, I would like to
note for the record that, as a rule, the Antitrust Subcommittee
usually receives testimony from industry witnesses who are
responsible for the business operations of their respective
companies. We have found that those who are responsible for the
day-to-day operations and the big picture strategic thinking
have been able to give us the most insight into the competitive
issues we focus on in this subcommittee.
In this instance, however, Mr. Ed Whitacre, the CEO of SBC
Communications, was unable to be here today because of
scheduling conflicts, so Mr. Jim Ellis, the General Counsel of
SBC, is here in his place. We appreciate Mr. Ellis being here
today and we anticipate that his testimony will focus on the
business environment and challenges facing SBC, rather than on
any legal battles that may be ongoing. We anticipate that our
other witnesses on the second panel will have a similar focus.
One final note before I do turn to Senator Kohl. As some of
you may be aware, Senator Kohl's basketball team, the Milwaukee
Bucks, successfully advanced to the second round of the NBA
playoffs just last night. We all want to congratulate Senator
Kohl and, in his honor, we are all using Milwaukee Bucks pens.
I'm sure that if any of you want to see the Senator afterwards
and want a pen, I'm sure that Senator Kohl has a few more.
Senator Kohl. Congratulations.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
Senator Kohl. Thank you very much, Senator DeWine. We
appreciate your holding this hearing here today.
More than 5 years have passed since the Telecommunications
Act of 1996 became law, so this is a good time to see what
progress has been made to bring true competition to
telecommunications. The main goal of the Act was to bring real
competition to all aspects of communications services,
particular to local telephone service. But with the regional
bells still controlling abut 93 percent of the local phone
market, and rates remaining steady over the last 10 years, no
one can claim that the Act has been a roaring success. We have
been waiting for local phone competition for 5 years, and we
are still being kept on hold.
As we look back on 5 years of the Act, it is time to try to
learn some lessons. With AT&T about to be broken into four
companies, and most of the potential competitors to the
regional Bells in serious financial trouble, the biggest lesson
seems to be this: Congress cannot mandate competition, and if
competition doesn't make business sense, then laws like the
Telecom Act will not really work.
Now, that doesn't mean that we shouldn't consider ``fine
tuning'' the Act so that it is a more effective tool to promote
competition. For example, one major stumbling block to
competition has been building access. If the owner of a big
apartment or office building has a sweetheart deal with a phone
company, then building residents are often prohibited from
shopping around for a different phone company. As a result, the
telecom competitors are denied access to a large, important
pool of potential customers, and people are locked into
expensive service because the building owner has a special
deal. This is a recurring problem that we have observed in our
recent cable hearing as well.
But, despite the need for fine tuning, most Americans would
probably look at the telecommunications field today and stand
in awe of the innovation explosion over the last 5 years. From
cell phones to the Internet, from e-mail to DSL lines,
consumers can communicate with each other quicker, faster, and
more efficiently than ever before.
Competition for long distance telephone service is
vigorous, with rival providers engaged in fierce competitive
battles and inexpensive rates of five cents a minute and lower
being common. Cellular telephone use continues to grow, with
more than 80 million users nationwide. With prices dropping,
cell phones are changing from a luxury item to a true mass
means of communications used for everyday needs.
That's the good news. But local residential service is
still the bread and butter of the telecommunications field, and
competition to provide that service is still the ``Holy
Grail''. We have not gotten there yet.
Maybe we need more time, but with the first round of
competitors dropping out of the field, maybe we need to tinker
with the Act. We need to ask whether the Act needs more
enforcement authority--through antitrust laws or by the FCC--
and we also should ask whether we need to give the regional
Bells more of an incentive to open up their networks.
Finally, we need to keep a vigilant eye on another
potential round of mergers, where antitrust laws and principles
will play a very important role.
We look forward to hearing from today's distinguished panel
of witnesses, and we thank you all for your willingness to
Thank you, Mr. Chairman.
Chairman DeWine. Thank you, Senator Kohl.
Let me turn to our first panel. Pat Wood is the Chairman of
the Public Utilities Commission of Texas, a three-member panel
which regulates the State's telecommunications and electric
power industries. He has served on the Commission since 1995.
He also has been nominated by President Bush to be a
Commissioner on the Federal Energy Regulatory Commission. We
congratulate him on his nomination and are certainly glad to
have him with us today. Thank you, Mr. Wood, for joining us.
Reed Hundt served, of course, as Chairman of the Federal
Communications Commission from 1993 to 1997, where he presided
over the implementation of the Telecom Act of 1996. Prior to
his work on the Commission, Mr. Hundt was a partner in the
Washington, D.C. Office of LathaM & Watkins. He is a senior
advisor on information industries, currently to McKinsey and
Company. Mr. Hundt has testified before our Subcommittee many
times in the past, and we welcome him back.
Mr. Wood, we will start with you. We have both your written
statements, which will, without objection, be made a part of
the record. We would ask you to proceed for about 5 minutes or
so and then we will have more of an opportunity to ask
STATEMENT OF PATRICK HENRY WOOD, III, CHAIRMAN, PUBLIC UTILITY
COMMISSION OF TEXAS
Mr. Wood. Thank you, Senator DeWine, Senator Kohl. It's a
pleasure to be here.
I view that the States are the front line for implementing
the Act that you all passed in 1995, and working with our
colleagues at the Federal Communications Commission, I think I
would like to provide some, I guess, real world checks on the
perceptions perhaps that the Act is not working.
I think in States like ours, where we have taken the
challenge from the Congress and the mandate from our State
legislatures and Governors to get the competition, the tools
that were given were quite sufficient. They may not be in years
to come, but certainly the tool of 271, which I mention at some
length in my testimony--and I should add that the end stages of
that 271 were negotiated with Mr. Ellis and some of his
colleagues, so his strategic business acumen I will attest to
from personal experience.
But the key takeaway from us, I hope, is that the Act can
work. It's not necessarily predestined to work, 271 being one
aspect. Certainly it is the one that is most fresh in my mind
because it was in 1998, 1999 and early 2000 timeframe that we
worked with the industry, with the company, with the
competitors, with customers, with our own staff, to try to
craft a 271 approval process that, in fact, got us from a
relatively highly regulated world for Southwestern Bell
Telephone to a wide open world, that was inviting to
competitors, that had sufficient bristling enforcement tools
available, to incentivize good business practices--because,
quite frankly, you're turning a business relationship that was
adversarial between competitors into one of being a wholesale
supplier and a wholesale customer.
I don't know what the analogy to divorce would be, but I
think it's similar to putting together a marriage that's been
irrevocably broken into one that now has a parent-child
relationship. Incest and all those wonderful things come to
mind, but it's a difficult relationship to monitor. Just trust
me. As the front line, it has been difficult.
But we do try to use some tools of our own making, working
with the Federal Commission. Some tools, quite frankly, a lot
of this has been make it up as you go. Regulators at the State
level have historically kind of looked at things, run them
through a typical procedural timeframe that's way too long for
competitive markets, and try to come up with outcomes.
Today, we do a ``rope `em/throw `em'' docket that is rough.
It can be from a 72 hour decision to a 14-day decision, or a
slow decision is viewed to be a 60-day decision. That requires
kind of a different mindset. It has been as difficult for us as
it has for the affected companies to adjust to this new world,
but it is one that we're slowly getting comfortable with.
I can speak for my sister States when I say that certainly
the 271 carrot, which was ``if you open your local markets,
then you get to get into that guy's long distance markets and
data markets'' is a great incentive. In the States that have
used it--and I think a number of us are using it still--even
after it's over, it still works. I get data every week from the
company as to how well they're performing under a series of
some 100 performance metrics on every aspect of their business
relationship with their wholesale customers.
That allows me and my colleagues and our staff and the
industry to track Southwestern Bell's performance, and I will
say that everyone had feared that once they get into long
distance, they'll say great, they'll never take it away from
us, let's just do it, and we need to do it anyway. They have
done a better job. It has not been backsliding. In fact, it has
gotten better in the Texas market, and I would venture to say
in the other markets as well.
So you can have a company come to the table, decide that
the old world is something they want to leave behind as well,
and move forward into the new world.
I would like to point out briefly before I close two things
that are in my testimony, that I would like to call to your
attention based on your comments. On building access, in 1995
Texas passed a building access law that Governor Bush signed,
and it has been on the books kind of quietly, quite frankly,
for the past 5 years. We put in some implementing rules to make
sure, if there was ever a process, the Commission could handle
it. But I would like to call to your attention that, at least
in our State, we have had a rule that allowed the last foot to
be not just the last mile but the last few inches of it to be
open at a customer's request in these multi-tenant buildings.
Finally, one thing I mentioned recently is a good aspect of
our Texas law. We standardized how municipalities, how local
governments interface with telephone companies. That has been,
quite frankly, something that facilities-based competitors tell
me is the best thing Texas could have ever done for its local
markets, is to standardize the way that you deal with, in
Texas, 1,200 municipalities. It's one thing to win a decision
at the PUC, but it's another to have to go slug it out at the
different cities of Texas. So that's something that doesn't
call for a Federal solution but is of interest.
Finally, residential rates. Residential rates are low. I
believe in your States they are as well. They may even be lower
than cost. I mentioned in my testimony some numbers there. It
will be difficult for competitors to ever come into the Texas
market, just as it will be difficult to get into the California
electricity market, if you can't sell for the proper price or
compete with the proper price which you just bought for ten
dollars more. That's a reality that I think we're going to have
Again, it's probably a State issue, but as Federal
decisionmakers that are lamenting, as I think is fair, the lack
of residential competition, it is important to know that
residential rates were purposely subsidized for 80 years, and
business rates and long distance rates were kept high to make
up for that.
Those are attractive markets for competitors. There is a
great market entry. The Texas statistics that I provided you
show there is plenty of entry into the business market. There
is some entry into the residential market as well, but to the
broad market, it's going to be a long time until there is
comprehensive competition due to the fact that the residential
rate has been largely subsidized to a below-cost offering over
the last 80 years.
I'm not urging that something be done for that. I think it
is difficult politically and on a policy basis to go there, but
please understand that that is one issue that is really our
fault. But it impacts the statistics that you all look at.
[The prepared statement of Mr. Wood follows:]
Statement of Pat Wood, III, Chairman, Public Utility Commission of
I am pleased to give you a ``Report from the Front Line'' of the
telecommunications revolution. I like to think of Texas as a good
example of how the Federal Telecommunications Act of 1996 (FTA96) is
working. Thanks to the FTA96, and to Texas legislation in 1995 and
1999, Texas has seen marked progress toward a more competitive local
market. We are already experiencing the benefits of more competition in
the long-distance and data markets.
Competition sets the stage for eventual deregulation, and that is a
goal worth working hard for. On our best days as regulators, we cannot
begin to compare with a well functioning market in delivering better
prices, more responsive service and unleashed technological innovation
The FTA96 removed legal barriers to entry of companies into various
telecommunications lines of business, and that was a significant step.
But that alone has not made competition happen. Undoing the effects of
a century of pervasive regulation has taken time, more time than most
thought would be needed. These effects are primarily operational in
nature and stem from the understandable reluctance of incumbents in all
markets to assist in implementing a regime that necessarily erodes
their historical market shares.
The FTA96 focused on opening the voice markets to competition, and
its primary focus was on opening the non-competitive local markets. The
FTA96 also pointed the way for greater competition in long-distance
markets. Data services were a small part of the text of the FTA96, but,
as technology has speedily evolved, some of the provisions of the Act
have been applied to these services as well.
Congress gave the state commissions a significant front line role
in implementing the various aspects of the FTA96:
arbitration of unresolved issues in incumbent-competitor
interconnection agreements under Sec. Sec. 251 and 252,
a mandate to reform decades-old universal service subsidy
structures under Sec. 254, and
the responsibility of steering the largest local providers,
the Regional Bell Operating Companies, through Sec. 271 long-
distance authority checklist.
Working with the federal commission, we have plowed through myriad
operational, technical and financial details to implement these
provisions. Implementing the Act has been the most resource intensive
project that we at the state level have undertaken in recent decades,
requiring us to become experts on every aspect of the telephone
network, from the Network Interface Device at a customer's home to
ultra-high bandwidth optical transport, and everything in between. We
have developed expertise on modern network design, pricing and
operational support systems. We have often interpreted the law in real-
time, often faced with deciding issues before the FCC or other states
did. We have been faced with numerous twists and turns as various
federal courts have issued their pronouncements.
State commissioners and our professional staffs have done these
things while keeping our focus on the retail customer. There has never
been such an opportunity to pull together so many key issues in this
industry for comprehensive resolution, and I can fairly speak for my
state commission colleagues when I thank Congress for giving us this
Sec. Sec. 251, 254 and 271 gift, which has allowed us to move swiftly
away from the old world of monopoly style regulation to a new world of
marketplace competition. We aren't all the way there yet, but I believe
that in Texas, at least, we have shown that the FTA96 can and does
Sec. 252 Arbitrations.
The fundamental business contract model of the Act (interconnection
agreements) was different from the tariff-based model familiar to us at
the Texas Commission. The FTA96 model is based on the premise that the
incumbents and competitors will negotiate many aspects of their
business relationship. In fact, in mid-1996, due to the relative
imbalance of bargaining position, we were called upon, under FTA96
Sec. 252, to arbitrate a comprehensive set of rates, terms and
conditions for Southwestern Bell Telephone Company (SWBT) and a host of
competitors (AT&T, MCI, Sprint, ACSI and Teleport). My two fellow
Commissioners and I presided over this ``Mega-arbitration,'' directly,
employing the considerable legal, technical, financial and process-
management talents of our staff. After a three week hearing, we issued
our Arbitration Award in December 1996, thereby establishing Texas'
policies for interconnection, provisioning and pricing. The resulting
interconnection agreement was later affirmed in substantial part by the
local Federal District Court and the U.S. Court of Appeals for the
Fifth Circuit, and numerous other competitors have adopted the
agreement for their own.
Following the approval of these initial agreements, the Texas
Commission has been involved in numerous follow-up contract
interpretation disputes. We adopted the famous ``rope `em and throw
`em'' expedited dispute resolution process to facilitate competitive
market entry. Often, these complaints related to money. Other issues
have related to the technical feasibility of certain network
interconnection arrangements and required the opposing parties to
provide our staff arbitrators with rapid primer courses in the latest
telecommunications technology. Our goal has been for the incumbent to
provide the requested service immediately unless it can show direct
network incompatibility, and the Commission will swiftly determine the
appropriate pricing. This prevents the incumbent from using the dispute
process to stall a competitor's entry.
Because most of 1996-1997 agreements had three-year terms, the
Texas Commission was called upon in 1999 and 2000 to arbitrate
successor agreements. The list of decision points for arbitration was
dramatically shorter, perhaps indicating that the initial 1996
decisions were generally acceptable to the parties. Interestingly,
these second-round arbitrations focused on new technology issues, such
as access to and pricing of xDSL technology, which reflected an
increased focus on the data services markets. As before, the Texas
Commission has had to make many determinations in real time, without
much precedent from other jurisdictions. Where other jurisdictions,
such as New York, have plowed similar ground, we have borrowed heavily
from their fine work to maximize our resources. NARUC, the state
commission national association, has aggressively and successfully
facilitated this exchange of information among the states.
At the Texas Commission, we have gotten relatively comfortable with
our role as wholesale market referee among industry players. The
balance between the FCC, as policy clearinghouse, and the states, as
front line arbitrators and watchdogs, seems to be working well.
Universal Service and other subsidies.
Over the years, state and federal regulators used various
regulatory subsidy mechanisms to maintain low retail prices for
residential service, particularly in rural areas. The arrival of
competition into telecom markets has forced us to revisit the way these
subsidies are handled. In the FTA96, Congress made clear it wanted the
rural universal service support to be maintained. This is challenging,
but it can be done. So long as the subsidy is competitor-neutral and
technology-neutral, it can be sustained in a competitive market.
In times of industry change, it was important for us to establish
early what the ground rules were so that sufficient investment would
come to Texas, particularly to rural areas. So, in 1997, the Texas
Commission began a two-year process to restructure our rural subsidy
support system. For years we had kept intrastate access charges much
higher than needed to subsidize the higher cost of providing dial tone
to low-density rural Texas. Using some rather complex cost modeling, we
quantified the excess cost faced by rural providers (above the revenues
obtained from the typical customer). We then removed those amounts from
the rates of all providers' access charges, and collected these amounts
on a 3.6 percent of retail revenue basis from all telecom customers,
including long-distance, local and wireless customers. This explicit
surcharge on customers' bills yields $600 million annually for the
Texas Universal Service Fund (USF). Although over 90 percent of the
fund is for rural support, the Texas USF also supports low income
subsidy programs and funds hard-of-hearing customer programs. A
separate 1.25 percent surcharge provides support to schools, libraries
and rural health institutions to offset costs of advanced technology
connections. This ten-year Fund, which began in 1995, is administered
by the Texas Infrastructure Fund Board.
I have been a member of the State-Federal Joint Board on Universal
Service for the past few years. In the national discourse over the
federal USF, I have expressed the view that all states should attempt
to address their own rural subsidy issue themselves to the maximum
extent possible, relying on the federal USF only as a last resort. This
would mean that current recipient states from the federal USF, like
Texas, should directly fund more subsidy from state USFs instead,
leaving federal support for those states which have few lower-cost
urban customers to support a sufficient state fund. With the many
present claims on the federal USF and a court determination restricting
the assessment base for the federal USF, the current federal USF
surcharge level is high and should not be stressed further.
Southwestern Bell Long Distance Entry.
Southwestern Bell Telephone Company (SWBT) serves over three-
fourths of the local access lines in Texas. As a Regional Bell
Operating Company, it was subject to satisfying the fourteen-point
checklist of FTA96 Sec. 271 before it could offer long distance to
customers in Texas. This ``carrot'' has been the most effective tool
Congress could have given states that desired to open their local
markets. But it has not been an easy process.
In March 1998, SWBT asked the Texas Commission to review and
approve the steps it has taken to open its local market under the
checklist. After a 90-day review process, which included three weeks of
hearings before my fellow Commissioners and me, we concluded that SWBT
had not met the checklist; we detailed 129 specific issues requiring
resolution. We then set up a collaborative process which would include
SWBT, its wholesale customers (CLECs) and the Commission staff to work
through the list. This ran from July through November, 1998 and
resulted in closing out many but not all of the 129 items. Patterning
off of New York PSC Chairman O'Mara's closure process earlier that year
in his state, and complying with our state's strict Open Meetings law,
my fellow Commissioners deputized me to negotiate the remaining items
directly with SWBT, which I did (with the assistance of highly capable
staff) in the Spring of 1999. Shuttling between a room of SWBT
executives and a room of CLEC experts to resolve issues, I was able to
recommend to my colleagues in April 1999, a Memorandum of Understanding
between SWBT and the Commission closing out all of the issues
identified the year before. With some amendments, the full Commission
approved the Memorandum.
The Memorandum formed the basis for a comprehensive thousand-page
interconnection agreement which we determined fully satisfied the
entire fourteen-point checklist. Over the following five months,
specific details of the Texas 271 Agreement (T2A) were worked out among
the parties, requiring some direct rulings by the Commission on
specific language. On October 13, 1999, the Texas Commission formally
approved the Agreement, permitting any interested CLEC to adopt the
agreement. Over 150 have done so to date, and many others have adopted
substantial parts of the T2A into their own customized agreements. I am
pleased that our sister state commissions in Oklahoma, Missouri and
Kansas have modeled their 271-compliant interconnection agreements on
One of the most significant aspects of the T2A was the adoption of
over 100 specific performance measures and a Performance Remedy Plan
placing up-front financial penalties on SWBT if it delivered sub-par
performance to its wholesale customers (CLECs). This set of performance
standards continues to serve as the weekly and monthly report card for
SWBT's wholesale performance, much the same as the Texas Commission has
monitored SWBT's retail performance. It has generated several million
dollars in penalties for the State and for individual competitors since
October 1999, but, more importantly has provided a very strong
incentive for SWBT to swiftly remedy any processes which have failed to
meet the performance standard. The measures themselves have undergone
two six-month reviews (removal of some measures, amendments to others,
creation of new ones) and are being spot audited by the Commission for
accuracy. We have combined this review process with our sister SWBT
states to ensure uniformity as much as possible.
While the T2A was being prepared, the Commission was closing out
its twelve-month review of SWBT's extensive Operation Support Systems
(OSSs) by an independent third-party advisor, Telcordia. All aspects of
SWBT's pre-ordering, ordering, maintenance/repair and billing systems
(both mechanized and manual) were reviewed. A number of items were
found lacking and required rework. The process was a military style
test, in that it ran and re-ran until it was passed. The total bill for
the testing process exceeded $14 million and was funded by SWBT.
The final step needed for the Texas Commission to conclude that the
SWBT local market was irreversibly open to competition was a review of
SWBT's actual performance. By reviewing the results of the monthly
performance data with the Commission and CLECs and by diagnosing
various shortcomings, SWBT made a number of further business process
In December 1999, the Texas Commission was fully satisfied with the
evidence on SWBT's performance, and we finally voted our unqualified
support of SWBT's application to the FCC for long distance authority.
Throughout SWBT's initial Texas 271 FCC filing in January 2000, and its
updated application in April 2000, the Texas Commission worked with the
Department of Justice and the FCC to explain and detail SWBT's
application. In July 2000, after receiving the Department of Justice's
first endorsement of a Sec. 271 application, the FCC granted the
request, making Texas the second state to fulfill the Sec. 271
The SWBT OSS is a regional system. The work of the company and
CLECs to meet our requirements in Texas assisted our sister states of
Kansas and Oklahoma in their successful Sec. 271 grants earlier this
year. The Missouri application is now pending before the FCC. Without
question, a regional approach on common matters is the most effective
way to move forward with the Sec. 271 checklist. I note with interest
that the fourteen US West/Qwest states are also engaged in a regional
collaborative on '271 matters.
Aggressive use of the Sec. 271 carrot has greatly accelerated
Texas' goal of opening its local markets to competitors. Attachment A
to this testimony is a staff compilation of data demonstrating that
substantial entry has already taken place in Texas. As of March 2001,
approximately 2,636,000 access lines are now being served by some 300
CLECs in SWBT's Texas region. This compares to SWBT's total access line
count of approximately 10,210,000 access lines. (September 1999).
Of course, the quid pro quo of this proceeding was SWBT's entry
into long distance in Texas. Public reports indicate that SWBT has been
successful in attracting about two million customers to its long
distance service. The presence of this significant new competitor has
dropped average retail long distance rates below 10 cents per minute
for the first time in Texas history.
About 22 percent of the access lines in Texas are not being served
by SWBT, and market entry by competitors in these mostly non-urban
areas is much lower. (Data from non-SWBT areas is not included in
Attachment A). I must fairly point to the lack of the Sec. 271 carrot
as the principal reason for this disparity. CLECs have discovered that,
even in competition-friendly Texas, market opening is not for the poor
or the weak-hearted. It requires money, smart people, and patience. By
consolidating all issues in a common proceeding, Sec. 271 allowed
CLECs, SWBT and the Texas Commission to pool efforts to achieve what I
believe is the most significant competitive breakthrough in our
Other Texas Points of Note.
Winning approval of a wholesale contract before the Texas
Commission is one thing; implementing it in 1200 Texas municipalities
is quite another. In 1999, the Legislature passed and Governor Bush
signed a law which standardized the municipal rights-of-way process for
incumbents and competitors. The law stabilized the municipal franchise
fee at the 1999 level and simplified its collection into three fee-per-
access-line categories (residential, commercial and point-to-point).
Payment of this fee to the end-user's municipality allowed unquestioned
access to the necessary municipal rights-of-way by any certified
telecommunications provider in any municipality. Many companies in
Texas have told me that this is the single best thing Texas could have
done to welcome facilities-based carriers to our state.
In 1995, Texas also adopted a building access statute which
required multi-tenant building owners to provide equal access to
certified telecommunications providers. In 2000, the Texas Commission
adopted specific procedural guidelines that should be observed and set
out a Commission process to be used if negotiations between building
owners and providers failed. To date, the Commission has not been asked
to formally adjudicate such a dispute.
More information about the Texas Commission can be found on our Web
Page at www.puc.state.tx.us.
In the five years since the FTA96 was passed, the Internet has
transformed our culture. In 1996, ``www'' was more often the result of
a lazy finger sitting on the keyboard than a pervasive form of
corporate and personal identification. It is amazing that, despite this
dramatic transformation of this industry, some of the fundamental
aspects of pricing under the 1996 Act are pending before the U.S.
Supreme Court, which may be completed by the sixth anniversary of the
Act. The time required for judicial review of every aspect of FTA96
implementation has been, and remains a destabilizing aspect of this
Another issue relates to capital investment. Unlike the
transitioning electric power industry nationwide, the
telecommunications industry has been relatively successful in
attracting capital. We have witnessed a slowdown in capital investment
in the past eight months, but I believe this is more a rest stop for
the market than an exit. Some business plans are passing sober investor
review; others, particularly narrow ones, are not. Nevertheless, one of
our bigger challenges is to continue to provide investor certainty with
a clear long-range vision and stable rules of the road. Predictable,
balanced outcomes and consistent enforcement of obligations are- needed
to maintain investor confidence in the sector.
One final concern worth pointing out, although it is unquestionably
a state jurisdictional issue, is the nature of local phone service
pricing. During the years of monopoly phone regulation, most states
have priced business service higher than residential service in order
to achieve social and political goals. One truth of functioning
competitive markets is that prices are driven to cost. Where the retail
price of residential service is below the wholesale cost of providing
it, the market fails to work.
In Texas, the ``all-in'' monthly retail price for SWBT basic
residential service (with no add-ons such as call waiting or caller
ID), is about $17. The corresponding business price is $32. Under the
extensive cost-study reviews conducted in the Texas Commission's
``Mega-Arbitration'' and continued in the SWBT Texas 271 Agreement, the
monthly wholesale price for a standard access line is about $21. These
numbers go a long way toward explaining why residential competition
falls far behind business competition today. While customers who use
multiple services will always be attractive, broader residential
competition will likely come from other technology platforms (cable,
wireless, satellite) rather than resale of incumbent networks. The
solution of raising residential rates to enable residential competition
is unpalatable. Again, this is an issue for state Legislatures and
regulators to wrestle with, but federal decision-makers should
understand that it is a core issue.
On behalf of my state commission colleagues across the nation, we
appreciate the confidence Congress had in us five years ago when it
designated us the ``Front Line'' for implementing competition in the
nation's critical telecommunications industry. I trust we have kept
faith with your intent.
Chairman DeWine. Good. Thank you, Mr. Wood.
STATEMENT OF REED E. HUNDT, SENIOR ADVISOR, MCKINSEY AND
COMPANY, INC., AND FORMER CHAIRMAN, FEDERAL COMMUNICATIONS
Mr. Hundt. Thank you very much, Mr. Chairman, Senator Kohl.
Thank you very much for inviting me back.
I would like to, if I might, compliment this committee, and
these two Senators, for your continuing stewardship and
monitoring of the information sector and the development of
competition in the sector. I think that the world should know
that your attention to developments in this sector is of
particular significance because there is now no doubt that this
is the most important sector of the American economy. It's not
the biggest sector of the American economy, but it is clearly
the most important sector of the economy, as the events of the
last 5 years have demonstrated.
In the last 5 years, this sector, while accounting for less
than an eighth of the total economy, is responsible for one-
third of all the economic growth in the economy. It is
responsible for more than ten million new jobs in the economy.
And most important of all, this sector, and no other sector, is
responsible for the record productivity gains that all parts of
our economy have enjoyed.
There has probably never been a law passed by not only this
Congress but any Congress, or any legislature in any country,
that has been so complex as the Telecommunications Act of 1996.
I doubt that there's ever been a law that has had such
aspirations. There are few, if any, laws that have represented
such a radical departure from precedent.
The precedent, as you certainly know, Senators, was to have
regulated monopoly in the information sector, and in all
dimensions of that sector, whether it was the media or
telephony or any part, at the very most to allow carefully
controlled oligopoly, and in most cases, a regulated monopoly.
The 1996 Telecom Act is the first law passed by any
significantly large country in the world that repealed that
entire idea and said, instead, that it was the law of the land
that we would promote competition and investment and
innovation. There is so much in this law that any single piece
of it can justly be criticized and litigated and debated, but I
think it's wise to take a step back and, if you'll permit me,
as a former seventh grade school teacher, to attach a grade, if
I think that Congress should give itself an ``A'' on this
law, and here's why. There is no question whatsoever that, in
the aggregate, consumers have benefited. Consumers now spend
about twice as much as they used to spend of disposable income
on communications services, not because they're paying twice as
much for the same things but because prices have gone down in
so many areas, and there's been such a flourishing of choice
and alternative in so many areas, that they're just spending
more because that demand was previously constrained by a
No. 2, there has been a fantastic investment boom. The
entire business world in the United States purchased in 1995
about $250 billion of communications stuff--equipment,
software, services, et cetera. That number doubled in just 4
years, from $250 billion to $500 billion between 1995 and 1999.
That is an astounding increase. In fact, all manufacturing
output growth in 5 years, all manufacturing output growth in
those 5 years, two-thirds was driven by the information sector
The productivity gains that have come out of this sector
have doubled all of the caps that economists said were
absolutely in concrete and limited expansion possibilities for
the American economy. Dr. Greenspan has, in a variety of
different ways, somewhat obliquely, repeatedly pressed the same
point over and over. None of these productivity gains are going
away. They are structural, they are locked into our economy,
and we will benefit forever from these productivity gains.
Now, an awful lot of people in this sector are wringing
their hands, and an awful lot of people have lost a lot of
paper value--and now that I'm in this sector, I could even talk
to you about that myself--in the last six to 9 months of stock
market downturn. But let me make sure that, in the face of all
that negativism, I at least speak out in favor of long-term
confidence. Because these assets that have been installed are
not disappearing, and as long as we stick with the policies of
the 1996 Act--promoting competition and innovation and
investment--we will get through this stock market downturn and
we will get through the inventory reduction, and we will go on
to even greater heights in terms of economic growth and
productivity gains. We did the right thing in 1996. We have to
stick with it.
Thank you very much.
[The prepared statement of Mr. Hundt follows:]
Statement of Reed E. Hundt, Senior Advisor, McKinsey & Company, and
Former Chairman, Federal Communications Commission
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me to testify today on the state of
competition in the telecommunications industry five years after
enactment of the Telecommunications Act of 1996 (1996 Act). It is a
pleasure to appear before you to address this topic. I want to commend
you for holding this hearing to examine our progress toward the goal of
the 1996 Act--the goal of a fully competitive, deregulated
telecommunications sector. The focus of today's hearing underscores the
vital importance of the telecommunications sector and of competition
policy to the overall growth and health of our nation's economy.
My testimony today reflects my personal views and not necessarily
the views of any of the companies with which I am affiliated. I
currently serve as a member of the boards of directors of Allegiance
Telecom, Inc., a facilities-based provider of telecommunications
services; Novell, Inc., a manufacturer of computer software; Brience,
Inc., a provider of platform software for extending e-business
applications to wireless devices; and Gemini Networks, Inc., a new
facilities-based provider of highspeed, broadband services to
residential customers. I also serve as Chairman of the Board of Sigma
Networks, Inc., a broadband telecommunications provider. In addition, I
am a Senior Advisor at McKinsey & Company, Inc., an international
management consulting firm, and also serve as a consultant to venture
I am pleased and honored to appear on this panel with my
distinguished colleague, Pat Wood, Chairman of the Public Utility
Commission of Texas. When I was Chairman of the Federal Communications
Commission I enjoyed and greatly benefited from many discussions of
telecommunications policy issues with Chairman Wood. He has been a
steadfast advocate of pro-competition policies in the State of Texas.
As you know, last year Texas became the second state in which the FCC
concluded that the incumbent Bell Operating Company had opened its
local markets to competition, in accordance with Section 271 of the
Communications Act of 1934, as amended (1934 Act). That decision is
testament to Pat's relentless efforts to carry out the mandates of the
Five years ago, in a dramatic ceremony held at the Library of
Congress, President Clinton signed into law the first major overhaul of
the nation's communications statute since passage of the 1934 Act. The
1996 Act reflected a sea change in telecommunications policy. Where
monopolies were once presumed and protected, the 1996 Act required the
FCC, in partnership with the state commissions, to foster the
development of competition for all telecommunications services.
The 1996 Act: Bringing Competition to Local Telecommunications Markets
The dominant themes of the 1996 Act can be described in two words:
competition and deregulation. Congress set forth in this landmark
legislation an extremely innovative plan for achieving these goals. It
gave new competitors in the telecommunications industry the tools they
need to enter the market quickly and establish their presence. In
addition to eliminating regulatory barriers to such entry, the 1996 Act
required the incumbent telephone companies to interconnect their
networks with the networks of new entrants. It also required incumbents
to provide access to their networks for lease by new entrants.
Congress gave the FCC and the state public utility commissions the
critical job of implementing these market-opening provisions of the
1996 Act. The FCC is charged with establishing policies to facilitate
new competition as well as deregulating as soon as competition rendered
While I was Chairman of the FCC, I worked with Chairman Wood and
many others in state commissions to fulfill the pro-competitive mandate
of the 1996 Act. We put in place what I believe were strong and fair
policies that, consistent with the FCC's statutory mandate, sought to
promote competition in all segments of the telecommunications industry
and deregulate as soon as competition permitted.
Explosive Economic Growth in the Late 1990s
By embracing competition instead of monopoly, the 1996 Act
unleashed unprecedented expansion in the information and
telecommunications sectors. In our great nation of innovators and
entrepreneurs, a multitude of brilliant technologists and creative
businesspersons seized the opportunities created by the new statute.
They launched new businesses that brought competition to markets
previously dominated by a single firm. With the 1996 Act, we changed
our legislative and regulatory policies in an attempt to throw open the
doors to competition.
Congress opened markets to new entrepreneurs and innovators. The
1996 Act provided the catalyst that resulted in hundreds of new
companies entering the telecommunications industry and the net creation
of hundreds of thousands of new jobs. New and existing firms invested
tens of billions of dollars in facilities, services, and research and
development. These investments in turn resulted in enormous
productivity gains for American businesses, increased capacity on our
telecommunications networks, the deployment of new technology, and the
rollout of advanced communications services. As a result, the United
States is the world's clear leader in the Information Economy.
According to a report issued by the Department of Commerce last
year, the productivity gains, investment rates, and real wage growth
the U.S. experienced in the five years ending in 2000 were all higher
than they have been in decades; unemployment and inflation were lower
than thought possible; and the expansion set an all-time U.S. endurance
Information technologies and the Internet are the driving forces
behind this record growth. Consider the following:
Although Information Technologies (``IT '') industries account
for a relatively small share of the economy's total output--
about 8 percent--they contributed nearly a third of real U.S.
economic growth between 1995 and 1999.
The prices for IT goods and services have declined at an
accelerated rate--from about 1 percent in 1994, to nearly 5
percent in 1995, and an average of 8 percent for the years 1996
to 1998. Declining IT prices have in turn reduced the overall
rate of inflation for the years 1994 to 1998, by an average of
0.5 percent a year, or from 2.3 percent to 1.8 percent.
Between 1994 and 1999, U.S. R&D investment increased at an
average annual (inflation adjusted) rate of about 6 percent--up
from roughly 0.3 percent during the previous five-year period.
The lion's share of this growth--37 percent between 1995 and
1998--occurred in IT industries. In 1998, IT industries
invested $44.8 billion in R&D, or nearly one-third of all
U.S. Dep't of Commerce, Economics and Statistics Administration,
Digital Economy 2000, page vi (June 2000).
The dynamic growth created by the Information Technology industries
prompted the Department of Commerce to conclude that the U.S. economy
``may well have crossed into a new era of greater economic prosperity
and possibility, much as it did after the development and spread of the
electric dynamo and the internal combustion engine.''
Just as the Information Economy has played such a large part in
driving the growth of the broader economy, so have new entrants driven
the success of the Information Economy. Fueled by an entrepreneurial
spirit and robust capital markets, new entrants invested over $30
billion dollars in new telecommunications infrastructure. This prompted
incumbent telecommunications carriers to renew their own infrastructure
investment. Investment by incumbent local telephone companies, while
flat in the early 1990s, grew by 19 percent between 1995 and 1998.
The Slowing Economy and Reduced Competition
The economic benefits conferred by the 1996 Act were immediate and
substantial. Competition in the telecommunications industry produced
extraordinary economic growth. New technologies were developed and
deployed, offering a tremendous array of new services to business and
residential consumers. The Internet Economy boomed, and many consumers
enjoyed more choice, better quality and better prices.
The burst of economic growth has slowed significantly in the past
year, however, particularly in the telecommunications sector. The
slowing economy, falling stock prices, and credit squeeze have made it
difficult for businesses to raise money. The debt markets are providing
little capital, and venture capital financing is down. U.S.
telecommunications companies that were able to raise an average of $2
billion a month in initial public offerings over the past two years
raised only $76 million in IPOs this past March.
This is having a domino effect on the rest of the economy, as
demonstrated by one example described in a recent news article:
Last year, Sycamore Networks Inc. was white-hot, with a
soaring stock price and booming sales as telecom players
scooped up its cutting-edge communications equipment. But on
Apr. 5, CEO Daniel Smith told Wall Street analysts that his
largest customer, Williams Communications Group Inc., and other
telephone companies were slashing their spending. Smith said
the company's sales for the current quarter would be only $50
million to $60 million, about $100 million less than analysts
expect. . . . The next day, the company's stock plummeted 20%,
to $7.25--a far cry from its 52-week high of $172.50. Worse,
Sycamore's troubles will trickle throughout its hometown of
Chelmsford, Mass., about 25 miles northwest of Boston. The
company will lay off 140 of its 1,100 employees, cut back its
spending, and delay construction on a new corporate campus in
nearby Tyngsboro. Sycamore is just one example of how the
meltdown in the telecom industry is rippling through the
Peter Elstrom, ``Telecom Meltdown,'' Business Week, April 23, 2001.
Reinvigorate the Telecommunications Sector By Promoting Competition
Until the recent downturn, the telecommunications sector resembled
a runner with boundless energy. It now looks more like a sprinter who
has paused to catch his breath. As the economy catches its breath, it
is important that we adhere to policies that will fuel competition,
innovation and growth in the local telecommunication industry. Much of
the credit for the extraordinary economic growth in the
telecommunications industry belongs to the scores of innovators and
entrepreneurs who took the risks to seize opportunities in the
marketplace. But we should also recognize that many of these
opportunities would not have been possible nor would they have been
apparent to investors without the firm commitment to competition
articulated by Congress in the 1996 Act.
At least part of this economic downturn can be traced to the
barriers new entrants continue to face in trying to compete in local
telephone markets, and the need to have policymakers underscore their
belief in pro-competitive principles. Incumbent local telephone
companies have little, if any, economic incentive to open their
networks to competition. It will take steadfast implementation and
enforcement of the 1996 Act's market-opening provisions to overcome the
incumbents' economic incentive to resist new entry. If the new entrants
lose the foothold that they established during the past several years,
we risk losing the competitive dynamic that prompted the extraordinary
economic growth and innovation the industry experienced in the late
1990s. Incumbent carriers will face no competitive threat, and we will
return to monopoly telecommunications markets, undermining our ability
to remain the world leader in broadband communications.
As a recent New York Times article observed, the ``local phone
companies have networks that cannot be duplicated. That is why . . .
unfettered deregulation will not lead to more competition. If
competition and lower prices are the goal, pro-competition oversight is
required to ensure that the companies with essential assets do not use
them to stifle others.'' Seth Schiesel, ``Sitting Pretty: How Baby
Bells May Conquer the World,'' The New York Times, April 22, 2001.
The most important aspect of these essential assets is the ``local
loop''--the copper wire that connects the consumer to the local
telephone network. New entrants must be able to gain access to this
local loop, which is typically owned by the incumbent telephone
company. The 1996 Act requires incumbents to give competitors access to
the local loop and it will be essential that policymakers enforce that
obligation. The FCC must be guided by the 1996 Act's objective of
opening up the local telephone market to new entrants. Only in this way
can we transform the local telecommunications marketplace from a regime
of heavily regulated monopolies to one characterized by competition.
Competition policy will also be a large factor in determining who
will benefit from broadband technology. Data networks are
revolutionizing the way large businesses operate and we should be proud
that our nation has led this ``revolution''. These networks offer not
only the prospect of delivering innovative telecommunications and
information services, but also a realistic potential for creating
facilities-based alternatives for traditional voice services. But we
should not be satisfied if only large enterprises reap the benefits of
broadband deployment. Pro-competition policies will encourage all
sectors of the industry, incumbents and new entrants, wireless and
wireline, to develop and deploy broadband networks to medium and small
businesses and residential consumers.
If we are to reinvigorate the telecommunications sector and to
encourage investment in broadband technology, we need to have a clear
commitment to procompetitive policies. Competition policy has had, and
will have, an enormous influence on economic growth and innovation. A
Princeton University study has found, for example, that countries such
as the U.S. and Finland that have government policies fostering free
competition in telecommunications have a significantly higher Internet
penetration than countries that continue to have monopoly
E. Hargittai, ``Weaving the Western Web: Explaining Differences in
Internet Connectivity Among OECD Countries,'' 23 Telecommunications
Policy 701 (1999).
This is why Congress's enactment of the 1996 Act, and the steadfast
implementation of the Act's procompetition goals, are so important.
Reviving competition is essential to reinvigorating investment and
economic expansion in the telecommunications industry. Vibrant
competition will advance the promise of the 1996 Act: innovation and
deregulation in a telecommunications industry shaped by competitive
market forces. With firm pro-competitive policies, the promise of the
1996 Act, the exceptional economic growth and consumer benefits it has
nurtured, and America's leadership in broadband can be sustained.
Alan Greenspan has said ``[t]here is . . . little of a truly old
economy left. Virtually every part of our economic structure is . . .
affected by the newer innovations.'' Alan Greenspan, Remarks at the
18th Annual Monetary Conference: Monetary Policy in the New
Economy (Oct. 19, 2000). The New Economy, as we know, has suffered a
downturn in recent months. We need a strong commitment to competition
to return it to robust health. An essential element of ensuring strong
economic and job growth, technological innovation, and America's
leadership in a broadband world will be policies that promote new entry
and competitive markets in the telecommunications industry.
Chairman DeWine. We appreciate, Mr. Wood and Mr. Hundt,
your testimony. Let me start off with a question for you, Mr.
We often hear that competition in the local telephone
market is moving forward and that we simply need to stay the
course. At the same time, we hear for calls to step up
enforcement of the 1996 Act.
What specific enforcement measures do you believe need to
be implemented or adjusted that would improve the competitive
environment, if any?
Mr. Hundt. Well, I'm not prepared to be a critic of any
enforcement efforts, you know, that may exist at the present
I would just say this. Probably the single most important
feature in the communications sector, or the telephony sector,
of the Act was the provision that required that the incumbent
telephone companies, for the most part, Bells, unbundle the
local loop, and do so at forward pricing.
Now, these provisions, the various words around them, have
been among the most intensely litigated provisions of any
statutes ever passed. The Supreme Court has already granted
cert. Here's the litany: two cases out of section 251, one 254,
one 252, and one 224. The point is that all these core sections
which are about unbundling have repeatedly been the subject of
In the face of all of that, the most important thing is
that all the enforcement powers at the FCC and at the State
level stick with one, basic philosophy: enforce it and talk
about it all the time, which is that the local loop will be
unbundled and will be made available to rivals at forward-
There are many debates about methodology. I am certainly
eager to stay away from the arcane details of them. But forward
pricing is critical to the competitive model, and it is
critical that these loops be made available. It is the way that
the promise of the Act will be delivered in years to come.
Chairman DeWine. Mr. Wood, any comment on that?
Mr. Wood. Enforcement from, again, the front line, we have
traditionally taken the promise of 251, which requires, among
other things, what Mr. Hundt just mentioned, and a number of
other obligations that the companies have to their competitors,
incorporating those in a business contract, and then served as
the body that people could come to to resolve matters in that
business contract if performance was not sufficient under that
So, rather than going into a District court and going on
those timetables, people could come to the Commission, again up
to that 72 hour and 60 day timeframe, depending if it was
customer affecting or not.
Our general philosophy has been to provide the service now,
so that competition won't be delayed by a litigation tactic,
and we will work on the price as fast as we can, so that
customers are not affected.
In a real way, enforcement is--a lot of these issues are
about money, how much money are you going to charge. That's no
surprise to you all. And it is a fair request of the company to
get compensated for what they do. I think as Mr. Hundt pointed
out, there is a philosophy, which the State of Texas has also
adopted, to use forward-looking costs on pricing these very
important parts of the network.
As long as that has a forum, I would venture that probably
closer to the problem is better, not necessary because of a
State's right argument, which I would probably be glad to make,
but just for the convenience of the parties, rather than having
to come up here and litigate that before a Commission that has
plenty of work to do--not that we don't--come before the State
who knows the parties, make the cut, get on with it and go on
to the next problem.
So enforcement might need some other aspects that I'm not
as familiar with, from what I don't deal with, but when you do
an interconnection agreement, those tend to have an
enforceability to them that we can handle pretty well.
Chairman DeWine. A question for Mr. Wood, and also possibly
Consumers have benefited from increased competition in the
long distance market and have received lower rates as a result.
However, the rate of return in the market has declined at the
same time. Some, therefore, have argued that this makes the
long distance market less attractive to the Bell companies and,
therefore, provides less incentive for them to open their local
markets to competition.
Do you agree with that or not?
Mr. Wood. Well, I can just say that I'm glad we were the
second State in line. If I were the 20th or 25th, it may not be
as attractive a place. When rates go from 12 cents on the
average a minute, as they were in Texas, down to eight cents a
minute, competition is--
Chairman DeWine. What did they go from? What was that
Mr. Wood. From 12ish, on average, down to eight. When Bell
entered into long distance, some had single digit long distance
rates. That starts to make the gravy a little thinner than it
was when you put it on the potatoes, but they still taste good.
So, I'm assuming, with other aspects of long distance entry
that are availing--data, for example, and others--it is still a
pretty tasty plate. But it has changed its flavor.
Chairman DeWine. A lot of food on the table here, Mr.
Hundt. Do you have any comment?
Mr. Hundt. Well, I'm going to pass up the food metaphors
and not get into competition with my colleague on that
The return on investment capital has gone down for every
player in every sector of the information sector for five
straight years. It has gone down in long distance; it has gone
down everywhere. That is because of two things: it is because
there has been so much more invested capital put in, and the
revenue has not kept pace with that, and No. 2, there is so
From a policy perspective, actually, it is a good thing to
put the pressure on industry and to not have guaranteed returns
on investment capital which correlate to regulated monopoly as
Now, what do you expect the people in industry to do under
those circumstances? The answer is they need to move into new
business models and they will seek consolidation. So I think
what we're going to see for sure over the next couple of years
is the incumbent local telephone companies confront the
necessity of making a strategic decision about vertical
integration, about moving into the long haul network.
That is not a bad thing. That is part of the working out of
the Act. In Texas, that is the way that Pat approached the
issue, and he laid the groundwork for that move. I'm not
talking about when. I'm talking about the inevitability of this
We now have in the country at least 15 different long haul
networks. It was not that way just a few years ago. There is
room to have integration here between local and long distance.
And it should happen. It should not be the case that government
abandon scrutiny and runs away from the issues, but we should
expect these issues to be presented.
Chairman DeWine. Senator Kohl.
Senator Kohl. Thank you very much, Mr. Chairman.
There may be some redundancy in my questions, but I would
still like to address them a little bit more fully.
Mr. Hundt, in the past 5 years, since the passage of the
Telecom Act of 1996, the purpose of which was to jump-start
competition in the telecom industry, we have seen an explosion
of communication technologies, from cell phones to Internet,
satellite, television, just to name a few. Yet, at the same
time, most consumers have seen little, if any, competition in
the most basic of all telecommunications services, which is
local telephone service.
Last year, the FCC reported that competitive telephone
companies had a market share of less than 7 percent of local
telephone lines, and while we have all seen sharp declines in
long distance and cell phone rates, the average local phone
rate has not declined in a decade, since 1990.
So why have consumers not seen more competition for their
local telephone service in the 5 years since the Telecom Act?
Is there a flaw in the Act that needs to be fixed, or is there
anything that we, as policymakers, can do to encourage and see
that, in fact, more competition exists in local telephone
Mr. Hundt. Well, if I might, let me first mention some
things that consumers definitely need to chalk up as benefits.
There is much more competition at last in video coming down
from satellites. It is because Congress passed the Satellite
Home Viewers Act which has changed the structure of this
particular industry in a very positive way.
There is infinitely more competition in wireless. Prices
have dropped. There is service available in many more places
and the prices per minute are going down.
There is, in fact, tremendous competition in all kinds of
equipment that attach to the network, and there is an awful lot
of competition in terms of Internet access. We do have some
emerging big players. We still have several thousand Internet
access providers in the country.
In terms of residential voice telephone service, as Pat
knows from Texas in detail, roughly speaking, on a nationwide
basis, about 40 percent of all consumers are paying less than
the cost of providing the service. Maybe Mr. Ellis at SBC has a
different number for his region, and I wouldn't want to debate
the specifics. But it is a big number. There is no way that
someone else is building an overlapping network to repeat the
experience of offering a below-cost service.
What will happen--and I am so confident of this, if we just
stick with our competition policies--what will happen in about
four to 5 years, actually, very soon in terms of how long it
takes to do these massive investments, we will see the cable
networks and the telephone networks delivering broadband to
more than half the homes in America. And at around that time
period, somewhere around 2005, maybe a little later, we will
see that routinely, when someone is buying broadband or high-
speed access to the Internet, they are getting along with it a
voice service that substitutes for today's voice service.
What I'm saying is that that will be the experience of
about 40 million homes in the United States by 2005. By the end
of the decade, if we stick with your competition policies, it
will be the experience of 75 to 80 percent of all homes.
That environment, the broadband competition between cable
and telephony networks, that is the environment in which we
will see the kind of competition for the residential consumer
in what today is called ``voice'' and then will be a bundled
service with data. That's the way that's going to work, I
Senator Kohl. So you're saying, in terms of the local
telephone service, it is a huge money-losing business, and
that's why there's no competition?
Mr. Hundt. I'm saying it is for 40 percent, maybe 50
percent of homes. It isn't for the other percentage. But the
only real way to have competition, just on the residential
side, is to have it be that you have two competing delivery
mechanisms or infrastructures--and we have them; one is cable
and one is telephony--that are going to be competing with high-
speed access to the Internet, and along with that will come
I know that we all are impatient for it. Everyone can tell
a story of how they tried to order it. But the reality is that
this is happening. Cable has already built, I believe, into
more than 70 percent of its homes the capability to do what I'm
We're talking here about tens of billions of dollars that
needed to be invested, and people who were doing it out of
their own pocket in the face of good and bad markets, but it
really is happening and we really should stick with our
policies because they actually are working out.
Senator Kohl. Mr. Wood, do you have a comment?
Mr. Wood. The only thing is just to give a number
reference, Senator Kohl. In Texas, the price for just a
residential line--no Call Waiting, no Caller ID, which a lot of
people actually in Texas have those--but if you don't, it's
about 17 bucks, taxes included.
For those that want to compete against Southwestern Bell,
if they want to buy that underlying line from Southwestern
Bell, or even build it themselves, we have calculated--and I
think the rates on our end are pretty low, actually -the
calculated rate to buy that $17 line is $21. So you can't sell
at a four dollar loss and make a lot of money.
I think that's where the rub is. If you get customers who
want Caller ID, want the Call Waiting, add some long distance
minutes on the network, add a broadband product--DSL, for
example, which you would buy from one of the Bell companies or
AmeriTech--then you get about that $21 pretty fast. The company
can make a return from coverage costs and make future
Quite frankly, we're stuck with our rate design errors of
the past. As I admitted to you all, that is really a State
problem. But it does explain, I think, why the figures for
residential are relatively dismal, and I think they will stay
so until the bundled platforms of cable-type products, or I
would even add wireless type products to those that Reed
mentioned, as well as what the phone company can offer, will be
kind of a salvation.
But there are always going to be what we call the
``grandmas'', who just want to get the basic dial tone and make
maybe two long distance calls a month, and that's all they
want. They're never going to be profitable people. It has been
a public policy in our State, and I believe in yours as well,
to keep the rate for those folks low and affordable. We will
face that music 1 day, but we're not there yet.
Senator Kohl. OK. Thank you, Mr. Chairman.
Chairman DeWine. Well, we appreciate your testimony. Mr.
Hundt, it's always good to have you. Mr. Wood, we appreciate
your testimony very much. You have both been very helpful.
Mr. Hundt. Thank you.
Mr. Wood. Thank you, Mr. Chairman.
Chairman DeWine. Let me invite our second panel to come up.
I will introduce you as you are coming up.
David Dorman is President of AT&T. His responsibilities
include the consumer business and network services groups,
international ventures, and AT&T labs. Prior to becoming
President of AT&T, he served as chief executive officer of
Concert, and President of Spring Business. He was also the
chief executive officer of Pacific Bell.
James Robbins is the President and Chief Executive Officer
of Cox Communications. Mr. Robbins joined Cox as Vice President
of the company's New York operations in 1983. He also has
served as the Chairman of the board of the National Cable
Television Association. He has testified before our
Subcommittee in the past and we welcome him back.
Larissa Herda is the President and Chief Executive Officer
of Time Warner. She rose to that position 3 years ago after
serving as the company's senior vice president of sales and
marketing for a year-and-a-half. She serves on the executive
Committee of the Association of Local Telecommunications
James Ellis has been the Senior Executive Vice President
and General Counsel of SBC Communications since 1989. His Bell
System career extends back some 29 years and has included the
position of Southwester Bell's vice president and general
counsel and secretary. We look forward to his testimony as
Thank you all very much for joining us. I guess we got the
nameplates sorted out here and we're rolling.
Again, the same rules apply as to the last panel. We
appreciate your testimony. We have written testimony, which we
will, without objection, make a part of the record. We would
welcome you all here.
Mr. Dorman, please proceed.
STATEMENT OF DAVID DORMAN, PRESIDENT, AMERICAN TELEPHONE &
Mr. Dorman. Thank you, Mr. Chairman, and Senator Kohl, for
inviting me here today to share AT&T's views on the state of
competition in the telecom industry.
Since 1996, AT&T has been the leader in developing
competitive alternatives to the local incumbent monopolies. I
know that our time here today is short, so I will just try to
make a couple of points.
First, the market opening provisions of the 1996 Act can
work. It is now clear that, despite the incumbents' arguments
to the contrary, there are no technical impediments to local
competitors seeking to deliver service over the incumbent's
high-speed facilities. In response to passage of the Act, AT&T
and dozens of companies invested tens of billions of dollars in
new telecom facilities and services.
AT&T itself has spent $11 billion to purchase Teleport in
1998, and since that time invested another $8 billion in that
business to expand it. We spent nearly $90 billion in 1999 and
2000 to buy the cable companies TCI and MediaOne, and earlier
this year, we committed more than $130 million to acquire the
assets of the now-defunct NorthPoint Communications. We spend
billions more each year to upgrade these networks, laying new
fiber and interconnecting to local customers. These investments
have paid off. Today we serve over two million local customers,
and we have local business customers in 71 markets around the
Secondly, although the 1996 Act established a sound
framework for opening up local telecommunications to
competition, the continued viability of local competition is in
trouble. The incumbent local exchange carriers have resisted
and challenged nearly every attempt to implement the pro-
competitive provisions of the Act. Their strategy of
resistance, delay, and litigation, and their control over the
prices and processes upon which competition depends, has
enabled them to maintain their dominance of the local phone
Incumbent local exchange carriers have refused to comply
with the Act's unbundling obligations, have made
interconnection as difficult as possible, and they charge
wholesale rates that are in many cases, as has been noted
earlier, higher than their own retail rates.
The anticompetitive behavior of the incumbent local
telephone companies, magnified by the recent market downturn,
has caused the competitive local exchange industry, or CLECs,
to virtually collapse. Numerous competitors, including Winstar,
NorthPoint, Actel, e-spire and others, have declared bankruptcy
or shut down operations altogether.
Each of these decisions has been accompanied by hundreds of
eliminated jobs. The CLECs, as a group, dismissed over 6,500
employees last year, attempting to remain in business and
viable. For those that continue to struggle in operation, stock
prices have plunged and the capital market for emerging
competitors has dried up, making it difficult for competitors
The repercussions of these events on consumers is
significant. CLECs reinvested most all of their revenues in
2000 in local network facilities. The CLECs declaring
bankruptcy in 2000 had planned to spend over $600 million on
capital expenditures this year. Those competitive networks will
not be available to customers. Further, as CLECs leave the
market, incumbents raise their prices and lose incentive to
rapidly deploy advanced services.
Third, even though the Bell companies are on the verge of
remonopolizing the telecom industry, they are now calling on
Congress for further deregulation. Current legislation in the
House would create broad exemptions for the incumbents'
unbundling and resale obligations for high-speed data
facilities and services. It would deprive competitors of the
ability to purchase access to crucial aspects of the
incumbents' network in order to gain a foothold in the market
and provide advanced services. Indeed, the House bill confers
an unbundling exemption so broad that competitors would
probably not even be able to lease the facilities that they
need to provide basic voice services in competition with the
incumbents. Further, it permits incumbents into long distance
markets, even though local competition is not emerged.
The incumbents claim that these changes will spur
investment and increase rural deployment, but history belies
that claim. After having DSL available for years as a
technology, the incumbents deployed it only after competitive
offerings sprung forth from the cable companies and CLECs. And
their arguments that new legislation will give them an
incentive to bring high-speed access to rural areas ring hollow
when you consider the fact that the Bells have already divested
10 million rural access lines.
Finally, Congress must reaffirm its commitment to the
market opening provisions it created in the 1996 Act if the
local competition created by AT&T and others is to survive.
Congress must resist efforts by the Bell companies to weaken
the commitment through unwarranted legislation that would
relieve the incumbents of the very obligations in which local
Congress must demonstrate its renewed commitment to the
principles of the Act by sending a clear signal that the goals
of the Act can only be realized through vigorous enforcement of
the provisions designed to end this century of monopoly control
over the local telecom market.
Five years ago, this Subcommittee and Congress concluded
that more, not less, competition would best protect consumers
and spur broadband deployment. We ask that you today reaffirm
that commitment by considering ways to make the Act more, not
We remain optimistic, that with the assurance of strict
adherence to the requirements of the Act, that the promise of
the Act will become a reality.
Thank you, again, for the chance to represent AT&T's views.
[The prepared statement of Mr. Dorman follows:]
Statement of David Dorman, President, American Telephone & Telegraph
Thank you, Mr. Chairman and members of the Subcommittee, for
inviting me here today to share AT&T's views on the state of
competition in the telecommunications industry. Since 1996, AT&T has
been a leader in developing competitive alternatives to the incumbent
telephone monopolies. We have invested tens of billions of dollars in
local telecommunications and cable networks and now serve over 2
million local customers. Unfortunately, our efforts and the efforts of
other local competitors have been resisted at every turn by the
incumbents. And now the incumbents seek changes in the law that would
repeal the rules that are essential to local competition and remove the
incentives put in the statute to encourage them to open their local
markets. If enacted, such changes would exacerbate the current
financial crunch and extinguish the prospects for competition that
seemed so bright only five years ago.
My message today is straightforward: Congress must reaffirm its
commitment to the market-opening provisions it created in the 1996 Act
if the local competition created by AT&T and others is to survive.
Congress must resist efforts by the Bell companies to weaken that
commitment through unwarranted legislation that would relieve the
incumbents of the very obligations on which local competition depends.
And Congress must demonstrate its renewed commitment to the principles
of the Act by sending a clear signal that the goals of the Act can only
be realized through vigorous enforcement of the provisions designed to
end almost a century of monopoly control over the local
The Telecom Act promised to spread the benefits of competition
across all segments of the communications industry. To keep that
promise, Congress made a simple deal with the Bell companies: Open your
monopolies to competition - real competition - and then you'll be
allowed into long distance. The incumbents were not given a choice.
Congress said in no uncertain terms that monopolies must be opened. And
that regulators should make sure that it happened, and that it happened
The 1996 Act provided three pathways to local competition: A
competitive local exchange carrier (``CLEC '') could purchase local
telephone services at wholesale rates from the incumbent and resell
them to local customers; a CLEC could lease specific pieces of the
incumbent's network on an unbundled basis, using what the industry
calls unbundled network elements (``UNEs ''); or a CLEC could build its
own facilities and interconnect them with the incumbent's network. In
return for opening their markets to competition, the Bell companies
would be allowed into the long distance market. This Subcommittee
played an instrumental role in crafting the procedure by which the
Department of Justice, the State commissions, and the FCC review a Bell
company's application for long distance entry.
Just the promise of competition spurred billions of dollars of
investment in new telecommunications networks. Competitive local
companies sprang up to compete with the Bells. Long-distance companies
began making plans to offer local service in every state. AT&T and many
others eagerly commenced efforts to offer local telecommunications
We are discouraged to report, however, that the 1996 Act has not
functioned as Congress intended. The flaws are not in the Act; they are
in the implementation of the Act. For five years, the Telecom Act has
bounced from legislation to regulation to litigation. Although
subscribers have responded positively to the competitive service
offerings of AT&T and others, and although it is now clear that there
are no technical impediments to local competitors seeking to deliver
service over the incumbents' facilities, the Bell companies are on the
verge of remonopolizing the telecommunications industry. Due primarily
to the anticompetitive behavior of the incumbent telephone companies
themselves--and magnified by the recent market downturn--the CLEC
industry has virtually collapsed. To finish off the job, the incumbents
are now calling on Congress for massive deregulation that would exempt
most of their network facilities from the market-opening requirements
of the 1996 Act and permit them into the long distance market even
though local competition has not yet emerged.
The incumbents' requests for government-sanctioned remonopolization
would be a defeat for the procompetitive impulse that led to the
enactment of the 1996 Act. Five years ago, this Subcommittee and
Congress concluded that more, not less, competition would best protect
consumers and spur broadband deployment. We ask you today to reaffirm
that commitment by considering ways to make the 1996 Act more, not
I will address each of these concerns in turn.
AT&T is Committed to Local Competition
Soon after the enactment of the 1996 Act, AT&T realized that it
could not rely solely on the incumbents for the network facilities it
needed to offer local service. After all, we are the competition and
the incumbents have little reason to cooperate in giving us access to
their networks in a timely and reasonable fashion. We realized we could
not be solely dependent on our rivals for essential facilities. As a
result, we began to acquire our own local networks. In 1998 we
purchased Teleport for $11 billion to serve business customers. Then,
in 1999 and 2000, we spent nearly $90 billion to buy the cable
companies TO and MediaOne so that we would have a line into the homes
of residential customers. We spend billions more each year to upgrade
those networks, lay fiber, and create data centers. These investments
have paid off: we've gone from about 50,000 cable-telephone customers a
year ago to nearly 600,000 today, and AT&T has local business customers
in 71 major markets around the country.
But our own local networks do not reach everywhere. Until recently,
for instance, FCC rules limited us to serving only about one-third of
all cable subscribers. The incumbents are under no such restriction, as
the reduction in the number of Bell companies from 7 to 4 in the last
few years dramatically illustrates. To bring competitive choices to
more Americans, we must rely on the market-opening requirements of the
1996 Act to lease facilities from the incumbents and resell their
services. Even in the fact of grudging and spotty compliance with these
requirements, the results have been dramatic: nearly 2 million local
residential customers in 18 states have chosen AT&T as their service
Earlier this year, AT&T committed more than $130 million to acquire
the assets of the now-defunct NorthPoint Communications. The assets
include collocations in 1920 locations, 3000 DSLAMs and other DSL
networking equipment, 153 ATM switches, and the associated systems
(hardware and software) that support provisioning, engineering, testing
and maintenance functions. However, without access to the incumbents'
facilities, as contemplated by the 1996 Act, AT&T's ability to put
these assets to use for consumers will be substantially diminished. As
I explain below, the incumbents' unceasing efforts to undermine the Act
have impeded the availability of competitive alternatives for American
Anticompetitive Behavior By the Incumbents
Has Hindered the Development of Local Competition
Back in 1996 the Bell companies pledged to support the Telecom Act.
Then they went to court to stop it. They challenged Congress' authority
to pass it, the FCC's authority to implement it, and just about every
meaningful interpretation of it by the states. The 1996 Act established
a sound framework for opening up the local telecommunications
marketplace to competition, but the incumbent local exchange carriers
have resisted and challenged nearly every attempt to implement the pro-
competitive provisions of the Act. Their strategy of resistance, delay,
and litigation, and their control over the prices and processes upon
which competition depends, has enabled them to maintain their dominance
of the local telephone market, while dozens of their competitors are
forced to scale back service plans, and many others go out of business
Incumbents Eliminate Competitors By Refusing to Comply with Unbundling
Competitive local exchange carriers seeking to lease elements of
the incumbents' networks to provide competitive service have been
frustrated by the incumbents' insistence that their obligation to
provide UNEs is limited to the most basic services. They will supply
competitors with the elements necessary to provide voice services (at
inflated prices designed to eliminate competitors), but will not supply
the elements used to provide the advanced data services that are the
economic heart of today's telecommunications industry. Competitors also
find that incumbents mishandle or delay their service requests. Last
year, Verizon admitted to mishandling more than a quarter of a million
competitive requests. And an FCC report for Pennsylvania shows that
while Verizon always fills orders for its own customers in under five
days, 80% of competitive customers must wait longer than five days.
Where regulators adopt policies to promote competition, the
incumbents respond by withdrawing new services rather than complying.
That happened recently in Illinois, where SBC announced it would halt
its digital subscriber line deployment program rather than comply with
an Illinois Commerce Commission order allowing competitors access to
its fiber optic technology at costbased rates. There is no better
indication of SBC's monopoly power than a unilateral decision to cease
providing service. As Illinois Commerce Commissioner Terry Harvill
aptly observed in a letter to Speaker Hastert, ``if the market were
competitive, SBC/Ameritech would not be able to unilaterally halt the
deployment of DSL infrastructure and deny these [Illinois] customers
advanced telephony services.''
AT&T agrees with Commissioner Harvill that ``[w]ithout competitive
guidelines like those [SBC] objects to, it is unlikely that millions of
customers in Illinois will ever see the intended benefits of the Act in
the form of lower prices, many choices for broadband services, and
better customer service.'' And if this happened in Illinois, it could
happen in Ohio, Wisconsin, or any other state served by SBC.
Incumbents Thwart Competition By Making Interconnection Difficult.
Although CLECs are entitled to obtain dedicated space in an
incumbent's central office or at other of their locations (such as
remote terminals) and to place equipment there to interconnect with the
incumbent's network, the incumbents have taken every possible step to
deny CLECs this right, including challenging the FCC's rules
implementing these requirements in court. In the meantime, the
incumbents have attempted to restrict the type of equipment and
facilities that CLECs may collocate at their central offices, and they
are refusing to permit CLECs collocated in the same central office to
connect to one another.
Incumbents' Wholesale Rates Would Eliminate Competition.
Although competitors seeking to enter the market by reselling the
incumbent's service are entitled to buy that service at the wholesale
rate, incumbents have virtually eliminated resale as an option for new
competitors by offering wholesale rates for local network capacity that
are too high for competitors to make a profit on the resold service. In
some cases, the wholesale rates offered to potential competitors exceed
retail rates. In New Jersey, for example, the average retail rate is
$8.19 per month, while the wholesale rate offered to competitors is $25
per month. After paying the ``wholesale'' rate, there is no margin
between the cost of service and what competitors can charge for its
services, including retail local exchange and exchange access services.
As a result of litigation brought by the incumbent monopolists, the
FCC lost its wholesale pricing authority for local telephone services.
Although the Supreme Court eventually restored this authority in 1999,
the FCC now appears unwilling to override state commissions that have
permitted the incumbents to charge anticompetitive rates.
In the face of these types of behavior, many competitors have been
forced to stop offering local telephone service. AT&T has warned that
because it is losing money on local telephone customers, it may have to
stop offering service in New York and Texas. Sprint has left both those
markets, and the Georgia and California markets as well. And where
competitors leave the market, price increases follow. In Texas, SBC has
announced a ten to thirty percent price increase for long distance
The same is true for advanced services, where the incumbent
carriers now control approximately 90 percent of all residential DSL
lines. Analysts at Legg Mason have noted that ``with numerous DSL
providers exiting the playing field . . . DSL pricing appears to be on
the rise.'' SBC, for example, raised its residential DSL rates in
February by about 25 percent and Earthlink followed suit.
Facing Resistance by Incumbents, Local Competitors Will Not Survive the
Downturn in the Financial Market
The recent downturn in the financial markets has further punished
competitors who faced incumbent-imposed technical, legal and procedural
hurdles to getting the access to services and facilities mandated by
the 1996 Act. Numerous competitors, including Winstar, Actel, e.spire,
Picus, Jato, OpTel and many others, have declared bankruptcy or shut
down operations. Even NorthPoint, which was widely considered the type
of major competitive player created by the Act, is now defunct.
For those that continue to struggle in operation, stock prices have
plunged, and the capital market has virtually dried up. While
telecommunications companies captured an average of two billion dollars
per month in initial public offerings over the last two years, they
raised only $76 million in IPOs in March, leading numerous companies to
withdraw their IPO plans.\1\
\1\ Telecom Meltdown, Business Week (April 23, 2001).
The difficulty in entering local markets has also caused nearly all
competitors to scale back their plans to offer service. Covad,
originally another success story, is closing down over 250 central
offices, and will suspend applications for 500 more facilities. Rhythms
has cancelled plans to expand nationwide. Net2000 has put its plans for
expansion on hold. Numerous other competitors, such as DSL.net, have
resolved to focus on a few core markets. Each of these decisions has
been accompanied by hundreds of eliminated jobs. CLECs dismissed over
6500 employees in the last year, attempting to remain in business.
The repercussions of these events on consumers is significant.
CLECs reinvested most of their 2000 revenues in local network
facilities. CLECs declaring bankruptcy in 2000 had planned to spend
over $600 million on capital expenditures in 2001. Those competitive
networks will not be available to consumers. Further, as CLECs leave
the market, the incumbents raise their prices, and lose incentive to
deploy advanced services. Indeed, we could well return to the
environment that existed before the 1996 Act, when the Bells kept DSL
technology on the shelf, feeling no pressure to deploy it in the
Regulatory Relief For The Incumbent Monopolists Is Unwarranted
In 1996, there were eight major providers of local phone service.
Those eight have become four today, thanks to a series of mega-billion
dollar mergers. All four are still monopolies. The only difference is
that today they are much bigger monopolies. And they aren't eager to
compete against each other. Verizon made a loud media splash last year
when they said they would compete against other Bells for local service
in nine states. They were a lot quieter just before the New Year when
they said they were pulling out of all nine of those states.
Despite the remonopolization of the industry, incumbent telephone
companies are now seeking changes in the law that would weaken
regulatory oversight and make it even harder for new entrants to
compete. Current legislation in the House would create broad exemptions
from the incumbents' unbundling and resale obligations for high speed
data facilities and services. It would deprive competitors of the
ability to purchase access to crucial aspects of the incumbents'
networks in order to gain a foothold in the market and provide advanced
services. Indeed, the House bill confers an unbundling exemption so
broad that competitors would probably not even be able to lease the
facilities they need to provide basic voice service in competition with
the incumbents. It would effectively close off one of the three
competitive pathways forged by Congress in 1996.
The Bell companies also seek the ability to provide high speed data
services across LATA boundaries without meeting the pro-competitive
requirements of the 1996 Act. As this Subcommittee is well aware, in
order to foster local competition, the 1996 Act permits a Bell company
to gain in-region interLATA authority only after it has opened its
local market to competition. This incentive-based approach takes full
advantage of the long distance restriction to provide the Bell
companies with a reason to open their local markets for the benefit of
all consumers. And the ability to provide high speed data services
across LATA boundaries is a powerful incentive: currently, the majority
of traffic traveling over long haul networks is data traffic, not
voice, and analysts predict that data traffic will make up 90 percent
of all traffic within four years. The pending proposal is a fundamental
abandonment of the incentive-based approach embodied in the 1996 Act.
The incumbents claim that these changes will spur investment and
increase rural deployment, but history belies this claim. After sitting
on DSL technology for years, the incumbents finally deployed it only in
response to competitive offerings of CLECs and cable companies
(specifically, AT&T). Under this competitive spur, they have made
substantial investments in broadband. Verizon, for instance, will spend
$18 billion this year on capital investment.\2\ SBC is spending more
than $6 billion on its heavily-promoted ``Project Pronto,'' \3\ and
Qwest will spend $9.5 billion this year to build out its facilities.\4\
BellSouth ``invested over $33 billion . . . during the 1990's,'' and
expects ``total DSL revenue of approximately $225 million this year and
$500 million in 2002.'' \5\ Tellingly, the BellSouth chief executive
acknowledges that the regulatory challenges BellSouth is facing ``are
unlikely to slow down the momentum of the marketplace.'' \6\ What is
clear is that this investment will slow dramatically without the
competitive spur that the 1996 Act makes possible.
\3\ SBC Investor Briefing, SBC Announces Sweeping Broadband
Initiative, at 2 (Oct. 18, 1999).
\4\ ``Running on Empty; Industry Trend or Event,'' Communications
Week International (Mar. 5, 2001).
\5\ Duane Ackerman, Talk Notes, Salomon Smith Barney Conference
(Jan. 9, 2001) at 7, 15.
\6\ Id. at 11
Further, these investments are producing significant revenue for
the incumbents. SBC has boasted to investors that ``[t]he network
efficiency improvements alone pay for this [Project Pronto] initiative,
leaving SBC with a data network that will be second to none.'' \7\
Beyond those savings, of course, SBC and the other incumbents will earn
substantial revenues from the new services made possible by the
deployment of advanced facilities. And when SBC makes advanced
facilities available to competitors as unbundled network elements, they
earn yet another revenue stream from competitors who must pay the costs
of these elements plus a profit.
\7\ Id. at 2.
There also is no assurance that the incumbents would use regulatory
relief to deploy broadband facilities any faster or to historically
underserved areas like rural communities or inner cities. Their
arguments that new legislation will give them the incentive to bring
highspeed access to rural areas ring hollow when you consider the fact
that the Bells have already divested 10 million rural lines, and there
is little evidence that the incumbent monopolists have used the last
five years to extend broadband to unserved communities.
To accede to the incumbents' requests for relaxed regulation would
be a retreat from the competitive goals of the 1996 Act. Although they
argue that such an approach would stimulate a renewed commitment on
their part to deploy advanced services, this approach already has been
tried and failed. There is no justification for allowing the incumbents
to evade their unbundling responsibilities, or creating a loophole in
section 271's balance of incentives designed with this Subcommittee's
participation to protect the public interest.
The CLEC industry is at a critical juncture. If we don't succeed
now, it will be a long time before others are willing to invest the
billions of dollars needed to try again. If local competition is to
succeed, Congress should send a clear signal of its renewed commitment,
both by rejecting the incumbents' self-serving requests for
deregulation, and by encouraging vigorous enforcement of the pro-
competitive provisions of the Act.
Senators Hollings, Inouye, Stevens and Burns recently emphasized in
a letter to FCC Chairman Michael Powell that there is a tremendous need
for ``strict adherence and strong enforcement of [the 1996 Act's]
market opening requirements,'' and that ``[m]eaningful exercise of
[section 271 ] authority is needed in light of the current precarious
state of the competitive carriers, which is due largely to their
inability to obtain affordable, timely, and consistent access to the
Bell networks.'' AT&T agrees with the Senators that what is needed
today is not a rewrite or even abandonment of the principles embodied
in the 1996 Act, but rather a rededication to those principles in the
form of vigorous oversight and enforcement. We remain optimistic that
with the assurance of ``strict adherence'' to its requirements, the
promise of the 1996 Act can become reality.
Thank you again for the chance to present our views.
Chairman DeWine. Mr. Dorman, thank you very much.
STATEMENT OF JAMES ROBBINS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COX COMMUNICATIONS
Mr. Robbins. Mr. Chairman and Senator Kohl, thank you for
the pen, incidentally, and congratulations on your ball team
Senator Kohl. Thank you.
Mr. Robbins. I'm here to tell a straightforward story and
make one simple promise. Cox is committed absolutely to the
provision of competition in the local telephone exchange
marketplace. This has been and will continue to be a highly
capital-intensive and extremely complex undertaking.
Going up against the entrenched incumbent local exchange
carriers is decided not for the faint of heart. But Cox is
succeeding and Cox is in it to stay. In the process, Cox will
have spent about $10 billion on such necessities as network
improvements, incremental equipment, infrastructure hardening,
call centers and billing and collection systems. This year
alone, we will spend about $2 billion. In addition, we have had
to employ and train the people to operate this network with the
reliability and quality of service that is the best in the
How are we doing? I will let our performance to date speak
for itself. By the end of this year, Cox will be able to
provide residential telephone service to 75 percent of our
customers in eight initially targeted market clusters. These
markets comprise nearly half of our 6.2 million customers. As
of the end of March, we had 300,000 residential customers and
410,000 residential access lines. We handle about 1.2 million
telephone calls each day. Cox Telephone is growing at an annual
rate of 118 percent, and is adding 4,000 new residential
customers per week. We already have deployed 20,000 route miles
of bundled fiber, ten telephone network switches, and back-up
The service that Cox is providing is a lifeline telephone
service. We are making payments to the Universal Service Fund
on all of our telephone revenues. In California, for example,
we have been certified as a carrier of last resort. By 2004,
almost 70 percent of our customer base will have access to Cox
local telephone service.
On the business side, we now have 1,250,000 voice grade
equivalent lines in service. Of our three new digital services,
video, high-speed data, and telephony, our new telephone
offering is by far the most challenging and time-consuming to
deploy, market and operate. But we are inexorably moving
Mr. Chairman, the next question then becomes, what do Cox
customers think about our telephone service. They love
everything about it. First and foremost, they love the price,
10 percent less than the incumbent local exchange carrier
service for the first line, and about 50 percent off for the
second line in most markets. Enhanced services are up to 30
percent less expensive.
Moreover, Cox customers like our state-of-the-art
technology, our quality customer service, and the reliability
of our network. In fact, 7 percent of our telephone customers
take only telephone service from us, but the vast majority of
our telephone customers also take data and/or our video
I should take a moment to comment about the future promise
of Internet protocol cable telephone, or IP telephone. Next
year, we will begin to test this new technology. There are
questions to settle about scalability empowering of IP
networks, but Cox is confident that IP telephony will add great
value for our customers, particularly in smaller systems where
circuit switch systems are not as economic to deploy. We
envision circuit-switched and IP services will coexist in all
of our networks.
The final question then, Mr. Chairman, is what should be
the government's role in fostering the speedier deployment and
development of local exchange competition. I have five
No. 1, encourage regulatory certainty in the marketplace by
allowing the 1996 Act to work.
No. 2, shift the FCC's focus away from CLEC resale and UNE-
P models, which are failing in the marketplace, toward
facilities-based competition which is succeeding.
Three, dramatically increase penalties for repeated ILEC
litigiousness, which is setting an all-time record.
Four, provide facilities-based competitors with special
fast-track enforcement and much more aggressive economic
sanctions against entrenched ILEC anticompetitive behavior.
Finally, No. 5, prohibit abuses of pole attachment, rights-
of-way and franchise requirements and local tax gouging.
Mr. Chairman, the prospect for local telephone exchange
competition is in its infancy. Entrenched incumbents, as you
have heard, still control 97 percent of the residential
marketplace. But if Cox is any example, the cable industry is
poised to ensure that robust facilities-based competition will
become a reality. Consumer choice will usher in a new era of
better service, lower prices, and technological innovation.
[The prepared statement of Mr. Robbins follows:]
Statement of James O. Robbins, CEO, Cox Communications, Inc.
Cox Communications, Inc. (``Cox'') is the country's fifth largest
cable MSO, providing basic cable services to roughly 6.2 million
regionally-concentrated and highlyclustered customers.\1\ Since the
passage of the Telecommunications Act of 1996 (``1996 Act''), Cox has
transformed itself from a distributor of traditional, one-way video
programming services to a provider of multiple, two-way advanced
digital offerings. This metamorphosis has been costly, difficult and
time-consuming. It also has been embraced fully by Cox's cable
customers, who signaled their approval by purchasing more than 1.2
million new services from Cox last year.\2\
\1\ More than 70 percent of Cox's customers are located in 15
markets that serve an average of 285,000 customers apiece. Cox's three
largest markets are Phoenix (serving 610,000 customers), San Diego
(serving 509,000 customers) and New England (serving 430,000
\2\ Cox expects to add about 1 million new service customers in
In the past two years, Cox spent $10 billion acquiring more cable
systems to ensure that it has sufficient scale and scope to enter the
broadband marketplace. Through these acquisitions, Cox increased its
customer base from approximately 4 to 6.2 million. Cox also is spending
an additional $10 billion to upgrade its cable networks to support new
broadband services.\3\ This massive capital investment is already well
underway. At the end of last year, roughly 73 percent of Cox's cable
plant in its 15 largest cluster markets had two-way capability and 70
percent had 750 MHz (or greater) capacity. By the end of this year, Cox
will have completed similar upgrades for more than 80 percent of all of
its cable systems nationwide.
\3\ This $20-plus billion investment in broadband is a substantial
commitment for a company with annual revenues of $3 billion.
Over the past several years, Cox has deployed three new broadband
services over its upgraded cable platform. The first of these is a
digital television service, branded Cox Digital TV, that enables Cox to
compete more effectively against the high-channel, highquality video
programming services offered by DBS providers DirecTV and Echostar and,
in some cases, the incumbent telephone company. The second offering is
highspeed Internet access, offered by Cox under the brand names
[email protected], Cox Road Runner and Cox Express. These services provide
customers high-speed access to the Internet via cable modems and a
network designed to maximize cable technology. They also offer
customers their own unique national and local broadband content, as
well as access to broadband content offered by third parties.
The third new service is local telephony, branded Cox Digital
Telephone, that already has proven to be a formidable competitor to
services offered by incumbent local exchange carriers (``ILECs'').
Indeed, as of March 31, 2001, Cox was providing local telephone
services to 300,000 residential customers using 410,000 residential
access lines. By Cox's rough estimate, these customer figures put Cox
on par with the 12th largest telephone company in the
country. And, Cox is continuing to roll out new telephone services to
its customers. Its residential telephone service is growing at a rate
of 118 percent annually, and it is now adding 4,000 new residential
telephony customers each week. By the end of this year, Cox will be
able to provide residential phone service to 75 percent of its
customers in eight markets - markets that serve nearly half of its 6.2
million customers. By 2004, Cox estimates that perhaps as much as 70
percent of its customer base will have access to competitive
residential telephone service.
The capital expenditures required to deploy digital telephone
service over Cox's upgraded cable systems are significant. Cox has
installed 10 telephone switches in its largest markets that are routing
1.2 million phone calls each day. Assuming a telephony penetration rate
of 25 percent of homes passed and an average take-rate of 1.5 lines per
customer, the switching cost per customer is $105 alone. Cox must then
spend an additional $505/customer for the Network Interface Unit (NIU),
the drop, the tap and the Headend Interface Terminal (HIT). This
combined variable cost of $610/customer for the provision of local
telephony is in addition to the $220/home passed that Cox must invest
to upgrade its cable plant to 750 MHz capacity and introduce two-way
interactivity. It also does not include the $100/customer that Cox is
investing to power its cable networks to ensure that telephone service
continues in the event of a power failure. By deploying back-up power
throughout the network and utilizing a unique ``ring-inring''
architecture, Cox is able to offer its customers a highly-reliable,
lifeline telephone service. Indeed, the reliability of Cox's cable
systems exceeds the Bellcore standards adopted for local telephone
networks. Cox also has been designated a carrier of last resort in the
state of California, and receives universal service subsidies for its
provision of telephone service to high-cost and low-income customers.
Cox first rolled out local telephone service to residential
customers in its Orange County, California system in 1997, nearly four
years ago. Customer response to Cox's local phone service since that
time has exceeded expectations. Overall, roughly 10 percent of Cox
customers able to purchase Cox Digital Telephone have done so. In some
neighborhoods, penetration rates exceed 30 percent. A key aspect of
Cox's value proposition for its residential telephone service is price.
Cox Digital Telephone is roughly 10 percent cheaper than the ILEC's
offering for the first telephone line and 50 percent cheaper for the
second. (Not surprisingly, about one third of Cox's telephone customers
purchase a second line.) Enhanced features such as call forwarding and
call waiting are up to 30 percent less expensive than the prices
charged by the incumbent. Cox also resells long distance service,
branded Cox Long Distance, which is purchased by roughly 75 percent of
its local phone customers.
Cox does not require its telephone customers to buy other Cox
services (such as cable service or high-speed Internet access), and
approximately 7 percent choose to purchase Cox telephone service alone.
Many more phone customers, however, do buy cable and/or Internet access
from Cox, and enjoy additional savings in the form of bundling
discounts. Cox also is testing a flexible bill program, which will give
customers the option of receiving a single bill or multiple bills for
the Cox services they purchase. Market research suggests that while
some consumers want the convenience of receiving a single bill, others
prefer to receive one, two or three separate bills. Cox's new billing
options will be responsive to all of its customers' desires.
Cox's provision of local telephone service over its cable networks
has had an unforeseen benefit beyond simply providing the company with
another revenue stream. Customers with the most favorable impression of
Cox are those that purchase phone service as well as cable service. By
considerable margins over cable-only customers, Cox cable/phone
customers believe that Cox ``uses state-of-the-art technology,''
``provides reliable service with few interruptions,'' and ``provides
quality customer service.'' The purchase of Cox Digital Telephone also
improves customer retention. Indeed, Cox's research shows that
customers who purchase two or more Cox services are noticeably more
likely to remain Cox customers than those who buy only a single Cox
While Cox is rapidly expanding its telephone service to residential
customers, it also has made a substantial investment in facilities
designed to serve business customers ranging in size from small retail
shops to large corporations. Cox has served business customers from the
time it began to offer telecommunications services and it expects that
the business sector will continue to be an important source of its
growth in the future. Its business services are now providing more than
1.2 million voice grade equivalent circuits nationwide.
Cox's local telephone services are provided entirely over Cox's
upgraded cable networks; with rare exception, Cox does not purchase
unbundled network elements (UN-Es) from the incumbent telephone company
or otherwise resell ILEC services. In addition to being fully
facilities-based, Cox also is offering circuit-switched, not Internet
Protocol (IP), telephony. Cox intends to begin testing IP technology
next year, and is aware that there are significant questions of
scalability and powering that will need to be resolved before IP
telephony can be marketed on a mass scale. Nonetheless, Cox is
confident that IP telephony will add great value for its customers,
particularly those served by its smaller systems for which it can be
economically difficult to deploy a switch. Cox believes that,
ultimately, circuit-switched and IP telephone services will coexist in
all of its cable networks.
Although Cox has enjoyed considerable success rolling out local
telephone services over its cable infrastructure, its telephony
deployment has been fraught with challenges. In addition to mastering a
new technology and overcoming significant operational hurdles, Cox has
had to navigate treacherous waters roiled by ILEC misbehavior and
regulatory miscues. For example, as a facilities-based competitor, one
would expect that Cox would be able to reach interconnection agreements
with the ILECs without much controversy since the principle issue to be
negotiated is how the parties will interconnect to exchange traffic.
Yet Cox has had to submit virtually all of its interconnection
agreements to state public service commissions for arbitration due to
ILEC intransigence. In addition, Cox has been forced to deal with a
variety of anticompetitive tactics undertaken by its ILEC competitors.
Cut-over schedules have not been met. Timely provisioning of trunks has
been a problem, resulting in busy signals for Cox customers. Ported
numbers have not been properly loaded by ILECs into their switches,
making it impossible for Cox customers to receive incoming telephone
calls. Some ILECs have declined to pay reciprocal compensation (and not
simply for ISPbound traffic) or have challenged Cox's exchange access
rates. Cox has had great difficulty getting ILECs to comply with state
regulations that guarantee its access to multiple dwelling units
(MDUs). These are but a few of the systematic roadblocks thrown up by
entrenched ILECs to thwart Cox's competitive entry into the local phone
Cox also has faced problems on the regulatory front. In particular,
Cox has had difficulty persuading regulators of the importance of
promoting facilities-based competition over the less viable resale and
UNE competitive entry strategies envisioned by the 1996 Act. The stark
reality is that it is difficult to implement a business model that
relies heavily on purchasing essential inputs from your fiercest
competitor, who also happens to be a long-standing monopolist. A far
more reliable approach is to make capital investments in your own
infrastructure and decrease reliance on the ILECs as much as possible.
Moreover, as the Federal Communications Commission has recognized,
facilitiesbased competition creates more consumer benefits than any
other form of competition. Facilities-based providers can compete more
effectively with incumbents, provide more reliable service and, because
they control the entire transmission path, can offer more innovative
and advanced services than non-facilities-based providers.
Unfortunately, regulatory initiatives aimed at encouraging the
deployment of new telecommunications infrastructure often take a back
seat to activities aimed at promoting resale and the lease of UNEs -
despite the fact that it is far less timeconsuming to promote
facilities-based competition than it is to sort through the myriad
complexities of implementing OSS and UNE-P.
A perfect example of regulators working at cross-purposes with the
development of facilitiesbased competition is the challenges Cox faces
when seeking to place back-up power supply cabinets in local rights-of-
way. As mentioned previously, Cox must install remote power supplies
(known as ``Network Reliability Units'' or ``NRUs'') throughout its
upgraded cable systems in order to ensure the network reliability that
its advanced services customers demand. In particular, consumers will
not switch their residential telephone service from the ILEC to Cox
unless they are assured that their telephone service will work in the
event of a power outage. Unlike the ILECs' copper plant, electricity
cannot be sent over fiber, which has been extended deep into Cox's
hybrid fiber-coax cable networks. Cox accordingly has been installing
state-of-the-art remote NRUs as part of its network upgrades to ensure
the reliability of its advanced services. These units contain
batteries, and are often coupled with gas generators that can provide
immediate and unlimited back-up capacity should the supply of
commercial power be interrupted.
As an authorized rights-of-way user, Cox works closely with its
local franchising authorities before installing NRUs in public streets.
Often, communities have initial questions about the safety, noise and
aesthetics of the NRUs to be installed by Cox. In most cases, Cox is
able to satisfactorily address these concerns in a reasonable timeframe
through the normal permitting process. In some communities, however,
Cox has encountered considerable resistance to the placement of its
critical powering equipment in public rights-of-way. A few communities,
for example, have enacted discriminatory cable-only ordinances that
effectively preclude Cox from installing units--even though these same
communities continue to promptly process permits for similar cabinets
submitted by other rights-of-way users (such as ILECs). Other
communities have set up community ``review'' procedures that are so
onerous that Cox has been unable to install a single cabinet in over
three years. Still others have adopted arbitrary size limitations,
raised unsubstantiated safety ``problems'' or simply refused to act on
pending permit requests. In each of these situations, Cox has been
forced to delay--sometimes by a number of years--its provision of local
telephone service to community residents.
Cox has experienced similar difficulties securing local permission
to deploy residential telephone service over its upgraded cable
systems. Although Cox already has permission through its cable
franchises to use public rights-of-way, and although the provision of
local phone services over its cable networks generally does not impose
any additional burden on public streets, a number of local governments
have asked Cox to secure a separate ``telecommunications franchise,''
and to pay a separate telecommunications ``franchise fee,'' before
rolling out local telephone service. All too often, the onerous
requirements included in such telecommunications franchises, and the
significant fees that accompany them, are imposed only on CLECs, and
not on ILECs. These obstacles increase Cox's cost of doing business
and, again, serve only to delay its provision of competitive local
Cox believes that there are five constructive steps that
policymakers could take to help speed the deployment of local telephone
service by facilities-based CLECs such as Cox and other cable telephony
1. Encourage regulatory certainty in the marketplace by allowing
the 1996 Act to work. Constructing telecommunications networks and
deploying competitive local telephone service is a daunting
undertaking, even for a company as well-positioned as Cox. New networks
and services simply will not be deployed if the regulatory regime is
destabilized. Facilities based CLECs depend on the capital markets to
survive. They cannot do so if regulators inject uncertainty into an
already precarious environment. The Congress accordingly should resist
urgings to re-visit the delicate balance achieved in the 1996 Act.
While not perfect, the Act is working to introduce competitive local
exchange service into the marketplace.
2. Shift the FCC's focus away from CLEC resale and UNE models and
toward facilities-based competition. It would be impossible to count
the endless hours devoted by the FCC to implementing the CLEC resale
and UNE models contemplated by the 1996 Act. While much of this
activity obviously must continue, the FCC must not let facilities-based
competitors get lost in the shuffle. Initiatives to promote the
deployment of new facilities, such as the Commission's competitive
networks proceeding, should be given top priority, not left
indefinitely on the back burner.
3. Dramatically increase penalties for repeated ILEC litigiousness.
CLECs like Cox often face the prospect of ``death by a thousand cuts.''
The ILECs are renowned for their willingness to litigate every issue
rather than negotiate reasonable business arrangements. ILECs with a
proven track record of aggressively litigating disputes against CLECs
should face dramatically increased penalties in regulatory proceedings
in which the CLECs prevail.
4. Provide facilities-based competitors with special fast-track
enforcement and implement much more aggressive economic sanctions
against entrenched anti-competitive behavior. Like all other CLECs, Cox
has had to repeatedly enlist the aid of regulators and the courts to
compel the ILECs to comply with their obligations under the 1996 Act
and related state and federal rules. If regulators are serious about
promoting the deployment of new telecommunications facilities, they
should establish enforcement procedures which give priority to
resolving the complaints of facilities-based competitors. They also
should adopt economic sanctions that penalize the ILECs' anti-
competitive behavior far more severely than the current regime allows.
Small fines and slow enforcement only encourage the ILECs to continue
their pervasive efforts to stymie local exchange competition.
5. Prohibit abusive pole attachment, rights-of-way and franchise
requirements and local tax gouging of CLECs. Although local governments
have a vital role to play in ensuring the integrity and safety of
public rights-of-way, they should not be permitted to abuse their
oversight and impose burdensome requirements, taxes and fees on
facilities-based CLECs. Similarly, the owners of essential
infrastructure such as utility poles should be prevented from charging
unreasonable rates when facilities-based providers deploy new services
over their existing networks.
Chairman DeWine. Mr. Robbins, thank you very much.
STATEMENT OF LARISSA HERDA, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, TIME WARNER TELECOM INC.
Ms. Herda. Thank you, Chairman DeWine, and Senator Kohl,
for the opportunity to speak to you today.
Before I tell you who we are, I would like to tell you who
we are not. We are not Time Warner, Inc.; we are not Time
Warner Cable. We have nothing to do with movies, entertainment,
``Bugs Bunny'' or ``Roadrunner''. AOL Time Warner is a large
shareholder of ours. However, they do not provide funding for
our business and they do not run our business. We are a
separately managed, separately traded public company.
We have built large fiber optic networks in 39 markets
across the U.S., and we will have 44 active markets operational
by the end of this year in 21 States. We have also built a
national IP backbone network.
Our local networks are large. They average 400 route miles
per city. We take that fiber all the way to the customers'
buildings, providing them with a completely diverse and
separate network from the RBOC. As a result, we have been able
to put 80 percent of our revenue stream 100 percent on our
We have spent over $2 billion to crease these networks. We
generate positive operating cash-flow, and we are fully funded.
We provide Internet, voice and data tele-communication services
to over 5,000 diverse customers, consisting of small, medium
and large businesses, as well as public schools, government
agencies and hospitals in both of your districts. In fact, the
service touches all the Members of Congress, since our network
serves the Defense megacenter in Columbus which does the
payroll for Congress and the White House.
When I started with Time Warner Telecom 4 years ago, we had
around 500 employees. Today, we have 2,500. So we have grown
My response to the question ``is the Telecom Act promoting
competition'' is a qualified Yes. We are precisely what the
Telecom Act envisioned. To put it in terms that I am familiar
with, however, the Telecom Act is a good business plan, but the
execution of the plan needs improvement. And where improvement
is needed is in enforcement.
In each State that the RBOCs obtain 271 or long distance
relief, it is critical that the RBOC have performance standards
and meaningful financial penalties for noncompliance with those
standards. The RBOCs have no financial incentive to cooperate
with us. When they cooperate, they lose customers. So it is in
their best interest not to cooperate. But in order to
transition from a monopoly environment to a competitive
environment, this cooperation is critical.
The only way to ensure this cooperation is to give the
RBOCs a financial incentive to cooperate. The financial
incentive is provided by clearly outlining the standards the
RBOCs must meet as a wholesale provider and interconnecting
carrier, and then imposing meaningful financial penalties for
noncompliance with those standards.
The best example I can give you from our perspective is
interconnection trunking. Interconnection trunks are the
facilities that connect our switches to the RBOC switches. They
are the facilities that allow our customers to make calls to
the RBOC's customers and vice versa.
When Southwestern Bell filed for its 271 application in
Texas, Time Warner Telecom was experiencing major problems to
get interconnection trunks installed in a timely manner. Not
only does an insignificant amount of trunking impair the
service quality to existing customers, but it also prevents us
from adding new customers to the network.
The solution that the Texas PUC devised, and the approach
that's being adopted by many other States, was to create
specific performance measures relating to how fast Southwestern
Bell had to respond to our request to add additional trunking
facilities, and required financial penalties for failure to
meet those measures. By clearly outlining the responsibilities
of both parties, and providing for penalties for noncompliance
of those responsibilities, the Texas PUC and the FCC created a
mechanism that works.
If Southwestern Bell cannot fill orders for a forecasted
need, they know that they will be forced to pay. If Time Warner
Telecom does not forecast properly, the fines won't be imposed
and we won't be able to get the inter-connection trunks we need
to provide quality service to our customers and grow our
I am pleased to report that this is working in Texas for
interconnection trunking. However, there are other services,
like special access, which still need a lot of attention.
Interconnection trunking is only one component of the 14-point
checklist, but the theory I have described applies to the
Another measure of whether the Act is promoting competition
is by considering what I would like to call barriers to
construction. In order to recognize the goal, true facilities-
based competition companies must physically construct the
network. Two obstacles to Time Warner Telecom's ability to
construct networks are, one, which was mentioned by Senator
Kohl, the failure of building owners to open up their buildings
to competitors, and No. 2, the failure of municipalities to
approve quick entry on a competitively neutral basis.
Chairman Pat Wood of the Texas Public Utility Commission
coined one of my favorite phrases: ``access to the first
foot''--excuse me, ``access to the last foot.'' First, last, it
doesn't matter. It's all the same.
In order to serve customers with our own facilities, we
must obtain access to the buildings where they can talk to
business, because we take our fiber directly into the
customer's buildings. The incumbents were given access, in most
cases, without having to contract with the building owners for
the rate, terms and conditions
Last October, the FCC adopted an order that prohibits
exclusive contracts between carriers and building owners. This
order sent an extremely important message to building owners.
However, the order falls short because the FCC didn't take the
next step of imposing penalties on building owners that deny or
delay access to their buildings.
With regard to access to rights-of-way, I simply say our
competitors who purchased unbundled network elements from
incumbents talk a lot about the last mile. Time Warner Telecom
also needs access to the last mile, but rather than leasing it
from the incumbents, we prefer to build it to the customer. We
are willing to pay for this access and to comply with
reasonable rules for access to the right-of-way, but too often
municipalities attempt to charge unreasonable rates and put
unreasonable terms and conditions on us.
In closing, I would like to leave you with some thoughts to
give you some perspective.
Last year, Time Warner Telecom had $487 million of total
revenue. It took Verizon 2.8 days to bring in the same revenue.
It took Bell South 6.9 days. It took SBC 3.5 days to bring in
the total revenues that we brought in in 2000. And keep in
mind, we're one of the larger CLECs out there. Honestly, I
can't quite understand why they keep looking to Congress for
Now, if you ever question whether or not the RBOCs would
use this market power, remember, time and money are on their
side. Their weapon is delay. They can call it process delays. I
call it strategic incompetence. Either way, it really doesn't
matter because it still serves them well to hurt our business.
This has already contributed to the near downfall of an
entire sector. RBOC provisioning delays and regulatory agency
delays in responding precisely, in my humble opinion, are one
of the leading factors that have hurt the DSL industry. The
RBOCs were able to delay provisioning and dramatically decrease
pricing to their end users, which resulted in higher costs,
lower revenues, and margins that were choked for the DSL
companies. They really didn't have a chance. Now that the
competition has been stifled, the RBOCs are raising their
rates. Time and money are on their side, but not on ours.
So, once again, I would like to stress the importance of
compliance with the 14-point checklist of the Telecom Act,
objective performance measures, and punitive penalties for
failure to meet those performance measures. The entire
competitive sector's ability to meet the goals of our business
plans are dependent upon vigorous enforcement of the Telecom
[The prepared statement of Ms. Herda follows:]
Statement of Larissa Herda, President and CEO, Time Warner Telecom Inc.
Mr. Chairman and Members of the Subcommittee:
On behalf of Time Warner Telecom Inc. I would like to thank the
committee for the opportunity to talk to you today about the status of
local phone competition. My name is Larissa Herda and I am the
President and CEO of Time Warner Telecom (``TWTC ''), which has grown
to be one of the largest new competitive entities in the
telecommunications industry. We exist today because of the pro-
competitive policies adopted in the Telecommunications Act of 1996. We
are unique in a number of respects.
TWTC builds its own local and regional fiber optic networks and
delivers ``last-mile'' broadband data, dedicated Internet access, and
voice services to small, medium and large businesses. We provide
service to a diverse customer base across the country. The Company
currently serves business customers in 39 U.S. metropolitan areas. We
plan to begin offering service in five other metropolitan areas in
2001. (See attached map) Since the passage of the 96 Act, we have
invested approximately $2.0 billion in building a network
infrastructure and have created nearly 2,500 high-tech jobs nationwide.
My response to the question ``Is the Telecom Act promoting
competition?'' is a qualified yes. To put it in terms that I am
familiar with, it's a good business plan, but the execution of the plan
needs improvement. And where improvement is needed is in enforcement.
I. Time Warner Telecom Inc. is Providing Facilites-Based Competition
Just as Congress Envisioned
Time Warner Telecom began in 1993 as part of the Time Warner
Entertainment Limited Partnership. The focus of the Company was to
provide cable/phone services to residential and business customers
using hybrid fiber coax (HFC) technology. After an extensive pilot
program to test residential service, Time Warner Communications evolved
into a company that offers business phone services over fiber-optic
In 1997, the Company added voice circuit switches and began
operating as a business CLEC. In 1998, Time Warner Communications
became a separate entity from Time Warner Entertainment and began to
operate as Time Warner Telecom Inc. During 1999, TWTC became EBITDA
positive, acquired an ISP, built a national IP backbone and went
public, offering 18,000,000 shares on the NASDAQ exchange. We trade
under the symbol: TWTC. In August 2000, TWTC successfully bid, during
an open auction bankruptcy proceeding, for most of the assets of GST
Telecommunications. This allowed us to double the size of the company
and extend our operating footprint throughout the Western United
States. By end of 2001, TWTC plans to offer telecommunications services
over its own fiber optic networks in 44 markets in 21 different states.
We are very proud to carry the Time Warner name. As I described
earlier, TWTC was initially created as division of Time Warner
Entertainment. While Time Warner Inc, now AOL Time Warner, owns 44% of
Time Warner Telecom Inc. stock, Time Warner Telecom Inc. is an
independently owned and operated company. The most important point,
from both your perspective and mine, is that we have no financial
backing from AOL Time Warner. We obtain the capital we need to do
business the same way the rest of the independent CLECs obtain theirs,
through debt and equity offerings in the financial markets and from
operating cash flow.
During a time when the news is full of stories on bankruptcies and
employee layoffs we are expanding our network and hiring new people. In
1996 TWTC had 500 employees, the majority of them located in the
corporate headquarters in Littleton, Colorado. Today we have
approximately 2500 employees and by the end of 2001 will be providing
service and employing people in 21 states. Time Warner Telecom's growth
plans focus on geographic expansion, extension into new market segments
and development of new data and Internet-based products and services.
Our success to date is the result of building and deploying our
extensive local and regional fiber optic networks all the way to the
end user's building and providing a diverse physical alternative to the
incumbent LEC. Our expertise is in selling complex network services
that customers want and need over these networks. We execute and
deliver on a sound business plan. We provide high quality broadband
service to a diverse segment of the small, medium and large businesses
in the country. In 1996 we had already constructed 5000 route miles.
Today that has almost doubled to approximately 9800 route miles. TWTC
has constructed more route miles than any other local competitive
carrier in the U.S. The fiber optic infrastructure we have built is
important because--it allows us to continue to layer more products and
services on our network. One of the distinguishing characteristics of
our network is that we have been laying this fiber in metropolitan
areas; and the networks are large, averaging 400 route miles per city.
We're building fiber where it is needed most, the last-mile. However,
it is important that Congress recognize that the largest competitor in
all of our markets, the local ILEC, has the ability to stymie our
growth. Vigorous enforcement of the Act is the only elixir to the
poison pill of anti-competitive behavior and abuse of market power.
This is how we do business. In every city that Time Warner Telecom
lays fiber, the sales staff is required to prove in advance that there
is business to be had. We don't build a network just to show growth, we
build a network to provide a service that is desired. This serves our
customers and our shareholders well because it ensures our continued
viability in the marketplace. And I can assure you that there is demand
for the service we provide. In many cases we supplement the services
that the incumbent carrier provides. Often, companies will come to us
for their new business or for a specific portion of their telecom
needs. As we prove our ability to provide this service, they give us
more and more of their business.
The fiber optic networks we have built allow us to offer our
customers any technology, product or service solution. With virtually
unlimited bandwidth, we can meet the rapidly changing demands of our
customers. Our networks allow us to provide voice and data
telecommunications services to a diverse customer base including public
schools, private schools, universities, health care facilities, banks,
the high-tech community, government agencies and military
installations, law firms, public utilities, many small businesses,
Internet Service Providers, insurance companies and most interestingly
many of the telecommunications companies operating in the U.S.
ARIZONA: Phoenix, Tucson
COLORADO: Denver (2001)
CALIFORNIA: San Diego, Los Angeles/Orange County, Santa Barbara,
San Luis Obispo,
Bakersfield, Fresno, San Francisco, Oakland, Sacramento
FLORIDA: Orlando, Tampa
GEORGIA: Atlanta (2001)
ILLINOIS: Chicago (2001)
MINNESOTA: Minneapolis (2001)
NEw JERSEY: Northern Jersey City
NEw MEXICO: Albuquerque
NEw YORK: Albany, Binghamton, New York City, Rochester
NORTH CAROLINA: Charlotte, Greensboro, Raleigh, Fayetteville
OHIO: Cincinnati, Columbus, Dayton
SOUTH CAROLINA: Columbia (2001)
TEXAS: Austin, Dallas, Houston, San Antonio
WASHINGTON: Seattle, Spokane, Vancouver
III. The Key to Successful Implementation of the Telecom Act is
TWTC has not just spent the last five years building networks. We
have also been engaged in legal and regulatory battles across the
nation for the right to do so. We are making progress in breaking the
monopoly stranglehold, but it has not been quick and it has not been
easy. The 96 Telecom Act provided one method for transitioning the
local telephone market from a monopoly to a competitive marketplace:
The ``carrot'' of in-region long distance entry for the incumbents if
and when they open their local networks to competition. The simple fact
is, no company wants to lose business. This creates strong incentives
for the monopoly provider to act in anti-competitive ways. But, in
order to have a competitive market, the monopoly must lose customers to
new entrants. Company policies are driven by financial decisions. It is
not in the incumbent's financial interest to cooperate and assist their
competitors in taking their customers. But, without this very activity,
competition will not exist. That is the brilliance in the 96 Act. By
requiring the incumbents to meet the 14-point checklist prior to
entering the long distance market, Congress has given the RBOCs a
financial incentive to cooperate.
INTERCONNECTION WITH THE RBOCS NETWORK
I would like to provide an example of how this has worked for TWTC.
When Southwestern Bell Telephone first applied for 271 relief in Texas,
TWTC was experiencing an unacceptable amount of call blocking because
TWTC and SWBT did not have the right quantity of interconnection trunks
connecting the two networks. Through months of negotiations with SWBT
under the supervision of the Texas PUC, a set of performance standards
was created. These standards clearly outlined the responsibilities of
both companies. TWTC had the responsibility of providing accurate
forecasts for the amount of interconnection trunking it would require
over the year. SWBT was required to plan for that amount of trunking
and if TWTC ordered trunks within its forecasted amount, SWBT was
required to cooperate in the installation of those trunks in designated
intervals. If SWBT fails to meet its end of the obligation, fines are
assessed. If TWTC fails to meet its end of the obligation, SWBT is not
required pay fines if it does not meet the installation intervals and
TWTC takes risks of not having the capacity to add new customers to its
As long as the CLEC and ILEC companies have the right amount of
trunks in place, customers on both networks can make calls without
experiencing call blocking. However, it is clearly in SWBT's best
interest not to install trunks in a timely manner. If they fail to do
this the quality of TWTC's service is severely diminished because
customers cannot make calls and TWTC's overall business suffers because
we cannot grow the business. The 271 process, through performance
measures and penalties, provided SWBT with the financial incentive it
needed to get the job done. We needAs our business grows and we add
more and more customers to our network, SWBT will have more of a
natural or ``market-based'' financial incentive to ensure that adequate
trunking exists between it and its competitors. If it fails to do so, a
larger percentage of its customers will suffer from poor quality of
service. Because of the nature of the marketplace and the fact that
until 1996 SWBT had all of the local phone customers, trunking problems
today impact a very small percentage of their customer base but a large
percentage of ours.
Government intervention and regulation are necessary until a
competitive marketplace exists to replace that regulation. In the long
run, it is in everyone's best interest to see this occur. Until it
exists, government must stand ready to supply the incentives that the
BARRIERS TO CONSTRUCTION
In order for facilities based competition to exist, companies like
Time Warner Telecom must be able to negotiate with municipalities and
building owners to gain access to the rights of ways and buildings in
order to lay fiber and bring that fiber to our customers. Our main
competitors, the incumbent LECs already have agreements or have been
allowed in without agreements. One of the more unfortunate results of
the 96 Act is that cities and building owners are attempting to control
the pace of competition by extracting unreasonable rates, terms and
conditions for access to a critical pathway to the customer. We are
willing to pay for access and meet specific terms of entry; we just
want them to be fair and reasonable.
Chairman Pat Wood of the Texas Public Utility Commission coined one
of my favorite phrases, ``access to the last foot.'' In order to serve
customers with our own facilities, we must obtain access to the
buildings where they conduct business. The incumbents were given access
in most cases without having to contract with the building owners for
rates, terms and conditions. It is our belief that the FCC has the
authority today to require fair and non-discriminatory access to
buildings so that providers can bring the benefits of competition to
businesses in multi-tenant buildings. Last October, the FCC adopted an
order that prohibits exclusive contracts between carriers and building
owners. This order sent an extremely important message to building
owners. However, the order falls short because the FCC did not take the
next step of imposing penalties on building owners that deny or delay
access to their buildings.
ACCESS TO RIGHTS-OF-WAY
Because of our relationship to Time Warner, our initial ability to
access rights-of-ways in municipalities may not have been as difficult
and time consuming as for some other CLECs. But as we have been
expanding into areas where Time Warner Cable is not in business we face
many of the same obstacles that our competitors have been complaining
about. Competitors purchasing unbundled network elements from the
incumbents talk a lot about access the lastmile. TWTC also needs access
to the last mile, but rather than leasing it from the incumbents we
prefer to build to the customer. We are willing to pay for this access
and to comply with reasonable rules for access to the rights-of-way.
But too often municipalities attempt to charge unreasonable rates and
put unreasonable terms and conditions on us.
To ensure that competitors are able to gain access to the necessary
rights-of way to provide service, Congress should consider amending the
Act to give the FCC the ability to ensure fair and consistent public
policy by establishing non-discriminatory access on a competitively
IV. Description of Differences in Local and Long Distance Markets
Importance of Growth in Local ``Last Mile'' Markets
I believe the Act as written, if vigorously enforced, provides the
tools necessary to ensure a successful transition from a monopoly
environment to a competitive environment. TWTC is a new entrant in both
the local and the long distance market. Our experience entering the
local market has been very different from our experience entering the
long distance market. To use Ohio as an example, it took TWTC more than
$1 million and 2 years to obtain the certification and interconnection
agreements necessary to enter the local market. This time and expense
does not take into account the huge capital investment required to
construct facilities. In sharp contrast, it took $2000.00 and 30 days
to obtain approval to offer long distance service in Ohio.
We have spent considerable time and money entering the local
markets in states across the nation. It took on average an entire year
(often longer) to obtain the required certificates and negotiate the
interconnection agreements and obtain the access to rights-of-way that
must be in place prior to our ability to provide service. In sharp
contrast, getting into the long distance market was a breeze. We didn't
have a network in place so we contracted with a provider to resell
theirs. There were five different companies bidding for our business.
Once we decided on an underlying carrier, we filed tariffs and filled
out simple application forms and we were quickly in the long distance
business. It was a completely different experience from the difficult
and protracted negotiations required to obtain an interconnection
agreement with the local monopoly.
I would like to put this in perspective, focusing onthe goals of
Time Warner Telecom's business plan and the goal of the 96 Telecom Act.
TWTC wants to provide the highest quality broadband telecommunications
service to its customers by building its own network. By providing
broadband local telephone service, TWTC is providing the `last mile' of
the broadband network. For well over a decade companies have been
building broadband long haul or long distance networks. While I
appreciate the RBOCs desire to be able to offer along distance product,
that product is available to customers and carriers today on a
competitive basis. In order for consumers to truly enjoy the benefits
of a broadband network and truly competitive pricing, we must have
competition at the local level. The only true way to incent the RBOCs
to provide their customers with broadband telecommunications service is
by ensuring that if they don't, there is another carrier in the
marketplace that will. Our ability to meet the goals of our business
plan is contingent upon vigorous enforcement of the Telecom Act
I agree that today we clearly have a ``Digital Divide.'' But the
divide exists between the long distance broadband fiber optics networks
and the local narrowband copper networks. The only bridge that will
connect this divide is competition. Time Warner Telecom is committed to
building broadband networks in the local markets. Faced with this
direct competition, the incumbents will have no choice but to meet us
in the marketplace by deploying new facilities or finding more ways to
expand the ability of their copper wires to provide broadband services.
Congress drafted the right business plan in 1996. Now the FCC and
state PUCs need to vigorously enforce that business plan. I
wholeheartedly support the statements FCC Chairman Powell recently made
before the House Commerce Committee: The enforcement measures that
state PUCs and the FCCs employ must be meaningful. They must be
something more than just the ``price for doing business.'' It is naive
to expect the incumbent phone companies to develop policies and
procedures that will allow their competitors to steal their customers.
But without competitors taking customers away from the local monopoly,
you will not have competition.
Again, I very much appreciate to opportunity to appear before you
today, and I welcome the opportunity to answer any questions that you
may have. Thank you.
Chairman DeWine. Miss Herda, thank you very much.
STATEMENT OF JAMES D. ELLIS, SENIOR EXECUTIVE VICE PRESIDENT
AND GENERAL COUNSEL, SBC COMMUNICATIONS, INC.
Mr. Ellis. Mr. Chairman, Senator Kohl, thank you for the
opportunity to appear and testify.
There are many subjects of the Telecom Act that would
certainly be worthy of discussion today, but I'm going to focus
on what I think, from my perspective, is one of the most
important--that is, whether my company has met its obligations
to open the local network to assist our competitors getting
into business and, ultimately, taking part of our business.
That is exactly what SBC has done.
You have heard today suggestions that we have interfered
and our market is not open. Some of the testimony is to that
effect. Numbers have been quoted as to the extent of
competition. But, I think if we look at the basic facts--and I
speak only for SBC's territory--it would demonstrate that we
have opened our markets. We spent billions of dollars to
comply. We continue to spend millions of dollars to comply.
We started with a wholesale organization that had six
people in 1996. We now have 6,000 employees, and their sole
purpose in being is to serve the growing needs of our
competitors in the wholesale business.
We have almost 2,000 contracts with competitors. Those
contracts let them lease parts of our network, they let them
resell our services, exchange traffic with us. We have another
500 contracts in the process of being negotiated. We have
10,000 co-location facilities arrangements in which our
competitors come into our central offices, put there facilities
in, and compete with us. We have eight million OSS orders of
our competitors that were processed last year, eight million.
We have exchanged 200 billion minutes of traffic. We have
provided almost three million trunks to our competitors for
them to provide their services. We have seen the so-called UNE-
P in some markets grow by 500 percent last year alone. We have
hundreds of competitors, large and small, operating in
virtually every one of our markets.
I think perhaps most telling, we started with an industry
that had zero exchange lines in 1996. Today, in our territory,
they have obtained ten million lines. Ten million. By any
stretch of the imagination, you can't say our markets are not
open. If competitors want to come in and compete, they can,
where they choose and when they choose.
Which brings me to the second point. We have heard a lot
about residential competition, or the lack thereof. And that's
correct. About 80 percent of those ten million lines are
business. But to any observer of our industry--and you've heard
it discussed here today--that's not surprising.
Mr. Dorman goes where the money is. For 100 years, the name
of the game in telecom in this country was to subsidize and
keep affordable the local rate. The Telecom Act didn't change
that. The day before the basic rate in Texas, for example, was
about ten dollars, before taxes and the universal service
charges, about ten dollars. And it is still ten dollars after
100 years. It hasn't changed. The competitors go where the
money is. They go after the more lucrative markets, and I don't
But the Act anticipated that. It recognized that problem,
that the old system of implicit subsidies was not sustainable.
The Act recognized it and directed the FCC to address that and
make those subsidies explicit. They gave them 15 months. Now,
you can say whether it was to complete the whole thing in 15
months, or get it started. But we're over 5 years from the
passage of the Act and nothing significant has happened in that
regard. We still have the same system of implicit subsidies. As
long as we do, as long as we do, they will be disincented to go
after the residential customer.
The one exception, the one exception is where we have
entered the long distance market. When that happens, they come
in. The statistics are in my testimony and in Chairman Wood's.
They enter the market to go after that bundle and to hold that
long distance customer.
The other thing I would tell you, the exact systems that
are used, the facilities, the wholesale group, the processes,
are equally available for whether you want to use them for
business or residence. But they follow the money, and that will
continue, until the subsidy.
So if somebody says there isn't sufficient residential
competition, urge them to call the FCC. Ask them to move and
make those subsidies explicit. Level that playing field.
One other thing I would like to mention is on advanced
services. In the last few days, I have seen nothing but
television ads on both sides on that. It's an important
subject. In advanced services, I'm not talking about the legacy
network of the telephone company. We're talking about four ways
to get to the high-speed Internet. That's what I mean. That's
what it's all about, fast access to the Internet.
There are four ways to get there: cable modem, DSL,
wireless, and satellite, four technologies offering the same
service. That's the reality of the world today. Each of those
technologies requires spending new money. It's not about the
old. It's new money investing, competing for who is going to
win that customer.
You wouldn't know it from the ads, and you wouldn't know it
from Mr. Dorman's testimony, but today, AT&T and its cable
modem compadres provide 75 percent of that high-speed access,
75 percent. The other three technologies, DSL, wireless and
satellite, are 25 percent.
Every analyst will tell you there is one market. It's high-
speed access. They are the dominant provider. It is the future,
I agree with them on that. But what they want is to have a
system of asymmetric regulation where the only provider that is
subject to regulation is DSL. They have absolutely no service
regulation on cable modem, none whatsoever. They want to extend
the legacy network regulation on to DSL.
I'm here to tell you, whether it be as a lawyer or
businessman, no incumbent is going to invest in DSL and enter a
market where they have the burdens of regulation and our direct
competitor is totally free of regulation. It doesn't have to be
that way. We have a model that's been alluded to, and that's
the wireless model. We have four or five competitors who spend
their own money, invest their facilities, operate
independently, not dependent on anybody's network, and they
compete head to head, with minimal or no regulatory
intervention. We have the most competitive wireless market in
the world. I hope that the Commission will follow that model,
and if they don't, I hope the Congress will grant that relief.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Ellis follows:]
Statement of James D. Ellis, Senior Executive Vice President and
General Counsel, SBC Communications Inc.
Good Morning. My name is James D. Ellis. I am of Senior Executive
Vice President and General Counsel of SBC Communications Inc. I am
pleased to be here this morning to discuss the Telecommunications Act
of 1996 and the impact it has had on competition in the local exchange
markets throughout SBC's thirteen state region. Although the
fundamental goal of the 1996 Act--to open all telecommunications
markets to competition and to do so in a deregulatory, marketbased,
competitive manner--is still to be achieved, there is simply no
question that the impact of the 1996 Act on local competition has been
II. SBC Has Opened Its Local Markets
Empirical evidence demonstrates conclusively that SBC has opened
its local markets to competition. Simply put, SBC has done an
outstanding job fulfilling its obligations under the 1996 Act to open
local markets to competition. The FCC has already granted SBC long-
distance authority in Texas, Kansas, and Oklahoma. By approving SBC's
applications for these states--the most for any Bell company the FCC
found that SBC has taken the statutorily required steps to open its
local exchange markets to competition. SBC has instituted the same
market-opening systems and processes throughout its region.
SBC has spent more than three billion dollars in developing systems
and processes to make it possible for competitive local exchange
carriers (``CLECs'') to enter and compete in the market for local
telecommunications services. It has devoted enormous staff and
technical resources in order to satisfy each of the 14point checklist
obligations that Congress identified in section 271 as a prerequisite
for granting long-distance relief. The facts demonstrate that SBC has
made each of the 14 point checklist items available to CLECs and that
CLECs have taken advantage of all of those checklist items.
For example, as of the end of March 2001, the SBC operating
companies have signed more than 1,860 interconnection agreements with
CLECs and those CLECs have captured more than 10 million lines
throughout the SBC region. As of April 2, 2001, SBC has provided more
than 2.9 million interconnection trunks to CLECs for the transmission
and routing of telephone exchange service and exchange access. SBC has
provided CLECs with 10,496 physical collocation arrangements (and over
600 virtual collocation arrangements), and there are CLECs collocated
in 1,346 of its wire centers. Since the beginning of 1998, SBC has
processed more than 18.9 million CLEC orders for unbundled network
elements. And while SBC has provisioned more than 1.2 million stand-
alone loops and more than 7,780 stand-alone switch ports, it has
provided more than 1.3 million UNE-Platform loop/port combinations.
As of the end of March 2001, there were more than 3.45 million
business listings in SBC's E91 1 database and more than 886,000
residential listings.\1\ The total number of CLEC end-user white pages
listings now totals over 4.2 million entries. Over 3.6 million
telephone numbers have been converted (i.e., ported) from SBC to
facilities-based CLECs. And CLECs are reselling over 1.69 million SBC
access lines. Since January 1997, excluding ISP traffic, SBC and CLECs
have exchanged over 210 billion local minutes of use.\2\
\1\ This number substantially understates the actual number of
facilities-based lines served by CLECs in SBC's region. For example,
E91 1 listings only represent those customer lines from which outbound
calls can be made. As a result, business customers such as call
centers, reservationists, telemarketing centers, and Internet providers
will have few of their access lines represented in the E91 1 database.
In addition, when a number is ported from SBC to the new serving CLEC,
the number would continue to appear as SBC's line in the E911 database.
Finally, CLECs themselves may make errors in entering E911 listings,
and SBC does not 'police' those entries to ensure that they are
accurate and complete. For all these reasons, the listings in the E91 1
database provide a very conservative estimate for the number of
business and residential listings served by facilities-based CLECs. The
true number of CLEC facilities-based access lines throughout SBC's
region can only be estimated, but it probably falls between 4.2 million
and 9.3 million lines.
\2\ Three years ago, an analyst recognized that competitive local
exchange carriers (``CLECs'') had signed up more new customers in that
quarter than the incumbent local exchange carriers had--something that
took MCI and Sprint more than ten years to accomplish in the long
distance market. See J. Grubman, et al., Salomon Smith Barney, CLECs
Surpass Bells in Net Business Line Additions for First Time, May 6,
Figures provided by AT&T to the FCC also demonstrate that CLECs are
aggressively competing in the telecommunications market. According to
its own estimates, AT&T paid approximately $106 million to CLECs in
access charges between January and December 2000.\3\ The FCC has
determined that AT&T paid a weighted average of 4.33 cents per access
minute,\4\ meaning that CLECs originated and terminated last year over
2.4 billion long-distance minutes for AT&T alone.
\3\ Seventh Report and Order and Further Notice of Proposed
Rulemaking, Access Charge Reform; Reform of Access Charges Imposed by
Competitive Local Exchange Carriers, CC Docket No. 96-262, Sec. 22 (FCC
Apr. 27, 2001).
\4\ Id. Sec. 48, Table 1.
Because the FCC and state regulators have made it far more
profitable for CLECs to serve business customers than residential
customers, CLECs in SBC's region have concentrated their efforts by
competing in the higher profit business market. Historically, of
course, residential rates have been kept artificially low in order to
guarantee universal service. By contrast, business rates have been kept
higher in order to subsidize the lower residential rates. That CLECs
have chosen to concentrate on serving business customers--where the
potential profit is much greater--is entirely rational, and nearly 80%
of the CLEC access lines in SBC's region are in the business market.
III. Local Competition and the Granting of Long-Distance Authority
There is simply no question that local competition is directly
related to longdistance relief--the closer that SBC has come to
providing a bundled package of local and long-distance services, the
more intense has been the commitment of traditional long-distance
providers to enter the local market. SBC can now provide customers in
Texas, Kansas, and Oklahoma with a single source for local and
longdistance service, and this has put significant pressure on the
competition to provide lower prices, enhanced services, and greater
\5\ ``We need only review the state of competition in New York and
Texas to know the Act is working.'' William E. Kennard, Chairman. FCC.
Statement Before the Committee on the Judiciary United States House of
Representatives on H.R. 1686--the ``Internet Freedom Act'' and H.R.
1685--the ``Internet Growth and Development Act'' (July 18, 2000),--at
http://www,house.gov/judiclary/k-ennO7l8.htm (``Kennard Testimony').
SBC filed its Texas 271 Application with the FCC in January 2000.
Approval was granted at the end of June, and SBC began offering long
distance service to subscribers in Texas on July 10, 2000. As Table 1
illustrates, the growth in local competition in Texas since SBC filed
its application has been phenomenal:
AT&T offers its Local One Rate' promotional service only
to customers in Texas and New York, the only states where the incumbent
Bell Operating Company is in a position to compete seriously for long-
distance market share. The Local One Rate' plan bundles
local and long distance into one package offering, and AT&T promoted it
through direct mail and telemarketing in Austin, Dallas, Houston, San
Antonio and South Texas, offering 60 minutes of free long distance to
consumers as an incentive to choose AT&T Local One Rate' for
local and long distance service. Most importantly, the AT&T Consumer
Sales & Services Contacts for AT&T Local Service list only two
geographical options for this service: New York--AT&T Local One Rate;
and Texas--AT&T Local One Rate. No other states are apparently given
these promotional alternatives.\6\
\6\ Three webpages may be consulted for this information: AT&T, For
Home:Customer Service Numbers, AT&T Residential Service, http://
www.att.com/help/callusihome/; AT&T,--As Advertised: AT&T Local One
Ratessm' New York, http://www.att.com/local--service/ny/;
and AT&T, As Advertised: AT&T Local Service in Texas, http://
www.att.com/local-service/tx/. Interestingly, the AT&T Local One Rate
promotion began in New York shortly before the FCC granted Bell
Atlantic permission to offer long distance in New York. As of February
5, 2001, this promotional offering was not available in any other
In July 2000, coincident with SBC's entry into the Texas long
distance market, AT&T also reduced its long distance rates in Texas
(offered through the Texas One Rate Plan) by greater than 50%--from 15-
cent a minute to 7-cent a minute. In addition, a Wall Street Journal
article on November 30, 2000 \7\ described AT&T's plan to launch a
separate promotion involving local cable telephony:
\7\ D. Solomon, AT&T to Offer Free Cable Telephony in Campaign to
Hit Subscriber Goals, Wall Street Journal at A3 (Aug. 30, 2000).
at&t to offer free cable telephony in campaign to hit subscriber goals
AT&T Corp., scrambling to meet a year-end promise to Wall Street to
sign up thousands of new cable-telephony customers, plans to
offer as many as five months of free local and longdistance
service to people who subscribe.
The new marketing campaign, which is expected to begin in a number of
big cities on Friday, is aimed at boosting the number of AT&T
consumers for ``cable telephony,'' industry parlance for phone
service over cable-TV lines. The campaign offers free
installation and as man as five months of free local and long-
distance hone service.\9\
Recently, the cable company Cox Communications, Inc. announced
that, in the first quarter of 2001, it had ``experienced vigorous
growth in residential telephone service, adding about 4,000 customers
per week by the end of March, achieving 11 % penetration of telephone
ready homes.'' \8\ In SBC's region, Cox offers telephony service in San
Diego and Orange County, California; Oklahoma City, Oklahoma; in West
Texas; and in various towns in Connecticut.
\8\ Press Release, Cox Communications Announces First Quarter
Financial Results for 2001: Solid Growth in New Services Fuels Healthy
Financial Results (Apr. 26, 2001), at http:// biz.yahoo.com/bw/010426/
On March 5, 2001, two days before Southwestern Bell's scheduled
launch of long-distance service in Kansas and Oklahoma, AT&T announced
a special deal exclusively for its longdistance customers in Kansas and
Oklahoma. AT&T customers in these two states automatically received a
special AT&T customer service greeting while placing a call and thirty
free minutes of long-distance calling. The promotion in Oklahoma and
Kansas by AT&T ``is part of the first broader application of this
innovative technology.'' \9\ And last week, Birch Telecom Inc.
announced plans to re-enter the residential markets in both Kansas and
Oklahoma, offering a bundled package of local and long-distance
\9\ See AT&T Press Release, AT&T Long Distance Customers in Kansas
Get the Message: Thanks for Your Loyalty, Mar. 5, 2001, at http://
www.att.com/press/item/ 0,1354,3701,OO.html; AT&T Press Release, AT&T
Long Distance Customers in Oklahoma Get the Message: Thanks for Your
Loyalty, Mar. 5, 2001 at http://www.att.com/press/item/
\10\ See Birch to Enter Residential Market Again, Kansas City Star,
Apr. 24, 2001; Birch Telecom Offers LongDistance Service, Tulsa World,
Apr. 24, 2001.
Not to be outdone, WorldCom responded to SWBT's Texas 271 approval
with the introduction of three new rate plans: MCI WorldCom 7-cent
Anytime; 9-cent Anytime and WorldCom Weekends. Effective September 7,
2000 WorldCom also began offering Texas consumers different options
(the One Company Advantage 200 and One Company Advantage 7 plans) for
bundling local, local toll and long distance calling, as well as
discounts on calling features.
The benefits of granting long-distance relief to the BOCs are
clearly not limited to enhanced long-distance competition. Indeed, the
granting of section 271 relief has led all competitors to increase
substantially their commitment to local competition. SBC and Verizon,
together with their local competitors, have begun to invest even
greater sums in advanced services and in upgrading the local
infrastructure in those states where section 271 authorization has been
granted. Verizon has invested approximately $1.5 billion in Western New
York during the past year, including 150,000 miles of fiber optic
cable, more than 90 switching centers, and more than 800,000 access
lines.\11\ Last year in Texas, SBC invested more than $1 billion to
upgrade its central offices, expand Advanced Intelligent Network
capacity, and install 2,600 miles of fiberoptic cable.\12\ In addition,
through SBC's $6 billion broadband initiative--Project Pronto--SBC's
DSL service was made available to an additional 900,000 Texas
residences and businesses, bringing broadband service at the start of
2001 to a total of 46 cities in Texas.\13\ To upgrade its networks and
central offices, and lay new fiber-optic cable, SBC last year invested
over $230 million and $135 million in Kansas and Oklahoma,
respectively--this includes 300 miles of new fiber optics in each
\11\ Verizon Fiber Network Wires Buffalo Market, American City Bus.
J., Jan. 15, 2001, at 11 (``Competition is driving this investment with
more and more companies vying for service.'').
\12\ See SWBT Press Release, Southwestern Bell Invests $1 Billion
in Network Enhancements, High Tech Product Offerings to Ensure State-
of-the-Art Communications for Texans in 2001, Feb. 8, 2001, at http://
\13\ See id.
\14\ See SWBT Press Release, Southwestern Bell Invests Millions in
Network Enhancements, High Tech Product Offerings to Ensure State-of-
the-Art Communications for Kansans in 2001, Mar. 2, 2001,--at http://
01,OO.html?NID=; SWBT Press Release, Southwestern Bell Invests Millions
in Network Enhancements, High Tech Product Offerings to Ensure State-
of-the-Art Communications for Oklahomans in 2001, Feb. 20, 2001,--at
Along with discounts on local/long-distance bundles and reduced
intrastate rates, the incumbent interexchange carriers are also
leveraging advanced technologies. According to former FCC Chairman
Kennard, ``We have witnessed a dynamic market for broadband services
develop as a result of the opening of local markets in Texas and New
York.'' \15\ AT&T recently announced major improvements to its networks
serving several Texas cities, including upgrading its fiber network to
OC-192 (ten gigabits per second).\16\ And AT&T is using Texas as one of
its test grounds for cable telephone service.\17\ All three of the
major interexchange carriers are implementing fixed wireless networks
to provide broadband access and residential telephone services. In
parts of Texas, AT&T uses a fixed wireless system to offer customers a
local/long-distance package.\18\ In Dallas, MCI WorldCom offers a new
alternative to wireline voice and Internet service with Multichannel
Multipoint Distribution Service technology.\19\ And Sprint has
developed a wireless Internet service, using line-of-sight technology,
that debuted this past summer and is already available in Houston.\20\
\15\ Kennard Testimony, supra n.5.
\16\ See AT&T Press Release, AT&T Offers Austin Business Customers
Local Service Choice, Dec. 5, 2000 (``In a move to enhance the suite of
local voice and data services it offers business customers, AT&T has
completed a $10 million enhancement of its high-speed local network
serving the Austin area.''),--at http://www.att.com/press/item/
0,1354,3527,00.html; AT&T Press Release, AT&T Offers San Antonio
Business Customers Local Service Choice, Dec. 5, 2000 (``AT&T has
completed an $1 1 million enhancement of its high-speed local network
serving the San Antonio area. The company is aggressively targeting the
lucrative $110 billion-plus local services marketplace nationwide with
promotional offers.''), at http://www.att.com/press/item/0,
1354,3526,OO.html; AT&T Press Release, AT&T Offers Houston Business
Customers Local Service Choice, Nov. 29, 2000 (``AT&T has completed a
$100 million enhancement of its high-speed local network serving the
Houston area''),--at http://www.att.com/press/item/0,1354,3501,00.html;
AT&T Press Release, AT&T Offers Dallas/Fort Worth Business Customers
Local Service Choice, Oct. 19, 2000 (``AT&T is completing a $28 million
enhancement of its high-speed local network serving the Dallas and Fort
Worth metroplex''), at http://www.att.com/press/item/
\17\ AT&T Broadband spokeswoman Sarah Duisik commented on how AT&T
has spent nearly $200 million in Dallas to upgrade cable networks to
offer two-way transmission. See Jim Landers, Faster, Faster: Americans
Clamor for HighSpeed Net; FCC to Release Data on Spread of Broadband
Services, Dallas Morning News, Aug. 3, 2000, at 22A.
\18\ Technology Briefs, Dallas Morning News, Feb. 28, 2001, at 2D
(``AT&T Corp. changed the name Tuesday of its fixed wireless service in
North Texas to AT&T Wireless Digital Broadband. The service will cost
529.35 a month for unlimited local and long-distance calls within
\19\ See MCI WorldCom Press Release, MCI WorldCom Adds Dallas to
``Fixed Wireless'' Service Trials, Apr. 5, 2000 (``MCI WorldCom today
announced Dallas as the fifth market for test cutting-edge wireless
technology which soon will offer customers a new,
competitivealternative for high-speed, broadband service. The Dallas
trial is the latest step in MCI WorldCom's overall strategic efforts to
offer high-speed, broadband services using radio spectrum designated
for an advanced technology known as Multichannel Multipoint
Distribution Service (MMDS)'') at http://www.worldcom.com/about--the--
\20\ See Tom Fowler, Sprint Has Wireless Net Access, Houston
Chronicle, Oct. 3, 2000; Sprint Press Release, Sprint Introduces New
Broadband Wireless Service to Fresno's Residential and Small Business
Customers, Jan. 23, 2001, at http://188.8.131.52/PR/CDA/PR CDA--Press
Local competition has taken hold in the states within SBC's region,
and SBC is committed to ensuring that it continues to flourish. As the
evidence from Texas, Kansas and Oklahoma makes clear, however, the key
to greater local competition is in permitting all carriers to compete
equally in all markets, giving everyone the incentives necessary to
invest in telecommunications facilities and to compete for all
Chairman DeWine. Mr. Ellis, thank you very much.
Mr. Dorman, do you want to respond?
Mr. Dorman. To the point about DSL?
Chairman DeWine. Yes.
Mr. Dorman. I think it is a fact that the cable modem has
more of the high-speed data marketplace. That is owing largely
to the fact that it started sooner. The cable companies began
providing cable modem service I think in advance of DSL
deployment in a big way in the local telephone companies.
It doesn't change the fact, however, that, in the case of
AT&T, we serve 16 million homes with our cable plant. We need
the opportunity to provide high-speed services to other
customers outside of our cable footprint. So we are pursuing
the provision of DSL service.
What concerns us is not having the ability to access DSL
services, either on the deployment ourselves--in other words,
being able to get to the local loop to provide the DSL
equipment ourselves--or having some disadvantage, inherent
disadvantage, by changing the Act's requirements for unbundling
for essential facilities.
Chairman DeWine. Let me ask a question of the whole panel.
A recent New York Times article dealt with the future of
the telecommunications industry. The article speculated that
many of the current long distance and competitive local phone
companies could potentially either fail or be acquired by the
Bell companies. That version of the future had the Bell
companies in control of the telecommunications industry in just
a few years. Obviously, the 1996 Act did not contemplate a
competitive landscape such as that described in this New York
Any comments? Let's start with you, Mr. Dorman. Get your
crystal ball out here.
Mr. Dorman. Sure. Well, if you go back to the separation in
1983 that basically spun the Bell companies off from AT&T in
settlement of the antitrust suit, I think we have to recognize
that the long distance industry, as it's been referred to, is
really a product. Long distance is a product of a more complete
telecommunications bundle. I think the fact it takes, as we've
talked here today, much longer to make progress in the local
entry than it does long distance, does create asymmetry.
I would agree with Mr. Ellis. There is asymmetry. The cost
and the time necessary--I think Verizon was granted authority
to be in the Massachusetts long distance market within the last
week or so. They were in the market the next day offering it
across the State to any of their customers.
When AT&T announced it was going to upgrade the TCI
MediaOne cable plants, we had been hard at it for 3 years. We
have spent $20 billion, and we still don't have it all done
yet. That's to 16 million homes.
I think the final point is, as former Chairman Hundt said,
vertical integration is an economic reality in situations where
you have these kinds of asymmetries. You know, there has been a
lot of speculation about that already in the industry, where
people want to accelerate their entry into different markets,
or do it in a more capital efficient way. So I don't think that
the article was suggesting something that hasn't already been
considered by some, or is completely out of the realm of the
Mr. Robbins. Mr. Chairman, let me make a couple of points
about the article that I think sort of outline the incumbent
local exchange carriers' behavior.
Yes, according to Mr. Ellis, 75 percent of broadband access
users are using the cable modem, and the reason for that is, as
Mr. Dorman just pointed out, cable did get out there in front
and provide this service, while the phone companies warehoused
the DSL technology. It wasn't until cable rolled out the modems
that the phone company said, ``Hey, we had better get with it
or we're going to lose this market opportunity.'' They were
selling second lines, they were selling ISTN, they were selling
I would give you another example of the power of incumbency
here. While there's been all sorts of talk about local rates
being subsidized, some of the ILECs have asked for pricing
flexibility so that they could decrease their local rates and
drive competitors like ourselves out of the business. So take
what Mr. Ellis says with a little bit of salt, please.
Chairman DeWine. Miss Herda.
Ms. Herda. Mr. Chairman, I didn't see the article, but I
think I understand the point.
If you had asked me 2 years ago, two or 3 years ago, who
would end up the stronger, the long distance companies or the
local companies, I don't think I would have predicted what has
occurred today. But I think what has occurred today is that you
have very significant competition in long distance services and
a lot of market share that a lot of the parties are going
Regardless of what Mr. Ellis says about all of the
competition that's going on in his marketplace, there truly
isn't open competition going on. They still have the vast
majority of the marketplace and, without enforcement, it's
going to stay that way.
Yes, that article could be true if that, indeed is what
occurs. I do believe, though, that if there is enforcement, if
the Congress and the FCC is vigilant, that article does not
have to be reality.
Chairman DeWine. Mr. Ellis.
Mr. Ellis. Senator, there is a lot I want to respond to. I
would just start out by saying, with respect to the advanced
services market, I don't think there's a single analyst who has
a different view but that cable modem will be the dominant
provider of advanced Internet services for as far out into the
future as they predict it. The question is whether there's
going to be an alternative to it. They're the dominant
The allegation that were slow getting into it is kind of
ironic. We know what we've been through in the last 5 years. We
have been spending billions and devoting thousands of employees
to comply with the Act. And for somebody to come in and fault
us because we're not embarking on DSL technology as fast as
perhaps we would have liked to, that's just wrong.
With respect to the issue that Miss Herda has raised about
enforcement, to my knowledge, we don't have any problems with
Time Warner. She referred to an incident that took place in
1999 and it was worked out. Our trunk performance, for example,
over the last year, there's been no problems. So if we have
difficulties with Time Warner or with any carrier, there are
processes in place to work them out.
Your question about the merger--I think that's where we
started, about potential mergers--all I can say is this
industry is increasingly competitive. There is an increasing
globalization of the market. It would not surprise me, across
telecom, that you will see people and businesses doing exactly
in our industry what they do in others. They look for scale and
Chairman DeWine. Mr. Ellis, as part of SBC's takeover of
AmeriTech, it promised to enter the markets of other
established phone companies. The Cleveland Plain Dealer
reported in March of this year that SBC had decided to delay
First of all, is that true, and if it is, what is the
company's plans for the future?
Mr. Ellis. Under the merger conditions, we were required to
be in 15 cities, I believe on March 9th, and we're in 20
cities. We are five cities out of the 30 ahead.
What we did, we put together what is called the national
local plan before the AmeriTech merger, more than 3 years ago.
It depended directly on our ability to go to customers, major
business, small business, medium-size business, and offer a
complete package, particularly data.
No one, I submit, would have predicted that almost three-
and-a-half years from when those plans were put together we
would be in only three States. It became clear to us that we
could not--that it did not make sense to fulfill our very
ambitious plans until we had that capability.
We are meeting our requirements. We are in a holding
pattern in terms of those cities. We're not going to spend the
money that we had originally intended until we got data and
primarily long distance relief. It's as simple as that. Nobody
would have anticipated--Just like no one would have anticipated
that here we are, 5 years plus after the Act, and there are
five States that have passed the 271 test. Nobody would have
predicted. And we didn't predict it would be three-and-a-half
years and there would only be three of our States.
Chairman DeWine. Senator Kohl.
Senator Kohl. Thank you, Mr. Chairman. Senator Leahy is not
able to attend, but he asked that his statement be placed into
Chairman DeWine. We will place that in the record.
Senator Kohl. I thank you.
Mr. Dorman, your company, AT&T, has plenty of experience
with antitrust law. I mention that because the regional local
phone companies created after the breakup of AT&T are now
engaged in several mergers of their own so that there are now
only four left, as you know. These companies maintain their
monopoly status for local telephone service and they control
over 90 percent of the service to local phone lines.
So, Mr. Dorman, what role should the antitrust laws again
play in ending the near monopoly of the incumbent local phone
companies, just as these laws were used to end the AT&T
Alternatively, many say that what we really need is to give
the FCC real enforcement power so that they can take action to
implement the Telecom Act. Is that a better route than the one
I mentioned first?
Mr. Dorman. I think you have a situation where we have
laws, and having more policemen on the street is probably a
good idea. What I mean by that is that both the FCC and the
State commissions have important roles in enforcement, and the
swiftness of that enforcement is critical. As Miss Herda said,
time and money is one the side of the incumbent.
So if we are in a situation where the only course of action
is antitrust, having recalled how long it took for the Bell
System and AT&T to be separated and settle that antitrust
action, I think that would create a situation where competition
would suffer and competitors would suffer.
But I do believe we cannot ignore the fact that there are
antitrust laws and we have to be vigilant in following those.
If there are abuses, then they should be pursued. I think, as a
business person, your first reaction in facing situations where
someone is, in your view, violating an antitrust law, is to try
to work it out, to point it out.
I think in the case of the Telecom Act we have a vehicle
that was established to identify the behavior, disincent it,
and, in fact, actually reward behavior opposite of that, with
the ``carrot'' of long distance entry. So I think a lot of that
was thought of in the building of the Act. But I don't think we
can walk away from the fact that there has to be a test in the
antitrust context that can be ignored.
Senator Kohl. Mr. Ellis, do you have an opinion?
Mr. Ellis. Senator, I have obviously not done a very good
job of trying to make the point, that our markets are open. In
some markets, Houston, Dallas, we have lost 30, 40 percent of
business lines. The very same systems that the competitors used
to take the business lines from us and provide that market are
available for residents.
I can't change the fact that people focus on the business
markets, but it is not because of a failure on my company's
part. They're there. We have lost those very lucrative
customers. They follow the money. That market is open for
competitors to come in. We have hundreds. I'll send you the
list of them. Look in a phone book. People have choices.
Now, I grant you, they are not focused on residents, and we
have talked about why. But the business market is flourishing
in every major city. There are multiple switches by Time Warner
and others. Facility-based, resale, UNE-P, the customer has
choices. It is wrong to characterize our market as a monopoly,
just as it's wrong in SBC's territory to say we have 93 or 96
percent of the market. We do not. And we certainly don't have
the most attractive customers in terms of returns. The
competitors are going right after them, for the reasons we
Senator Kohl. Miss Herda, Time Warner Telecom has not had
the problems that many other competitors have had. Why have you
achieved your successes while many of the other companies in
your industry have failed, and is there a lesson from your
successes that can be applied to other CLECs?
Ms. Herda. That sounds like a question I would get from the
Well, first of all, we have been very focused on being a
true facilities-based provider. We build fiber optic networks
and our strategy is to leverage those networks with additional
products and services and continue to get a good return on our
I think that a lot of our competitors, quite frankly, their
biggest competitor is also their biggest vendor. When you have
a situation where your biggest competitor is your biggest
vendor, in an environment where there is no enforcement, you
run into problems.
As I said in my testimony, that's what happened to the DSL
providers. It happens to us today, because even though we are
very independent from the local exchange carriers with our own
networks, we must interconnect with them.
I am happy to agree with what Mr. Ellis said earlier, that
the trunking problems in Southwestern Bell territory were taken
care of. But that's just the point. The 271 process worked
there, and we need that type of enforcement all across the
I just recently lost a $100,000 a month customer in Verizon
territory because of trunking problems. They were slow to
respond and, by the time we got all the trunks in, the customer
had already chosen another provider. Now I have to take the
trunks down because, if I don't use them in 90 days, then
they're no longer valid trunks. But I lost the customer, so we
spent a lot of money for nothing.
I think the fundamental reason why we have also succeeded
is because we have also focused on getting a return on our
investment, and our business plan works. It's very facilities-
based and we are not as dependent upon the local exchange
carriers as others are.
Senator Kohl. As you know, your company does not currently
directly serve residential customers, but you instead serve
business companies. Why is this, Miss Herda?
Ms. Herda. Actually, prior to me joining the company in
1996, we were very deeply involved in a residential pilot in
Rochester, NY, which was very successful in terms of customer
acquisition. The only problem was we couldn't figure out a way
to make money. So the company decided to leave the residential.
That was over the hybrid fiber coax cable with Time Warner
Cable at the time we were integrated within that same company.
When I came on board, I separated the company from Time
Warner Cable and refocused it on business services, where I
knew we could make money. There is limited capital out there
for businesses, and that's where we thought we could get a
better return on our investment.
I think a lot of people have testified today that there was
no money in residential service then. I really can't say if
there's money in it today. We haven't been pursuing it.
Senator Kohl. OK, Miss Herda.
Mr. Dorman, many competitive local phone companies face
difficulties gaining access to multi-tenant buildings, and many
argue that this is one important reason why their companies
have had such a difficult time competing with the incumbent
Would you favor building access legislation that would
enable phone companies to gain access to multi-tenant buildings
on the same terms as incumbent companies? Wouldn't this promote
competition by removing a major competitive bottleneck?
Mr. Dorman. I think, as Chairman Wood said earlier, the
last foot or first foot, whatever the case may be, is very
important. If a customer wants to be served by our company and
they cannot be because of the control of that last foot or the
connection into the building, then obviously that's a difficult
thing for us to overcome.
The benefit of having national legislation is obviously not
having to work through a crazy quilt of 50 individual States
considering that issue and coming to some conclusion which may
perhaps be very different State by State. So I think, whether
it goes all the way to legislation or FCC action, having an
ability to do that on a national basis would be attractive for
Senator Kohl. Any other opinions on that?
Mr. Ellis. I would just say, Senator Kohl, this issue is
not unique to the CLECs. This is between the landlords. We have
the same problem. The landlord and a competitor enter into a
contract and we have to live with it. So this is not an issue
that we have a position that's any different from any of the
Senator Kohl. OK.
Ms. Herda. Although I think that the advantage that the
RBOCs have is that they are in quite the vast majority of the
buildings that are out there. Without a doubt, there are a few
landlords--I mean, quite frankly, the landlords have been
trying to get a piece of telecom revenue for as long as I've
been selling competitive telecom, which is about 13 years. We
have always had to spar with them.
We eventually do get into buildings where we have the
tenants in the buildings, but when you sell to a lot of small
customers in the building, the tenants, those types of
customers don't have the pull with the landlords, and those are
the customers that don't get the competitive telecom services.
It's usually the larger ones that do.
The landlord community absolutely needs to be compelled to
provide nondiscriminatory access, and there should be penalties
for any delays that they create. We have lost millions of
dollars of business because they've delayed or refused to let
us into buildings.
Senator Kohl. I thank you, Mr. Chairman.
Chairman DeWine. Miss Herda, do you want to tell me a
little bit about what you all are doing in Ohio, what your
Ms. Herda. We actually have quite a presence in Ohio. I was
just looking through some of my customer lists here.
We are in Dayton, we're in Columbus, we're in Cincinnati.
We have large networks in those cities. We are serving
customers like Wright-Patterson Air Force Base in Dayton. We
serve a lot of school districts actually in Cincinnati, the
Kings local school district, Roger Bacon High School, Covington
Catholic High School. We serve large customers, too, and
hospitals, like Mercy Hospital.
We are connecting up our cities, also. We have a strategy
of building regional connections between our cities, and those
particular cities have a lot of community of interest between
them, so that we can truly provide a completely diverse network
to the customers in the Ohio area.
Chairman DeWine. Good. Thank you very much.
Ms. Herda. You're welcome.
Chairman DeWine. Let me thank our panel very much. It has
been very informative, both panels.
I think this has been an informative and important
discussion about competitive progress in the local telephone
market 5 years after the 1996 Telecom Act took effect. The
testimony we heard today has demonstrated that, to some extent,
the Act is working and competition is moving forward.
It is the pace at which it is moving that concerns us.
Competitive providers have less than 7 percent of the national
market and, clearly, much remains to be done. We will continue
to watch the competitive developments closely to ensure that we
have vigorous competition in the tele-communications industry.
We look forward to working with those in the industry to
promote competition and to protect consumers.
We thank you all for your patience, and again, we thank our
witnesses very much.
Ms. Herda. Thank you very much.
[Whereupon, at 3:30 p.m., the Subcommittee was adjourned.]