[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?

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                    BUSINESS RIGHTS, AND COMPETITION

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 2, 2001

                               __________

                          Serial No. J-107-14

                               __________


         Printed for the use of the Committee on the Judiciary

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
77-586                     WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001


                       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

                                                                   Page

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

                               WITNESSES

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 
  Communications.................................................    30
Wood, Patrick Henry, III, Chairman, Public Utility Commission of 
  Texas..........................................................     4

 
     THE TELECOM ACT FIVE YEARS LATER: IS IT PROMOTING COMPETITION?

                              ----------                              


                         WEDNESDAY, MAY 2, 2001

                               U.S. Senate,
    Subcommittee on Antitrust, Business Rights and 
                                       Competition,
                                Committee on the Judiciary,
                                                    Washington, DC.
    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 
year.
    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 
acceptable result.
    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 
hearing today.
    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 
                          OF WISCONSIN

    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 
testify.
    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 
questions.
    Mr. Wood.

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 
to face.
    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 
                                 Texas

    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 
to customers.
    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 
work.

                         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 
the T2A.
    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 
improvements.
    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 
requirements.
    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 
Commission's history.

                      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.

                            Current Issues.

    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 
transition.
    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.
    Mr. Hundt.

   STATEMENT OF REED E. HUNDT, SENIOR ADVISOR, MCKINSEY AND 
  COMPANY, INC., AND FORMER CHAIRMAN, FEDERAL COMMUNICATIONS 
                           COMMISSION

    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 
you will.
    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 
regulated environment.
    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 
alone.
    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 
capital firms.
    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 
1996 Act.
    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 
regulation unnecessary.
    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 
record.
    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 
        company-funded R&D.

    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 
        economy.

    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.

                               Conclusion

    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 
telecommunications services.
    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. 
Hundt.
    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 
time.
    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 
litigation.
    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-
looking prices.
    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 
contract.
    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 
Mr. Hundt.
    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 
again?
     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.
    [Laughter.]
    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 
particular topic.
    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 
much competition.
    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 
your paradigm.
    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 
particular trend.
    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 
service?
     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 
believe.
    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 
voice.
    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 
talking about.
    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 
investments.
    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. 
Thank you.
     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 
Services.
    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 
well.
    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 & 
                           TELEGRAPH

    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 
country.
    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 
market.
    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 
like AT&T.
    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 
competition depends.
    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 
less, effective.
    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 
telecommunications market.
    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 
quickly.
    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 
services.
    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 
less, effective.
    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 
provider.
    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 
consumers.

               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 
entirely.

Incumbents Eliminate Competitors By Refusing to Comply with Unbundling 
                              Obligations.

    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 
service.
    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 
marketplace.

     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.
---------------------------------------------------------------------------
    \2\ Id.
    \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.
    Mr. Robbins.

   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 
last night.
    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 
business.
    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 
power supplies.
    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 
forward.
    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 
product.
    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 
suggestions:
    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 
customers).
    \2\ Cox expects to add about 1 million new service customers in 
2001.
---------------------------------------------------------------------------
    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 
service.
    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 
market.
    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 
telephone service.
    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 
service providers:
    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.
    Miss Herda.

   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 
fiber networks.
    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 
significantly.
    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 
business.
    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 
entire list.
    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.
    [Laughter.]
    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 
more help.
    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 
Act.
    Thank you.
    [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

                            COMPANY HISTORY

    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 
networks.
    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.

                          OWNERSHIP STRUCTURE

    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.

                             COMPANY GROWTH

    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.

                            SERVICE PROVIDED

    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.

                             MARKETS SERVED

    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
    HAWAII: Honolulu
    GEORGIA: Atlanta (2001)
    ILLINOIS: Chicago (2001)
    INDIANA: Indianapolis
    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
    OREGON: Portland
    SOUTH CAROLINA: Columbia (2001)
    TENNESSEE: Memphis
    TEXAS: Austin, Dallas, Houston, San Antonio
    WASHINGTON: Seattle, Spokane, Vancouver
    WISCONSIN: Milwaukee

    III. The Key to Successful Implementation of the Telecom Act is 
                              Enforcement

    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 
network.
    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 
market cannot.

                        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.

                            BUILDING ACCESS

    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 
neutral basis.

   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

                             V. Conclusion

    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.
    Mr. Ellis.

 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 
blame them.
    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.

                            I. Introduction

    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 
enormous.

                  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, 
1998.
---------------------------------------------------------------------------
    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 
quality.\5\
---------------------------------------------------------------------------
    \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 
state.
---------------------------------------------------------------------------
    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/
2084.htm1.
---------------------------------------------------------------------------
    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 
services.\10\
---------------------------------------------------------------------------
    \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/ 
0,1354,3702,OO.html.
    \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 
state.\14\
---------------------------------------------------------------------------
    \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://
www.swbell.com/About/NewsCenter/ShowRelease/ 0,1018,20010208-
01,00.htm1?NID=.
    \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://
www.swbel1.com/About/NewsCenter/ShowRelease/ 0,1018,20010302-
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 
http://www.swbell.com/About/ NewsCenter/ShowRelease/0,1018,20010220-
O1,00.html?NID=.
---------------------------------------------------------------------------
    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/
0,1354,3408,00.html.
    \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 
Texas.'').
    \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--
company/press--releases/ display.phtml?cr/20000405.
    \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://144.226.116.29/PR/CDA/PR CDA--Press 
Releases Detail/1,1579,2198,OO.html.
---------------------------------------------------------------------------

                             IV. Conclusion

    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 
customers.

    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 
Times article.
    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 
possible.
    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 
T-1's.
    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 
after.
    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 
provider.
    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 
efficiencies.
    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 
these plans.
    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 
the record.
    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 
monopoly?
    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 
talked.
    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 
investment community.
    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 
investment.
    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 
country.
    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 
phone companies.
    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 
national competitors.
    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 
other competitors.
    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 
plans are?
    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.]