[Senate Hearing 107-1093]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1093



                      LOCAL TELEPHONE COMPETITION

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

                                HEARING

                               BEFORE THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 19, 2001

                               __________

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


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           COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

              ERNEST F. HOLLINGS, South Carolina, Chairman


DANIEL K. INOUYE, Hawaii             JOHN McCAIN, Arizona
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska
    Virginia                         CONRAD BURNS, Montana
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
JOHN B. BREAUX, Louisiana            KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
RON WYDEN, Oregon                    SAM BROWNBACK, Kansas
MAX CLELAND, Georgia                 GORDON SMITH, Oregon
BARBARA BOXER, California            PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              GEORGE ALLEN, Virginia
BILL NELSON, Florida


               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel
                  Mark Buse, Republican Staff Director
               Ann Choiniere, Republican General Counsel


                            C O N T E N T S

                              ----------                              

                                                                   Page


Hearing held on June 19, 2001....................................     1
Statement of Senator Brownback...................................     6
Statement of Senator Carnahan....................................    18
Statement of Senator Cleland.....................................    13
Statement of Senator Dorgan......................................    16
Statement of Senator Hollings....................................     1
    Prepared statement...........................................     2
Statement of Senator Lott........................................     5
Statement of Senator McCain......................................     4

                               Witnesses

Armstrong, C. Michael, Chairman and CEO, AT&T Corporation........    35
    Prepared statement...........................................    36
Greene, Margaret H., Executive Vice President, Regulatory and 
  External 
  Affairs, BellSouth Corporation.................................    21
    Prepared statement...........................................    23
Holland, Royce J., Chairman and CEO, Allegiance Telecom, Inc.....    42
    Prepared statement...........................................    44
Kimmelman, Gene, Co-Director, Washington Office, Consumers Union.    76
    Prepared statement...........................................    78
Markey, Hon. Edward, U.S. Representative from Massachusetts......     7
McLeod, Clark, Chairman and CEO, McLeodUSA.......................    25
    Prepared statement...........................................    27
Rolka, David W., Senior Vice President, Rhoads & Sinon Group LLC.    65
    Prepared statement...........................................    68
Sullivan, Hon. Dave, State Senator from Illinois.................    94
    Prepared statement...........................................    96

 
                      LOCAL TELEPHONE COMPETITION

                              ----------                              


                         TUESDAY, JUNE 19, 2001

                               U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 

SR-253, Russell Senate Office Building, Hon. Ernest F. 
Hollings, Chairman of the Committee, presiding.

         OPENING STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    The Chairman. Good morning. The hearing will come to order. 
We very much appreciate our distinguished colleague on the 
House side, Mr. Markey, for coming and obliging the Committee. 
As I understand, there is a very important hearing over on the 
House side concerning the Firestone case.
    I first invited Chairman Bliley and he had a conflict, and 
then Chairman Tauzin and Congressman Dingell, but they told me 
of the conflict and we will have them at another time. 
Otherwise, Senator McCain and others--who started this change 
in seating, anyway?
    Senator McCain. We were told that, Mr. Chairman.
    The Chairman. Well, we will return to the way it was 
before. We will not do it this way just for TV, Sam. Do not 
worry about it.
    The truth of the matter is, with 23 Members, we always have 
to yield to the Chairman and the Ranking Member for their 
opening statements, but we are going to hold opening statements 
to a minute in length, not necessarily this morning, because we 
are not crowded, but when we get 23 Members. Otherwise, I will 
try to set an example by putting my full statement in the 
record.
    I would simply say that the 1996 Telecommunications Act was 
a very deliberate, studied deregulation. I have heard about 
being so-called anti-Bell companies. The truth of the matter 
is, I started deregulating the Bell companies myself back in 
1991 as Chairman when I put in the bill to allow them into 
manufacturing. I worked on the bill--1822--for a little over 2 
years and then, when the Republicans took over the Congress in 
1995, of course, we had 652 and we amended the two bills and 
passed it finally in February, 1996.
    But everyone should understand and the record should show 
that we had meetings with the Bell companies' representatives, 
their attorneys, and their K Street counsel. They came in every 
Friday--and the competition for long distance, they came in 
every Tuesday morning over a 2-year period, hammering out the 
so-called 14-point list. In other words, when you deregulate 
and allow the Bell companies into long distance, we told the 
Bell companies that they could get into long distance anywhere 
they wanted to in the country except where they had a monopoly.
    The whole idea of those meetings on Friday and Monday with 
all the parties were so there would be no hidden ball tricks or 
anything of that kind, that they would hammer out what would be 
reasonable and acceptable, and because I had already 
experienced deregulation in the airlines and it had not worked. 
We still have the best telecommunications system in the entire 
world and the idea at that time was to bring about this 
deregulation in a studied fashion so that we did not mess up 
America's telecommunications.
    It was the Bell companies who were begging for the 
deregulation to get into long distance to compete. So we 
provided that the local exchange networks be made available 
under Section 251. Then in Section 271, they wrote up the 14-
point checklist. I would like to go back home when I am a 
politician and say I wrote it and everything like that, but the 
truth of the matter is, the Bells and the long distance 
companies hammered this out. That is why when we passed it we 
had 95 votes in favor of it in the U.S. Senate.
    So what we are really looking at in this hearing--what we 
are looking at with Chairman McCain on local competition, is 
how do we get compliance with the deregulation of the 1996 Act. 
Simply put, we know that instead of competing, the Bells 
questioned the constitutionality of it immediately. It was a 
shock to me because I had checked with my Chairman, John 
Clendennon with BellSouth, in December before we had the final 
conference and I read to him the language that he was asking 
for. He was down in Florida and had already left for the 
Christmas holidays, and I said: ``John, does this suit you?'' 
He said: ``That is fine; pass the bill; we are ready to 
compete.''
    Instead, they questioned the constitutionality. They took 
us through every court and every public service commission, the 
Federal Communications Commission, all the way up to the 
Supreme Court, and have even the Chairman of the present 
Federal Communications Commission saying the only way we are 
going to get compliance is to double or increase the fines.
    Let me yield to Senator McCain.
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

    Today, the Committee will examine the state of competition in the 
local telephone market. Specifically, the Committee will address the 
question as to why competition has not arisen in the local telephone 
markets as had been planned for by the passage of the 1996 
Telecommunications Act. Some have questioned whether there are problems 
with the Act. What we will find as we explore the record today, 
however, is that the problems arise, not from the Act, but from the 
efforts by the Bells to avoid the requirements of the Act, and enter 
the long distance and broadband markets while simultaneously preserving 
their local monopolies.
    Today, we will hear from the competitive companies that are trying 
to bring competition to the local markets. These companies together 
have already invested over $150 billion in their efforts to compete in 
the local market place. We will hear from State officials who have 
attempted to enforce and follow guidelines of the Act, as well as from 
public interest groups.
    Finally, let me make it known that I extended invitations to every 
Bell company to testify. I am glad that my friends from BellSouth have 
agreed to attend. And let me make it clear for the record that anytime 
the Bell companies--particularly their CEOs--would like to speak on the 
record on this issue before this Committee, they are welcomed. But the 
one thing that this Committee will not do is function at the dictates 
of Bell companies. This is what is happening in the marketplace and is 
the crux of the difficulties we are experiencing today in the 
telecommunications industry.
    I have heard that the Bells would like to make this a debate solely 
about broadband, but the fact of the matter is that this is not a 
debate about broadband. This is a debate about how to ensure 
competition in local telephone markets--whether it is the provision of 
local or broadband service. In other words, broadband, like all the 
other service issues, is merely a subset of the larger issue--which is 
market structure and competition. So let's begin this debate by doing 
away with the subterfuge and obfuscation.
    So, why is today's hearing important? The answer is simple, because 
of the importance of the telecommunications industry to the whole 
infrastructure of our Nation's economy. According to the Department of 
Commerce, telecommunications currently accounts for nearly 10 percent 
of our Nations's total economic output. All of America's industries--
and American consumers in general--have a crucial stake in the 
structure of our telecommunications industry: if it is competitive, our 
costs are cheaper, and services better: if it is not competitive, cost 
will be higher, and quality of service will suffer. We often hear much 
talk today about the internet and e-commerce. I, for one, am proud of 
these new technological advancements and on this note, was honored to 
work with my friends Tom Bliley and Senator McCain in passing the 
Digital Signature bill last year, which has opened the door to massive 
growth in e-commerce. But though these industries are great, it all 
begins with telecommunications. Who owns the lines, and those that 
compete in the telephone business may very well determine the fate of 
those industries.
    But we didn't get to where we are on a whim. For more than two 
decades, the courts, Congress, State legislatures, and regulators have 
been working to bring competition to the telephone marketplace. This is 
no easy feat since Congress gave Ma Bell a monopoly in the local and 
long distance phone markets, protected Ma Bell from competition, and 
guaranteed Ma Bell a profit. In that environment, Ma Bell fulfilled its 
mission of building a nationwide network and connecting the vast 
majority of residents to that network.
    Over time however, other companies attempted to compete, but their 
efforts were thwarted by Ma Bell which used its power to lock its 
competitors out of the marketplace. Judge Greene stepped in and in the 
early 1980s, broke Ma Bell into AT&T and 7 regional Bell operating 
companies. This allowed competitors to enter the long distance market, 
and since then, consumers have had a choice of service providers and 
have generally benefited from lower long distance rates.
    When Judge Greene broke up Ma Bell, he recognized the significant 
market power of the local Bell companies, and the fact that they had no 
competitors in their local markets. Clearly, under such conditions, if 
the Bells were allowed to enter new markets, they could quickly destroy 
their competitors by using their monopoly revenues to subsidize their 
entry into these markets. Consequently, in an effort to protect 
competition in other markets, Judge Greene restricted Bell companies 
from entering markets such as the long distance and manufacturing 
markets.
    The next step for Congress then was to open the local phone markets 
to competition. After many years of hard work, numerous hearings, and 
tons of analyses, Congress in an agreement signed on to by all the 
relevant parties--including the Bells, long distance service providers, 
and cable companies--passed the telecommunications Act of 1996. The 
1996 Act is a landmark bill, representing the most significant 
restructuring of the 1934 Communications Act. The bill met the needs 
and requests of each of the important parties and most critically, gave 
the Bells what they most coveted, entry into all markets. In doing so 
however, Congress put in place provisions to ensure competition. This 
was to be accomplished by preventing Bell companies from extending 
their monopolies to new markets until they allowed competitors to 
interconnect with their networks.
    I am proud to have been one of the principal members involved in 
drafting the 1996 Act. I am proud to have worked with my good friends 
Larry Pressler and Tom Bliley. We all had high hopes, particularly 
given that all the major companies were at the table and signed onto 
the Act. We knew we had overcome an enormous hurdle--bringing together 
some of the most powerful warring industries in the country--and 
passing one of the most significant industrial bills ever enacted by 
Congress.
    As noted, the essence of the Act was to restructure and make 
competitive one of the most monopolistically controlled industries in 
the country--the local telephone market. If everyone played by the 
rules and kept their promises, the goal would be accomplished. But 
unfortunately, the Bells have not played by the rules and have not kept 
their promises.
    Almost as soon as the ink was dry on the Act, the Bells were in 
court seeking a short cut to extend their monopoly into new markets. 
They have bullied competitors and refused to provide real access to 
their monopolistic networks. In essence, they have sought to use the 
Act to get what they didn't have, but coveted--entry into the long 
distance and other markets--and preserve through circumvention what 
they had, and still have--their local telephone monopolies.
    Having not been as successful as they would have liked before the 
courts and Federal and State regulators, they have now returned to 
Congress seeking legislative help to extend their monopolies. They 
claim that no one contemplated the development of data service when the 
1996 Act was passed. Well, we all knew about the potential of data 
service when the 1996 Act was passed. We included Section 706 in the 
1996 Act which requires the FCC to take action to encourage the 
deployment of broadband service, and as early as 1984 Richard 
McCormick, then CEO and Chairman of USWest, in 1994 testifying before 
the Senate Commerce Committee stated the following: ``We have embarked 
on an aggressive program both within our 14-State region and outside to 
deploy broadband. We want to be the leader in providing interactive--
that is, two-way multimedia services, voice, data, video.''
    At the time the Act passed, Members of Congress even made similar 
statements. Representative Tauzin stated: ``Today, in a bipartisan way, 
we unleash the spirit of competition in all forms of telecommunications 
services, from telephones to computers, to services dealing with video 
programming, and data services to interexchange services that are going 
to link us as Americans together as one like never before and give us 
access to the world and the world access to us as never before.'' 
[February 1, 1996, page H1151 of the Congressional Record.]
    Furthermore, many Wall Street analysts have noted that competition 
has been a driving factor in Bell deployment of broadband service. A 
Wall Street analyst with Montgomery Securities stated that ``RBOCs have 
finally begun to feel the competitive pressure from both CLECs and 
cable modem providers and are now planning to . . . accelerate/expand 
deployment of ADSL in order to counter the threat.''
    Another Wall Street analyst with Prudential Securities noted that 
with respect to RBOC deployment of broadband service an ``important 
motivating factor is the threat of competition [and] [o]ther players 
are taking dead aim at the high-speed internet access market.''
    The fact is that Congress should not help the Bells extend their 
monopolies. It is clear that under the 1996 Act, Bells can enter the 
long distance or the broadband market or any other market they choose, 
but just not by extending their monopoly and harming competition. 
Today, Bells continue to hold 92 percent or all phone lines. Cable 
companies do not compete with the Bells for business customers. 
Therefore, Bell companies are the predominant providers of broadband 
service in the business market where they compete primarily with CLECs. 
In Addition, Morgan Stanley and others predict that by 2004, Bell 
companies will catch up to the cable companies in the residential 
broadband market.
    The reality is that Congress gave the Bells a monopoly in the local 
telephone market. Congress certainly should not now grant them a 
monopoly in the long distance and broadband services markets. The Bells 
must compete like everyone else to get customers in these markets and 
not look for a government handout. Given the potential benefits of 
competition, the answer must be ``yes'' to competition in the long 
distance and broadband markets and ``no'' to monopoly dominated 
markets.
    Congress has a responsibility to consumers to promote an open 
competitive local telephone market and must Act to ensure Bell 
compliance with the 1996 Act.
    I thank the witnesses for joining us today and look forward to 
their testimony on this vital issue.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you very much, Mr. Chairman. Thank 
you for holding this hearing on this important topic, and we 
welcome our colleague from the House, Congressman Markey.
    When the Telecommunications Act of 1996 was passed, its 
supporters hoped that its passage would let communications 
companies from various sectors enter into each other's markets, 
thereby stimulating an explosion of new competition in all 
sectors of the telecommunications market. This hoped-for 
explosion was in turn expected to produce an abundance of 
consumer choice and lower consumer prices for 
telecommunications services.
    Unfortunately, we have not seen the lower prices promised 
by the Telecommunications Act. We have consistently seen prices 
rise since the Act's passage. Local phone prices are up more 
than 12 percent. Take out long distance prices and consumers 
are paying almost 20 percent more than in 1996. Cable rates are 
up almost 33 percent, which is almost three times the rate of 
inflation.
    Moreover, I note that AT&T has recently raised its basic 
long distance rates 11 percent, its third increase in basic 
long distance prices since October 1999.
    These price increases are caused by several factors, but 
the most important of these is doubtless a lack of competition 
between various types of service providers. Nowhere is this 
lack of competition more apparent than in the provision of 
local phone service. In fact, according to the FCC's recent 
report on local competition today, more than 5 years after the 
Act's passage, CLECs are only providing service on a little 
more than 8 percent of local telephone lines, meaning that the 
Bell operating companies still control about 92 percent of the 
local phone market.
    Of course, the CLECs and the Bell companies have 
diametrically opposed views about the causes of this lack of 
competition. The Bell companies claim excessive subsidies and 
regulations make the local consumer market unattractive to 
potential competitors, so they encourage further deregulation.
    Some CLECs allege anti-competitive conduct by Bell 
companies and urge further regulation as a means of shoring up 
their market capitalization.
    This Committee needs to probe behind the rhetoric of the 
parties to discover a solution designed not to favor or punish 
particular industry sectors, but to create competition and true 
competition that will reduce prices for consumers. That has to 
be our goal, a pro-competitive solution that will lower 
consumer prices.
    Mr. Chairman, I thank you again for holding this hearing 
and congratulate you on your assumption of the chairmanship of 
this Committee. As always, I look forward to working together 
as we have for many, many years. I thank you.
    The Chairman. Very definitely we will continue to work 
together. Do you want to yield to Senator Lott? He might have 
to get to the floor.

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. I will be very brief. Thank you, Mr. Chairman 
Thank you for having this hearing and thank you to our 
colleague from the House and to the other witnesses who are 
here today. I am glad we are having this hearing and I assume 
that there will be additional hearings on this important 
subject.
    I will be brief this morning because you have already asked 
whether we all need to have opening statements before we get to 
our panel. So I will be very brief. I just want to say that you 
and I obviously have worked together on the Telecommunications 
Act of 1996 and were able to, I think, have a breakthrough that 
has been positive. Our goals were more competition and better 
access. In some respects and in some areas these goals have 
been achieved, and in others there has not been as much 
success.
    I think it is incumbent upon us to see if we need to take a 
look at the Act and see if it needs to be tweaked in some way 
and make sure that what we tried to accomplish in the 
Telecommunications Act actually is occurring. So, since there 
is legislation that has been introduced and has been moving 
some in the House, I think we need to learn more about what it 
does and decide how we are going to proceed.
    So this hearing is the beginning of a process that will 
allow us to do that. I thank you for that.
    The Chairman. Very good.
    Senator Brownback.

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

    Senator Brownback. Thank you, Mr. Chairman. I too want to 
congratulate you for holding this hearing. This is your first 
one as Chairman in this iteration this time around on 
telecommunications and competition, and I think that is an 
important topic. I am glad you are doing it, and I would ask 
that my full opening statement be included in the record as if 
read.*
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    The Chairman. It will be.
    Senator Brownback. The one point I would like to make is I 
would like to use this hearing to examine something that has 
been a great deficiency, and that is the deployment of 
broadband or high-speed Internet, particularly into rural areas 
and into a number of urban areas as well. That is a great 
shortage that we have in my State of Kansas. It has been in 
most rural areas across the country that we simply are not 
getting the high-speed Internet access, and I would like to see 
why and hear from the individuals that are here to testify 
today why we are not getting this broadband deployment out into 
many areas across the country, and what needs to take place for 
us to get this.
    There are different approaches for coming forward. Some 
Members are putting forward subsidy approaches. Others are 
putting forward tax credits.
    What I would hope we could do is seriously address this 
topic because it is becoming a business of competitiveness or 
lack of it, in rural areas in particular and some urban areas 
as well. So I would hope that we can look at that issue, which 
is one that is front and center and a difficult one for people 
in my State.
    I will be looking forward to putting forth legislative 
vehicles to try to deal with this need for broadband 
deployment, particularly in a deregulatory framework. With 
that, I look forward to the testimony, Mr. Chairman.
    The Chairman. Very good, thank you.
    Mr. Markey. We appreciate your appearance.

                STATEMENT OF HON. EDWARD MARKEY 
             U.S. REPRESENTATIVE FROM MASSACHUSETTS

    Mr. Markey. Thank you, Mr. Chairman. I appreciate the 
invitation to appear before you today.
    This is one of the longest-standing discussions that we 
have had in the Congress. When I was first elected in 1976 I 
arrived, I think, in the same way that most of us arrived, with 
the notion that the telephone company was a natural monopoly, 
that is that there could only be one telephone company. It took 
me a while and many meetings with Bill McGowan, the Chairman of 
MCI, sitting in my office in 1977 and 1978 trying to explain to 
me that there could be competitive telephone companies.
    I will be honest with you. For the first several meetings I 
had visions of like 4-foot telephone poles going down the 
street as we had a startup telephone company that would compete 
against AT&T. I could not figure out how they would do it. How 
can a company compete against AT&T?
    Then after a while it became clear that if you allowed MCI, 
if you allowed Sprint, if you allowed dozens of other companies 
to have access to the wires of AT&T and to the switches and to 
the homes that they served, that they could provide a competing 
long distance telephone service.
    But AT&T, a company with over one million employees, the 
largest company in the United States, a monopoly, really 
refused to allow any competitors any realistic access to 
consumers. So as a result the Federal Government, the Justice 
Department, beginning with Gerald Ford, through Jimmy Carter 
and then through Ronald Reagan, ultimately on January 1, 1984, 
Judge Harold Greene's decision went into effect which called 
for the breakup of AT&T, so that the regional Bell operating 
companies that still controlled the local loop--that is, the 
seven Bells from BellSouth to Nynex and Pac Bell and SBC--would 
be broken off and AT&T would be left with its manufacturing and 
with its information services and long distance.
    So now the local Bells had no additional reason to 
discriminate against MCI and Sprint since they no longer were 
in the long distance business. What happened? Almost 
immediately, rates started to plummet. Choices started to be 
made available to consumers all across the United States.
    Instead of the long distance call being something special, 
as it was in my home, where your mother would say to you: ``You 
are on the phone with long distance; you cannot talk for 
long.'' Now it is no big deal. Now long distance is just 
another service.
    That is what happened because we ensured that MCI and 
Sprint could create the competition which collapsed the rates 
that long distance had always presented to the ordinary 
American family.
    What else happened? Well, because the local Bells no longer 
controlled the manufacturing, they no longer had a monopsony as 
well. That is, the Bells used to be the only purchaser of 
equipment. So if you made competing telephones, if you made 
competing telephone equipment, well, why would the Bells buy 
from you if they made their own equipment? My father used to 
say to me: ``Eddy, every cook loves the smell of his own 
food,'' although he did not quite use that phrase, a similar 
phrase to that.
    The reality is that the Bells did not buy from anybody 
else. So as a result, by 1977 when I arrived in Congress, 1980, 
I still had a black rotary dial phone in my house and just 
about every one of us did as well. Notwithstanding the fact 
that the Bell Labs had been winning Nobel Prizes in basic 
telecommunications research, but because they had a monopsony 
they did not have a stake in developing new technologies for 
consumers.
    But once the monopoly was broken up, once the monopsony was 
broken up, as of January 1, 1984, all of a sudden each of us in 
our own homes could purchase any equipment that we wanted to. 
There was no longer this control over the development of these 
technologies.
    However, there was one thing that was remaining. Each of us 
still thought that the provision of local telephone service was 
a monopoly. How are you going to break that up? We just could 
not figure that out. So we kind of allowed them to stay there 
under rate of service, cost of service controls, with universal 
service built in to reach the rural parts of any State. But we 
just could not figure out how to do that.
    But the Bells almost immediately sought to get out from 
underneath the restrictions. Let us into long distance, they 
said. Let us into manufacturing, let us into information 
services. We had many hearings in the 1980s and in the early 
1990s.
    Finally, we cut a deal with them at their request, and the 
deal was this. If we allowed them into long distance, which 
they had been prohibited from getting into since January 1 of 
1984, they would open up their local phone markets to 
competition, because it turned out that there were companies 
like McLeod and RCN and Covad and scores of other companies 
that said if you could just guarantee that we had access to the 
local phone business in the same way that you guarantee to MCI 
and Sprint that they could gain access to those customers for 
long distance, we will provide local competition. Just to 
sweeten the pot, we actually threw in free, no extra charge, 
the lifting of the restriction that the Bells were under that 
prohibited them from getting into cable service. They promised 
that if we lifted the restriction on them getting into cable 
that they would go out and deliver cable competition all across 
the United States.
    We passed that Act in 1996. Senator Lott and Senator 
Hollings and I and Tom Bliley, Democrats and Republicans, 
liberals and conservatives, we came together on that 
legislation.
    Now, as you pointed out, Senator, the first act of the 
Bells was not to comply with the Act. It was to take the Act to 
court. SBC actually brought a case saying that the bill was a 
bill of attainder, that is, it targeted a specific company or 
set of companies, and that the bill was illegal.
    Now, my memory is the same as yours. I remember the CEOs 
coming in and begging us to pass the bill. It was just the 
opposite of being a bill of attainder. It was their request 
that we grant them this relief and in turn they would accept 
the restrictions that were placed upon them that forced them to 
open up their local loop.
    As a result of all the court cases, however, they delayed 
opening their local loop. 1996, 1997, 1998, 1999, they still 
have not opened up a single State because they are in court. 
Only in December 1999, almost January of the year 2000, do they 
finally accede, after having lost the court cases, to opening 
up New York.
    Now, that is only a year-and-a-half ago. An Act 5 years old 
and people say, why is it not working? Well, they went to court 
first, and they also wanted to consolidate. So the first thing 
they tried to do was to, in addition to the court cases, was to 
move from seven companies down to four, which is where they are 
now. Economies of scale, they say, synergies.
    Monopoly is another word for it. But that is where we were.
    So only a year-and-a-half has transpired. Since that time 
we have had Massachusetts, we have had Texas, we have had 
Kansas, and we have had Oklahoma, that is it. Now, they have 
applications in in other States now as the local regulators and 
the FCC has increasingly begun the process of ensuring that 
there is proper and timely review of the applications which 
they are finally making in these States.
    So what has happened, though, since the 1996 Act has 
passed? $60 billion worth of new investment by new companies in 
broadband deployment all across this country. Hundreds of 
competitors. ISPs by the thousands which now have access to 
millions of homes. They are innovating, they are driving prices 
and service. If the Bells had had their way, there would have 
been no access which they would have granted as of yet to any 
of these homes for any of the competitors.
    The bottom line on this is that what finally is driving 
innovation and deployment of technology in this country is 
paranoia. It is the paranoia of a competitive marketplace, 
Darwin-like competition, Adam Smith smiling in his grave 
competition looking up at this marketplace that has finally 
unfolded after 100 years.
    So we are at this critical point right now where we have 
proven that you can provide local phone service, local 
telecommunications competition. Now, we are only up to 7 
percent of all of the lines in the United States being 
controlled by the competitors, but it is as a result of the 
1996 Act.
    So in the same way that in long distance we saw a 
revolution, we are at the dawn of this local phone competition. 
Now, the good news is that 52 percent of all American homes now 
have access to broadband technology. That is only since the 
1996 Act passed, 52 percent. So it is moving fast, very fast, 
as fast or faster than the long distance revolution.
    Remembering, however, that long distance was already 
available, so there was a flick of a switch quality to that. 
But the reality is that the Act is working, not perfectly, but 
in a way that ultimately has given this incredible incentive to 
hundreds of companies to make investments.
    We have a word for this phenomenon. We call it the NASDAQ. 
So many of us look at the NASDAQ and say: What are the names of 
all those companies? I never heard of them before. There is a 
good reason, because in the 1996 Act they did not have access 
to the capital markets. There was no incentive to deploy new 
technologies.
    Now, there is a little bit of irrational pessimism which 
has hit the NASDAQ over the last year. But without question it 
has been for the last 5 years and it will be for the rest of 
our lives the single most important revolution that affects our 
society.
    So thank you, Mr. Chairman, for the opportunity to testify 
before you today. All I say to you is the bottom line on the 
competitive local exchange carriers is that they lead to more 
job growth, more innovation, lower prices, and ultimately more 
choices for consumers across this country. It is something that 
I think that we should stay the course with because it is a 
success, not a success without some deficiencies, but a success 
of historic proportions.
    Thank you, Mr. Chairman.
    The Chairman. Well, Mr. Markey, that is an outstanding 
statement. Let the record show that you were in the room at the 
conference committee when we finalized the 1996 Act. It might 
be well to remember at that particular time it was a pretty 
well designed Act.
    I will never forget that the Vice President came on that 
evening right in the middle of Tom Brokaw. I thought maybe the 
President had gotten shot, because Brokaw said: ``Wait a 
minute, folks; we have got a highly important announcement; 
here is the Vice President of the United States.''
    So he came on and he said: ``We have gotten together on the 
telecommunications highway and I got everything I wanted.''
    When he said ``I got everything I wanted,'' Bob Dole said 
``that bill will never pass,'' and Newt Gingrich said ``that 
thing is deader than Elvis.'' That was in the first part of 
December, and I had to hold the hands of all the members of the 
conference until February without a change of a word.
    I mean, he did not get everything he wanted and that kind 
of a thing. It was just a political thing to put us all off.
    The record ought to show that you are exactly right. You 
just made an outstanding statement and jogged my memory. You 
helped me recall Bill McGowan. I will never forget, he got a 
Farmers Home Loan in order to finance two little things, a two-
story one-room proposition down here in Georgetown with a 
couple of aerials up on top. That is how he started the 
competition.
    As to the equipment, I competed with the Bell Labs trying 
to get that telephone manufacturer in South Carolina. They got 
it in Raleigh, North Carolina, but it is now out in Singapore 
and maybe it has moved to China. I have not checked in a few 
years. But we are losing all of that.
    But in any event, what you point out is the dynamism of the 
market and the great success. However, there is weeping and 
wailing on the House side about, ``oh, this thing is a 
disaster, we do not have any competition, we have got to change 
the law.'' All we have got to do is enforce the law.
    Our problem was that we did not make mandatory Section 271. 
In fact, when I saw the movement on the House side in the last 
Congress, I put in a bill, a drop-dead date for the Bells to 
comply with their own 14-point checklist that they wrote 
themselves. If they did not do so for half of their States by 
2001, they would have a certain fine of $100,000 every day for 
non-compliance. But if we ever got compliance there and real 
opening up, we would have the competition.
    So what has occurred? In Illinois they have tried to beef 
up and make more mandatory the different voluntary provisions. 
Otherwise, in Pennsylvania they say, well, we have got to have 
a structural separation where you can more easily audit 
wholesale and retail service, to make the Bells sell to their 
competitors on a retail basis the same as they are selling to 
their in-house retail company.
    But those are the real needs right now as seen by NARUC. 
All the State commissioners have come in and begged us: Do not 
mess up the Act itself; it is working, except for the fact that 
they are not complying. The ones who begged for this thing are 
putting on a Broadway act up here in Washington to the effect 
that, oh no, this thing has not worked and what we need is 
data, and we never considered data and those kinds of things. 
It is all out of the whole cloth, the biggest bunch of nonsense 
I have ever heard of.
    Senator Brownback or Senator Lott.
    Senator Lott. I will pass.
    Senator Brownback. On that note, Congressman Markey, you 
noted on the broadband deployment issue that there had been, I 
think your figure was, 52 percent penetration. In the rural 
areas of the country it is under 20 percent. It is about 19 
percent, and that is with one broadband provider. It is not 
competition in high speed. There are not two people competing. 
That is one out there.
    So it has been slow going into rural areas. That is an area 
that you may not have as many in your district of, rural areas. 
But a lot of us have large patches or large swaths across the 
country. I would hope you could work with us on that particular 
issue because that is one where I want to make sure that we 
have the rural areas in North Dakota or Mississippi or South 
Carolina or Georgia or across the country, that high-speed 
Internet access and deployment on an increasing and a more 
rapid basis.
    So I would hope you could work with us on that particular 
issue.
    Mr. Markey. I note, Senator, on the next panel you will 
have, amongst others, Mark McLeod, who is the CEO of McLeod 
Communications, which is an Iowa company which focuses upon 
rural America as part of its business plan.
    One of the things that I remember most vividly about the 
1996 Act was the amount of time that Senator Hollings and I 
spent in Senator Lott's office, and I would say the single most 
discussed subject was how to maintain universal service to 
rural America. Senator Stevens was interested in it, Senator 
Lott, Senator Hollings, just about every Member of the Senate 
who talked about this issue.
    I guess what I would say to you is this. For good parts of 
rural America, competition is going to work. There is an 
incentive. It is again they are moving slow because the Bells 
started slow. They decided not to move in the competitive 
direction first, but rather to consolidate and then to 
challenge in courts, whereas, however, in most parts of rural 
America there may be a solution which is necessary. I think we 
can discuss that in the context of some universal service-like 
provision, some tax incentive, some solution.
    It would be a big mistake in my opinion to remove the 
incentives which have been built in that are driving the Bells 
to deploy in urban and suburban and in good chunks of rural 
America already and to replace that with something that would 
allow the Bells to remonopolize in terms of their giving access 
to the competitive local exchange carriers and all of the ISPs 
that are out there now able to survive and potentially thrive 
because of this 1996 Act.
    So I think there is a solution, Senator. But I think it 
should be done in the context of our historic understanding 
that universal service is especially appropriate for the most 
rural parts of the country.
    Senator Brownback. I hope you would recognize that very 
point, because we have not left rural areas behind before, 
whether it's on electrification or telephones. Now people need 
access, high-speed access to the Internet, and this is not an 
area we should leave the rural areas behind. So I would hope 
that we could intensively focus in that area.
    You present a universal service approach. I put forward a 
deregulatory approach. Others have put forward tax credits. But 
we need to do something, because the longer it languishes the 
longer that rural areas are left vulnerable to business moves 
or lacking of information or lacking access to the very means 
they need to have to be able to produce commerce and to have 
competitive goods and services out there.
    I would hope you would continue to work with us on these 
sorts of topics, as I would hope the Chairman would as well.
    Mr. Markey. By definition, Senator, the reason that the 
telephone companies or electric companies do not go to the most 
rural parts of America is that it is uneconomical. So in my 
opinion it is unrealistic to think that just because we allow 
them to wall out the CLECs and the ISPs that they now are going 
to go to this uneconomical part of the country. I do not think 
that is going to happen.
    I think what we should do is keep in place this paranoia-
based competition policy which drives them to serve every 
street in urban and suburban and rural America they can reach 
economically and then to construct a policy that deals as we 
have historically done with the most rural parts of the 
country. I think we can do it, but I think it would be a big 
mistake to take off the books that thing which has essentially 
created the NASDAQ, these hundreds and thousands of companies 
that have changed the face of this information age and made us 
the leader in the world, looking over our shoulders at number 
two and three in the world over the last 5 years.
    Senator Brownback. I do not know that this needs to be 
constructed such that what you are saying, that a certain group 
is walled off from the marketplace in order to try to get at 
the problem that I think you would agree is there and that 
exists, and that I think the Chairman agreed exists in his 
State, it certainly is in mine, and that we can maybe knock the 
straw man down and say: OK, here is the serious business about 
what we need to deal with, it is a problem that exists and we 
want to get at it and we want to focus on that.
    Thank you very much, Mr. Chairman.
    Mr. Markey. In Boston, my father and I, we have been 
subsidizing the most rural parts of New England forever, and we 
accept that. I mean, we do believe in notions of universal 
service. But it should not be done at the expense of policies 
which also work for urban, suburban, and the most densely 
populated parts of rural America.
    The Chairman. There are no restrictions at this minute to 
go into the rural areas, none whatsoever. They can go in right 
this minute. In the real world, that is why you have got the 
co-ops. I mean, it was not economically profitable and so they 
just avoided and neglected it and that is why we have got the 
strong co-ops.
    I am, like you say, from a rural State. Senator Lott is as 
well.
    Senator Cleland.

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

    Senator Cleland. Thank you very much, Mr. Chairman. Let me 
just say it is a pleasure to welcome some dear friends: 
Margaret Greene of BellSouth, based in Atlanta, and my dear 
friend, Mike Armstrong, with AT&T.
    Just on a philosophical note, Mr. Markey, I wonder. I have 
always had some reservations about total deregulation or the 
wisdom of deregulation. It does seem to me that when you 
deregulate, whether it is airlines, trucking, 
telecommunications, or whatever, it is the rural areas of our 
country that suffer, because there is no real economic 
incentive to go there any more, so to speak.
    Under a regulated environment, airlines went there under a 
certain tariff, trucking went there under a certain tariff, and 
telecommunications went there, such as it was, based upon a 
regulatory environment. I wonder if we are not reaching the 
outer banks of the effects, the positive effects of 
deregulation and running up against the negative effects of 
deregulation.
    I have often thought that in the telecommunications world 
that we had sewn to the wind and are now reaping the whirlwind, 
that we have reaped, in effect, the benefits of deregulation 
for 20 years, now we are running up against the hard part of 
it.
    In my State the hard part of a deregulated 
telecommunications environment is that the people most in need 
of the new telecommunications services are the ones most 
denied, for several reasons. First of all, expense; second of 
all, distance. Third, basically there is no economic viability 
there. There is no ``there'' there.
    I think back, and the distinguished Chairman mentioned the 
co-ops. I think back to my State and the whole question of 
electricity, how were we connected first of all in electricity. 
Now we seek connectivity with the Internet and the World Wide 
Web and connectivity with the telecommunications assets. But 
how was my State connected first of all in electricity?
    First of all, it was Franklin Roosevelt that came in 1936 
and threw a switch in Barnesville, Georgia, that created the 
REA, which was a government program, a regulatory environment, 
and that has, in effect, created the co-ops that now serve 
rural Georgia. It is now Georgia Power. It is Oglethorpe Power, 
it is a bunch of co-ops out there, and TVA, all of which were 
basically started as governmental programs under a regulatory 
environment. That is how we get electricity first of all in the 
rural environment.
    Now, I guess my question to you is where do we go from 
here? I mean, how are we going to--it is one thing to have 
competition in Buckhead, which is where I have an apartment, 
and I have all those assets. What is the Billy Joel song, ``50 
Channels and Nothing On.'' But anyway, the point being I have a 
suburban friend who has access to 500 channels. It takes him an 
hour-and-a-half to surf the Net.
    The point is, we are overwhelmed with choices in 
metropolitan Atlanta, but in Umadilla and parts like it, 
basically two-thirds of my State area-wise, they are still 
struggling just to get fiber optic cable. They are struggling 
just to get hooked up to the Internet.
    So how do we get, in this deregulated environment, how do 
we get ``there'' there? How do we put the ``there'' there? How 
do we connect rural America? Because there are so many 
disincentives to go there.
    Now, I do not see the CLECs in my State just all of a 
sudden popping up in Umadilla, either. I mean, they are in 
metropolitan Atlanta as well. So do you have any guidance here 
for us as we consider some of these great challenges? I think 
the big challenge here we all face is how do we provide 
incentives to get out there and connect all of our people.
    Mr. Markey. You raise a very good point. First of all, it 
should be understood that DSL was invented by the Bells, but 
until 1996 they did not have any incentive to deploy it because 
there was no competition in the marketplace. So it was no 
different really than the black rotary dial phone. It could sit 
there forever.
    Only at the point at which competition was introduced did 
the Bells begin to deploy DSL. Again, as I pointed out earlier 
in the testimony, they took all of 1996, 1997, 1998, and 1999 
to bring the 1996 Act to court rather than to the marketplace. 
So they are a little bit behind, there is no question about 
that. We really only have seen this in full deployment since 
the beginning of the year 2000.
    What the key insight of the 1996 included was that the word 
should not be ``deregulated,'' Senator. That is really a 
misnomer for what we did. What we did was demonopolize. 
Deregulation is a concept which is possible to be implemented 
at a point at which there are multiple competitors in the 
marketplace. Here we were faced with a situation where there 
was one competitor and so we had to demonopolize and, 
paradoxically, we then had to put regulations on the books that 
would make it possible for these dozens, these hundreds of 
competitors, to get into the market and to serve all of these 
consumers.
    So at this point, pretty impressive: 52 percent of all 
Americans have access to the technology, to DSL, to broadband, 
to high-speed Internet. That is very impressive. By the way, 8 
percent of all Americans have access to the Internet itself, I 
mean narrowband. By the way, most Americans are never going to 
subscribe to broadband because they do not need it, because 
most Americans use the Internet for email.
    Only at the point at which there is this ability to 
download massive amounts of video in an economically viable way 
are we ever going to see the average consumer even using 
broadband in their home. Right now it is mostly businesses. 
When people get home, even though they have had it at work, 
they still only really subscribe to narrowband. That is where 
most Americans get it and have it today, as a matter of fact.
    Senator Cleland. Mr. Markey, my time is up. May I just say 
that in order to enhance incentives to go to rural areas, 
Governor Roy Barnes and the State enacted the business 
expansion and support tax, which BellSouth quite frankly, is 
taking advantage of to upgrade their switches to accommodate 
high-speed services.
    So there are actions that government can take, which is one 
of the reasons I am fascinated by our panelists today. What 
actions can we take to provide greater incentives to get into 
rural areas. But I might say, it does seem to me that 
deregulation ultimately tends toward monopoly, because what I 
see in the airlines and the trucking and to a certain extent in 
telecommunications, the greater the deregulation, after a 
period of time the ultimate result of that is that you wind up 
with two or three dominant players, whether it is airlines, 
trucking or telecommunications.
    I just thought that it does seem to me that the more you 
deregulate, the more you ultimately tend in the private sector 
to end up with a monopolistic situation.
    Anyway, Mr. Chairman, it is a fascinating hearing. Thank 
you.
    Mr. Markey. Can I just briefly respond. First point: In the 
most rural parts of America it is possible to construct at a 
statewide level or a national level a set of policies--tax 
incentives, universal service--that ensures that there is 
deployment of any technology out into those parts of the 
country. The analog is electricity, the analog is telephone. We 
can do it as well for broadband if that is our decision.
    The second point is that in 1996, for all intents and 
purposes, the telephone industry had a 100 percent control of 
the local marketplace. Today, after the passage and this brief 
implementation period of the Telecom Act, the competitors now 
control 7 to 8 percent of all the lines in the United States. 
So we are heading in just the opposite direction of some of 
these other deregulation analogies which you used.
    The protection which the consumer and competitors have is 
that there is an Act on the books, there is a 14-point 
checklist, there is a carrot which is held out there, which is 
that they cannot get into the long distance business, a $100 
billion business, until they open up their local loop, and then 
it is up to the FCC and the State regulators to make that 
determination.
    Although they have only now complied in five States, we 
already see 7 percent of all the lines in the United States 
controlled by competitors. When we hit the 50-State level, if 
we hold onto this Act, if we ensure that the State and Federal 
regulators implement it and we do not repeal it, which is what 
many people are proposing, then we will see a dramatic increase 
in the total lines that are controlled by competitors. We will 
see just the opposite of what happened in the trucking or in 
the airline business.
    So we have just the opposite situation. We actually put the 
law on the books to break it up. We have not done that yet in 
airlines. We have not done that in other industries. We have 
done it here, and I would just say that our best course is stay 
the course.
    Senator Cleland. Thank you very much.
    The Chairman. Senator Dorgan.

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

    Senator Dorgan. Mr. Chairman, thank you very much.
    Mr. Markey, this must be therapeutic for you, to come over 
and be able to say in front of the Senate what I have heard you 
say so often.
    Mr. Markey. Well, as you know, my wife is a psychiatrist, 
so I say it to her at night. So this is great.
    [Laughter.]
    Mr. Markey. It is great to have others.
    Senator Dorgan. Like I say, it is actually therapeutic for 
us to just have you sit there so we can talk about these 
issues.
    Let me just follow my colleagues' lead on that and make a 
couple of remarks and then ask you a question. I am actually 
pretty tired in the morning, getting up and shaving, and I have 
a television set on, and hearing advertisement after 
advertisement after advertisement about Dingell-Tauzin, selling 
it kind of like a foot powder, something that will cure 
everything from hiccups to the gout. But Dingell-Tauzin, every 
morning, Dingell-Tauzin.
    Well, let me try to describe where I think we are. We 
passed the Telecommunications Act. I thought it was a pretty 
good bill. I do not think we ought to take it apart at this 
point. I think a couple things have intervened. I think, one, 
we have had an FCC that made some bad turns, some wrong turns, 
and probably drug their feet for some while in terms of the 
implementation of it. The FCC must be a referee in a 
circumstance like this and I think in some respects has not 
done as good a job as we would like.
    Second, some companies took this to court, delayed its full 
implementation.
    But as I see it there are two issues. One is the ability 
for consumers around this country to have competition in the 
local exchanges. While I think that there has been some small 
amount of progress, it is infinitesimal and we need to get at 
the business of giving people around this country the 
opportunity to see competition in local exchanges.
    If you take away the business lines, in terms of 
residential I think you are talking only 3 or 4 percent of the 
people in this country that have that choice. The incumbents 
control about 96 percent or so. So we have not made great 
progress there.
    Second, the buildout of advanced services all across the 
country, that is going to happen in rural areas only when you 
have universal service support. The investment stream necessary 
to support the buildout of that infrastructure for advanced 
services will occur only to the extent that the FCC understands 
that universal service was intended by us not to be capped, it 
was intended by us to be a mechanism by which all Americans 
would have universal access to all of the technologies and the 
services.
    So I think that we are in a situation at the moment where 
things have not gone as well as we had hoped. The solution is 
not to take apart the 1996 Act. The solution is to make sure 
that the 1996 Act works as we intended it to work. We intended 
it to work in a manner that allows a checklist for the 
incumbent local exchange carriers to meet the checklist, after 
which they are free to go into long distance inter-LATA, but 
when they meet the checklist it means the competitive local 
exchange carriers will be able to come in and compete.
    Competition is when you have a number of firms competing 
over price and service and you have robust competition. But we 
have a market system that is clogged at this point. The 
arteries of that system are clogged and it does not work right. 
So some say, well, let us just pass Dingell-Tauzin.
    In my judgment, Dingell-Tauzin is going to get slowed way, 
way down when it gets here to the U.S. Senate and should get 
slowed down. I do not think the Senate is prepared to pass the 
Dingell-Tauzin Act. But what we should do, it seems to me, is 
try and evaluate what has not worked and how do we put it on a 
track to make it work?
    Now, Congressman Markey, with those comments, very briefly, 
tell me the two things you think we can do in dealing with 
establishing once again the need for competitive local service 
in the local exchanges and, second, the buildout of advanced 
services to rural areas?
    Senator Lott. Senator, would you yield?
    Senator Dorgan. Of course.
    Senator Lott. I am concerned because I fear that those who 
have been running these ads may double their buy, because 
apparently they have not gotten through to you. It is Tauzin-
Dingell.
    [Laughter.]
    Senator Dorgan. Is it?
    Senator Lott. It is Tauzin-Dingell.
    The Chairman. Instead of Dingell-Tauzin.
    Senator Dorgan. That is why I thought it had something to 
do with foot powder, ``Tauzin-Dingell.''
    [Laughter.]
    Senator Dorgan. Well, it goes to show my attention deficit 
in the mornings. But I have just enough attention to it is 
annoying.
    Congressman Markey, I have asked you a question.
    Mr. Markey. I think saying it Dingell-Tauzin is 
anticipating, Senator, a five-seat switch in the House. You 
know, it is anticipatory.
    Senator Dorgan. Something we have experience with in the 
Senate.
    Mr. Markey. So again, the Act is working. As each Bell in 
each State applies to the Federal Government, the Federal 
Government at the FCC then relies upon the State public utility 
commission to determine whether or not the checklist has been 
met.
    I think that if the message is sent from the Senate that 
the Act is not going to be changed, then the Bells no longer 
have an incentive in delaying in their applications being sent 
to the FCC and to the States, because there will not be any 
relief from the requirements. If, however, there is a sense 
that the Senate may change the Act, then they do not have an 
incentive to comply because they will be relieved of their 
responsibilities.
    So there is a regulatory uncertainty which has been 
introduced into the marketplace by the introduction of this 
legislation. It hurts these competitive companies in the 
capital markets and it hurts them in the sense that the four 
Bells do not have an incentive to fully comply at the State 
level with the opening of their market.
    So I think the first and most important thing that can 
happen is that a signal be sent that there will be no changes. 
As a result, the Bells have a higher incentive to more quickly 
comply with the 14-point checklist and we will see more 
competition.
    With regard to rural America, again they have already been 
the beneficiaries of this competition policy. It may only be 20 
percent of rural America thus far, but again that has happened 
in a relatively short period of time. To the extent to which 
all of rural America, that is the parts of it that are very 
difficult to reach, need a special policy, I think that we can 
construct one, looking at tax incentives, looking at universal 
service, looking at a State-Federal co-operation to effectuate 
that end.
    But I do not think that we should tamper with the 
underlying principles of the Act which have created hundreds, 
thousands of companies which have revolutionized information 
services in this country and across the world. I think that 
that would be the biggest mistake which we could make.
    Senator Dorgan. Mr. Markey, my time is expired. Let me 
just, Mr. Chairman, mention, in Minot, North Dakota, there is a 
company, it is a rural telephone co-op called Soares River 
Telephone, which actually bought the exchange from the old 
Northern States Power. They took Minot, which is about 40,000 
or 50,000 people, and all the small towns and the farms in 
their entire service area, and they have decided as a co-
operative, we are going to build out advanced service 
capability to everybody.
    All of Minot is now able to achieve advanced services if 
they want to do so under this system. Small towns 30 miles away 
can. In September, using a wireless approach, this company--
this rural telephone co-op, has said everybody in our service 
area is going to have advanced service capability. It is a 
matter of will for those that want to do it.
    I would say the larger carrier in our State that provides 
the local exchange service has not had that will. In fact, they 
have wanted to sell some of their exchanges and to not invest 
in others. I am very concerned about what is happening in 
larger towns than Minot where people do not have the same 
capability because the will does not exist by those that are 
now serving it.
    That is why I would like to see a strong, good burst of 
competition all across this country in these areas.
    Mr. Chairman, thank you very much.
    The Chairman. Very good.
    Senator Carnahan.

               STATEMENT OF HON. JEAN CARNAHAN, 
                   U.S. SENATOR FROM MISSOURI

    Senator Carnahan. Thank you, Mr. Chairman. I want to thank 
you for inviting me to participate today. I am very much 
looking forward to rejoining this Committee at the appropriate 
time.
    I am pleased the Committee has convened this hearing to 
examine this, what is an extremely important issue of 
competition in local telephone markets. It seems lately that, 
as Senator Dorgan pointed out, you cannot turn on your 
television or open a newspaper without being deluged by 
messages promoting competing theories about the rollout of 
high-speed Internet services.
    The debate, however, is fundamentally about contrasting 
views concerning the proper interpretation of the 
Telecommunications Act of 1996. Although I was not here when 
that legislation was crafted, I do believe strongly in the 
importance of its overall goal, to encourage competition in 
local telephone markets. Robust competition is good for 
consumers, it is good for the economy. Competition helps to 
forge breakthroughs in technology as well.
    Consumers have already reaped the benefits of competition 
in long distance services and we need to ensure these same 
benefits are available in local markets as well. These are 
certainly extremely complicated issues that have tremendous 
implications for consumers in Missouri and across the Nation.
    Our panelists today, I am sure, will have a diverse set of 
viewpoints concerning the State of local competition, and I am 
looking forward to a lively and insightful discussion with 
them. But I might ask Mr. Markey this question. I have noted 
that Chairman Powell has said that he thinks the FCC needs to 
be able to levy larger fines against incumbent carriers when 
they do not comply with the Act. Do you agree with that 
assessment and, if so, do you think that larger fines will 
suffice?
    Mr. Markey. I do believe that larger fines are necessary, 
much, much larger fines. But I do not believe that we should 
have the fine collected any longer go to the Federal 
Government. I believe that the fine should then be given over 
to the companies that were harmed, so that there is a jeopardy 
which is run by the Bells if ultimately a decision is made 
against them whereby the companies that were harmed actually 
got the money and not the Federal Government and as a result 
become more competitive. So it makes it a much more dangerous 
game for the Bells to engage in if they wind up being the 
source of funding for their competitors.
    If a decision is made that a fine should be levied right 
now, that is not the case. Otherwise, what we wind up with is 
kind of a posthumous vindication by the competitors as to fines 
that are collected by the Federal Government but not handed 
over to the companies.
    So yes, I do believe fines are necessary. I do not believe 
that in and of themselves they are sufficient because these 
companies do want to compete and only if there is a full 
implementation of the 14-point checklist will there be full 
competition in the marketplace. So stronger fines that go to 
the competitors, not to the Federal Government, coupled with a 
full implementation of the 14-point checklist, will be a 
formula which will guarantee the consumers will get choice in 
the marketplace.
    Senator Carnahan. Thank you very much.
    The Chairman. Mr. Markey, my only regret is we did not have 
all 23 Senators here on the Committee to hear your testimony. 
You know, when they do not have roll calls then they do not 
come in, and that is unfortunate and we are going to have to 
have you back. You are the most informed Member on 
telecommunications in the Congress and we cannot thank you 
enough for coming over here. Just tell our friend Billy when 
you see him--he is having those Firestone hearings--tell him 
the tread has come off of the monopoly tire over on the Senate 
side.
    [Laughter.]
    Mr. Markey. Can I say one final word, Senator? I appreciate 
the honor to have been asked to come and testify before you. In 
my opinion, in summary, there are three key reasons why we do 
not need a change of law, especially the proposal which is 
being touted on television that Senator Dorgan referred to.
    First, it is unnecessary. There is competition in the 
marketplace today. It is very vigorous. It has been hurt by the 
marketplace. It has been hurt by the potential that new 
legislation could pass. But there is tremendous competition out 
in the marketplace, so it is unnecessary in terms of the new 
legislation.
    Second, it is unfair. It is unfair to all these companies, 
the hundreds, the thousands of them that have gone out into the 
marketplace and raised all of these tens of billions of dollars 
to change the rules halfway through the game.
    Third, it is undigital. It is undigital to argue that it is 
possible to separate the zeros and ones of voice and data and 
video. It cannot be done. The very point of everything that we 
are trying to accomplish is that there is a convergence. So 
they are setting up a proposal that is from a regulatory 
perspective impossible to ever monitor, because you cannot take 
out the zeros and ones of voice from the zeros and ones of 
data. That is why we have the restriction on the books.
    Once they are allowed into long distance, they are allowed 
in for voice and data. But you cannot say that they are just in 
for data but not for voice, because a regulator cannot separate 
them. So in my opinion the CLEC slump means that prices have 
started to rise, that the DSL prices are up, cable modem prices 
are up, cable programming rates are up. If we do not 
reinvigorate competition by letting the marketplace know that 
this Act is going to be implemented, then the new economy will 
suffer.
    There is a misunderstanding that I think is sought to be 
created that it is a battle between the cable guy and the 
telephone guy for the future. It is not. That is a false 
choice. It is a choice between the cable guy, the telephone 
guy, and hundreds of other companies who are now finally 
allowed in, ISPs and CLECs, that are invigorating competition 
that both of these monopolies historically have not been 
subject to.
    Those are the primary beneficiaries, that is those 
companies combined with the consumers that now see deployment 
of technology that they otherwise would never have seen from 
either the cable or the telephone guy. So keep those people in 
mind because those are the real entrepreneurs. Those are the 
little guys, those are the people taking risks, those are the 
technologists, those are the people who are changing our 
country. When you consider this Act, consider the impact which 
you will have upon them.
    Senator Hollings, it is a great honor to have been up 
first.
    The Chairman. Thank you very, very much.
    The next panel will please come forward: Mr. Royce Holland 
of Allegiance Telecom; Ms. Margaret Greene, Vice President, 
BellSouth; Mr. Michael Armstrong, Chairman of AT&T and Mr. 
Clark McLeod, Chairman of McLeodUSA.
    Very good. I am southern enough to start with the lady.
    Ms. Greene, we will recognize you and go right across, Mr. 
McLeod, Mr. Armstrong, and then Mr. Holland.

  STATEMENT OF MARGARET H. GREENE, EXECUTIVE VICE PRESIDENT, 
     REGULATORY AND EXTERNAL AFFAIRS, BELLSOUTH CORPORATION

    Ms. Greene. Mr. Chairman, it is good to be with you today, 
and congratulations on your chairmanship.
    The Chairman. Turn on that microphone or let us get a 
little closer, please, so we can all hear.
    Ms. Greene. I have a prepared summary and I am going to 
totally abandon it at this point.
    The Chairman. We will include the entire summary of each of 
the four on the panel. Your full statements will be in the 
record and we will ask you please to summarize them, because we 
have another panel following you and we would like you to 
highlight it and then be subject to questioning. Thank you very 
much.
    Ms. Greene. What I would like to do, sir, is not to use the 
prepared summary, but talk about some of the things where I am 
in agreement with what has been said here this morning and 
where I have disagreement with what has been said here this 
morning.
    BellSouth agrees totally with you that the Act was 
carefully crafted. It was a very well balanced Act. It had four 
major platforms. Those four major platforms would introduce 
deregulation first, demonopolization and deregulation into the 
telecommunications marketplace. The feeling of BellSouth, 
though, is that only one purpose of the Act has been 
implemented and that is to encourage competition. The other 
three remaining purposes that were so carefully designed into 
the Act--ensuring universal service, making sure that 
alternative networks were incented, and ultimately moving 
toward deregulation--those purposes have not been accomplished.
    We also would agree with what was said here today, that 
rural service is essential, it is required, and we will have to 
have economic incentives and strong economic incentives in 
place to make sure that rural high-speed access is placed and 
we have appropriate rural investments.
    We would also agree regulatory uncertainty exists in the 
broadband market today and that regulatory uncertainty is what 
Tauzin-Dingell seeks to address.
    But, as you might imagine, the conclusions that I draw from 
the facts that I agree with are quite different from what has 
been put forward today. First of all, I strongly disagree that 
we sought to block implementation of the 1996 Act. In fact, 
what we sought to do is understand how the 1996 Act was being 
implemented.
    You will recall on August 8, 1996, the FCC put forward 
implementing regulations and in those regulations the FCC 
introduced something called TELRIC pricing. What they did was 
break up our network. They broke it into piece parts and they 
priced those piece parts looking forward and using technology 
that does not exist in our network today, but a hypothetical 
most-efficient network.
    I would say probably the single most detrimental thing that 
has been done to achieve your vision of competition and 
deregulation in this marketplace is the implementation of 
TELRIC pricing or breaking our network--not the breaking our 
network up, but the prices that were put into place. Those 
prices basically offered our competitors about a 70 percent 
discount on accessing our business customers.
    The second purpose of the Act, preserving universal 
service, would have called for either an increase in 
residential rates and implementation of a universal service 
fund or some other mechanism that would have put similar 
economic incentives into the residential marketplace. It was 
not until late 1999 or 2000 that any attention was paid to the 
concept of universal service at all.
    So as a result, you have exactly the way the Act was 
implemented has decreed the kind of competition we have. In 
BellSouth's service territory we have robust increase in our 
business market. We have some of our central offices where we 
have less than a 50 percent market share for business customers 
today. We have 100 percent of the residential rural customers 
that nobody else wants because our service is priced well below 
the cost of serving those customers.
    In Columbia, South Carolina, we have 45 competitors that 
are competing in our business market in downtown Columbia. They 
are able to offer service to our customers at a mere fraction 
of what our rate, our business rate today, how our business 
rate is set today. Remember that those rates were set 
intentionally at a high margin, not being cost-based, to 
encourage universal service and to incent a broad deployment of 
network. That universal service piece is what is missing from 
the economic incentives that we have in place today.
    I would also disagree that we have sought to delay the 
implementation of the 14-point checklist. As you will recall, 
Senator in 1997 we brought an application up to the FCC out of 
South Carolina. We twice brought applications up, in 1997, 
1987, out of Louisiana. In those applications we interpreted 
and sought to work with the FCC to implement what we thought 
was the 14-point checklist.
    Today we still do not have a successful application in 
BellSouth, even though we now have proceedings filed in all of 
our States. The 14-point checklist has grown in Georgia to be 
1800 different performance measures that we are required to 
report on and to disaggregate and report on a CLEC-specific 
basis.
    By the time this is implemented--what we have been doing 
since 1996 is first of all, seeking to understand what will be 
required for us to get into long distance. We have hired 
hundreds of people to help implement the solution that 
regulators are outlining for us and we have invested $1.6 
billion in equipping our network to deliver that solution that 
the regulators are outlining.
    I would also disagree that we have anything that remotely 
resembles deregulation. I came into this business from the 
Federal Government, where I served as a regulator. I have 
served as a cabinet secretary for the Governor of Kentucky. I 
have been in government and outside of government.
    I entered this business at divestiture and at no time in my 
career in the telephone company have we been more regulated 
than we are today. Every aspect of our business is 
micromanaged. Every price that we charge is examined and 
judgment substituted for the judgment that we put into our 
pricing models. Our performance is measured and sliced and 
diced to the million parts.
    So we are as far away from deregulation as you could 
possibly imagine. The 1996 Act was carefully designed. It was 
carefully crafted. We have just implemented one piece of the 
four-part plan that Congress saw fit to send forth. I would say 
that we need to stay the course. The 1996 Act needs to stay in 
place. It is working in many respects. But we need to fully 
implement the vision of the Congress that passed the 1996 Act.
    [The prepared statement of Ms. Greene follows:]

  Prepared Statement of Margaret H. Greene, Executive Vice President, 
         Regulatory and External Affairs, BellSouth Corporation

    Today's telecommunications headlines lament a ``breakdown in 
competition,'' and the ``remonopolization'' of the telecom industry. 
These reports suggest there are four factors responsible for the lack 
of competition in the telecommunications market--the financial woes of 
the competitive local exchange companies' (CLECs), limited competitive 
alternatives for residential customers, the failed business strategies 
of the interexchange carriers (IXCs) and the consolidation of the 
Regional Bell Operating Companies' (RBOCs). The conclusion that should 
be drawn is in fact quite different. Competition is robust in every 
sector of the communications market except long distance. The RBOCs are 
not the dominant players in the data, broadband, Internet and long 
distance markets and are experiencing significant share loss in the 
local business voice market. Only in the subsidized residential voice 
market do the RBOCs remain the dominant provider. Across the country, 
the competitors share of the local residential market is about 5 
percent--it is important to note that they have done this in about half 
the time it took MCI to gain a similar share from AT&T after 
deregulation of the long distance industry.
    A more complete examination of each of the four factors shows that 
they have erroneously lead to incorrect conclusions drawn by a 
backward-looking, voice-centric perspective, and that these conclusions 
are therefore irrelevant, and in fact are even injurious, to our 
economic future.
    Often cited as evidence that the 1996 Telecommunications Act is not 
working are the financial woes faced by the competitive local exchange 
industry. The CLEC industry is indeed undergoing a significant 
restructure not unlike that which occurs in any industry transitioning 
to competition. The belief among telecommunications industry analysts 
is that the recent experiences in the CLEC industry are no different 
from other evolving industry segments. It can be compared to the 
railroad, automobile, airline or personal computers. All went through a 
period of rapid increase in the number of competitors and the 
subsequent failure or merger of these competitors until the market 
determined the number of competitors that could succeed. Many CLECs are 
failing, and the once darlings of the capital markets are having 
significant problems raising investment capital. Investors are 
increasingly reluctant to put their money in this and other segments of 
the telecommunications market, and in the larger technology market 
without assurances that those they invest in have sound business plans 
that can generate the earnings growth expected in today's market.
    However, while many CLECs have seen their business plans fail, the 
CLEC industry has seen a growth in revenues of 93 percent year over 
year. While the recent FCC report shows that CLECs have achieved an 8 
percent market share overall nationwide in 2000, up from 4.4 percent in 
1999, they have achieved a far higher penetration in the business 
market. In several wire centers in BellSouth territory, CLECs now enjoy 
over a 50-percent business-market share, and the number of CLECs 
operating in our territory, over 300, is increasing. The FCC says that 
nationwide, business customers make up 60 percent of the CLECs 
revenues, as contrasted to only 20 percent of the incumbent local 
exchange carrier (ILEC) revenues. These business customers are high-
margin customers, located in highly concentrated business districts.
    The CLEC industry sprang up in response to regulatory policy put in 
place to implement the Telecommunications Act of 1996. The Act has four 
major purposes:
     To encourage competition;
     To encourage investment in alternative networks;
     To ensure universal service by making subsidies obvious 
instead of hidden; and
     To increase deregulation.
    Regulatory policy to date, however, has focused solely on creating 
competition by any means possible.
    The FCC created a structure whereby the ILECs are required to open 
their existing networks for wholesale purchase by competitors, either 
in whole or in pieces. If sold in whole, the network pricing is at a 
prescribed resale rate (defined as retail less avoided costs such as 
marketing). If sold in part (unbundled network elements or UNEs), the 
pricing would be on a cost-plus or rate-of-return basis. The FCC 
largely ignored the resale pricing provisions, and the UNE prices were 
set at TELRIC (total element, long-run incremental cost) levels, which 
were decreed to be forward-looking, most-efficient technology prices--
prices that the local exchange companies find hypothetical and 
inadequate. UNE pricing was designed to jump-start competition by 
carving up the ILEC revenue stream, and it has worked well in the 
business market. However, it has not worked in the subsidized 
residential market. A review of the actual numbers clearly shows why.
    Significant competition has developed for the business market in 
urban locations, like Atlanta, Georgia; Nashville, Tennessee; Miami, 
Florida; or New Orleans, Louisiana. Examining the difference between 
the retail business rate and the wholesale-unbundled rate--both 
products of regulation--is instructive. BellSouth's retail business 
rate in Columbia, South Carolina, for example, is $42.75. This rate was 
set by regulators intentionally above cost to subsidize local 
residential rates. The wholesale rate available to competitors is 
$18.48, also intentionally set at cost. The $24 difference in these 
rates is available to the competitor as a margin, thereby providing a 
clear incentive to concentrate on the business market. The picture 
changes though when we look at rural South Carolina and the 
competitors' interest in the residential voice customer. The subsidized 
residential rate in rural South Carolina is $12.70. The wholesale, 
cost-based rate is $36.91. Competitors are not flocking to pay $36.91 
to access a $12.70 revenue stream.
    Working from a regulatory structure that clearly enabled them to 
compete using a business plan of price arbitrage against the ILEC, 
hundreds of CLECs have flocked to the same urban areas to compete for 
the same business customers. The CLECs have not sought to serve the 
residential market despite the fact that 88 percent of all U.S. 
households reside in ZIP codes ``served'' by a CLEC. Not surprisingly, 
there is not sufficient revenue in the limited targeted-customer 
terrain to sustain them all.
    Today, many business customers enjoy new pricing plans and lower 
rates. For the most part, however, the CLECs have not built modern 
alternative networks or introduced new products or services. The ones 
that have, and thus have an ability to distinguish themselves in the 
marketplace, are the ones that are expected to survive and prosper.
    It is a relevant fact that there has been limited competition for 
the landline residential voice customer, especially those in rural 
areas. The actual rates outlined above, while specific for South 
Carolina, are representative of the economics surrounding the non-urban 
segment of the market. There are no easy financial incentives for 
competition in the residential landline voice market. The 1996 Act did 
not fail in this regard; it just was not fully implemented. The 1996 
Act required that implicit subsidies be made explicit. This has been 
done only to a very limited extent.
    If subsidies were removed, residential rates would have to be 
permitted to rise to cost. Retail rates would have to be deaveraged to 
accurately reflect costs, historic jurisdictional cost allocations 
would have to be removed, access charges would have to be uniformly 
reduced, and class of service distinctions between geographically 
separate markets would have to be ignored. Artificially low residential 
rates, coupled with state-regulatory-imposed retail service standards, 
currently discourage competitors from serving the residential voice 
market through or with competitive landline services or networks. 
Perhaps more importantly, however, they also serve to retard 
competitive technology's ability to take hold in the residential 
market.
    Today there are many alternatives to traditional voice 
transmission. There is E-mail, wireless voice, wireless E-mail, fixed 
wireless, paging and voice over Internet Protocol. In fact, only one-
in-four new connects for telephone service goes to the landline 
network. The front page of the New York Times on June 12 reported that 
Microsoft is ready to supply a phone in every computer for computer-
based telephony. Cable modems are the dominant residential high-speed 
Internet access tool today and increasingly are able to accommodate 
switched voice as an add-on service. By 2003, it is expected that voice 
landline traffic will be reduced to approximately 45 percent of the 
total telecommunications traffic. If even a reasonable residential rate 
were introduced into this environment, the competitive dynamics would 
explode. Customers would then choose their technology according to 
their user needs without the artificial repression of rates or market 
definition created by regulation.
    A third factor cited as evidence that competition is failing is the 
financial uncertainty of the IXCs. The three key participants in the 
long-distance market, AT&T, WorldCom and Sprint, are all subject to 
increasing market pressures despite the fact that the cost of access 
has declined by as much as 95 percent over the last several years. The 
long-distance companies say the ILECs prevent them from entering the 
local residential market. It is not the ILECs, however. It is the 
economic reality previously noted that discourages them from leaving 
the safe haven of regulatory protection for the competitive 
marketplace. Further, their safe haven is increasingly dwindling 
because there is no longer a discreet long-distance market. Always a 
creature of regulation, first expressed through pricing subsidies 
embedded in long-distance rates, then enforced through judicial decree 
and later codification, long distance is obsolete as a stand-alone 
market.
    This demise did not come at the hand of the ILEC industry nor did 
it originate with the approval of Verizon's entry into long distance in 
New York or SBCs entry in Texas. In fact, the FCC found that the RBOCs 
entry into long distance stimulated local residential competition 
dramatically in New York and Texas. Ironically, long distance as a 
stand-alone market was first attacked by AT&T itself, and then killed 
by Sprint, as a result of their wireless pricing plans that eliminated 
roaming charges and moved to flat rate nationwide. Wireless pricing, 
coupled with the substitution of data or E-mail and Internet traffic 
for long distance voice traffic, makes their earnings growth potential 
problematic and finds them actively engaged in businesses like cable 
television, broadband deployment, Internet transport and nationwide 
wireless.
    These new technologies and efforts are expensive and capital 
intensive, thus creating intense earnings pressures. But make no 
mistake; this earnings pressure applies to BellSouth and to any company 
that undertakes the development of a broadband platform. The broadband 
platform does not exist in the legacy monopoly plant. It must be built 
and it is expensive. No one company will have the financial capacity to 
build it all, and no one technology will have the flexibility to meet 
all of a user's needs. The IXCs, however, have many digital assets, and 
they are assisted by their national scope and virtual freedom from 
regulation at the State and Federal levels.
    The final fact purported to show the demise of competition is due 
to the consolidation which has occurred in the local exchange industry. 
True, the seven RBOCs are now four. They have arrived at this point by 
responding to the incentives currently available to them in the 
marketplace. The RBOCs still are regulated as if they are a monopoly. 
With traditional profits subject to regulatory redistribution, billions 
of available investment dollars are being mandated to build an open-
access or open-network platform. (This construction has been mandated 
under the Act's 14-point checklist, which has now grown to be some 
1,800 performance metrics. When calculated for each CLEC operating 
within BellSouth, this expands to a total of some 4.5 million 
measurements per month.) Additionally, the RBOCs find themselves in a 
market position where they trail their cable-company competitors by a 
3-to-1 margin in customers for data and future growth-oriented 
technologies. RBOCs have had to turn their attention to maintaining the 
margins demanded by the capital markets by taking existing technology 
and applying it across as many customers as possible to achieve 
decreasing costs. Without progressive policy tools, many of which were 
outlined in the Act but not implemented, the pressure to consolidate to 
shed costs in the legacy network will continue.
    Telecommunications regulation has reaped what it has sown--limited 
and tentative investment in only one of the four technology platforms 
poised to deliver the digital economy. The landline, ILEC, public 
switched network alone is subject to price, service and investment 
regulation. Policy, driven as it is today by backward-looking 
residential voice concepts, will continue to severely limit investment 
and may ultimately not allow the growth in the domestic economy that 
was foreseen by Congress when it enacted the Telecommunications Act of 
1996.
    Tomorrow's telecommunications headlines should read, ``robust 
competition in telecommunications stimulates domestic economy and 
brings unparalleled benefits of advanced technology to all.'' In order 
for this headline to become a reality, we must move forward now with 
the full implementation of forward looking telecommunications policies.

    The Chairman. Thank you.
    Mr. McLeod.

        STATEMENT OF CLARK McLeod, CHAIRMAN AND CO-CEO, 
                           McLeodUSA

    Mr. McLeod. Thank you, Mr. Chairman. My name is Clark 
McLeod and I am the Chairman and Co-CEO of McLeodUSA. We are 
the largest independent CLEC in the country. We provide bundled 
local, long distance, and high-speed data products in 25 
States. We are the company that is truly bringing competition 
to medium and small businesses, to residences, and to your 
local communities. We do not just serve large commissions. 
McLeodUSA has a presence in 2,250 cities.
    Today I would like to speak briefly about H.R. 1542 since 
it has come up earlier. H.R. 1542 has no redeeming qualities. 
It guts key open access provisions of the 1996 Act and it 
strengthens the Bells' control over the local network. It moves 
us toward re-monopolization of service that is presently 
competitive, and finally it has created incredible uncertainty 
which has cut off CLEC access to capital.
    I urge each of you, as you already have stated, Chairman 
Hollings, to publicly oppose H.R. 1542. The tread certainly 
should come off of that tire.
    Now let us focus on the key to local competition going 
forward, and this will go back into the 1980s. I have heard a 
lot of talk today about long distance. I think it is very 
important. The key to local competition is equal access to 
competitors. Today we are beginning to provide consumers with a 
choice to local service. Five years after the Act, however, all 
of us together have about 8.5 percent share. If you contrast 
that to the 5 years following the 1984 divestiture of AT&T, the 
long distance competitors in the same length of time had gained 
30 percent market share, four times the rate that we have 
gained today.
    Why has local competition been slow? The answer is the Bell 
companies have successfully denied competitors equal access. 
What is the remedy? Well, let us look again at long distance. 
During the 1980s, I was a founder of a company that grew to be 
the fourth largest long distance company in the U.S. Equal 
access to the AT&T network was mandated and Judge Greene was 
dedicated to enforcing it. Real competition flourished. In the 
last 7 years, we have seen about 40 percent reduction in long 
distance prices.
    Second example is wireless. For the first 10 years, the 
wireless industry was a duopoly and prices remained 
artificially high. Then the FCC opened up additional spectrum 
in the mid-1990s, thereby allowing equal access to more 
competitors. Voila, real competition developed, resulting in a 
50 percent reduction in prices to consumers over the last 7 
years.
    What do these models have in common? Access to consumers. 
So what is the answer for local competition? As Chairman 
Hollings pointed out, we need to mandate equal access to that 
local loop and we need to enforce it. Unfortunately, there is 
not equal access today, either in economic terms or in 
functional terms.
    Let's start with economic equal access. For the CLECs 
today, local access is the equivalent of paying the power 
company, but also having to purchase and operate your own 
generator to keep and guarantee the lights are on. Competitors 
pay for 100 percent service from the Bells and receive far 
less. Accordingly, competitors should be paid damages for the 
costs they incur as a result of unequal access. Alternately, 
rates charged competitors should be discounted--like the 
feature group A discount--was in the long distance industry 
back in the 1980s.
    These remedies will produce results. For example, with 
QWEST we have seen positive trends in responsiveness, service 
delivery, creativity, if you will, all of which have 
contributed to a significant improvement in our relationship. 
This result is attributable, we think, in part to the fact that 
QWEST is paying us penalties directly for misperformance.
    Second, functional equal access. This means competitors are 
able to order, provision, and service lines in the exact same 
way the Bell companies are. It seems like common sense, but we 
do not have that today. Bell company systems must be blind to 
who is ordering the service. This eliminates their ability to 
discriminate.
    So to enforce functional equal access, penalties are 
necessary. Some have suggested fines of $10 million, but that 
is not enough. Imagine a $10 million fine for a company with a 
$100 billion market cap. I am afraid it is the equivalent to a 
parking meter violation.
    Last year, the Illinois Commerce Commission fined SBC $60 
million. Later, one Illinois legislator was told that paying a 
$60 million fine was simply ``cost of doing business.'' 
Progressive penalties must be meaningful. Functional equal 
access comes from separating network operations from retail 
operations. This can be done functionally and QWEST is 
currently working with competitors to implement that.
    But if separation is not done, then regulators must have 
the authority to structurally separate the Bells' retail and 
network operations.
    In conclusion, competitors, after spending billions of 
dollars, have averaged a little more than 1 percent market 
share per year, and if you extrapolate that, there will be no 
one in this room alive by the time we have meaningful 
competition. In fact, all current competition may die along the 
way.
    We need a mechanism for consumers to receive higher levels 
of service at lower rates, like they have enjoyed in long 
distance and wireless service. Congress needs to finish what 
was started in 1996 by taking action to enforce the Act and 
provide equal access to the local network.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. McLeod follows:]

                  Prepared Statement of Clark McLeod, 
                     Chairman and Co-CEO, McLeodUSA

    McLeodUSA provides competitive telecommunications services to 
residential and business customers in 25 States. We also serve rural 
and urban markets. We currently provide a bundle of local, long 
distance and high-speed DSL and other data products.
    H.R. 1542 has no redeeming qualities. It guts key open access 
provisions of the 1996 Act and strengthens the Bells' monopoly control 
over the local network. This bill created uncertainty, which cutoff 
CLEC access to capital. This bill would move us toward remonopolization 
of all telecommunications industries by the Bell companies. I urge you 
to publicly oppose H.R. 1542.
    Local competition has developed much slower than long distance 
competition. The reason is that the Bell companies have successfully 
denied competitors equal access (both economic and functional) to their 
local network.
    In order to open up the local network to competition, we should 
review the successful models in the long distance market and the 
wireless market. Access led to competition, which led to lower prices 
and higher service quality for customers.
    The answer for local competition is to mandate equal access and 
enforce it. Unfortunately, there is not equal access today, either 
economic or functional.
    Economic equal access does not exist today, because competitors are 
not getting what they pay for. Competitors pay for 100 percent service 
from the Bells but receive far less. Consequently, competitors must 
receive damages to offset the costs they incur as the result of unequal 
access. Alternatively, the price competitors pay the Bells should be 
discounted (similar to the long distance feature group A discount).
    Functional equal access also does not exist. Competitors must be 
able to order, provision and service lines in the exact same way the 
Bell company does. A system is needed within a Bell company that does 
not reveal who the ordering company is, thus eliminating the ability to 
discriminate. Until that occurs meaningful and progressive penalties 
must be assessed when the Bells discriminate.
    Separation of retail and network operations is critical to 
functional equal access. Separation can occur functionally within a 
company, which is the system Qwest is implementing. But, if meaningful 
separation does not occur, regulator must have the authority and budget 
to structurally separate the Bells' retail and network operations and 
must use it to accomplish functional equal access.
    On behalf of McLeodUSA, I would like to thank the Committee for the 
opportunity to talk with you today. I would like to accomplish three 
goals: first, highlight McLeodUSA's progress in serving residential and 
business customers in rural and urban markets; second, briefly 
summarize our opposition to H.R. 1542, which moves us toward re-
monopolization of all telecommunications industries by the Bell 
companies; and third, highlight the keys to local competition.

            I. McLeodUSA IS EXACTLY WHAT CONGRESS ENVISIONED

A. Entrepreneurial
    In the early 1980s, I was CEO of Teleconnect, a company founded to 
compete in the long distance industry. I started basically out of my 
garage and began to bring the benefits of competition to my customers. 
In 1981, the Federal Communications Commission (FCC) mandated AT&T to 
allow competitors access to its existing network. As public policies 
continued to encourage and support competition in that industry, 
several competitors, including Teleconnect, began to have success. Over 
the course of about 8 years we built Teleconnect into the fourth 
largest long distance company in the country employing nearly 7,000 
employees. So I know entrepreneurial competition can work to bring 
competition to medium and small businesses and residences in your local 
communities.
    In 1992, I organized McLeodUSA, headquartered in Cedar Rapids, 
Iowa, began competing in the local and long distance telephone markets. 
We started slowly. When the Telecommunications Act of 1996 (``the 1996 
Act'') was passed, we were able to take our company public and 
accelerate our growth.
    McLeodUSA's corporate team is recognized as one of the strongest 
management groups in the telecom industry: strong because of our 
breadth, and strong because of our depth.
    McLeodUSA Incorporated is a Nasdaq-100 company traded as MCLD. The 
Company's website is available at www.mcleodusa.com.

B. Serving a Wide Range of Customers
    We serve both business and residential customers. In fact we serve 
more residential customers than business customers. Our goal is to be 
the number 1 and most admired company in the markets we serve. We 
cannot accomplish that by only serving large business customers in 
large cities, so we rejected that model. The Bells like to portray 
competition as competitors who merely ``cherry-pick'' high-margin large 
business customers. In our case that portrayal is just not true.
    We also serve a wide range of communities ranging from cities as 
small as a few hundred people up to cities as large as Chicago. In the 
communities we serve, our focus is primarily on small and medium sized 
enterprises. While we do serve residential customers and large 
businesses, we have found that small and medium-sized businesses are 
largely underserved. We have good success with those customers using 
our beat-cop sales approach that meets customers face-to-face. 
Currently our average business customer has 6 telephone lines. So again 
you can see we are not in this business to only serve the ``high 
revenue'' large business customers of the Bell companies. We are 
committed to taking competition to the small businesses along Main 
Street as well as to the residences of your constituents.

         II. McLeodUSA IS BRINGING COMPETITION AND ITS BENEFITS

    McLeodUSA is the largest independent CLEC in the country. In March 
1996 we served approximately 40,000 local access lines. Today, we serve 
over 1 million lines.

A. Jobs
    In late 1994 we had approximately 200 employees, primarily in Iowa. 
Today we have nearly 11,000 employees working in 150 offices located in 
25 States.

B. Technology
    At the end of the first quarter of 2001, we had 50 central office 
and long distance switches and 396 data switches in operation. In 
addition we had deployed and begun operating approximately 29,000 route 
miles of fiber optic cable connecting most of those facilities. By the 
end of 2002, we will operate a 30,000-mile broadband network connecting 
810 cities capable of delivering service to a local telephone 
connection (the ``local loop'') for 90 percent of the U.S. population. 
See Exhibit 1. The one critical missing requirement for meaningful 
local competition, however, is for competitors to have equal access 
(functional and economic) to the Bell local network . . . the entire 
local network.

        III. H.R. 1542 MOVES US TOWARD RE-MONOPOLIZATION OF ALL 
          TELECOMMUNICATIONS INDUSTRIES BY THE BELL COMPANIES

    Let me get immediately to the point: H.R. 1542 has no redeeming 
qualities. It guts key equal access provisions of the 1996 Act and 
strengthens the Bells' monopoly control over the local network.
    It does nothing to spur broadband investment in rural America.
    It is totally irrelevant to the Bells' ability to provide DSL 
service. The Bell companies can and do provide broadband DSL service 
today.
    It substantially reduces the Bells' incentive to open their local 
markets to competitors, by granting immediate authority to provide 
long-distance ``data'' services.
    This bill created uncertainty, which cutoff CLEC access to capital.
    Consequently, I urge each of you to publicly oppose H.R. 1542.

                     IV. KEYS TO LOCAL COMPETITION

    Today, we are at the beginning of providing consumers a competitive 
choice for their local telecommunications service. Five years after the 
1996 Act, all competitors (independent CLECs, AT&T, Worldcom and 
Sprint) have gained 8.5 percent share of local access lines. In 
contrast, competition in the long-distance industry during the 1980s 
developed much faster. Five years after the 1984 divestiture of AT&T 
from the Bell companies, all long-distance competitors had gained 
nearly 4X the marketshare that competitors have gained in local access 
lines.
    Why has local competition been slow to develop? The answer is that 
the Bell companies have successfully denied competitors equal access 
(both economic and functional) to their entire local network. [See 
Exhibit 2.]
    How do we open up the local network to competition? Let me describe 
two successful models used in the long distance market and the wireless 
market.
    First, long distance. The two keys actions that allowed competition 
to flourish in the long distance industry was that equal access was 
mandated and enforced. In 1981, the FCC mandated that all competitors 
have access to the AT&T network. In 1986, equal access from the Bells 
was mandated, thus allowing 1+ dialing. Additionally, Judge Greene 
provided strong enforcement, including meaningful penalties, to deter 
anti-competitive conduct. The result was healthy long distance 
competition, an approximate 40 percent decrease in prices since 1993 
and higher service quality for all customers. I can personally testify 
to this market opening during the 1980s as the founder of the 4th 
largest long distance company in the 1980s. [See Exhibit 3.]
    Second, wireless. For the first 10 years, the wireless industry was 
a duopoly. Even though technology made great strides, prices remained 
artificially high. The FCC then opened up additional spectrum, thereby 
allowing equal access to more providers. Real competition developed and 
prices decreased over 50 percent since 1993. [See Exhibit 3.]
    What do these two models have in common? Equal access to customers. 
So what is the answer for local competition? It is very simple. Mandate 
equal access.
    QWEST has shown some positive improvement, but unfortunately, there 
is not equal access today, either economic or functional.

A. Economic Equal Access
    First, economic equal access. Competitors are not getting what they 
pay for. For CLECs, local access today is the equivalent of paying your 
monthly bill to the local power company but also having to purchase and 
operate your own power generator to guarantee the lights stay on. 
Competitors pay for 100 percent service from the Bells but receive far 
less. Not only do competitors receive less than 100 percent of what 
they order from the Bell companies, current local access rules cause 
competitors to lose money while ensuring the Bells make a profit. [See 
Exhibit 4.]
    So how do we enforce economic equal access? There are two 
alternatives. Competitors must have the price they pay the Bells 
discounted like was done successfully with long distance (the feature 
group A discount). Or, in the alternative, award damages for costs 
competitors incur when less than 100 percent service by the Bells is 
provided. We know damages will accomplish our goal. With QWEST, we have 
seen positive trends in its responsiveness, service delivery and 
creativity, all of which have contributed to a significantly improved 
business relationship. This result is attributable in part to the fact 
that QWEST pays penalties related to performance problems directly to 
us.

B. Functional Equal Access
    Functional equal access means competitors are able to order, 
provision and service lines in the exact same way the Bell company 
does. This seems like common sense, but we don't have it today. A 
system is needed within a Bell company that does not reveal who the 
ordering company is, thus eliminating the ability to discriminate.
    So how do we enforce functional equal access? Progressive penalties 
can be imposed against the Bell companies when they engage in 
discriminatory conduct. Some have suggested up to $10 million, but $10 
million is too low by several orders of magnitude. Imagine a $10 
million fine against a company with a $100 billion market cap. It's the 
equivalent of a parking meter violation.
    During last year, the Illinois Commerce Commission fined the 
incumbent provider $60M. In response to these payments, one Illinois 
legislator was told that paying the $60 million fine was simply a 
``cost of doing business.'' Clearly penalties must be increased 
substantially in order to be meaningful.
    Functional equal access can also be implemented by separation of 
network and retail operations with the incumbent provider. QWEST is 
working with competitors to implement adequate functional separation 
and non-discrimination practices. Other Bell companies are not. If 
penalties do not result in functional separation, then State and 
Federal regulators should be authorized to structurally separate the 
Bell companies. They need the authority and the budget to carry out the 
separation, and if they do not determine separation has occurred they 
should use this authority.

Conclusion
    Competitors, after spending billions of dollars, have averaged a 1 
percent marketshare gain per year. If you extrapolate, there will be no 
one is this room still alive by the time we have meaningful local 
competition. And in fact, competition may die enroute. Congress needs 
to finish what was started in 1996 and take action now to mandate equal 
access and enforce it.

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    The Chairman. Thank you.
    Mr. Armstrong.

              STATEMENT OF C. MICHAEL ARMSTRONG, 
               CHAIRMAN AND CEO, AT&T CORPORATION

    Mr. Armstrong. Thank you, Mr. Chairman.
    Congratulations. Thank you for holding this hearing and it 
is an honor to appear. I know time is limited, so I will be 
brief.
    First of all, AT&T is committed to bringing competitive 
local telephone service to residential and business customers. 
We have invested over $100 billion in local telecommunications 
and cable networks and we now serve over two million local 
telephone customers. We are fulfilling our part of the bargain 
of the 1996 Telecom Act.
    Second, we and other local competitors could be doing even 
more if the incumbents were living up to their responsibilities 
under the 1996 Act. Unfortunately, the Bells have spent 5 
years, as has been talked about, playing their hole cards, 
mostly price and process, after the delays and litigation.
    Even though the Bells are required to lease parts of their 
networks to competitors at reasonable wholesale rates and with 
reasonable processes, we all lose money because the wholesale 
prices the Bells charge and the processes we are subjected to 
are not reasonable. Where Federal and State regulators have 
insisted on compliance with the Act, as appears could be the 
case in New York now, we have seized the opportunity and 
entered the local marketplace.
    Third, contrary to the incumbent monopoly claims, there is 
no regulatory barrier to the Bells' deployment of broadband. It 
is occurring faster today than the deployment of any new 
technology in memory. The Bells are spending billions now to 
deploy DSL, but for one reason: competition. As was mentioned, 
DSL sat on the Bells' shelf for about 10 years. Now the first 
places they have deployed it is where competitors are most 
active.
    The local monopolies claim that a bill now pending in the 
House, the Tauzin-Dingell bill, would bring broadband more 
quickly to rural areas. This is a transparent effort to exploit 
digital divide concerns. In fact, the deployment provisions of 
the bill actually mandate less than what the Bells are already 
doing. At the same time, the Bells are selling off a lot of 
rural exchanges.
    Far from being necessary to promote competition, the 
Tauzin-Dingell legislation presents a serious threat to local 
competition. It would deprive competitors of the ability to 
purchase access to critical parts of the monopoly's network, 
and it would allow the Bells to enter the long distance market 
without first opening their local market to competition. 
Eliminating these provisions of the 1996 Act would preserve 
monopoly power over local phone service and really allow the 
Bells to leverage this monopoly into the control of high-speed 
data services.
    Finally, if action is needed to finish the job started in 
1996, it is to enforce the law. There must be meaningful 
penalties and damages available to the competitors where their 
businesses have been harmed by the incumbent's failure to 
comply. Most importantly, policymakers should consider 
compelling the Bell companies to create a clear structural 
separation between their wholesale and retail operations. This 
will simply help ensure the Bells provide the same price and 
the same process to their competitors as they do to themselves.
    If a monopoly is not de-monopolized before entering a 
competitive market, it will use its monopoly power to 
monopolize that competitive market. This is exactly what the 
Bells are doing in the narrowband arena with price and process 
and it is exactly what they are up to in the broadband market 
with the Tauzin-Dingell bill. Separation of the Bells' network 
and retail operations will enable the market to demonopolize 
the Bells' local monopoly.
    Regulation and enforcement can work, but, as we have seen 
repeatedly, Bell gamesmanship against competitors and the lack 
of meaningful penalties are defeating the intentions of the 
Act. Structural separation coupled with stronger enforcement 
will let the market do the work.
    The hope for competition and local phone service is really 
at a critical juncture. CLECs and long distance companies have 
invested billions relying on the 1996 Telecom Act. Due to a 
lack of compliance by the Bells, it is not working. Not only 
does simple fairness argue against Congress repudiating the 
rules it wrote, now in the middle of the road or the game, it 
also argues to make sure the rules are enforced and that local 
competition results. If this does not happen, we will surely 
face the re-monopolization of the consumer-small business 
communications market in America.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Armstrong follows:]

              Prepared Statement of C. Michael Armstrong,
                   Chairman and CEO, AT&T Corporation

    Thank you, Mr. Chairman and Members of the Committee, for inviting 
me here today to share AT&T's views on the status and prospects for 
local competition. Since 1996, AT&T has been a leader in developing 
competitive alternatives to the incumbent telephone monopolies for 
residential and business customers. In reliance upon the promise of the 
Telecommunications Act, we have invested over a hundred billion dollars 
in local telecommunications and cable networks and now serve over 2 
million local residential customers.
    The 1996 Act promised to end almost a century of monopoly control 
over the local telecommunications market and bring the benefits of 
competition to consumers. 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 the long distance market. 
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.
    In response to the passage of the Act, AT&T and dozens of other 
companies invested billions of dollars in new telecommunications 
facilities and services. In addition to spending over $95 billion to 
acquire and upgrade cable facilities to provide telephone competition, 
we purchased Teleport for $11 billion to serve business customers. AT&T 
also supplemented its existing long distance network by bringing more 
than 70 local switches and hundreds of collocation facilities on line 
across the country to compete with the incumbents. All new entrants 
took substantial risks in reliance on the regulatory framework created 
by the 1996 Act, under which they should have had a fair chance to 
compete with the established incumbents. And where that framework has 
been supported and protected by State regulators, it has enabled 
successful local competition.
    Unfortunately, the ILECs have resisted and challenged nearly every 
attempt to implement the pro-competitive provisions of the Act. They 
have spent 5 years playing their two hole cards--price and process. And 
with them, they've largely managed to keep competitors out of their 
monopoly. Their strategy of resistance, delay, and litigation has 
enabled the ILECs 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. And the 
incumbents now 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. Even considering 
such legislation creates the kind of market uncertainty that deters new 
investment and deployment. Enactment of such a bill would repudiate all 
of the hard work of Congress, and this Committee in particular, to 
bring consumers the benefits of a competitive marketplace, would 
jeopardize the significant investments made by AT&T and other new 
entrants to bring broadband and competitive local service to the 
American people, and would slow the deployment of advanced services. 
There is no justification for doing so.
    There is no need to abort the promise of competition in exchange 
for broadband deployment by the incumbents. The market-opening 
requirements of the 1996 Act have not been an impediment to Bell 
company investments. In the past 5 years, the Bells have added almost 
five times the total number of access lines of all the competitive 
providers combined, and today they provide more than 90 percent of 
residential DSL services.
    We have heard the incumbents complain before that overregulation 
was deterring them from rolling out advanced services and facilities. 
In 1998, they demanded that the FCC give them the right to offer 
advanced services largely free of the market-opening requirements of 
the 1996 Act. But before they gained the relief they sought, 
competitors began to deploy broadband services and the incumbents 
responded with vigorous deployment of their own. Under the spur of 
competition, regulatory relief proved unnecessary. Now, with the 
competitors seriously weakened and their deployment plans curtailed, 
the incumbents are back with the same untenable claims of 
overregulation. They are as unjustified now as they were two or 3 years 
ago. Now, as then, the incumbents' threat that they will cancel 
deployment unless the rules are changed is nothing more than a ploy to 
retain and strengthen their monopoly position.
    Nor is the demand for ``regulatory parity'' between the ILECs and 
cable companies a justification for deregulating the local telephone 
monopolies. There are good reasons why cable companies and telephone 
companies are regulated differently, starting with the fact that cable 
companies face substantial competition in their core video business. In 
any event, it is a myth that cable operates on an unregulated basis. To 
the contrary, cable companies are subject to significant regulatory 
obligations, such as local franchising requirements and payment of 
local franchise fees, that do not apply to ILECs.
    Experience shows that the ILECs have deployed advanced services 
under the existing rules when faced with competition--and absent 
competition did not deploy them--even when the technology existed and 
the market-opening requirements of the 1996 Act had not yet been 
enacted. Remove the possibility of DSL competition and the prospects 
for ILEC deployment of advanced services will be substantially reduced.
    Legislation may be necessary to finish the job started in 1996, but 
the right tools for that job would ensure a forum for rapid resolution 
of complaints against ILECs, meaningful penalties for violations of the 
market-opening provisions of the Act, and structural separation between 
the wholesale and retail operations of a Bell company. In other words, 
rather than dismantling the framework of the 1996 Act, Congress must 
reaffirm its commitment to its competitive principles. 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 monopoly 
control over the local telecommunications market.
    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. 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 TCI 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 825,000 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 marketopening requirements of the 
1996 Act to lease facilities from the incumbents and resell their 
services. Even in the face of grudging and spotty compliance with these 
requirements, the results have been dramatic: over 2 million local 
residential customers in 16 states have chosen AT&T as their local 
service provider.
    AT&T has also made a substantial commitment to providing 
competitive DSL service to residential and business customers. 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. Those assets will be integrated with AT&T's 
existing network and allow us to reach more of our customers with a 
broad mix of services, including DSL broadband, local, and long 
distance.

    LOCAL COMPETITION IS EMERGING WHERE REGULATORS HAVE UPHELD THE 
  PRINCIPLES OF THE 1996 ACT AGAINST ANTICOMPETITIVE BEHAVIOR BY THE 
                               INCUMBENTS

    To be able to put our assets to work for consumers, we need to be 
able to interconnect with the incumbents' networks, and we need to be 
able to lease use of their network elements at reasonable prices and 
fair terms. Without these things, AT&T and other competitors will not 
be able to provide the full range of services on regional and national 
levels that customers demand.
    The history of the telecommunications industry teaches that use of 
ILEC network elements is an important stepping stone to facilities-
based competition. No new entrant--even a facilities-based competitor--
can be expected to build out a national or even a regional network 
before signing up customers. The market-opening requirements of the 
1996 Act allow new entrants to enter the marketplace and gain customers 
while they are building their networks. This is how long distance 
competition developed. MCI and Sprint began service as resellers of 
AT&T's service. They would not be in business today if they had to 
build out their networks before signing up a single customer--or if the 
pro-competition rules and policies that attracted them to the market 
were subsequently reinterpreted as favoring or preferring only 
facilities-based providers.
    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. Their 
continued resistance to meeting their obligation to open local markets 
has caused significant harm to the prospects for successful local 
competition. Where states have made meaningful strides in insisting on 
compliance with the Act, we have seized the opportunity and entered the 
local marketplace. In those states, consumers can buy local service at 
competitive prices that is better tailored to their needs than what 
they get from the incumbents. In fact, a recent report found that 
residential consumers in New York have saved up to $416 million dollars 
a year by switching to competitors for local telephone service.\1\ That 
is the true accomplishment of the 1996 Act. Without the necessary 
commitment of resources toward enforcement and implementation, however, 
the incumbents have deterred competition in a myriad of ways.
---------------------------------------------------------------------------
    \1\ ``TRAC Estimates New York Consumers Save up to $700 Million A 
Year on Local and Long Distance Calling,'' [TRAC Press Release May 8, 
2001.]
---------------------------------------------------------------------------
    For example, competitive local exchange carriers seeking to lease 
elements of the incumbents' networks to provide competitive service 
have been frustrated by the incumbents' refusal to provide these 
elements. At various times since 1996, the Bells have refused to 
provide elements essential to voice services, elements essential to 
advanced services, and combinations of elements essential to all 
services.
    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 showed that while Verizon always filled orders for its own 
customers in under 5 days, 80 percent of competitive customers had to 
wait longer than 5 days.
    Moreover, the elements that are provided are offered at inflated 
prices designed to eliminate competitors. As a result of litigation 
brought by the incumbent monopolists, the FCC lost its authority over 
wholesale pricing. Although the Supreme Court eventually restored this 
authority in 1999, the FCC has since been reluctant to override State 
commissions that have permitted the incumbents to charge 
anticompetitive rates.
    In addition, although CLECs are entitled to obtain dedicated space 
in an incumbent's central office or at other of its 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.
    In some cases, ILECs are prepared even to punish consumers rather 
than comply with the Act. 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 cost-based 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.
    In the face of these types of behavior, many competitors have been 
forced to stop offering local telephone service. 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.''
    The current threat to local competition does not stem from the 1996 
Act. When State regulators intervene and protect competition by 
blocking anticompetitive acts by the incumbent monopolists, local 
competition can work successfully. For example, we previously had 
warned that we would have to leave the New York market because we were 
losing money. But if a recent New York ALJ decision ordering Verizon to 
lower its network element rates is upheld, we will be able to stay in 
New York and continue to compete, to invest, and to expand our efforts 
to provide broad-based local service to consumers. As a result of 
positive efforts by the Michigan Public Service Commission to set fair, 
costbased wholesale rates for unbundled network elements, we also plan 
to begin offering UNE-based local service in Michigan by the end of the 
year.

 LOCAL COMPETITORS CANNOT SURVIVE THE DOWNTURN IN THE FINANCIAL MARKET 
        IF MORE LOCAL MARKETS ARE NOT TRULY OPEN TO COMPETITION

    Competitive LECs are suffering heavily because of the difficulties 
they have encountered entering local markets and the economic downturn. 
Over the past year, the CLEC industry has virtually collapsed. Numerous 
competitors, including Winstar, e.spire, Vectris, Jato, Prism, NETtel 
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 2 years, they raised only $76 million in IPOs 
in March of this year, leading numerous companies to withdraw their IPO 
plans.\2\
---------------------------------------------------------------------------
    \2\ 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 canceled plans to expand nationwide. Net2000 has put its plans for 
expansion on hold. Numerous other competitors have resolved to focus on 
a few core markets. Each of these decisions has been accompanied by 
hundreds of eliminated jobs. CLECs dismissed over 13,000 employees in 
the last year-and-a-half, attempting to remain in business. While the 
ILECs conveniently dismiss the massive collapse of the CLEC industry as 
the result of ``bad business plans,'' this cynical criticism clearly 
does not explain what has caused the failure of CLECs running the 
entire gamut of strategies, sizes, financial backing, and geographic 
location. In fact, what these companies had in common was their 
reliance on the promise of the 1996 Act for a fair chance to compete 
and the utter refusal of the incumbents to satisfy their statutory 
obligations to competitors.
    The repercussions of the troubled CLEC industry on consumers are 
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.

     REGULATORY RELIEF FOR THE INCUMBENT MONOPOLISTS IS UNWARRANTED

    The incumbents argue for changes in the law that would repeal rules 
essential to local competition and remove the incentives put in the 
statute to encourage the incumbents to open their local markets. But 
relieving the ILECs of these obligations--such as unbundling loops--
will only delay successful local competition by undermining the ability 
of competitors to offer DSL and other services.
    Legislation pending in the House--H.R. 1542--would create broad 
exemptions from and limitations on the ILECs' unbundling and resale 
obligations for high-speed data facilities and services. This type of 
bill would deny customers the better value, greater innovation, and 
broader deployment of advanced services that only competition can 
deliver. In a direct reversal of the requirements of the 1996 Act, it 
would preserve, exclusively for the incumbent carriers, the economies 
of scale, scope, and density that they have built on the backs of the 
ratepayers as the sanctioned monopoly providers of local services for 
nearly a century.
    It is clear that this price need not--and should not--be paid in 
order to encourage ILEC investment in broadband facilities. After 
sitting on DSL technology for 10 years, ILECs finally deployed it only 
in response to competitive offerings of CLECs and cable companies (and 
specifically AT&T). Verizon, for instance, will spend $18 billion this 
year on capital investment,\3\ and SBC is spending more than $6 billion 
on its heavily promoted ``Project Pronto.'' \4\ Qwest will spend $9.5 
billion this year to build out its facilities,\5\ including a 1000-mile 
fiber optic network in the Detroit metro area over which it will offer 
high-speed service to business customers. BellSouth's Duane Ackerman 
has stated that BellSouth ``invested over $33 billion . . . during the 
1990s,'' and that BellSouth expects ``total DSL revenue of 
approximately $225 million this year and $500 million in 2002.'' \6\ 
Mr. Ackerman acknowledged that the regulatory challenges BellSouth is 
facing ``are unlikely to slow down the momentum of the marketplace.'' 
\7\ Contrary to the incumbents' complaints, the facts demonstrate that 
application of the 1996 Act's unbundling requirements has not been a 
deterrent to this extraordinary level of investment.
---------------------------------------------------------------------------
    \3\ Id. 4. ``SBC Communications,'' Interactive Week [June 4, 2001].
    \4\``SBC Communications,'' Interactive Week [June 4, 2001.]
    \5\ ``Running on Empty; Industry Trend or Event,'' Communications 
Week International [Mar. 5, 2001.]
    \6\ Duane Ackerman, Talk Notes, Salomon Smith Barney Conference 
[Jan. 9, 2001] at 7, 15.
    \7\ Id. At 11.
---------------------------------------------------------------------------
    Further, these investments are producing significant revenue for 
the ILECs. While SBC threatens to cease deployment of advanced 
facilities in Illinois after a State regulatory decision allowing 
competitors access to SBC's fiber optic facilities, it simultaneously 
boasts 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.'' \8\ Beyond those savings, of 
course, SBC and the other ILECs 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.
---------------------------------------------------------------------------
    \8\ Id. At 2; see also www.sbc.com/data/network/0,2951,5,00.html.
---------------------------------------------------------------------------
    Nor is there any assurance that the incumbents would use the 
regulatory relief in H.R. 1542 to deploy broadband facilities any 
faster or to historically underserved areas like rural communities or 
inner cities. Their arguments that this bill will give them the 
incentive to bring high-speed access to rural areas ring particularly 
hollow when you consider the fact that they are selling off many of 
their rural exchanges, and there is little evidence that the ILECs have 
used the last 5 years to extend broadband to unserved communities.
    Indeed, the broadband deployment ``requirement'' added by the 
Commerce Committee's mark-up mandates less deployment than the Bells 
have already announced. It requires deployment to only 20 percent of 
incumbents' central offices within 1 year after enactment. By contrast, 
SBC currently can provide high speed service to more than 50 percent of 
its customer base and has announced that it will deploy its ``Project 
Pronto'' to 80 percent of its customers by the end of 2002. Verizon can 
currently provide high speed service to 47 percent of the company's 
access lines. Even if these companies deploy no new facilities until 
2003, they would still be in compliance with the bill's ``buildout 
requirement.'' Further, there is nothing in the bill that prevents the 
incumbents from selling exchanges to avoid the buildout 
requirements.\9\ The amendment does not even include a provision, like 
the duty imposed on the cable industry, prohibiting the BOCs from 
denying access to their services based on the level of the residents' 
income.
---------------------------------------------------------------------------
    \9\ The benefits of the ``buildout requirement'' are illusory for 
two further reasons. First, the requirement can be met with the same 
satellite technology that is being used today by satellite providers in 
their existing offerings of highspeed services. Second, enforcement of 
the requirement is in all events subject to consideration of technical 
feasibility.
---------------------------------------------------------------------------
    Without the competitive spur of new entrants, the incumbents will 
slow the pace of deployment and raise prices for advanced services. 
Analysts at Yankee Group have observed that: With the majority of ILECs 
transitioning toward self-install models to improve provisioning time 
and reduce operating costs, the question that arises is: Why are DSL 
monthly prices increasing? The answer: The Return of the Monopoly. The 
downfall of DLECs such as NorthPoint effectively eliminated competition 
in the DSL market, leaving little motivation for the incumbent 
providers to maintain existing $40 per month price levels.\10\
---------------------------------------------------------------------------
    \10\ Imran Khan, ``Broadband Price Hike: Whatever Happened to 
Greater Choices and Lower Prices?,'' Yankee Group Research [May 22, 
2001.]
---------------------------------------------------------------------------
    Although incumbent local telephone companies argue that they should 
be relieved of the market-opening requirements of the 1996 
Telecommunications Act because cable companies' broadband services are 
unregulated, that is simply not true. Cable companies face local 
franchising requirements, the payment of billions of dollars in annual 
franchise fees, and often must provide free service to local 
governments and schools. Local telephone companies face nothing 
similar. Cable companies also face the possibility of limits on the 
number of subscribers that they can serve, under a statutory scheme not 
applicable to local telephone companies. As noted above, cable 
companies also must provide access to their services without regard to 
the level of the residents' income. The incumbents, by contrast, can 
and likely will deploy broadband services where they stand to gain the 
biggest profits and avoid other communities that could greatly benefit 
from high-speed Internet access.
    Congress chose, correctly, to regulate telephone and cable 
companies differently because telephone companies still dominate their 
core business while cable faces video competition from DBS and other 
providers. Only a tiny percentage of Americans actually have a choice 
for local phone service. By contrast, nearly everyone in the Nation has 
an alternative to cable for multichannel video. Since 1993, the share 
of the multichannel video programming marketplace held by cable's 
competitors has increased to 20 percent. The incumbent telephone 
companies' demand for deregulation in the name of ``parity''--while 
their local markets remain closed--ignores the facts that led Congress 
to reject a similar proposal prior to the enactment of the 1996 Act.
    More fundamentally, the proposed legislation is unnecessary because 
the BOCs themselves hold the key to obtaining the authority to provide 
any long distance service by opening their local markets to 
competitors. Verizon recently was granted permission under Section 271 
of the Act to provide interLATA service in Massachusetts, in addition 
to its existing authority to provide interLATA service in New York. The 
FCC has also granted SBC approval to provide interLATA service in 
Texas, Kansas, and Oklahoma. Although AT&T believes that each of these 
Bell company applications fell short of what the Act requires in 
particular respects, it is clear that the requirements of Section 271 
of the Act are attainable and can be met, if a Bell company takes steps 
to open its local markets to competition.
    This is a particularly significant point because granting the Bell 
companies interLATA data relief would harm the very competition that 
Congress is seeking to promote. Congress' 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 4 years.
    Too much remains to be done for Congress now to remove or lessen 
the incentives provided by Section 271. The four Bell companies 
continue to dominate the local exchange market. CLECs account for less 
than 9 percent of the total local telecommunications market, and far 
less of the market for residential local telephone service.\11\ By 
permitting Bell companies to enter the high speed interLATA data market 
without first opening their local markets, H.R. 1542 would 
substantially reduce the likelihood that this dominance will end.
---------------------------------------------------------------------------
    \11\ ``Local Telephone Competition: Status as of December 31, 
2000,'' [Federal Communications Commission, May 2001.]
---------------------------------------------------------------------------
    VIGOROUS OVERSIGHT AND ENFORCEMENT IS NEEDED TO FINISH THE JOB 
                            STARTED IN 1996

    What is needed today is not a weakening of the principles embodied 
in the 1996 Act, but rather vigorous oversight and enforcement of the 
Act's market-opening requirements. Congress should ensure that 
competitors have a forum in which complaints against incumbent LECs can 
be heard and addressed expeditiously. Where an incumbent is found to be 
in violation with its unbundling or interconnection obligations, there 
must be meaningful penalties and damages available to the competitor 
whose business is harmed by the incumbent's failure to comply.
    Most importantly, Bell companies should be forced to create a clear 
structural separation between their wholesale and retail operations. At 
a minimum, this should be done if they continue to fail to meet their 
obligations under the 1996 Act. The arm that provides local-service 
elements for both the Bell company and its competitors needs to be a 
structurally separate organization. It is the only way to make 
competitive local service more than simply a vision. Pennsylvania has 
taken a courageous first step in this direction by ordering Verizon to 
engage in the ``virtual structural separation'' of its wholesale and 
retail local exchange businesses. True separate subsidiaries are a 
necessary precondition for a competitive local market. They help ensure 
that the Bells provide the same price and the same service to their 
competitors as to their colleagues. By improving a Bell company's 
incentive to act as a neutral wholesaler of services and facilities, 
and highlighting transactions between the parent and the affiliate, 
structural separation will require less regulation in the long run. And 
by putting all local service providers on an equal footing with respect 
to access to network elements, the success or failure of their business 
plans will be determined in the marketplace rather than through 
affiliation with the incumbent.
Conclusion
    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. Rather than eliminate the 
obligations and most important incentive for the Bell companies to open 
their local markets, Congress should consider ways to make the process 
that it established in the 1996 Act more--and not less--effective. We 
remain optimistic that with the assurance of such dedication to its 
requirements, the promise of the 1996 Act can become reality. Thank you 
again for the chance to present our views.

    The Chairman. Thank you.
    Mr. Holland.

       STATEMENT OF ROYCE J. HOLLAND, CHAIRMAN AND CEO, 
                    ALLEGIANCE TELECOM, INC.

    Mr. Holland. Thank you, Mr. Chairman. I am Chairman and CEO 
of Allegiance Telecom. We are headquartered in Dallas, Texas. 
We operate in 32 markets across the United States and will be 
in 36 markets by the end of this year. Before starting 
Allegiance, I was President and Chief Operating Officer of MFS 
Communications Company, one of the first competitive access 
providers, and it was said quite often that we were the poster 
child for the 1996 Telecom Act.
    Representing MFS, I testified before both the Senate and 
the House committees in 1995. I felt that Congress was on the 
right track in structuring what became the Telecom Act of 1996, 
and to this day I feel that it is one of the most significant 
pieces of commercial legislation passed by Congress since the 
early 1950s.
    In 1995, I felt that the weakest part of the bill was its 
tepid enforcement provisions. This is because an incumbent 
carrier that merely failed to be responsive to requests of 
competitors for access to local bottlenecked facilities could 
kill competition by inaction as readily as by overt competitive 
practices. I will tell you, 4 years of battle scars out there 
competing in the market have done nothing to change that 
opinion.
    I could spend the rest of the hearing reciting real world 
examples of the consequences to customers and competitors of 
poor enforcement and inadequate penalties. In the interest of 
time I will just hit two major ones. First, Allegiance's 
fastest growing product is an integrated voice-high speed 
Internet and web hosting service provided to small businesses 
that desire to update from dial-up Internet service and have a 
presence on the web. The bottleneck in providing these services 
is attaining the last mile, generally a T-1 tail circuit or 
DSL-qualified copper loop from the Bell company, which is the 
only feasible way to serve these small businesses in over 95 
percent of the cases.
    We have thousands of these small business customers that in 
many cases have been waiting over 2 months to have service 
installed due to the inability or unwillingness of the Bell 
company to provide the bottleneck local loop facility. Now, 
astoundingly enough, they can usually provide such a facility 
to their retail customers in a week or two.
    We will lose at least half of these customers to our 
competitor--the Bell company, due to the incompetence or 
duplicity of our bottleneck supplier, also the Bell company. 
This is totally absurd.
    Another malady that plagues the entire CLEC industry today 
is the deadbeat dominant carrier syndrome that has infected 
some of the Bells and their former parent, AT&T. By not paying 
their bills absent litigation or threat of litigation, these 
behemoths have used their market power to bully smaller players 
into untenable financial positions, thus muffling competition.
    The FCC needs much more powerful medicines to effectively 
stamp out dominant deadbeat carrier syndrome. That is why I am 
so encouraged by Chairman Powell's recent statement that when 
companies break the law he will hurt them and he will hurt them 
bad. But the Chairman also said that his current authority is 
woefully inadequate to deter the frequency of the incumbent's 
poor performance. The Chairman needs a much bigger stick. I 
would like to highlight a few suggestions for provisioning the 
FCC with that bigger stick.
    Number one, I would recommend the maximum fine of 1 percent 
of a company's quarterly revenues. The dominant carriers have 
quarterly revenues of $10 to $15 billion. A fine of $1 million, 
even $10 million, literally gets lost in the accounting 
accruals. A fine or the potential of a fine of $100 to $150 
million, 1 percent, would impact quarterly earnings and set off 
alarm bells in the executive suites and make obeying the law a 
much higher priority. I am a CEO; I know what gets my 
attention.
    Number two, direct the FCC to adopt national performance 
standards, including penalties that are payable to CLECs as 
liquidated damages, as suggested by Congressman Markey, when 
the RBOCs fail to meet the standards.
    Number three, adopt measures to combat that ``deadbeat dad 
syndrome'' from which dominant carriers like AT&T and its 
offspring seem to suffer.
    Number four, significantly accelerate the enforcement cycle 
by authorizing the FCC to hire 25 special masters to speedily 
resolve complaints and severely restrict the abilities of the 
parties to unleash their lawyers to file numerous appeals of 
the masters.
    Number five, as a last resort, if these enforcement 
initiatives do not get the job done and the anti-competitive 
abuses continue, Congress should authorize the FCC to require 
structural, or at least functional, separation of the RBOCs 
into wholesale and retail divisions.
    In closing, I would also like to take a moment to comment 
on the debate going on in the House that we heard about today. 
I have listened to a lot of rhetoric about the need to 
deregulate the Bells so they will deploy broadband. Well, the 
truth of the matter is that the Telecom Act lets the Bells 
enter any market they want to out of region. SBC can build in 
Atlanta and BellSouth can build in Dallas totally free of 
regulation.
    The Tauzin-Dingell legislation is not about encouraging 
deployment. It is simply about Bell companies wanting to 
preserve and extend their government-granted legacy monopoly. 
Nothing could be more anti-competitive or anti-consumer than 
this.
    Stricter enforcement of the Telecom Act is essential if the 
promise of the Act is to be fulfilled. That requires, one, more 
enforcement powers for the FCC, but, two, the resources 
necessary to use those powers effectively.
    Thank you, Mr. Chairman, for allowing me to testify.
    [The prepared statement of Mr. Holland follows:]

                Prepared Statement of Royce J. Holland, 
               Chairman and CEO, Allegiance Telecom, Inc.

    Mr. Chairman and Members of the Committee, I am Royce J. Holland, 
Chairman and Chief Executive Officer of Allegiance Telecom, Inc. 
Allegiance is a facilities-based, competitive local exchange carrier 
(CLEC) headquartered in Dallas, Texas that offers the small and medium 
sized enterprise (SME) market a complete package of telecommunications 
services, including local, long distance, international calling, high-
speed data transmission and advanced Internet services including high 
speed dedicated access, web hosting, virtual corporate intranets, and 
an E-commerce platform.
    I appreciate this opportunity to testify before the Committee. I 
wish to address three of the most important issues facing my industry: 
fulfillment of the pro-competitive intent of the Telecommunications Act 
of 1996, effective enforcement of Congress' mandate to open 
telecommunications markets to competition, and national performance 
standards for incumbent local exchange carriers (ILECs).
    Before I do so, let me provide the Committee with some background 
about Allegiance. Since its founding in 1997, Allegiance has expanded 
its operations to serve 32 markets across the country with almost 4,000 
employees. We had revenues of $285 million in 2000, an increase of 188 
percent over the prior year. And we expect to double that revenue again 
this year with projected revenue of approximately $550 million.
    Allegiance has designed our networks using a ``smart build'' 
approach. We use a combination of our own network facilities, unbundled 
network elements leased from the incumbent telephone companies and, 
where it is available, fiber leased from third parties to provide 
service to small and medium sized businesses. To date we have installed 
more than 730,000 lines, approximately 90 percent of which are ``on 
switch.'' We have collocated in 636 incumbent local exchange carrier 
central offices across the nation, and when we add four more markets 
this year we will complete our current fully funded 36 market business 
plan.
    Prior to co-founding Allegiance, I was President and co-founder of 
MFS Communications Co., one of the pioneers in the competitive local 
telephone industry even before the passage of the Telecommunications 
Act of 1996. MFS grew from a privately held startup operation to one of 
the Nasdaq 100 Index companies serving 52 markets in North America, 
Europe and Asia, with annual revenue of about $1 billion. At the time 
the Telecom Act was debated and passed, MFS was the leading competitive 
entrant in the local telecommunications market. MFS was purchased by 
WorldCom in 1996.

                    COMPETITION PRE-1996 TELECOM ACT

    Six years ago, in my capacity as President and Chief Operating 
Officer of MFS Communications, I testified before the Senate Judiciary 
Committee and the House Telecommunications and Finance Subcommittee 
regarding the bills that were then pending that were ultimately enacted 
as the Telecommunications Act of 1996. I know what we went through then 
to get the bill passed, and I know what was at stake. We knew then that 
the Telecom Act was about transition--transition from regulated 
telephone monopolies to fullblown competition in the local exchange 
market. We knew that local competition would not happen overnight, but 
with the right conditions and legal requirements, market forces would 
break through the stone walls of the monopolies to allow competition to 
take root and flourish.
    As you know, MFS was providing local exchange services in 
competition with the ILECs before passage of the Telecom Act. We knew 
first-hand what it was like to deal with entrenched monopolists that 
controlled bottleneck facilities. Before the Telecom Act, one of our 
goals was simply to be able to connect our network facilities with 
those of the incumbents so that our customers could make calls to their 
customers. This so-called ``interconnection'' of competing local 
networks was a radical departure from the past, and the Bell companies, 
most notably, were extremely reluctant to concede one inch of ground to 
upstart competitors like MFS. We knew that the Bell companies would not 
voluntarily do anything to help their competitors succeed, and they 
would resist legal requirements for network access every step of the 
way.
    We knew the experiences of the Judge Greene court and the antitrust 
proceeding that broke up the old Bell System. We knew how hawkish 
oversight of monopolies in transition to competition was essential if 
competition in the long-distance market was to take hold. If 
competitors to AT&T's monopoly over long distance services were ever to 
succeed, they needed conditions that would provide them, at a minimum, 
a level playing field with AT&T.
    We knew how the Bell companies, dating back to the first decades of 
the century, would drive small telephone companies out of business 
simply by denying them the ability to connect their networks to the 
Bell network. Once those small companies failed, the Bell companies 
would seize their customers, seize their markets, and expand the Bell 
company's own monopoly power.
    More recently, we knew how at least one Bell company would charge 
MFS more than $100,000 for a 10-foot by 10-foot chain link enclosure to 
keep our equipment separate from its equipment in the Bell central 
office. Somehow those same exorbitant real estate rates were never 
reflected in the rates that the Bell companies charged their own 
customers. As a result, we knew that network elements and colocation 
had to be made available to competitors at cost--the Bell companies 
should have no pricing advantage simply because they were entrenched as 
incumbent carriers. The most critical element that competitors needed 
from the incumbent--access to the local loop--had to be provided at 
cost, on commercially viable terms, and within timeframes that the Bell 
company provided to itself. Unless competitors had a level playing 
field, unless we could compete with the Bells on the same terms that 
the Bell companies provided service to itself, there would be little 
hope for true competition.
    In 1995, we tried to impress upon Congress the need for clear, 
strong language that would compel the Bell companies to open their 
markets to competitors. We attempted to impress upon you that the 
monopolist must be treated differently. With its market power and 
control over essential facilities, an incumbent that merely failed to 
be responsive to the requests of competitors could kill competition as 
readily as with overt anticompetitive practices. The monopolist must be 
told in unambiguous language what it must do, when it must do it, and 
what would happen if it didn't do it. I testified in the Senate and the 
House that strong and effective follow-up enforcement and compliance 
provisions were needed in addition to a competitive checklist. As I 
said then, the competitive checklist approach alone would be like 
having a law which says that every car must contain an engine, four 
wheels, a transmission, brakes, and headlights, but does not require 
that these parts together enable the car to drive off the dealer's lot, 
let alone for a prescribed warranty period or shakedown cruise. I said 
we wanted a car that runs!
    MFS's success proved that Congress created a car that runs. I left 
MFS after it was acquired by WorldCom and started up Allegiance with 
the view that the new markets created by the Telecom Act could support 
more competitors to the Bell companies. The car that is the competitive 
market certainly runs, but it could run better. While the Telecom Act 
began the transition to competitive markets, Congress and the FCC must 
make sure that the transition process is completed.

           COMPETITION AS ENVISIONED BY THE 1996 TELECOM ACT

    There has been a lot of frustration expressed over the slow 
development of local competition since the enactment of the Telecom 
Act. I share that frustration. But I think the blame is misdirected. 
It's important to review for a moment the framework of the 1996 Telecom 
Act in light of the 100-year head start enjoyed by the Bell companies. 
It is important to also note that the Telecom Act was about bringing 
competition to two markets that had no competitive choice: the small 
business market and the residential market. Prior to 1996, companies 
like MFS, were able to offer some level of competitive choice for the 
large corporate users. But Congress wisely recognized that facilities-
based competition to the RBOCs could not occur overnight. Congress also 
wisely did not mandate a generic, industrywide business plan. Instead, 
the Act provided for three methods of competitive entry and relied on 
market forces to decide where and how that competition would emerge.
    In essence, the 1996 Act envisioned competitive entry under three 
scenarios: (1) resale; (2) a combination of facilities and unbundled 
network elements; and (3) pure facilities-based entry. The only 
economically feasible entry method to serve the small business market 
and residential market is by the first two entry methods. The only long 
term economically feasible way to serve these markets is by a 
combination of network facilities and unbundled network elements, most 
importantly, the local loop. The pure facilities-based entry method is 
only viable for cable TV companies serving the residential market and 
for CLECs serving only the large corporate market. Since Allegiance 
Telecom specializes in serving the small and medium-sized business 
market, we based our entry on a combination of our own facilities and 
unbundled network elements that we lease from the ILEC.
    Entry to a new market requires extensive planning and can be 
extremely time consuming. Let me outline the steps that Allegiance 
takes before it is prepared to begin service to customers in new 
markets. As you will see, any additional delay imposed by ILEC 
recalcitrance makes a difficult process even more arduous.
     First, Allegiance must file for and obtain authorization 
to provide local, intraLATA toll and long distance service from the 
State Public Utility Commission.
     Second, Allegiance must negotiate interconnection 
agreements with the incumbent LECs. If negotiations are unsuccessful, 
Allegiance must file an arbitration petition with the State Public 
Utility Commission to establish interconnection terms and conditions. 
An arbitration takes up to 9 months and can easily cost a hundred 
thousand dollars.
     Third, Allegiance must design the network and order the 
switch.
     Fourth, Allegiance must secure real estate for its switch 
site and sales office.
     Fifth, Allegiance must select the ILEC central offices 
where Allegiance needs to be colocated to serve customers, and then 
submit applications to the ILEC for colocation space. Colocation is 
essential because Allegiance uses the local loop unbundled network 
element provided by the ILEC, and Allegiance must have physical access 
to the local loop in the ILEC central office.
     Sixth, Allegiance must contact city and county Public 
Safety Administration Point (PSAP) jurisdictions for purposes of 
negotiating agreements and completing other tasks necessary to obtain 
authorization to provide 911 service.
     Seventh, Allegiance must apply to the North American 
Numbering Plan Administration for blocks of telephone numbers.
     Eighth, Allegiance must place orders with the ILEC for 
interconnection trunks, 911 trunks and operator services/directory 
assistance trunks.
     Ninth, Allegiance must order and install colocation 
equipment.
     Finally, Allegiance must update the Local Exchange Routing 
Guide (LERG) with our company-specific information. The LERG is an 
industry data base of carrier codes and routing information so that 
other carriers know how to route calls to and from Allegiance customers 
in the new market.
    While Allegiance certainly analyzes the market for the likelihood 
of successful market entry before initiating the process, and solicits 
customers during the process, we still enter new markets without any 
guarantees that we will establish a customer base sufficient to justify 
the significant investment needed to provide service. As the above list 
illustrates, the risk associated with new market entry strongly depends 
on ILEC conduct and whether the ILEC provides essential services and 
facilities that Allegiance needs in a timely manner.
    I am proud to say that the success of Allegiance's business model 
validates the foresight of the 1996 Act every day. And as our 
performance continues to improve every quarter--which it does--the 
benefits of the 1996 Act will continue to grow as well. Now is not the 
time to abandon those principles of competition, or the unbundled loop 
approach that makes our business possible. Instead, Congress and the 
FCC should ensure that CLECs can depend on ILEC compliance with the 
duties placed on them by the 1996 Act.

                   COMPETITION POST-1996 TELECOM ACT

    The Telecom Act was one of the greatest pieces of commercial 
legislation of the last thirty years. For the first time in any of our 
lifetimes, it offered consumers the promise of a choice of local 
telephone service providers. No one expected that competitors would 
find it easy trying to break the monopoly strongholds controlled by the 
Regional Bell Operating Companies (RBOCs) and GTE. Nonetheless, 5 years 
after you so astutely determined that developments in technology and 
the public interest demanded that the government sanctioned protection 
for local telephone monopolies should be lifted, competitors have been 
able to capture a mere 8 percent of local telephone lines. In the 
residential market and small business market, the disparity is even 
greater--the RBOCs alone control over 140 million lines while CLECs 
have 8 million lines.
    At the same time, the RBOCs and GTE have joined forces to increase 
their size and domination of the nation's local telephone market, with 
the former Bell Atlantic acquiring New York Telephone, New England 
Telephone and GTE to become the behemoth Verizon; and Southwestern Bell 
acquiring Pacific Telesis, Nevada Bell, Southern New England Telephone, 
and Ameritech. While Congress concluded that it would only be fair to 
open the long distance market to the RBOCs once they had opened their 
local markets to competitors and for that reason overrode the MFJ and 
Judge Greene's oversight of the RBOCs, an unfortunate byproduct of life 
without the MFJ has been the concentration of control of the nation's 
local telephone market in the hands of 4 megamonopolies, rather than 
the 8 that dominated the market in 1996. What this means for CLECs is 
that the Goliaths they must battle for both customers and network 
access have grown bigger, more powerful and more cocky about using 
their market power to keep their competitors at bay.
    Take Verizon as an example. According to its Year 2000 Annual 
Report, the Verizon companies are the largest providers of wireline 
communications in the United States with nearly 109 million access 
lines in 67 of the top 100 US markets and 9 of the top 10. Verizon 
serves one-third of the nation's households, more than one-third of 
Fortune 500 company headquarters and the Federal Government. Verizon 
has proudly trumpeted to Wall Street that it lost 29 percent fewer 
lines to competitors in the second half of 2000 than it did in the 
first half of the year. Statistics like these demonstrate that further 
deregulation of the RBOCs is not appropriate, and indeed would be 
extremely detrimental to the struggling competitive industry, at this 
time. The increase in concentration of control of the nation's local 
access lines since the passage of the 1996 Act means that more, not 
less, regulatory enforcement is needed if the pro-competitive goals of 
the Act are to be realized.
    In order to provide service to customers, CLECs need access to the 
networks and facilities of the incumbents, especially to the unbundled 
loops connecting customers to the network (also known as the last mile) 
and colocation space in the incumbents' central offices. In passing the 
Act, Congress recognized that competitors could not duplicate the 
ubiquitous facilities of the incumbents overnight and indeed that in 
most instances, the last mile could never be duplicated for the small 
business market and residential mass markets. Sections 251 and 252 
provide CLECs with access to the interconnection, unbundled network 
elements, colocation and wholesale pricing that we need to get into the 
local telephone market, but the rights afforded by the Act are 
ephemeral unless they can be expeditiously enforced without expensive 
and drawn out litigation. Although CLECs are big customers of the RBOCs 
as purchasers of interconnection trunks, colocation and UNEs, CLECs use 
those tools to compete for the same end users as the RBOCs. This 
inherent conflict between their roles as suppliers and competitors 
significantly diminishes the incentive the RBOCs have to open their 
markets.
    To help ensure that local telephone competition becomes a reality 
for all American consumers, Congress must give the FCC the resources to 
implement a regulatory scheme that has certainty and an enforcement 
program that has teeth.

               COMPETITION NEEDS STRONGER FCC ENFORCEMENT

    The need for stepped-up enforcement is shown by the relative 
ineffectiveness of the major enforcement actions over the last year 
that the FCC took against RBOCs for flouting their local competitive 
obligations. By far the largest of these actions concluded nearly a 
year ago when GTE agreed to pay $2.7 million for openly flouting the 
collocation provisioning standards. In another proceeding, the FCC 
fined BellSouth for refusing to provide Covad with cost justification 
and other information in an interconnection proceeding. This conduct, 
the FCC found, constituted a breach of BellSouth's legal obligation 
under Section 251 to negotiate in good faith with requesting CLECs. The 
FCC, nonetheless, found that BellSouth's intransigence, which stymied 
competitive entry into the multi-billion dollar high speed services 
market, warranted a fine of $750,000, approximately one-half of the 
amount that the FCC could have assessed.
    In December 2000, as finalized this past March, SBC was found to 
have ``willfully'' and repeatedly violated the service quality 
reporting obligations imposed by the FCC as a condition of the SBC-
Ameritech merger. Specifically, SBC overstated the quality of service 
provided to CLECs for such important performance measures as timely 
Firm Order Confirmations, OSS order flow-through, the number and 
duration of provisioning delays, and the number of trouble reports. 
Most troubling, this data was used by the Oklahoma and Kansas 
Commissions as part of the basis for their respective endorsements of 
SBC's section 271 applications in those states. The FCC Enforcement 
Bureau assessed a woefully inadequate fine of only $88,000.
    Similarly, this past January, the FCC Enforcement Bureau issued a 
Notice of Apparent Liability finding that SBC failed to comply with the 
FCC's collocation notice requirements. The consequences that SBC faces, 
however, are fairly trivial. Despite the Enforcement Bureau's detection 
of ``numerous'' violations--each punishable by a forfeiture of up to 
$110,000 per day--the Bureau proposed a forfeiture amount of only 
$94,500.
    Although I commend the willingness and the ability of the FCC to 
identify and sanction the BOCs' actions that threaten competition, the 
penalties imposed are trivial for these huge companies. These fines are 
plainly insufficient to deter the BOCs' illegal and anticompetitive 
conduct. Additional authority and direction from Congress that it 
intends the FCC to impose greater penalties should serve as 
encouragement to the FCC to take more aggressive action against future 
violations. Given the relative laxness of enforcement of violations of 
the Telecom Act, the RBOCs must view FCC enforcement as the better 
course than actually complying with their statutory obligations. Paying 
the fines and continuing to discriminate against competitors remains a 
smart business decision when one considers the competitive advantages 
to be gained by the RBOCs as a result. We appreciate Chairman Powell's 
recognition that CLECs have often ``been stymied by practices of 
incumbent local exchange carriers that appear designed to slow the 
development of local competition'' and applaud his request for 
increased forfeiture authority.\1\ But more is necessary.
---------------------------------------------------------------------------
    \1\ May 4, 2001 letter from Chairman Michael K. Powell to the 
Members of the House and Senate Commerce and Appropriations Committees.
---------------------------------------------------------------------------
    The Commission's enforcement authority must be increased 
significantly to the point where the fine would significantly impact 
the quarterly financial results of an RBOC or AT&T. The FCC should be 
specifically directed to assess the fine based on the revenues of the 
offender. We recommend that the maximum penalty be leveled at 1 percent 
of a company's quarterly revenues. Such penalties would impact the 
quarterly financial reports of the offending party. That is the only 
way to really focus the attention of the RBOC's CEO and senior 
management to change the culture of the RBOC to abide by the spirit and 
letter of the law. If the FCC penalties do not impact the financial 
success of the company, then there will be no change in the company's 
behavior in its compliance with the law.
    The FCC should also be authorized to require that all or a portion 
of a forfeiture assessed for violations of the Act or the FCC's rules 
be paid to the carriers injured by the violations, rather than to the 
Treasury, in an amount sufficient to compensate them for the damages 
caused by the violations.
    The FCC should also be encouraged by Congress to exercise its Cease 
and Desist Authority more readily. We have experienced several issues 
with RBOCs that we believe warrant Cease and Desist action. The RBOCs 
have the ability to thwart CLECs' efforts to attract and retain 
customers in a myriad of ways other than poor provisioning of the 
facilities needed to provide service. For example, one RBOC appeared to 
be engaged in a systematic attempt to thwart Allegiance's sales efforts 
by, among other things, calling our prospective customers after we 
submit orders to the RBOC to switch the customer's service to 
Allegiance and offering the customers a better deal if they cancel 
their orders with Allegiance. This campaign included the following 
specific actions:
     We learned from a customer who canceled his order with 
Allegiance before his service had been switched from an RBOC that its 
representative called him shortly after he signed on with Allegiance 
and offered to match Allegiance's rates. Section 222(b) of the Act 
prohibits carriers that receive proprietary information from another 
carrier from using such information for their own marketing purposes. 
The only way this RBOC could have learned of the customer's impending 
cancellation of service was through the order Allegiance submitted to 
it to convert the customer's service. This was not an isolated 
incident. During the fourth quarter of 2000 and the first quarter of 
this year, more than 10 percent of the customers who had signed up for 
Allegiance service in two large states served by this RBOC canceled 
their orders before their service was converted.
     We learned from another customer who called his RBOC to 
lift his PIC freeze so that he could switch his service to Allegiance 
that the RBOC's representative responded, ``Are you sure you know what 
you are asking me to do? Let me fax you over a list of the problems 
Allegiance has caused and then you decide if you still want me to 
remove the freeze.'' The FCC has specifically determined that Section 
222(b) prohibits a carrier executing a customer's request to change 
carriers from using such information to convince the customer not to 
make the switch. This has not stopped this particular RBOC.
    Competition is clearly harmed where an RBOC exploits the advance 
notice of a customer's impending cancellation of service that it 
receives in its position as the underlying network facilities provider 
to market its own services and win the customer back. Such conduct is 
clearly prohibited by the Act. It is also not clear that carriers 
injured by such conduct have a private right of action for damages. To 
the extent that the FCC finds a carrier guilty of the misuse of carrier 
to carrier proprietary information and assesses a fine, it should be 
authorized to share a portion of that fine with the carrier injured by 
the violations.
    Under the FCC's new slamming rules, carriers that receive 
allegations from customers that they have been slammed are required to 
notify the unauthorized carrier of the customers' allegations. All 
carriers are required to file a report with the FCC twice a year 
stating the number of slamming allegations made against them and 
whether the allegations were valid, as well as the number of slamming 
allegations they received against other carriers and the identity of 
those carriers. Since the notification rules have become effective, 
Allegiance has received a disproportionate number of slamming 
notifications from one RBOC in two of its service territory states. For 
example, during the week of April 23-27, 2001, 66 percent of the 
slamming notifications Allegiance received were generated by these RBOC 
subsidiaries. Almost every notification we have received from this RBOC 
bears the fax line of its General Business Services Win Back Group. The 
Win Back Group apparently takes a very liberal approach to the 
definition of a slam as we have learned when we contact the customers 
to investigate the slamming allegations and discover that a substantial 
majority are unfounded. This RBOC's Win Back Group seems to categorize 
any instance where a customer decides to return to it as a slam no 
matter what the circumstances. We have received slamming notifications 
on customers who have reported to us that they never told this RBOC 
they were slammed. We received one slamming notification from the same 
RBOC on a former customer who had called to complain about its bill 
from that RBOC.
    Allegiance takes slamming very seriously and immediately terminates 
any employee found to have engaged in slamming. Allegiance does not 
believe, however, that the FCC intended for carriers to classify any 
instance where a customer elects to go back to its former carrier as a 
slam. The apparent abuse of the RBOC described above of the FCC's 
slamming notification rules has caused Allegiance to devote 
considerable staff time and resources to investigating allegations that 
have no basis. We have no means to recoup these resources. Again, to 
the extent that the Commission could assess substantial fines against 
carriers for such abuses, and share a portion of those fines with the 
victimized CLECs, CLECs could be compensated for the damages they 
incur.

   PROVIDE THE FCC WITH ADDITIONAL RESOURCES TO ADJUDICATE COMPLAINTS

    Of course, it is easy for me to say that the FCC needs to do more 
to enforce the Telecom Act, but I know that it cannot do more unless it 
is given more resources. The threat of enforcement must be constant 
enough and the penalties for noncompliance must be high enough to 
effectively deter anticompetitive behavior. Congress should appropriate 
sufficient funds to enable the FCC to double the size of the Market 
Disputes Resolution Division of the Enforcement Bureau and to hire 25 
special masters with relevant legal and industry experience to hear and 
adjudicate complaints between incumbents and competing carriers.

                      FCC MUST ENFORCE SECTION 251

    Lax enforcement has encouraged a perception by some of the ILECs 
that compliance with Section 251 of the Act is somehow voluntary and 
only to be achieved in order to receive Section 271 authority to enter 
the inter-LATA market. The FCC has authority pursuant to Section 251 of 
the Act to resolve inter-carrier disputes and enforce interconnection 
agreements, statements of generally available terms and State tariff 
provisions that codify the RBOCs' obligations to provide 
interconnection, UNEs and colocation. While many State commissions have 
been vigilant in resolving interconnection disputes, the decisions have 
no precedential value outside of the State where the dispute was 
brought and the RBOCs often take the position that the decisions are 
applicable only to the parties to the dispute. For example, over the 
past several years, the Texas PUC has issued several decisions 
directing SBC to pay reciprocal compensation to CLECs. Despite these 
decisions, another RBOC has continued to resist its obligation to pay 
reciprocal compensation arguing that the PUC's rulings applied only to 
SBC. Even after the PUC issued a decision last fall specifically 
holding that the RBOC was subject to the same reciprocal compensation 
obligations as SBC, the RBOC has continued to withhold full payment of 
amounts owed to CLECs on the grounds that the decision applies only to 
the CLEC that brought the action.
    The FCC has the authority to enforce compliance with section 251 
and to decide interconnection disputes which would allow for the 
development of precedent that has nationwide applicability and would 
relieve CLECs of the financial burden of bringing multiple complaints 
against every RBOC in every State in which they operate. The 
substantial financial resources that are currently being diverted to 
litigating interconnection rights on a State by State basis could be 
far better spent by the CLECs on developing and expanding their 
networks.

AUTHORIZE THE FCC TO REQUIRE PAYMENT PENDING THE RESOLUTION OF BILLING 
                 DISPUTES AND TO AWARD PUNITIVE DAMAGES

    One very effective method RBOCs have employed to harm their 
competitors is to withhold or delay payments of amounts owed and to 
resist or delay providing credit for amounts overcharged under 
interconnection agreements or tariffs. Allegiance has faced this 
situation time and again with the RBOCs. CLECs do not have the luxury 
of withholding payment as an offset to amounts owed or delaying payment 
to the RBOCs because the consequence of doing so is being cutoff and 
denied access to the essential facilities we need to provide service to 
our customers.
    It is not only the RBOCs that have resorted to self-help to 
withhold payment to CLECs. CLECs all across the country have been 
forced to bring lawsuits against AT&T to collect payment of access 
charges for the use of their networks to originate and terminate the 
long distance calls of AT&T's customers. AT&T complained for years 
about the ILECs' access rates, but never withheld payment as it has 
done with the CLECs. The FCC repeatedly has ruled that carriers are not 
entitled to engage in self-help to withhold payment, but instead must 
pay amounts billed pursuant to tariff under protest and then bring an 
action to challenge the billings. Unfortunately, AT&T has ignored these 
rulings and continues to use the CLECs' networks to complete their 
customers' calls without payment, benefiting as it does from the delays 
involved as the complaint cases wend their way through the courts and 
the public utility commissions.
    If the CLEC industry is to survive, CLECs must have access to a 
forum that can resolve payment disputes on an accelerated basis and 
that can provide relief while the actions are pending. Congress should 
require the FCC to hear complaints arising under interconnection 
agreements or tariffs on an expedited basis and authorize it to provide 
interim relief in the nature of ``Deadbeat Dad'' remedies. If one party 
to the dispute has failed to pay charges billed by the other party, the 
FCC should require payment of the full amount billed within 30 days of 
the filing of the complaint unless the nonpaying party can show by 
clear and convincing evidence that the billing is fraudulent or 
otherwise invalid on its face. Such immediate relief, subject to true-
up after a full hearing of the dispute, is necessary to remove the 
benefits the RBOCs and AT&T currently realize by delaying payment and 
depriving CLECs of the revenues necessary to fund their operations.
    The Commission should also be given the necessary resources to 
process all such complaints under a revised Accelerated Docket. The FCC 
should be required to resolve disputes on the merits within 60 days of 
the filing of the complaints and should have the authority to grant all 
relief necessary to remedy violations of the agreement or tariff, 
including, but not limited to, injunctive relief, compensatory damages 
and punitive damages.

THE FCC SHOULD ADOPT PERFORMANCE STANDARDS AND REGULATIONS TO IMPLEMENT 
                     ITS 271 ENFORCEMENT AUTHORITY

    For competition to survive, the FCC should adopt a comprehensive 
set of selfenforcing performance standards governing the provision of 
interconnection and unbundled network elements. While the carrot of 
entry into the long distance market provides some incentive for the 
RBOCs to provision interconnection and unbundled network elements at an 
acceptable level of performance in the months immediately prior to the 
filing of their Section 271 applications with the FCC, the performance 
standards they are required to meet vary State by state. In addition, 
the RBOCs have shown a proclivity to backslide once 271 relief has been 
granted and the carrot has been eaten. The penalties currently being 
assessed against incumbents have not proven sufficient in size to deter 
discriminatory and anticompetitive behavior as Allegiance can attest.
    CLECs cannot succeed in the marketplace unless they can offer their 
customers a level of service comparable to what those customers can get 
from the RBOCs. National selfenforcing performance standards would 
create an invaluable tool for monitoring RBOC compliance with their 
obligations under the Act and detecting incidences of discriminatory 
behavior. The FCC should adopt minimum performance benchmarks, which 
RBOCs must meet in providing service to their CLEC customers with 
automatic monetary penalties to be paid to CLECs when the RBOCs' 
performance falls below the benchmarks.\2\ To monitor compliance, the 
FCC should require the RBOCs to publish monthly performance statistics 
on a state-by-state basis for installation and maintenance of 
interconnection trunks, UNEs and any other services CLECS purchase. The 
performance reports should compare the intervals within which the RBOCs 
actually install and repair similar facilities for themselves, their 
retail customers and their affiliates and the intervals within which 
they provide such services for CLECs. The reports should also compare 
the frequency and duration of service outages suffered by the RBOCs' 
retail customers and those suffered by CLECs. If, over a 12 month 
period, the reports reveal a deterioration in service quality in any 
State in which they operate, the RBOCs should be required to show cause 
why their rates for interconnection and UNEs should not be reduced on a 
going forward basis by an amount proportionate to the deterioration in 
service quality.
---------------------------------------------------------------------------
    \2\ Allegiance proposes, at a minimum, the following national 
performance standards: Firm Order Commitments (FOCs) and order 
rejections returned within 48 hours of order submission. FOCs should be 
complete and accurate when delivered and should identify all Circuit 
identification numbers, any potential facility issues, and working pair 
issues. Initial order rejects should also be complete and should 
identify all issues with the order as opposed to the ILECs' current 
practice of issuing serial rejects, each identifying only one issue at 
a time.
    On-time delivery of facilities consistent with FOC date.
    Where ILEC reports that facilities are unavailable to fill CLEC 
order, ILEC must provide accurate delivery date within 48 hours after 
receipt of clean Local Service Request (LSR) or Access Service Request 
(ASR).
    Orders to augment trunk groups fulfilled in 14 days or less.
    Mean Time to Repair (MTTR) 24 hours or less for all out of service 
conditions.
    Timely and accurate notification of ILEC completion of CLEC 
colocation spaces and augments.
    Provisioning intervals for unbundled loops and interoffice 
transport at parity with provisioning intervals for comparable retail 
products.
    Mean Time Between Failure (MTBR) and repeat Trouble Tickets.
    Updates to CFA data bases made within 24 hours.
    Billing accuracy standards.
---------------------------------------------------------------------------
    In addition, the FCC should adopt rules that require RBOCs to 
provide automatic discounts on interconnection trunks, UNEs and special 
access services in any State where the actual installation and repair 
services they provide to CLECs are inferior to the services they 
provide to their retail customers and themselves. A sliding scale of 
discounts should be established based on frequency and extent of 
delays. For delays in installation of new services, the discounts would 
be applied to non-recurring charges. The RBOCs should not be permitted 
to assess any non-recurring charges for installation if service is not 
installed within the retail installation interval. For delays in 
repairing services, the discounts would apply to monthly recurring 
charges for the affected facilities. Self-enforcing penalties are 
imperative both because they will provide the right incentive for RBOCs 
to improve their performance and because CLECs receiving poor 
performance should not be required to pay full price.
    The FCC should also adopt rules to implement the enforcement 
authority granted in Section 271(d) and to deter backsliding from 
compliance with the competitive checklist once the RBOCs are allowed 
into the long distance market. Such regulations should incorporate a 
range of penalties for violations of 271 and should include mandated 
rate reductions for wholesale services and network elements, suspension 
of 271 authority, the imposition of material fines and revocation of 
271 authority.

         CONGRESS SHOULD CONSIDER A REQUIREMENT FOR STRUCTURAL 
                        SEPARATION OF THE RBOCS

    As I noted above, the RBOCs have the ability and the incentive to 
deny their competitors full, fair and nondiscriminatory access to their 
networks. If the increased penalties do not sufficiently alter their 
current anticompetitive behavior then I would suggest the only 
plausible solution at the end of the day would be for Congress to 
require structural, or at least functional, separation of the RBOCs' 
retail and wholesale operations. If the retail side of an RBOC's 
company was forced to purchase service for their customers under the 
same terms and conditions that CLECs are, the wholesale division would 
have significantly stronger incentives to improve provisioning and 
performance standards.

Conclusion
    I testified in the Senate and the House when the Telecom Act was 
being considered, and I recall how we all expected the Telecom Act to 
unleash the power of competitive forces on the local telephone market. 
With access to the bottleneck facilities of the incumbents, in exchange 
for regulatory relief once their markets were open to robust 
competition, competitors would be able to provide new services at lower 
prices and with better quality. The incumbents would be forced to do 
likewise by the operation of market forces.
    Looking back from 5 years out, the robust competition we expected 
then has been painstakingly slow to develop on a broad scale in the 
small business market and residential mass markets. I believe that this 
is due primarily to the lack of effective enforcement of the Telecom 
Act, caused by the FCC's limited resources and limited forfeiture 
authority. Despite good intentions, the FCC's enforcement authority, 
enforcement resources and cumbersome and bureaucratic processes are not 
geared to a dynamic competitive environment, and have facilitated the 
constant delays and violations of the Act by the RBOCs and AT&T.
    Instead of invading each other's monopoly service territories and 
competing for each other's customers, the RBOCs have focused on 
combining their forces to form even larger monopolies. They have 
devoted scant effort to complying with Sections 251 and 252 of the Act. 
They have abused their dominant market power in many ways, including 
illegally withholding payments for exchange of traffic with CLECs. AT&T 
has also used its dominant position in the long distance market to 
favor the ILECs over new entrants in terms of paying its access bills, 
thereby causing significant financial harm to a number of CLECs.
    The bottom line 5 years after passage of the Act is that (1) 
competitive choices are available to you if you are a large 
corporation; (2) far more often than not you remain at the whim of the 
local monopolist if you are a small or medium-sized business; and (3) 
most residential subscribers are still stuck with the same monopoly 
providers they had in 1996 for local phone and cable TV service, or the 
new owners who bought out those providers. There is nothing that 
Congress can do to make the reluctant monopolists (the RBOCs and AT&T) 
compete with each other. However, Congress can significantly improve 
the opportunity for competition to develop in the small business market 
and residential mass markets by arming the FCC with greatly increased 
enforcement powers, and by directing it to establish objective 
performance standards that can be enforced with meaningful penalties. I 
urge you to strengthen the FCC's enforcement powers to help ensure that 
as the RBOCs and AT&T get bigger, the strides made by CLECs in 
providing consumers with competitive choices are not reversed. It is 
imperative that Congress make the penalties for noncompliance with the 
Act steep enough to serve as a deterrent, and not just a cost of doing 
business for the monopoly providers.

    The Chairman. Thank you.
    I want to hold my Senators as long as I can. Max, let me 
yield to Senator Cleland.
    Senator Cleland. Thank you very much. I feel like I am 
watching live Atlanta wrestling here.
    The Chairman. Yes, deadbeat dads, what is it, dominant 
deadbeats.
    Senator Cleland. Let me just say, I am an old Army signal 
officer and one of the things I learned in Vietnam was it did 
not matter what your obstacle was, the objective was to provide 
service. I mean, that is really where I come out. It does seem 
like that we have been focusing on the way to get to service 
rather than service itself. It does seem like we have been 
talking about whether we are deregulated or not regulated or 
whether deregulation is a good idea or a bad idea, whether 
competition is good or bad, whether people have access the 
consumers and so forth.
    The truth of the matter is that in my State about two-
thirds of the State is rural. We have about 100 counties there. 
There is plenty of access to consumers. Any of you want to come 
on down, we will be glad to take a tour and I will show you 
more consumers than you can shake a stick at, even a big stick.
    Mr. Holland, we noticed that you are in Georgia, but you 
are in Atlanta. You are not in Fitzgerald. In Fitzgerald, 
Georgia, there is a community college there that is anxiously 
awaiting connectivity of any kind to connect up their little 
school to the Internet and the World Wide Web, because their 
goal is to move from a textile-based pine tree economy which is 
declining to a high tech, Internet global marketplace, and they 
are training information technology majors there. They just 
want to connect.
    Over in LaGrange, Georgia, in Troop County, the founding 
fathers there 10 years ago decided to wire the whole town. This 
means public housing residents and everybody. I have been 
there. It is an amazing sight. They just want to connect.
    So in the world of globalization connectivity is the key, 
service is the key. That is really what I would like to turn 
your attention to, not whether so much we are deregulated or 
whatever or we are competitive or whatever, but how do we get 
there.
    Ms. Greene, I would like for you the tell me what plans you 
have, particularly in Georgia, that might be worthy of our 
attention here to overcome the digital divide, to get more 
people in play here, to get people, particularly in rural 
America, in the global marketplace.
    It is interesting we talked about NASDAQ. NASDAQ just went 
under 2000 for the first time in a while. CLECs in my State are 
going broke. I mean, I think we focus on how to get there too 
much rather than the goal. The goal is service, how are we 
going to provide service to more people at a reasonable cost, 
and what is it about this whole question of universal service 
that we are not able to execute.
    Ms. Greene first.
    Ms. Greene. Well, government has two proper roles to play 
in incenting deployment of technology. They can incent 
deployment of technology through putting proper economic 
incentives in place, because competitors--we are all running a 
business here. Competitors will go where the money is. That is 
why you do not see competition going into the residential 
market for the most part. You do not see it going into the 
rural market for the most part.
    A second role that government can play is to create 
investment incentives through tax credits. What has been done 
in the implementation of the 1996 Act is the role that 
government has tried to play is micromanagement and 
overregulation. What government needs to do is to put the 
correct incentives in place through proper pricing and then get 
out of the way or, some combination, government needs to put 
proper investment incentives through tax credits, as we have 
done in Georgia.
    In Georgia, through a port tax we have been able to use 
some tax incentives to greatly expand our rollout of DSL. We 
take our responsibility to our rural areas--BellSouth is a very 
rural company. We take our responsibility seriously. We have 
plans right now to roll out DSL to 70 percent of our service 
territory and we are looking every day to find ways to make the 
technology more affordable, to find new investment avenues, and 
also to work with our States to create incentives.
    I would like to take your point about service just one step 
further. BellSouth takes our service responsibility very 
seriously. Four out of the last 5 years we have gotten the J.D. 
Power Award for outstanding service. We are number one in 
customer loyalty from the Yankee Group. This year we were 
picked by the American Customer Satisfaction Index as the 
number one provider of telecommunications.
    We take service responsibility very seriously. Penalties, 
we talked about penalties here over--the last three speakers 
talked about penalties. The biggest penalty--there are two big 
penalties in place for us today besides the Federal and the 
State level penalties that we pay both to government and CLECs. 
The biggest penalty that we have is any time we pay a fine, our 
customers read a headline that says BellSouth did not give them 
good service, and that is not in our best interest, it is not 
in our best competitive interest, and it is not consistent with 
our heritage, which is to be a premier service provider.
    So that, coupled with the fact that we do not have access 
to a $14.2 billion revenue stream, which is long distance, 
those are both some pretty big penalties.
    Senator Cleland. Mr. McLeod, what are some of your plans to 
provide better service at lower cost, in rural areas 
particularly?
    Mr. McLeod. We have taken an approach to deploying our 
network facilities on a regional basis. So as we build network 
through Iowa or Illinois, we connect up not only first tier 
markets, but second, third, and fourth tier markets. So that 
has been our plan, and we have now about 30,000 miles of fiber 
network that we either own or control in our area.
    Now, of course in a marketplace where we have access to 
capital we can deploy network like that. In today's market we 
do not have access to capital. Basically, we have stopped the 
deployment of additional facilities of this type.
    Even with those facilities that we have today, once we 
bring our fiber line into a community--and it might be a 
community of a thousand people or 5,000 people--we are still 
dependent on getting access to that very last mile of 
connectivity, the copper line, if you will. In some cases it is 
a combination of fiber and copper.
    On that last mile line, we can put high-speed Internet 
service. So the key to us is getting access to the last mile. 
So we have already interconnected hundreds of cities with 
fiber. The key is to get to the consumer, and that is what the 
1996 Act was all about, the last mile.
    In rural areas where you have small telephone companies 
now, there are really two areas. There are the areas covered by 
the Bell companies, 85 percent of the country, and then you 
have the small telcos, the co-ops, and so on and so forth. We 
have actually found in our markets a lot of the co-ops have 
done a very good job of deploying DSL services in their market 
and are not necessarily behind the rest of the areas. So where 
you have a monopoly, a local telephone company--and by the way, 
local small telephone companies are highly profitable. If you 
have ever looked at a P&L, they have money to invest.
    So that smaller company, it is dependent on them to deploy 
some of those profits that they have. If you want to encourage 
it through tax incentives, tax incentives would be great for 
little telephone company monopolies and they would be great for 
large telephone company monopolies, but for the CLEC industry 
there is not one CLEC in the United States that is making a 
profit to offset taxes against, tax credits against. So in our 
case, incentives of some other sort is needed, at least in the 
near term, like our rates being too high that we are paying for 
that last mile connection and areas like this that will cause 
us to better serve these customers.
    Senator Cleland. Mr. Armstrong, can you tell us a bit about 
AT&T's plans for interconnectivity in a global marketplace?
    Mr. Armstrong. Yes, Senator, I will speak to that from a 
variety of technologies, since AT&T has been and is investing 
in several technologies to bring all forms of communications to 
consumers and business. I think first, of course, enforcing the 
Telecom Act is going to create the most competition out there 
across all the technologies.
    I think, second, understanding the buildout plan so we do 
not go solve yesterday's problem when it is not tomorrow's 
problem. For example, we took a cable system that was analog 
broadcast video, just doing limited entertainment, and we 
converted it from low capacity to high capacity. We converted 
it from analog to digital and we converted it from broadcast to 
interactive so that it could do all voice, video, and data 
applications. We spent about $6 billion last year on that 
capital program to upgrade it across the country where we have 
the homes passed. We are spending $4.5 billion this year. As I 
testify this morning, we are about 74 percent of our homes 
passed complete, which means we can bring digital video and we 
can bring interactive data. We are going to be spending in 2002 
and 2003, capital to complete that, so that in small towns, big 
towns, every town that we are in, where we can afford that we 
will be upgrading it to bring those services.
    We are doing the same thing with fixed wireless. This is 
using bandwidth that could have been used for the mobile 
application, but in this case the fixed application, and we are 
deploying it in communities for both telephone service and 
online high-speed data services as well. That will roll out 
over the next 4 to 5 years to pass some 11.5 million homes.
    Also for the rural area, in my prior career with Hughes in 
the satellite business, when we implemented the DirecTV, we 
also implemented something called DirecPC. That enables a 
geosynchronous satellite with the same KU band transponder 
capacity to actually beam a broadcast signal down for download 
of Internet data of about 400 kilobits and using the backhaul 
of the telephone infrastructure so that they could reach all of 
rural America with a broadband solution.
    But there still, to take your point, may be some who are 
underserved or not served at all. AT&T has been I think very 
supportive of universal service. We are, I think, the largest 
collector of that and pass it on. If the Congress deemed 
through any of the alternatives, to those that can be untouched 
in the future by broadband, that a policy change in 
subsidization, incentives, or tax breaks is necessary, we would 
support that as well.
    Senator Cleland. Thank you very much, sir.
    Mr. Holland.
    Mr. Holland. Yes. Let me take a look at my home State of 
Texas, one that I am familiar with. I grew up in a small town 
there. In fact, my mother was the office manager for the small 
independent telco that operated in that town. It is something 
that I have always been very interested in. Texas is a State--
and I know Illinois, where I have also lived, also is typical 
of this--where the 20/80 rule applies very well. The RBOC, in 
Texas SBC, serves about 80 percent of the population and about 
20 percent of the land area. With the independents, the 80/20 
rule works the other way.
    In fact, you can get in your car in Austin, Texas, and 
drive to El Paso, which is 600 miles, and you pass through 10 
miles of SBC territory through West Texas. Those are the rural 
regions that are very tough to serve. The further west you go, 
the more remote they are. As you get to New Mexico and Arizona, 
it is even worse.
    We serve typically a lot of small schools, churches, barber 
shops, beauty parlors, retail stores, real estate brokerages, 
things like that. That is our bread and butter type customer. 
We do not serve the large customer.
    To try to go into the rural areas, though, would be very 
difficult, not only for us but for SBC. For instance, the 
Tauzin-Dingell bill says that it is going to provide broadband 
deployment to rural areas. Well, SBC could go build, except for 
that one 10 miles around Fort Stockton, 600 miles of facilities 
where they are not the ILEC and have no regulation at all in 
the State of Texas in the independents' areas. That is not 
going to happen.
    I agree with Congressman Markey, the only way to make that 
happen is really through tax credits, subsidies, through 
leveraging the buying power. I know this Committee was very 
instrumental in the Telecom Act of 1996. I think they got it 
right, because to a large extent they set up a system that 
protected a lot of the small independent telcos, which I fully 
agreed with. It prevented companies from going in and just 
taking the big industry or the school in town away from the 
independent telco and leaving everything else there. I think 
that was a good system.
    But that is a barrier to anyone coming in there because you 
cannot interconnect. I think the tax credits, the subsidies, 
financial incentives--I have even suggested in Texas, where I 
am on the e-government task force, that the State of Texas use 
its buying power as one of the biggest telecom users in the 
State to attach conditions on its suppliers to go provide 
services to rural areas.
    I really think the government has to play a big role in 
that area.
    Senator Cleland. Thank you all very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you.
    Mr. Holland, does your company market to individual 
telephone users in the home?
    Mr. Holland. To the home, no, sir. We serve small 
businesses. Over half of our customers are one-, two-, and 
three-line customers. That is, in fact, the most neglected part 
of the market today. The dynamics of serving that customer, of 
execution, are very similar to serving the one- or two- or 
three-line homeowners.
    The problem gets down to the competitive landscape. When we 
go serve a small business, you know, the barber shop with two 
lines, we are competing against one monopoly. That is the 
telco, the ILEC. We have been able to do that successfully and 
have done quite well, and we have installed over 750,000 lines 
in the last 3 years.
    If we go to the home with the same type of service, we have 
got to compete with two monopolies, the RBOC and the cable TV 
company. I will tell you every DSL player out there today has 
either gone bankrupt or has been given this going-concern 
tattoo on their forehead by their accountants, which puts you 
in the Chapter 11 waiting room, because they tried to go in, 
even in urban areas, and compete with those two behemoths and 
they got squeezed. It cannot be done without better 
enforcement. With better enforcement, you can go in and be 
successful. But it would take a lot better enforcement.
    Senator Dorgan. Mr. Holland, I heard you say that and Mr. 
McLeod and Mr. Armstrong all talked about better enforcement. 
Let me ask about that for a minute.
    Mr. McLeod, you said on page 6: ``The Bell companies have 
successfully denied competitors equal access to their entire 
local network, both economic and functional.'' I assume you 
take that complaint to the FCC repeatedly; is that correct? I 
mean, that is the referee here.
    Mr. McLeod. Sure. I mean, we would take it to the State 
commissions and then go through a process there, and then 
eventually we could get to the FCC, where we would wait maybe a 
couple of years to be heard there. So yes, there is an 
administrative remedy, but it is very long and very involved. A 
rocket docket is a 2-year plan and not a 1-month plan.
    Senator Dorgan. So back up 24 months from today and you 
have 24 months ago, you have a vista of new enterprises, new 
companies out there having access to the capital market with a 
great deal of new capital. They have got plans, they have got 
business plans that are exciting. They are going to go compete, 
right?
    Twenty-four months later, to the extent that there are some 
left, they are hanging on by their financial fingertips. Many 
have fallen by the wayside. Many are in Chapter 11. Those that 
are left are hanging on by their fingertips. Mr. McLeod said 
they are not making profit at all, not a penny of profit. So 
what happened in the intervening 24 months?
    Mr. McLeod. Two things happened, and it was not just a 24-
month period. We actually began our expansion back in 1996. The 
two areas are, one, gaining access to that local network in an 
equal fashion to our competitor--let me give you an example. I 
have got one here that I want to just run through just to show 
you, not only functional access, but economic access.
    We have a travel agency here last fall that wanted to move 
eight blocks, about 14 telephone lines, already a customer of 
ours in Illinois. We sent an order to the local telephone 
company, in this case SBC, and we get a firm order commitment 
from them. Now, that sounds like we are going to get something 
on a specific day. So we go to do the cutover on that specific 
day. The travel agency, who depends totally on telephone 
service, moves to the new facility.
    On that day we are told by SBC that there are no facilities 
available. So we start the process of trying to hold onto this 
customer of ours, and the first thing we do is we go out and 
buy cell phones for all of the people in this operation and 
fund that, and we call-forward their old number into a cell 
phone.
    Then we also have a policy of giving refunds to a customer 
that would be damaged. We paid the neighboring business to use 
one of their telephone lines in this case. Then we finally had 
a settlement with the customer--this is a $500-a-month 
customer--and 8 months later we have service from the local 
telephone company. We have paid $4,500 out of our own pocket 
just to keep this one customer.
    Now, the problem is that we are supposed to have access to 
this customer or to this network to service these customers. If 
we can get access to that network, we can provide great 
telephone service to the customer. But this kind of access, the 
competitive industry cannot survive long.
    Now, when the financial markets are wild and crazy and 
saying, 1996 Act, we are going to open up all of this to 
competition, sure they are going to pour funds into it. But 
then the footsie bill, the Tauzin-Dingell bill, came in last 
year and everybody started wondering whether or not the 1996 
Act was going to be overturned. That was the start of it. There 
has been a study done to show the effect on people's stock 
prices every time the Tauzin-Dingell bill has been talked 
about.
    So you have got inferior access going on through this whole 
period of time, and then you get the stock market nervous about 
Congress, and now the stock market is saying: ``Make a profit, 
CLECs.'' Well, we will not make profits when we are making up 
$4,500 credits to customers that should be just typical small 
business barber shop kinds of customers. So we have an economic 
and a functional unequal access to that local network and we 
need to get that resolved through enforcement and mandating 
equal access.
    The 1996 Act is just fine.
    Senator Dorgan. Mr. Chairman, Mr. McLeod told a fascinating 
story here. I will follow up with you later about what you did 
with respect to that specific situation. I understand all of 
you have talked about the need for enforcement and I think you 
will find Members of Congress, and perhaps the Chairman and 
myself and others, sympathetic to wanting to do something that 
is real with respect to enforcement.
    Mr. McLeod. Can I just add one thing to that? During that 
same year, SBC was fined $60 million in this same State for 
some of these same kinds of occurrences. Of course, we are one 
of the damaged parties. We got none of it. So there were 
penalties in this case, but in this case, the Bell companies 
viewed it as a cost of doing business.
    Senator Dorgan. I would like to ask a brief question.
    Ms. Greene, you said it was your company's intention to 
build out advanced services to 70 percent of your territory. I 
am wondering whether that is like the Blackberry, Palm VII, who 
say they serve 94 percent of America, but you cannot operate 
them in North Dakota. They are talking about population versus 
territory.
    A substantial amount of the territory of this country is 
not territory where you can carry a Blackberry and get that 
kind of service. But they still advertise that they are 
somewhere in over 90 percent of the territory. Tell me about 
the 70 percent?
    Ms. Greene. We have actual plans to equip 70 percent of our 
lines, so it will be an actual retrofitting of the line to be 
able to carry DSL. Our goal is, of course, to achieve as close 
to 100 percent as we can, because we view that as our 
responsibility and ultimately it lets us build a platform that 
creates economic growth for everybody.
    We do not have the financial wherewithal right now to see 
our way clear to building out to 100 percent. But something 
about this Act is working and I think that Mr. McLeod tells an 
interesting story, but I have got a couple of charts here that, 
if I could just show you a second. You know, we are hearing a 
lot about the demise of the CLEC industry and Mr. McLeod said, 
we will all be dead by the time it really takes off.
    To show you these charts, just to really show you the slope 
of the line, even though we are talking about the CLEC industry 
being under duress, if you look at the slopes on those lines, 
which is the number of operational CLECs and also the number of 
CLEC facility-based lines, those are pretty steep curves.
    I think what you are seeing here in this marketplace is you 
are seeing a huge technology challenge. A lot of the money that 
we could have spent equipping DSL we have had to spend on 
retrofitting our network to be able to break our network up 
into pieces and to do things that it was never designed to do. 
Our network was built to serve a telephone number that was 
identified with a specific geography. Now it has to be made 
available to competitors and the telephone number goes with the 
specific person and not with the specific geography.
    We have had to totally rebuild our systems to do that. What 
I think you see in the slope of that line is not that we are 
finally getting around--or we have got the threat of penalties. 
What you see in the slope of that line is we have done the 
heavy lifting that it takes to make our network do something 
that it was never designed to do.
    We look forward to when we have made that investment and we 
can then turn our attention to deploying DSL lines.
    Mr. Holland. Senator Dorgan, could I just add something to 
what Ms. Greene said? One thing I have heard a lot of the ILECs 
talk about, especially the RBOCs, was they are going to do this 
and that and we are going to build this amount of population 
and that and so forth. What I have never heard them say is: We 
are going to go out of territory where we cannot leverage the 
monopoly to do that. Like BellSouth could have been in North 
Dakota 4 years ago building anywhere it wanted to with 
absolutely no regulation whatsoever. It could have found out 
what it was like to be a CLEC.
    Despite the number of lines increasing, this time last year 
there were about 45 publicly held players--CLECs, DLECs, ISPs, 
that type of thing. Today most of the Wall Street analysts will 
tell you that Clark, myself, and Time Warner Telecom and a 
handful of others will probably survive the shakeout, probably 
less than ten.
    In fact, since last July between 15 and 20 emerging telecom 
providers have gone bankrupt, representing $35 billion of 
invested capital. That is not market cap. That is actual checks 
written and put into play.
    Now, a lot of these wounds were self-inflicted. There were 
a lot of bad business plans. There was a lot of poor execution. 
Some of them tried to bite off more than they could chew 
financially. But the intransigence of the incumbent telcos in 
complying with the law and implementing the Telecom Act and the 
inability, unwillingness and lack of tools of the regulators to 
act as policemen and make them obey the law and give 
competitors the same access to the local bottleneck facilities 
as they provide to themselves, equal parity or equal access, as 
Clark says, has produced that problem.
    The ILECs should walk in our shoes before they start 
talking about what a bed of roses it is.
    Senator Dorgan. Mr. Armstrong, one of the interesting sagas 
of recent years has been to watch AT&T. You took a big old 
sleepy company and gave it an industrial strength vitamin B-12 
shot, and we are not where all of this takes you and it. But it 
has been a very interesting thing to watch. The population of 
companies and entrepreneurs and interests to get into this 
business and do interesting things goes from the very small to 
the very large. Mr. Holland, in fact, calls you a behemoth.
    So tell me, if you will, from the perspective of a very 
large company involved in this issue, as opposed to Mr. Holland 
and Mr. McLeod that are smaller--well, Mr. McLeod is a pretty 
good-sized operation these days in our part of the country. But 
give me your perspective from a very large company doing 
business in the same set of circumstances. You have all of the 
issues dealing with opening the systems and trying to deal with 
the FCC and the local regulators and so on. Give me your 
perspective on what is happening here.
    Mr. Armstrong. Senator, I would be happy to. Three-and-a-
half years ago when I started this journey with AT&T, we 
quickly realized that we were left with the remnants of Judge 
Greene's order, as Congressman Markey was so eloquent in 
describing. That is, the middle of the phone call, a thing 
called long distance. It was never born out of the marketplace, 
regulation, or legislation. It was born out of Judge Greene's 
breakup of the Bell System in 1984.
    It was not a bad place to be. We got to be kind of a 
behemoth. But two things happened along the way. The first is 
that the networks went from analog to digital, and that meant 
the whole access regime that was really the predicate of the 
Judge's decision, regulated monopolies originating and 
terminating and having something in the middle be an industry 
or a market called long distance.
    And of course, the Telecom Act, which then set a 14-point 
checklist, can a LEC, the originators and terminators, complete 
the call.
    So we set out to do two things. One is to rebuild and 
transform our company by transforming three networks: a 
wireless network, a data network that would not only be 
domestic, but global, and a cable infrastructure that would 
make a fiber infrastructure. That was the first challenge.
    The second challenge is we had 60 million consumer long 
distance customers, and what they engaged with us was long 
distance and it was going to go away, because completing the 
call is the natural act, whether it's a technology statement, a 
human statement, or a cost statement, connecting the call, 
completing the call.
    So we had to have access to the only thing that connected 
our 60 million long distance customers, the twisted copper pair 
local loop. The enforcement and interpretation of the Telecom 
Act of 1996 was fundamental to AT&T being able to connect the 
call, to complete the call, because that is all that connected 
our 60 million ubiquitous customers throughout the United 
States.
    We started it--this is our third foray. We started it back 
in 1997 with a thing called TSR. That was Total Services 
Resale, which was taking a platform from the Bells in six 
States and reselling it. After 6 months, we shut it down 
because we had gotten 400,000 orders and after 6 months had 
only been able to provision 200,000 of them. We had to incent 
the other 200,000 to go back to the Bells because we just could 
not get them through the Bell systems. We shut down the 
operation. It cost us $3.2 billion.
    Then New York opened and we pleaded with the commission as 
well as the FCC that it was not operationally ready, nor was it 
economically viable, for UNEP, Unbundled Network Element 
Platform or Loop. It still was enacted. We showed up. It was 
important for three reasons: one, to prove, to demonstrate to 
this town as well as to this country, that if a market opened 
AT&T would provide consumer choice and competition in that 
market for local exchange service.
    The second reason is that we could take share, that the 
choice would not be just showing up, it would also be taking 
share.
    Third, to demonstrate that it was not economically or 
operationally viable.
    Unfortunately, we proved all three. We have about 800,000 
customers. We lost several hundred million dollars. We have 
stopped our marketing activities. No one is showing up of other 
significance in other markets, however, that are opening.
    Mr. Markey's market of Massachusetts, nobody of 
significance has shown up. In Oklahoma and Kansas, nobody of 
significance has shown up. Why? Because we know we will lose 
lots of money if we go in there under the conditions that are 
being presented. It is not being interpreted or being enforced 
to be either operationally or economically viable.
    Now we have just bought $135 million worth of Northpoint 
assets to co-locate in 1900 local service offices for DSL, and 
Tauzin-Dingell would like to take the loop back so that nobody 
can provision broadband services competitively.
    So our experience, Senator, has been from 1997 attempting 
with TSR and losing billions of dollars, to the UNI situation 
today, to the DSL situation tomorrow. This Act can work with 
the right interpretation and enforcement.
    Senator Dorgan. Mr. Chairman, you have been very patient. 
If I have other questions I will submit them to the panel.
    Thank you very much.
    The Chairman. Very good.
    Ms. Greene, Mr. Holland says that BellSouth can go to North 
Dakota without any regulation or restriction whatsoever, a 
totally open market, no 1996 Act or anything else, no 271.
    You are ready, willing and able according to the law. Why 
have you not gone to North Dakota?
    Ms. Greene. Because we choose to invest our money in our 
home territory of the nine States that we serve. We had 
invested----
    The Chairman. Well, wait a minute. Now, you are in some 7 
or 11 countries. When I go to Buenos Aires, they congratulate 
me on my company making a heck of a lot of money down there in 
Buenos Aires. I get up to Lima, Peru, they congratulate me. You 
can get down to Peru and Argentina and these other countries, 
but you cannot get to North Dakota?
    Ms. Greene. Well, why am I not surprised that we have ended 
up at this point? Let me talk a little bit about the amount of 
money that we invest in BellSouth. Last year we invested $5.5 
billion in our nine States.
    The Chairman. How much money have you invested overseas?
    I am paying the rate down in my home, the BellSouth rate. 
Are my profits that you make from my paying the rate going to 
Argentina, Mexico, New Zealand?
    Ms. Greene. Actually, we have invested more in South 
Carolina over the last 4 years than we invested last year in 
Latin America. That is in South Carolina alone. In addition to 
that, we have invested 165 percent of the net income of our 
domestic communications group back in domestic communications.
    The Chairman. But you are regulated in South Carolina, but 
you are not regulated in North Dakota. Why do you not go to 
North Dakota?
    Ms. Greene. Because there is not enough money to build out 
a network everywhere that we go--everywhere in this country.
    The Chairman. But there is enough money to build a network 
out down in Buenos Aires?
    Ms. Greene. Well, we would like to serve our customers with 
DSL and we would like to make sure that we are honoring 251 and 
271 of the Act, and that is how we have chosen to spend our 
money.
    The Chairman. Well now, you say regulatory uncertainty. You 
know, that sort of gets me, because you wrote it. It is just 
like Plato's famous couplet: ``The politician makes his own 
little laws and sits attentive to his own applause.''
    Here you write the regulation and then you talk about the 
uncertainty of it, and that you are trying not to block all 
these court proceedings and everything else, but trying to 
understand the checklist. Is it not a fact that Senators McCain 
and Brownback asked for interpretation and then when they get 
it out of the FCC you say the 14-point checklist has expanded 
to 600, 800, 1,000, 1100? It has not been expanded.
    Telecommunications is highly technical, very complex, and 
you can paint any kind of picture you want. But we understand 
and know, you wrote the 14-point checklist. There was no 
difficulty understanding at the time that you wrote it and 
said, ``vote on it.'' You asked me to support it.
    Ms. Greene. I think what we have to do here is to separate 
the implementation of the Act with the Act itself. The Act was 
clearly designed and was tightly woven to put forward a 
balanced platform. When the Act was implemented--I will give 
you an example of what happened. When the Act was implemented 
back in 1996, there were at that point about a dozen piece 
parts of our network. Today we are up over 300 piece parts that 
our network has been broken into.
    The uncertainty that Tauzin-Dingell seeks to clarify is how 
the FCC's authority about how many piece parts it needs to 
break the network into is unbridled and unclear. When the FCC 
itself tried to scale back its breaking up the network, they 
did so in SBC's merger, the court told them: No, there is no 
real authority under the Act for you to restrict your actions 
in this way.
    So what Tauzin-Dingell would seek to do is to give clear 
policy direction to the FCC about what they can and cannot do 
to facilitate broadband services going forward.
    The 14-point checklist--actually, the 1100, 1800, 600, 
whatever you want to call it, it does not make any difference. 
Those different categories have come in under four of the 
points under the checklist. So when we came out of South 
Carolina, when we came out of Louisiana seeking to provide long 
distance and felt we had opened up our network, the reaction we 
got back from the FCC was: No, in these four areas we want to 
break those down into thousands more subparts.
    That is not the fault of the Act. It is the fault of 
incomplete implementation of the Act.
    The Chairman. Well, the implementation has got to be done 
by the company itself. It cannot be done by the FCC. In fact, I 
followed your application. I was interested in BellSouth and, 
in fact having been one of the principal authors of the Act 
itself back in 1996, I thought it would be fine if my own RBOC 
could comply. I learned from the FCC that the public service 
commission order was 69 pages practically word for word as a 
typical order, a model order that you submitted at the time, 
and of course the PSC signed it.
    Legally it sounded pretty, but you did not have actual 
substance. That is why you were refused. It did not have 
anything about the implementation and the uncertainty.
    But let us get to the confiscatory pricing. You took that 
all the way to the Supreme Court. The Business Week schedule 
showed last year BellSouth increased their profits 22 percent, 
and the court refused this confiscatory pricing that you are 
talking about, like you are being penalized or going out of 
business.
    Ms. Greene. Well, actually it is still pending at the 
Supreme Court. The whole issue about TELRIC pricing is still 
pending at the Supreme Court, and we did win that pricing at a 
lower court on appeal because the court said that the way the 
FCC implemented the Act, they looked at a hypothetical network 
and not at an actual network and that that was not appropriate 
to do.
    The Chairman. Why is it being appealed to the Supreme Court 
if you have won it?
    Ms. Greene. Well, we are not the only--there are two sides 
and one side does not like what has happened here.
    The point being, I mean if you just step back and look at 
hypothetical pricing, what happened is that the FCC took our 
network, which was a legacy network that was designed in a 
cost-plus environment, and they transformed us on paper into 
being the most fleet, efficient competitor. How can companies 
like--one of the big mysteries to me in this whole policy 
debate is how companies like Mr. Holland's or Mr. McLeod's can 
view that as being a positive situation for themselves, where 
our network is priced at a cost that is so low, no matter how 
modern a network they build, they are not going to be able to 
effectively compete with us on a price basis.
    The Chairman. It has been now 5 years of courts, appeals, 
rulings, and yet very little compliance over the entire 
country. For example, in Pennsylvania they said what we need to 
do is have some restructuring, operational restructuring, not 
to have separate subsidiaries. When we wrote the 1996 Act we 
required a separate subsidiary for manufacture.
    Rather than arguing about the price and everything else 
like that, what is the matter with listing your wholesale price 
and your resale price separately?
    Ms. Greene. Well, sir, we do list our wholesale price and 
our retail price separately today. Structural separation----
    The Chairman. Wait a minute. Let me understand that, 
because I have heard differently. I can come and look at the 
BellSouth books and find out how much you wholesale to 
BellSouth and how much you wholesale, let us say, to a CLEC 
like Mr. McLeod?
    Ms. Greene. Let me give you a couple of examples, because I 
have some actual pricing. All of our rates are published and 
all of our rates are set by regulators. Our retail rates are 
set by regulators, our wholesale rates are set by regulators.
    In Columbia, South Carolina, for example, the FCC has 
determined and the State PSC has determined that the rate that 
competitors are going to pay in Columbia is $18.48. They have 
set our retail rate for business customers at $42.75. The $24 
difference there is known to our competitors and known to our 
customers, and that is why all the competitors are flocking to 
the business market, because they know exactly what their 
wholesale price is, they know exactly what our retail price is. 
They also know exactly how close to parity we are giving them 
in how we are treating them from a service standpoint compared 
to our retail, because we have to report 1800 measures 
disaggregated by CLEC, posted to the Internet, fines assessed 
already by each of our State jurisdictions against our 
performance.
    Structural separation is an answer looking for a problem. 
There is not a problem today that requires structural 
separation.
    The Chairman. Therefore you would not object to a 
functional separation or a requirement thereof?
    Ms. Greene. Sir, we operate under functional separation 
today. This detailed checklist and report card that we have in 
each of our States serve as functional separation.
    The Chairman. So you would not object to it, since you are 
already doing it, I take it?
    Ms. Greene. Structural separation, mandated separate 
structural separation, does nothing but drive up costs for 
consumers. So the devil is in the details. Today we 
functionally offer parity and functionally separate out our 
networks. To have that structurally mandated or legislatively 
mandated we would disagree with, because the ultimate person 
that gets cheated out of that is the consumer.
    The Chairman. Well, I appreciate it. The Committee really 
is indebted to each of you for your appearance this morning. I 
am sorry that we have not had more of the Senators present 
because, as I explained earlier, we do not have roll calls 
today and so they are doing a lot of work at home.
    Thank you all very much. The record will be open for 
questions and any other comments that you folks might want to 
add. Thank you a lot.
    We will now go to the final panel: Mr. David Rolka of 
Rhoads & Sinon; Mr. Gene Kimmelman of the Consumers Union; and 
Senator Dave Sullivan of the State of Illinois.
    [Pause.]
    The Chairman. Let us have a little order, please. We will 
start again from left to right, or your right to left.
    Mr. Rolka of Rhoads & Sinon, we are glad to hear from you, 
sir.

      STATEMENT OF DAVID W. ROLKA, SENIOR VICE PRESIDENT, 
                    RHOADS & SINON GROUP LLC

    Mr. Rolka. Good morning, Mr. Chairman. It is really a 
privilege and an honor for me to be here this morning, and I 
commend you for your patience and endurance in weathering 
through these arguments.
    I guess I should introduce myself a little. I am one of 
those viruses from the Petri dish of State regulation. I was a 
public utility commissioner for two terms. I was unanimously 
confirmed by my State Senate to participate in these decisions 
as they have all evolved. I am now with a consulting firm 
located in Harrisburg and I continue to enjoy the opportunity 
to provide services to my former colleagues in the States, 
advising them on cases and working on such things as universal 
service administration.
    Contrary to some rumors that reach me in Harrisburg, I do 
not have as a client AT&T. I never have. I have refused some 
entrees they have made to me to provide services and do some 
work for them. I am here at my own expense and I have taken 
three-and-a-half days out of my otherwise consulting schedule 
to be here, and I really appreciate the opportunity to be here 
and to do this.
    The Chairman. Well, that is just to your credit, because he 
has just been described as a dominant deadbeat dad, so I would 
not be associated with him either.
    [Laughter.]
    Mr. Rolka. I am not here on behalf of NARUC, the 
organization of commissioners. But having sat here for the 
morning with you and listened to the things that the other 
people have testified to before you, I would encourage you--and 
hopefully the testimony has whetted your appetite--to hear from 
some of my current colleagues in the field of regulation at the 
State level, to hear about what is actually going on in at the 
States in terms of implementing the Telecom Act.
    I know I am invited here to talk a little bit about my 
experience in Pennsylvania that occurred over the last year. As 
you have mentioned several times during the testimony, 
Pennsylvania did embark on the exercise of trying to 
structurally separate Verizon of Pennsylvania. I have submitted 
for the record a lengthy prepared statement. I encourage your 
colleagues to----
    The Chairman. I will ask each of the witnesses please--the 
full statements will be included in the record and I ask each 
of the three to summarize. Thank you.
    Mr. Rolka. Pennsylvania clearly was frustrated at the lack 
of progress in opening the local communications markets to 
competition. The responsibility to open the local markets to 
competition is an obligation that predates TA-96 and it is not 
an obligation in Pennsylvania that is conditioned on the 
success or failure of Verizon to get into the long distance 
market.
    Structural separations for the dominant service provider, 
with an inherent incentive to discriminate against its 
competitors in order to preserve or expand its own market 
share, represented the only rational choice to compel Verizon 
of Pennsylvania to comply with the nondiscriminatory provisions 
of the State law and the Federal law in Pennsylvania.
    The commission found in the global proceeding that the non-
structural remedy proposed by Verizon would be less effective 
in preventing market power abuses and more costly to enforce. 
Structural separations provides a bright-line demarcation point 
between the retail and the wholesale activities of the 
incumbent. While ongoing oversight of these contractual 
requirements would be required, the structurally separate 
relationship of these entities would make it much easier to 
police and to oversee.
    The commission staff is accustomed to and well qualified to 
monitor the implementation of this contractual arm's length 
relationship and division of responsibilities between the 
wholesale and retail operations of the company.
    In contrast non-structural separations enables the 
incumbent to continue to bundle its retail and its wholesale 
services and functions and makes it much harder to enforce any 
code of conduct that the commission indisputably must prescribe 
in either situation.
    Inappropriate conduct, should it emerge under the 
structurally separate relationship, would be easier to detect, 
sanction, and correct. Nonetheless, the commission decided in 
March, and issued an order again in April of this year, to 
require Verizon to undertake a functional structural separation 
rather than full structural separation. While, in my opinion, 
full structural separation represents the best course of 
action, the commission's decision sets forth a number of 
measures that it intends to undertake in order to put in place 
non-structural competitive safeguards and a code of conduct to 
govern Verizon's wholesale and retail relationships.
    The PUC claimed that the expeditious implementation of 
functional separation would be more worthwhile than compelling 
structural separation followed by the inevitable litigation and 
regulatory micromanagement stemming from functional 
separations. In my view, the commission reinterpreted the 
concept of regulatory efficiency, failed to appreciate that the 
implementation of its current plan will not be expeditious, and 
condemned itself to ongoing regulatory oversight, for which it 
is poorly equipped, and will inevitably continue to face 
protracted litigation.
    The key to the commission's decision, a stringent code of 
conduct and competitive safeguards, have not yet been defined 
and must be addressed in another ongoing rulemaking proceeding. 
The fact that Verizon continues to argue that forcing its 
retail operations to function similarly to all other CLECs is 
inefficient and that it imposes additional costs on its 
customers demonstrates very clearly that the two functional 
divisions that it wants to set up, one for itself and another 
for the competitors, that it proposes to handle its retail 
competitors, are not equal.
    Structural separation is not the wildly expensive, 
draconian blood-letting of a regulatory agency run amok that 
Verizon has depicted to the public, to the legislature, and to 
the courts. Unlike divestiture, which is used to remedy anti-
competitive behavior and which requires certain lines of 
business to be sold, structural separation is a less sweeping 
vaccination that leaves the company free to engage in the 
activities at issue.
    Structural separation is the best mechanism for ensuring 
nondiscriminatory access to interconnection, resale, unbundled 
network elements, and it will reduce the regulatory oversight 
and the resources needed by the regulator to monitor and 
enforce the rules that it will have to use to implement the 
code.
    As I sat here, I made a few notes of things other people 
talked about. The first thing I wanted to point out to you as 
you are looking for solutions to address the deployment in 
rural areas. Pennsylvania, several years before the passage of 
Telecom Act of 1996--and I guess I am guilty, guilty of liking 
my own cooking here--passed its own law that traded alternative 
forms of regulation for a network deployment scheme, and in 
that scheme we mandated as part of our tradeoff that deployment 
would be balanced across urban and rural and suburban areas of 
our State.
    There were no ceilings, no limitations on the pace. Bell 
could, if it chose, race ahead in any of those regions to do 
its deployment, but it was obligated after it specified where 
it wanted to go to meet the minimum targets of deployment in 
the rural areas.
    They have repetitively, despite things they have said here 
in Washington, reported to the legislature and to the 
commission in Pennsylvania that they are on target for meeting 
those deployment schedules, that they are able to deploy 
broadband services in Pennsylvania without the relief that 
would be afforded by Tauzin-Dingell. In my opinion, the Tauzin-
Dingell bill would not only have the adverse consequences that 
many of my former colleagues in the States have identified, but 
it would seriously, very seriously, undermine the ability of 
universal service programs currently in place to continue in 
operations and it would seriously jeopardize the ability to 
roll out provisions of service in high-cost areas of this 
country.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Rolka follows:]

                 Prepared Statement of David W. Rolka, 
            Senior Vice President, Rhoads & Sinon Group LLC

    Mr. Chairman and Members of the Committee. My name is David W. 
Rolka, Senior Vice President of Rhoads & Sinon LLC, a consulting firm 
located in Harrisburg, Pennsylvania. Prior to joining the consulting 
firm of Rhoads & Sinon LLC, I served as a member of the Pennsylvania 
Public Utility Commission (December 1989--September 30, 1999). During 
my tenure at the Commission, I co-sponsored the motion, adopted by the 
Commission, which among other things, directed Bell Atlantic-
Pennsylvania, Inc., (VZ-PA) to file a plan that creates a structurally 
separate affiliate to supply retail telecommunications services.
    It was our conclusion \1\ that structural separation of retail and 
wholesale operations is the most efficient tool to ensure the 
successful development of fair and nondiscriminatory local telephone 
competition. Following on our state's successful implementation of 
electric competition, we found that the division of retail and 
wholesale operations is particularly necessary where a large incumbent 
monopoly controls the vast majority--around 90 percent at the time of 
the vote--of local exchange access lines in its service territory. 
Equally important, VZ-PA continues to control bottleneck facilities 
that competitors must have fair and nondiscriminatory access to in 
order to compete, in virtually all local exchange markets where it 
currently operates.\2\ The overwhelming competitive presence and 
concomitant ability to exercise market power, including the ability to 
provide itself with anti-competitive, preferential treatment and cross-
subsidies, and the corresponding opportunity and incentive to 
discriminate against competing telecommunications carriers in the 
provision of wholesale services, strongly supports the Commission's 
conclusion in September 1999 that structural separation is necessary to 
provide the local service competition envisioned under State law 
(Chapter 30, of the PA Public Utility Code) and TA-96.\3\
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    \1\ Opinion and Order, P-00991648 and P-00991649, entered September 
30, 1999, Chairman John M. Quain, Commissioners David W. Rolka, Nora 
Mead Brownell and Aaron Wilson, Jr. in accord. Vice Chairman Robert K. 
Bloom dissenting (Global Order).
    \2\ As of December 31, 1998, Verizon Pennsylvania (then known as 
Bell Atlantic Pennsylvania, Inc.) (VZ-PA) controlled a minimum of 90.6 
percent of the business access lines and over 99 percent of residential 
access lines in its service territory. While the percentage of access 
lines that VZ-PA has declined over the last year, VZ-PA remains the 
monopoly service provider of all wholesale services that CLECs need in 
order to serve their customers.
    \3\ Global Order, P-00991648/P-001649.
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    It is a privilege and an honor to be invited to present this 
testimony to the U.S. Senate Committee on Commerce, Science, and 
Transportation today.

                  I. INTRODUCTION: A CHANGED PARADIGM

    During most of the 20th century, local telephone service has been 
treated as a natural monopoly. That paradigm changed in Pennsylvania in 
1993, with the enactment of Chapter 30 of the Public Utility Code, 66 
Pa.C.S. Sec. Sec. 3001-3009. Pursuant to Chapter 30 of the Code, 66 
PA.C.S. Sec. 3009, the Commission approved four consolidated 
applications to provide competitive local exchange service in 
Application of MFS Intelenet of Pa., et al., Docket No. A-310203F002, 
et al. (October 4, 1995)(MFS-I). These applications represented the 
first efforts at competition in the local exchange market for 
Pennsylvania since the first decades of the 20th century.
    The national paradigm changed in 1996 with the enactment of the 
Federal Telecommunications Act of 1996, Pub. L. No. 104, 110 Stat. 56, 
codified at 47 U.S.C. Sec. Sec. 151 et seq. (Hereafter TA-6).
    Pursuant to TA-96, Congress mandated the opening of local 
telecommunications markets to competition. Consequently, many 
proceedings--over 20--were initiated before the Commission to bring 
competition to the local telecommunications markets in Pennsylvania 
including proceedings to address access charges, implicit subsidies in 
local exchange rates, and the maintenance of universal service.\4\
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    \4\ Application of MFS Intelenet of Pennsylvania, Inc. for Approval 
to Operate as a Local Exchange Telecommunications Company, A-
310203F0002, P-00961137. Application of MCImetro Access Transmission 
Services, Inc for a Certificate of Public Convenience and Necessity to 
Provide and Resell Local Exchange Telecommunications Services in 
Pennsylvania , A-310236F0002. Bell Atlantic-Pennsylvania, Inc. v. 
MCIMetro Access Transmission Services, Inc., C-00967717, R-
00973866C0001. Formal Investigation to Examine and Establish Updated 
Universal Service Principles and Policies for Telecommunications in the 
Commonwealth, I-00940035. Generic Investigation into Intrastate Access 
Charge Reform, I-00960066. Investigation into Bell Atlantic-
Pennsylvania's Entry into In-Region InterLATA Services under Section 
271 of the Telecommunications Act of 1996, I-00980075, M-00960840. Sen. 
Vincent J. Fumo Request for Declaratory and Injunctive Relief against 
Bell Atlantic for Violations of the Pennsylvania Telecommunications 
Act, I-0980080. Formal Investigation to Examine and Establish Updated 
Universal Service Principles and Policies for Telecommunications 
Services in the Commonwealth, L-0950105. Statement of Policy on 
Expanded Interconnection for Interstate Special Access, M-00920376. 
Implementation of the Federal Telecommunications Act of 1996, M-
00960799. Petition of Bell Atlantic-Pennsylvania, Inc. for a 
Determination of Whether a Telecommunications Service is Competitive 
under Chapter 30 of the Public Utility Code, P-00971293. Petition of 
Bell Atlantic-Pennsylvania, Inc. for a Generic Proceeding to 
Investigate Issuance of Local Telephone Numbers to Internet Service 
Providers by Competitive Local Exchange Carriers, P-00981404. 
Pennsylvania Public Utility Commission v. The Bentleyville Telephone 
Company, R-00974174, R-00974174C0001, R-00974174C0002. Pennsylvania 
Public Utility Commission v. Denver and Ephrata Telephone and Telegraph 
Company, R-00984315, R-00984315C0001.
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  II. REALIZATION THAT AN INTEGRATED RESOLUTION OF LOCAL COMPETITION 
                          ISSUES WAS REQUIRED

    Due to the complexity of the various subject matters, the 
Pennsylvania Commission had proceeded to separately adjudicate 
individual telecommunications cases, with each case focused upon a 
particular aspect of local competition. This approach was the tried-
and-true way that regulatory commissions historically have handled 
complex proceedings. However, the Commission realized that the 
telecommunications issues facing it were not only complex; they were 
inextricably intertwined. Resolution of one issue required 
consideration of many other local competition issues. The Commission 
also recognized that the pace of change in the industry and technology 
would outstrip the slow pace of piecemeal adjudication. The Commission 
therefore embarked on a comprehensive resolution, commonly known in 
Pennsylvania as the Global proceeding. The approach was not 
unprecedented in Pennsylvania, and in fact had been used in the 
discussions that led to the legislation restructuring the electric 
industry, and in the individual company proceedings that followed.

 III. SIX MONTHS OF COMMISSIONER-FACILITATED SETTLEMENT DISCUSSIONS TO 
                     REACH A BROAD SCALE SETTLEMENT

    In the fall of 1998 Chairman Quain and I issued an invitation to 
the parties to the numerous pending proceedings to join us in a global 
settlement conference for the purpose of exploring an integrated 
resolution of the complex issues presented by those proceedings, in an 
integrated conclusion. On March 1, 1999, the negotiation expired 
without resolution, but the negotiations did serve to focus the parties 
on potential integrated solutions. In addition, the discussions 
provided a much-needed opportunity to confer with the parties in a less 
formal atmosphere and served to provide us with a fundamental 
understanding of their business needs and concerns.\5\
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    \5\ Legal waivers of due process concerns arising from the 
Pennsylvania statute governing ex parte communications were provided by 
the participating parties prior to the commencement of the settlement 
conferences.
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                  IV. SIX MONTHS OF FOCUSED LITIGATION

    Shortly after the global negotiations were concluded, two petitions 
were filed with the Commission proposing comprehensive solutions and 
recommending the closure of the pending dockets. The petitions were 
each sponsored by several participants in the prior negotiations and 
while each proposal addressed the same issues, the proposals clearly 
were incompatible. One Petition--docketed at P-00991648 and which 
became known as the 1648 petition was filed by three State senators, 
interexchange companies (IXCs) and competitive local exchange companies 
(CLECs). The other Petition--docketed at P-00991649 and which became 
known as the 1649 petition was filed on behalf of Verizon-Pennsylvania 
(VZ-PA), the rural telephone company coalition and two CLECs.
    The Commission asked the parties to attempt to reach stipulations 
regarding issues that might reduce the necessity for prolonged 
hearings. This effort failed completely. All parties maintained that 
their competing proposals were indivisible package deals. Consequently, 
the Commissioners unanimously decided to sit en banc during hearings 
and commenced formal litigation to develop an evidentiary record to 
enable them to decide the merits of each of the major issues of the 
numerous proceedings identified by the Commission. One of those issues, 
structural separation, is the focus of the balance of this testimony.

          V. BACKGROUND OF PENNSYLVANIA LOCAL COMPETITION LAWS

    In Pennsylvania, VZ-PA was granted an alternative form of 
regulation pursuant to Chapter 30 in 1994.\6\ Chapter 30 expressly 
anticipated that the alternative regulation of VZ-PA, as the dominant 
incumbent in the state, would facilitate competition in the local 
exchange market by requiring Verizon to provide cost-based, 
nondiscriminatory pricing and access to its network elements. See 66 
Pa. C.S. Sec. 3009; MFS-I, et al. That did not happen, however, because 
VZ-PA had absolutely no incentives to open up its local exchange market 
to competitors. Even after the Telecommunications Act of 1996 was 
passed, the important policy objective in Pennsylvania and Federal law, 
the promotion of local exchange competition, remained largely 
unsatisfied. Instead, VZ-PA still maintained a virtual monopoly in the 
Pennsylvania local exchange market. In addition, the evidence presented 
by VZ-PA's competitors in the Global proceeding, and in earlier 
proceedings incorporated into the pending docket, contained numerous 
examples of VZ-PA's abuse of its market power by providing competitors 
with less than comparable access to its network, or by employing other 
discriminatory conduct that prevented VZ-PA customers from switching to 
a competitor.\7\
---------------------------------------------------------------------------
    \6\ In re Bell Atlantic--Pennsylvania, Inc.'s Petition and Plan for 
Alternative Form of Regulation Under Chapter 30 , Docket No. P-00930715 
(Order entered June 28, 1994).
    \7\ See, e.g., MCI WorldCom Statement No. 4.0, at 23-30 (various 
examples provided); Covad Statement No. 2, at 4-10 (Covad witness 
describes collocation experience in Pennsylvania with BA-PA); AT&T 
Statement No. 3.0, at 13-24 (AT&T witness similarly describes 
collocation experience in Pennsylvania with BA-PA); Petition of Bell 
Atlantic Pennsylvania, Inc. for a Determination that Provision of 
Business Telecommunications Services is a Competitive Service under 
Chapter 30 of the Public Utility Code, Docket No. P-00971307, 
Recommended Decision of ALJ Michael Schnierle at 46 (July 24, 1998) 
(litany of CLEC complaints arising from BA-PA's OSS cited to by Judge 
Schnierle; Docket No. P-00971307).
---------------------------------------------------------------------------
    At the time of the Globaldecision, the Pennsylvania Commission was 
clearly frustrated, as were the FCC, other State commissions, and State 
and Federal legislators, at the lack of progress in opening the local 
telecommunications markets to competition since the passage of TA-96 
over three-and-one-half (3\1/2\) years before \8\ and the issuance of a 
Competitive (pricing) Safeguards Order \9\ shortly thereafter. At the 
time of our decision, the FCC had rejected five (5) Section 271 
applications and approved none. A good argument could be made that we 
were hardly closer to competition in the local exchange markets than we 
were in 1996. Some, like myself, had come to believe that the carrot of 
long distance entry might not have been sufficient inducement to open 
the local exchange market to competition. However, I also recognized 
that the responsibility to open the local markets to competition in 
Pennsylvania was an independent obligation and should not be 
conditioned on the success or failure of VZ-PA to gain entry into the 
long distance market.
---------------------------------------------------------------------------
    \8\ Opinion and Order, of the Pennsylvania Public Utility 
Commission, P-00991648/P-001649, page 228.
    \9\ Opinion and Order, of the Pennsylvania Public Utility 
Commission, M-00940587, entered August 6, 1996.
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    VI. THE COMMISSION'S DECISION TO REQUIRE SEPARATION OF VZ-PA'S 
                    WHOLESALE/RETAIL OPERATION \10\

    The 1648 and 1649 Petitions each acknowledged the serious conflict 
of interest and opportunity for anti-competitive conduct by an 
incumbent local exchange carrier that provides both retail services 
directly to local service customers and wholesale services to other 
telecommunications carriers competing for those same local service 
customers. Accordingly, both petitions proposed a ``Code of Conduct'' 
setting forth rules to ensure fair and nondiscriminatory treatment of 
telecommunications carriers when they seek to purchase wholesale 
services from an ILEC in order to provide retail services to end-users 
in competition with the ILEC.
---------------------------------------------------------------------------
    \10\ A copy of this section of the Order is appended to the 
testimony. The text of the full Order can be found on the web site of 
the Pa PUC at http:puc.paonline.com.
---------------------------------------------------------------------------
    A very significant difference between the two proposals was in the 
type of business unit separation requirement recommended for preventing 
VZ-PA from receiving any unfair competitive advantage in the 
marketplace. The 1649 Petition's Code of Conduct proposed a 
functionally separate organization for its wholesale services, such as 
an operating division within the existing corporate entity that would 
service the wholesale clients, as adequate protection to ensure 
nondiscriminatory access to VZ-PA's wholesale services by competing 
telecommunications carriers. The 1648 Petition, on the other hand 
advocated a structural separation of the wholesale and retail arms of 
BA-PA into two distinct corporate subsidiaries such that the wholesale 
subsidiary would service its retail affiliate and competitors alike.
    Based on the record, the Commission concluded that structural 
separation is the most efficient tool to ensure local telephone 
competition where a large incumbent monopoly controls the market. VZ-PA 
controlled the vast majority local exchange access lines in its service 
territory and controlled bottleneck facilities in most, if not 
virtually all, local exchange markets where it operated. This 
overwhelming competitive presence, the concomitant ability to exercise 
market power; the ability to provide itself with anti-competitive 
cross-subsidies, and the opportunity and incentive to discriminate 
against competing telecommunications carriers in the provision of 
wholesale services strongly support the Commission's conclusion, that 
structural separation is necessary to provide the local service 
competition envisioned under Pennsylvania law (Chapter 30) and TA-96.
    TA-96 and Pennsylvania's own statutory mandate under Chapter 30, 
have as goals the provision of competitive services by alternative 
providers on equal and non-discriminatory terms. 47 U.S.C. 
Sec. Sec. 251 and 271; 66 Pa.C.S. Sec. 3001. Both legislative mandates 
envision a telecommunications arena where competition creates savings 
and technological innovations for our Nation and Pennsylvania. Both 
statutes recognize and authorize structural separation as a regulatory 
tool to implement a competitive market where unfair competition may 
result absent its implementation. 47 U.S.C. Sec. 272; 66 Pa. C.S. 
Sec. 3005(h).\11\
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    \11\ Section 3005(h) specifically provides for the use of 
structural separation as a regulatory tool for LECs serving over one 
million access lines ``if the commission finds that there is a 
substantial possibility that the [competitive] service on a non-
separated basis will result in unfair competition.'' Section 3005(h) 
was clearly applicable because the ultimate goal of the proceeding was 
to open up competition in all telecommunications markets in 
Pennsylvania, especially local competition. In addition, the proceeding 
established a process that could lead to a formal declaration that all 
remaining retail local services are ``competitive'' under Chapter 30. 
Moreover, the fact that the Commission addressed this matter in a 1994 
proceeding under Chapter 30, well in advance of the enactment of TA-96, 
did not preclude the Commission from imposing structural separation 
based on the record of the current proceeding.
---------------------------------------------------------------------------
    The Commission found that it could not exercise its duty to 
enforce, execute, and carry out the pro-competitive mandates of Chapter 
30 absent structural separation \12\ It also found that given the 
length of time needed to actually accomplish structural separation for 
VZ-PA (estimated at the time to require approximately 1 year), it would 
be inefficient and more burdensome for VZ-PA to require separate retail 
affiliates on a piecemeal basis as different parts of the local service 
market are declared competitive. The Commission expected that if it 
ordered the structural separation planning, hearing, and implementation 
process to begin, it could be accomplished within the approximate 
timeframe that VZ-PA was expected to achieve Section 271 approval from 
the FCC and formal designation of its remaining retail services as 
competitive from Pennsylvania. A proceeding to implement the details of 
structural separation was convened following the Global Order. I'll 
address that proceeding later in this Statement.
---------------------------------------------------------------------------
    \12\ ``. . . we cannot fulfill our Section 501 duty to enforce, 
execute and carry out our mandate under Chapter 30 to promote and 
encourage the provision of competitive services on equal terms 
throughout the Commonwealth'' [absent structural separations]. (p. 224)
---------------------------------------------------------------------------
    The Pennsylvania Commission's structural separation decision was a 
sound exercise of its administrative discretion and application of law, 
based on the overwhelming record evidence that had been amassed. The 
decision also built upon its experience in designing and implementing 
the most successful competitive electric model in the country.\13\ 
Structural separation for the dominant service provider, faced with an 
inherent incentive to discriminate against its competitors in order to 
preserve or expand its own market share, represented the only rational 
choice to compel VZ-PA to comply with the non-discrimination provisions 
of State law and Federal law in Pennsylvania. The Commission also found 
in the Global Proceeding that the non-structural remedy proposed by VZ-
PA would be less effective in preventing market power abuses and more 
costly to enforce. We also took administrative notice that structural 
separation had been successfully implemented by other states in the 
telecommunications and gas industries.\14\
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    \13\ See, e.g. Application of PECO Energy Company for approval of 
its restructuring Plan Under Section 2806 of the Public Utility Code 
and Joint Petition for Partial Settlement, Docket Nos. R-00973953 and 
P-00971265 (Order entered December 23, 1997) (PECO Restructuring 
Order). In the PECO Restructuring case the Commission found that: 
Functional separation of regulated [electric distribution company] 
functions and competitive generation functions is essential for the 
development of a vibrant competitive market. Structural separation 
through the establishment of fully independent entities is preferable 
whenever possible. Id at 128.
    \14\ See AT&T Statement No. 1, at 24-26; Senators' Statement No. 1, 
at 28, 30-32; Main Brief of AT&T at 85-87; Initial Brief of Senators 
Madigan, Fumo, and White at 53-57. See also Robert E. Burns et al., 
Market Analysis of Public Utilities: The Now and Future Role of State 
Commissions at 6 (National Regulatory Research Institute July 1999) 
(study recommends that State regulatory commissions should consider 
structural separation as a regulatory tool to offset potential cross-
subsidization problems, especially where utility services are being 
provided in markets that are initially highly concentrated).
---------------------------------------------------------------------------
    Structural separation is not the wildly expensive draconian 
bloodletting of a regulatory agency run amok that VZ-PA depicted to the 
Pennsylvania legislature and the courts. Unlike divestiture, which is 
used to remedy anti-competitive behavior and which requires certain 
lines of business to be sold, structural separation is a less sweeping 
vaccination which leaves the company free to engage in the activity at 
issue.
    The structural requirement levels the `regulatory parity' field. It 
also changes the regulatory oversight responsibilities, hopefully in 
ways that better suit regulatory staff skill sets and makes parity of 
reporting treatment more realistic.
    Separate subsidiaries enable regulators to view the terms of 
affiliate transactions in ways that facilitate detection of an 
affiliate receiving favored treatment due to the contractual nature of 
the transactions. Structural separation heightens both the likelihood 
and perception of fairness and if carried out hopefully will enhance 
the willingness of potential competitors to make the investment to 
enter a market in the face of an overwhelming competitor that controls 
essential bottleneck facilities.

                       VII. THE INEVITABLE APPEAL

    While the Commission's decision to order structural separations was 
final, the details remained to be worked out. VZ-PA undertook 
extraordinary appellate efforts to request the Pennsylvania Supreme 
Court to immediately assume fast-tracked jurisdiction of the appeal. 
Its effort proved unsuccessful and typical appellate procedures ensued. 
VZ-PA filed State and Federal appeals of the Commission's decision. 
Front and center was the structural separations decision, along with 
various and sundry challenges to other portions of the Global Order.
    VZ-PA also initiated appeals of the Global Order in the lower 
appellate court, Pennsylvania Commonwealth Court, as well as in the 
U.S. District Court, Eastern District of Pennsylvania. The Pennsylvania 
Commonwealth Court unanimously upheld the PUC's Decision on all issues 
and in particular the structural separation decision. Bell Atlantic-
Pennsylvania, Inc. v. Pa. PUC , Nos. 2790 C.D. 1999 et  seq ., (October 
25, 2000). The Court found that the PUC had the authority under Federal 
and State law to order structural separations (47 U.S.C. Sections 
253(b), 272, 261(c)), and that the PUC's evidentiary record constituted 
``substantial evidence.'' Subsequent events, which will be explained in 
Section IX, have mooted further State appeals challenging the PUC's 
authority to impose structural separations.
    I find the similarities between the Pennsylvania Commonwealth Court 
Opinion and a subsequent Order of the United States Court of Appeals 
for the Sixth Circuit, to be compelling! The Sixth Circuit focused on 
the decision of the FCC to impose structural separation on all local 
telephone companies providing commercial mobile radio service. GTE 
Midwest, Inc. et. al. V. Federal Communications Commission, Nos. 98-
3167/3203, 2000 FED App. 0392P (6th Cir.) (November 15, 2000).
    The FCC argued: a. The LECs have the incentive and opportunity to 
engage in anti-competitive practices; b. Increased competition may 
increase the incentive to discriminate against competitors requesting 
interconnection; c. The costs of the separate subsidiary implementation 
do not outweigh the benefits; d. It is not a requirement without 
precedent.
    The Petitioners argued: a. The requirement was contrary to the 
Congressional intent underlying the Telecommunications Act of 1996; b. 
Congress had the opportunity to impose structural separation and 
declined by classifying wireless services as ``incidental interLATA' 
services, which are exempt from the separate affiliate requirement; c. 
Section 601(a)(3) of the Act released AT&T from the requirement that it 
provide its cellular service through a separate affiliate; d. Congress 
sought to promote parity between AT&T and the Bell companies and did 
not intend for the Commission to have the power to declare a new 
separate affiliate requirement.
    The Court affirmed the FCC decision, as a legitimate exercise of 
the agency's expertise and as a matter of Federal law, finding: a. That 
the FCC reasonably concluded that it could not rely exclusively on non-
structural safeguards given the monopoly power of the LECs that stems 
from the bottleneck control over the infrastructure; b. The Court 
expressly declined to second-guess the expert choice of the FCC on this 
point, and did not require the FCC to point to specific instances of 
past abuse to justify its decision; c. The Act does not limit the FCC's 
authority to adopt separate affiliate requirements, citing Section 
601(c)(1); d. There is no explicit indication that the Act is intended 
to promote regulatory parity between non-dominant carriers such as AT&T 
and dominant carriers such as the Bell companies; e. If Congress had 
sought to preclude the FCC's ability to impose separate subsidiary 
requirements, it could have done so explicitly.

 VIII. STRUCTURAL SEPARATIONS PROVIDES A PREFERRED MEANS OF ENFORCING 
                 COMPETITION-OPENING LEGAL REQUIREMENTS

    In my opinion, structural separation provides a bright-line 
demarcation point between the retail and wholesale activities of the 
incumbent, and coupled with an appropriate code of conduct, prescribes 
a clear framework for requiring arms length dealings with the 
incumbent's retail affiliate. The wholesale affiliate must treat its 
retail affiliate in the same manner that unaffiliated competitors 
interact with the wholesale company. Under Pennsylvania law, the retail 
and wholesale affiliate transactions and services would have to be 
memorialized in a written agreement that would be subject to regulatory 
scrutiny before the fact under the affiliated interest provisions of 
the PA Public Utility Code, 66 Pa. C.S.A. Sec. 2100, et seq. The 
Commission has the built-in mechanism for exercising forward-looking 
regulatory responsibility. While ongoing oversight of these contractual 
requirements would be required, the structurally separate relationship 
of these entities would make it much easier to police and oversee. 
Detection of contract violations and Commission Orders would be more 
consistent with the training and practice of commission staff. 
Violations if detected could result in voiding business transactions 
and could be determined to be unlawful activity.
    Structural separation avoids the detailed, ongoing, enforcement 
responsibilities that functional separations demands. Joel Klein, 
formerly of the U.S. Department of Justice, captured the assessment of 
the situation with the following observation: Finally, based on a 
century of experience, I would further emphasize that the Department 
[Department of Justice] is also highly skeptical of any relief that 
requires judges or regulators to take on the role of constantly 
policing the industry. Relief generally should eliminate the incentive 
or the opportunity to act anticompetitively rather than attempt to 
control conduct directly. We are institutionally skeptical about code-
of-conduct remedies. The cost of enforcement are high and, in our 
experience, the regulatory agency often ends up playing catch-up, while 
the market forces move forward and the underlying competitive problems 
escape real detection and remediation, ( Making the Transition form 
Regulation to Competition, FERC Distinguished Speaker Series, January 
21, 1998, p.12)

        IX. THE STRUCTURAL SEPARATION IMPLEMENTATION PROCEEDING

    True to its word, the PUC initiated a separate proceeding to 
implement the structural separation decisions that it reached as part 
of the Global Order. The parties' arguments were predictable: VZ-PA 
complained that structural separation was inefficient and costly while 
CLECs set forth various alternatives to accomplish the PUC's decision. 
The proceeding turned on whether VZ-PA would be permitted to bundle its 
retail and wholesale services together and whether the retail and 
wholesale companies must abide by a true, arms length relationship, to 
be prescribed in a stringent Code of Conduct. VZ-PA mainly relied on 
the Verizon Advanced Data Services affiliate that it set up in 
compliance with one of the merger conditions to which Verizon had 
agreed as part of obtaining the FCC's approval of the Bell-GTE merger. 
CLECs objected, contending that wholesale and retail services must be 
uncoupled from its current intertwined relationship.
    The PUC decided in March, and issued an Order in April, to require 
VZ-PA to undertake a ``functional/structural separation'' and to agree 
to other market-opening conditions. If VZ-PA refused the conditions, 
then the PUC advised that it would issue another order calling for 
structural separation. VZ-PA did subsequently accept the PUC's 
conditions. The PUC claimed that the ``expeditious implementation'' of 
functional separation would be more worthwhile than compelling 
structural separation followed by the inevitable litigation and 
regulatory micro-management stemming from structural separations.
    In my view, the Commission has substantially abandoned the concept 
of regulatory efficiency, failed to appreciate that the implementation 
of its current plan will not be expeditious, condemned itself to 
ongoing regulatory oversight for which it is poorly equipped and will 
not avoid protracted litigation. In summary the PUC replaced the 
structural separation directive with the following provisions.
    1. VZ-PA is required to establish non-structural safeguards, such 
as separate accounting for wholesale and retail services and abide by a 
code of conduct that requires VZ-PA to treat competitors in a 
nondiscriminatory manner.
    2. The separation of wholesale and retail divisions must be 
accomplished through a new Code of Conduct and competitive safeguards, 
that will be established in a separate rulemaking proceeding. The New 
Code of Conduct shall encompass personnel, accounting, record keeping 
and business practices. In the meantime, VZ-PA is supposed to comply 
with the Interim Code of Conduct established in the Global Order.
    3. Although already accomplished, consistent with its commitment to 
the FCC in the Bell-GTE merger, VZ-PA must establish an advanced 
services affiliate.
    4. Verizon's advanced data services affiliate must comply with the 
Section 251 unbundling, interconnection and resale obligations.
    5. Several industry collaboratives concerning pending technical 
issues regarding loop provisioning were convened.
    a. Industry standards for providing CLECs with access to equipment 
known as ``DSLAMs'' in remote terminals that may enable them to provide 
DSL service over copper lines will be discussed through an industry 
collaborative.
    b. VZ-PA must commence a trial of electronic loop provisioning to 
determine its feasibility.
    c. Next Generation Digital Line Carrier and equal access to DSL 
over fiber will be discussed through an industry collaborative.
    d. A line-splitting collaborative was established.
    6. VZ-PA must withdraw all appeals that challenge the PUC's Global 
Order. VZ-PA must agree to increase remedy payments for providing CLECs 
with discriminatory service. For violations of performance standards up 
to 30 days, VZ-PA must pay $3,000 to each affected CLEC. For violations 
that occur from the 31st day to the 90th day, VZ-PA must pay $5,000 to 
each affected CLEC. The PUC also initiated another new proceeding to 
determine whether any further adjustments of these payments should be 
made.
    VZ-PA must reduce (by 75 cents) the loop rate in the rural areas of 
VZ-PA's territory known as Density Cell 4. The PUC convened another 
separate proceeding to address whether any further UNE rate adjustments 
should be ordered.
    As part of its March 22, 2001, deliberations, two of the 
Commissioners made clear that they were extremely displeased with the 
manner in which VZ-PA had conducted its publicity campaign concerning 
the regulatory issues at stake in the proceeding. Outgoing Chairman 
Quain requested the PUC prosecutory staff to initiate an Order to Show 
Cause against VZ-PA for engaging in an ``extensive, systematic campaign 
of misinformation'' that was ``based on exaggerated fears rather than 
the facts.''
    In response to Petitions filed by AT&T and Sprint to clarify the 
April Order, the PUC issued a subsequent Order in May, 2001. The May 
2001 Order referred allegations to the Commission's Law Bureau for 
review and potential initiation of an action against VZ-PA for failing 
to comply with the Global Order Interim Code of Conduct from September 
1999 through April 2001, the period following the Global Order through 
the issuance of the April 2001 Structural Separations Order. As for 
considering the adoption of an Interim plan for functional/structural 
separation, the PUC declined to adopt one and instead directed VZ-PA to 
submit a report by July 23, 2001, detailing the interim compliance with 
the PUC's April 2001 Order.

        X. A REGULATORY MANDATE RATHER THAN A UTILITY-SPONSORED 
                        ``VOLUNTARY'' INITIATIVE

    Structural separation may be painful to implement, at the 
beginning, but more cost effective and efficient over time. There is no 
question that structural separation would have imposed additional costs 
on VZ-PA-Retail; but no one at the Commission has suggested that those 
costs are not recoverable from the clients of the wholesale subsidiary, 
competitors and affiliates alike. Those costs are, in my opinion, a 
reality of the transition to non-discriminatory access to the incumbent 
network. One of the fundamental tradeoffs in converting from a monopoly 
to a competitive market is the potential for duplicative capacity and 
higher operating costs in the immediate term, in exchange for 
innovation and managerial changes that improve productivity and thus 
lower costs over the long term.
    The fact that VZ-PA continues to argue that forcing its retail 
operations to function similar to all other CLECs is ``inefficient'' 
and ``imposes additional costs on its customers'', demonstrates very 
clearly that the two functional divisions (one for itself and another 
for competitors) that it proposed to handle wholesale customers, are 
not equal.

   XI. HOW WOULD I DEFINE A SUCCESSFUL STRUCTURAL SEPARATION REGIME?

    A successful structural separation would accomplish each of the 
points that I have identified in my testimony and which were identified 
by the Commission when it initially directed the structural separation 
of Verizon-PA. It would:
     Ensure non-discriminatory access to interconnection, 
resale, UNEs and OSS.
     Benefit ratepayers with lower overall cost of service.
     Result in improved ILEC wholesale performance to CLECs as 
a general matter (i.e. improved OSS interfaces, arms length 
transactions).
     Reduce regulatory oversight and the resources needed by 
the regulator for monitoring and enforcement.

XII. IF STRUCTURAL SEPARATIONS IS SUCH A CRAZY IDEA, THEN WHY HAVE SOME 
   COMPANIES VOLUNTARILY EMBRACED IT AS PART OF THEIR BUSINESS PLANS?

    In April, 2000, British Telecom (BT) announced plans to separate 
its wholesale and retail businesses, creating a new network company, 
NetCo., which would be both structurally and managerially separate. BT 
said that the move is pro-competitive and removes any perceived 
conflicts between NetCo and the rest of BT. The new NetCo will be able 
to focus solely on meeting the needs of the other licensed operators 
and service providers including of course, BT-Retail and the retail 
operators will all benefit from being served by a company that has a 
clear, separate and exclusive emphasis on their distinct needs. In the 
view of BT (Nov. 9, 2000), the creation of NetCo (a fully separate 
company) should reduce the need for those aspects of regulation which 
derive from its current vertically integrated structure. Sir Ian 
Vallance, BT's chairman, expected NetCo to be up and running during 
2001, assuming shareholder approval and the Annual shareholder General 
Meeting in July 2001.
    Regulation of BT in the UK will have greater clarity and should be 
concentrated primarily on the wholesale business. An immediate 
advantage of the restructuring is that in identifying the separate 
businesses within BT, shareholders and analysts will be able to gain a 
greater understanding of their intrinsic value and potential. This in 
turn will facilitate separate stock listings for some of BT's 
businesses.
    The new businesses would trade on an arm's length basis with each 
other. This would allow regulation to be concentrated primarily on the 
wholesale business, which will supply services to other operators and 
service providers as well as the BT retail operation. This change 
should enable the BT retail operation to be increasingly treated in the 
same way as other companies in the competitive market by its 
regulators.

                            XIII. CONCLUSION

    The Pennsylvania Commission found that it could not exercise its 
duty to enforce, execute, and carry out pro-competitive mandates absent 
structural separation. It also found that it would be inefficient and 
more burdensome on VZ-PA to require separate retail affiliates on a 
piecemeal basis, as different parts of the local service market are 
declared competitive.
    The Commission's decision to require structural separation of 
wholesale and retail functions was logical, and built on its experience 
in designing and implementing the most successful competitive electric 
model in the country. Structural separation, for the dominant service 
provider, steeped in embedded subsidies and support mechanisms, 
represented the only rational approach of record for administering the 
non-discrimination provisions of State law and Federal law in 
Pennsylvania.
    Unlike divestiture, which is used to remedy anti-competitive 
behavior and which requires certain lines of business to be sold, 
structural separation is a less sweeping vaccination against anti-
competitive and discriminatory behavior. Structural separation is not 
the wildly expensive, draconian bloodletting, of a regulatory agency 
run amok, that VZ-PA depicted to the public, the legislature and the 
courts.
    A structural separation requirement changes the regulatory 
oversight responsibilities, hopefully in ways that better suit 
regulatory staff skill sets and makes parity of reporting requirements 
more realistic among competitors.
    Separate subsidiaries enable regulators to view the terms of 
affiliate transactions in ways that can easily discern that an 
affiliate is not receiving favored treatment. It heightens both the 
likelihood and perception of fairness and, when implemented, would 
hopefully enhance the willingness of potential competitors to make the 
investment to enter a market where a competitor continues to control 
essential bottleneck facilities.
    Thank you very much for the opportunity to present my perspectives 
on this issue to you.

    The Chairman. Thank you very much.
    Mr. Kimmelman.

           STATEMENT OF GENE KIMMELMAN, CO-DIRECTOR, 
               WASHINGTON OFFICE, CONSUMERS UNION

    Mr. Kimmelman. Thank you, Mr. Chairman. On behalf of 
Consumers Union, publisher of Consumer Reports, and I am also 
representing the Consumer Federation of America this morning, I 
appreciate the opportunity to testify.
    I learned something I think very important this morning. If 
I am ever so honored as to be asked by you to draft 
legislation, I think I am going to respectfully decline to do 
so. I think it is a tough standard to live up to, but I think 
it is the appropriate one to place in front of the companies 
who did help design the 1996 Act.
    What I have heard this morning is to me the really classic 
story of special interest groups trying to manipulate a law 
that was very optimistically designed to respond to promises of 
the potential for competition in telecommunications. It is a 
classic form of manipulation, focused on extremely appealing 
concepts and terms--deregulation and competition, which we all 
are very favorably inclined toward for their potential to 
provide more choices for consumers, lower prices for consumers.
    The manipulation, and we have seen it in other markets as 
well, takes many forms. First, there is an enormous 
exaggeration and promises made about what companies will do. 
Recall the local phone companies all were going to go into 
cable and long distance. The long distance companies were all 
going to go into cable and provide local phone service that 
way. Many of those promises are unfulfilled today.
    One of the first things many of these companies did with 
the relaxed oversight resulting from deregulation was to take 
advantage of that, to consolidate. We had Bell Atlantic and 
Nynex getting together and then getting together with GTE, SBC 
with Pacific Telesis, then Ameritech. We now have two companies 
expanding their monopolies, each of which controls more than a 
third of the phone lines in the country, before we have had any 
meaningful opening up to competition.
    It is like taking dominant airport hubs and then just 
connecting them all together and then saying, well, maybe we 
will open up after that. It just does not work. We have seen it 
in other sectors of the industry as well.
    Then you have heard stories this morning about slow-rolling 
of competitors, failure to provision, failure to respond, 
failure to make the equipment necessary to connect the 
customers available. Obviously, when you start with a monopoly 
or close to it, the slower you serve potential companies that 
need access to your network the longer you hold onto that 
customer, the more difficult you make competition to develop.
    There has certainly been some squeezing of consumers, as 
Senator McCain pointed out, some local phone fees are up, 
certainly cable rates way up, high-speed Internet access, 
whether it is offered by cable or phone companies, all up. More 
players in the market, but prices up, not down. Basic long 
distance rates, up.
    Then what we see is an effort to look for the high margin 
customers to serve, the people where you can make the most 
money. It is no surprise. In deregulated markets, you look for 
the highest profit margin. But as we heard from many of your 
colleagues today, there are many, many pockets, particularly 
rural America, particularly people of modest income, small 
businesses, who cannot even get the services. They are not 
being served, they are not being offered the newest 
telecommunications services.
    I think that the bottom line, Mr. Chairman, is that this 
manipulation of the law and, as you point out, the words 
actually written by many of the companies involved, is 
tarnishing an important concept, the concept of competition 
itself. It is tarnishing the notion of how deregulation can be 
helpful to the public.
    I think what is really most dangerous to the goal of 
deregulation is the reality that consumers are getting very 
little competition, we are seeing prices going up. We are 
appreciative of your effort to revisit this issue and look at 
what is really happening, because we believe the FCC and the 
State regulators need to go back to the drawing board and make 
sure that we have a meaningful implementation process, so that 
we are not driven by ideology and buzzwords, we are driven by 
meaningful facts in the marketplace.
    The core reality here is that there is very little 
facilities-based competition. Mr. McLeod's company, Mr. 
Holland's company, need the local phone network. We are not at 
a point where we have meaningful local competition from 
multiple wires and we may not be for a long time. We may never 
be for parts of the country. I think that is a fact we need to 
address and regulators need to address and not be driven by the 
buzzwords.
    So we hope that through your oversight process that you 
will get the FCC refocused, realigned to look at the real facts 
in the marketplace, and understand that this is not a fight for 
who can be more deregulatory or who can have the more powerful, 
potent rhetoric, but this ought to be a fight for serving 
consumers.
    I must say, from a consumer perspective we are not 
necessarily always unhappy with a monopoly if it is offering 
the good service that Senator Cleland was talking about, with 
fair prices and where there is no price-gouging. That is not 
the end of the world. We have had that before in 
telecommunications and it has offered enormous benefits, and it 
may be the case that we need that in parts of rural America as 
well, that just bringing in another player, if the prices go 
up, is not worth it for the consumer.
    If we bring in other players, surely we need to grow them 
fairly and honestly so that they have a chance in the 
marketplace.
    So we hope that, through your oversight process, that you 
will get the FCC back on course, and your colleagues will help 
out, to make sure that we separate out where we have monopoly 
from where we have competition, provide the appropriate public 
oversight to ensure there is no price-gouging where there is 
monopoly, and make sure that where that competition is there 
the we can sustain it and grow it, and hopefully expand it back 
in these other markets.
    Thank you.
    [The prepared statement of Mr. Kimmelman follows:]

 Prepared Statement of Gene Kimmelman, Co-Director, Washington Office, 
                            Consumers Union

    By now, and certainly by 2004, AT&T as well as the company once 
called MCI and perhaps even Sprint, were expected to be significant 
forces in local communications markets across the country. New 
communications companies, lots of them, were supposed to be bringing 
smiles to both investors and consumers by delivering innovative bundles 
of services, worrying the old carriers and stealing their customers.
    Many people thought that cable companies would be offering local 
phone service broadly, even as phone companies would be offering 
television service, adding choices and driving down prices in both 
markets. The Internet, or at least wireless technology, was supposed to 
threaten the traditional telecommunications oligopolists with 
irrelevance.
    Consumers were supposed to be able to choose from many new local 
carriers, leading to better service and lower prices.
    Little of that has happened. The Bells--the race's tortoises--have 
won.
    The local phone companies have networks that cannot be duplicated. 
That is why, lawmakers' rhetoric aside, 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.\1\
---------------------------------------------------------------------------
    \1\ Seth Schiesel, ``Sitting Pretty: How Baby Bells May Conquer 
Their World,'' New York Times April 22, 2001.
---------------------------------------------------------------------------
    Unfortunately for consumers, this quotation from the New York Times 
accurately describes how the 1996 Telecommunications Act's goal of 
promoting broad-based local telephone competition has failed to become 
a reality. Consumers Union \2\ and the Consumer Federation of America 
\3\ believe that, if Congress remains committed to expanding 
telecommunications choices and lowering prices for consumers, 
significant regulatory oversight for a considerable period of time will 
be necessary. The attached Appendix A entitled ``The Status of 
Residential Local Telephone Competition,'' describes in detail how we 
got to this market and regulatory situation.
---------------------------------------------------------------------------
    \2\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education and counsel about goods, 
services, health, and personal finance. Consumers Union's income is 
solely derived from the sale of Consumer Reports, its other 
publications and from noncommercial contributions, grants and fees. In 
addition to reports on Consumers Union's own product testing, Consumer 
Reports with approximately 4.5 million paid circulation, regularly 
carries articles on health, product safety, marketplace economics and 
legislative, judicial and regulatory actions that affect consumer 
welfare. Consumers Union's publications carry no advertising and 
receive no commercial support.
    \3\ The Consumer Federation of America is the nation's largest 
consumer advocacy group, composed of over 280 State and local 
affiliates representing consumer, senior, citizen, low-income, labor, 
farm, public power and cooperative organizations, with more than 50 
million individual members.
---------------------------------------------------------------------------
    More than 5 years of experience under the Act illustrates how 
deregulating entry into local telephony does not do nearly enough to 
open that market to competitive forces. You will recall that, in 
preparation of the Act, cable television industry representatives 
unequivocally told this Committee that ``cable television companies are 
the most likely competitors to local phone monopolies'' and asserted 
that eliminating cable rate regulation would make that competition 
happen:
    If you look at the entire structure, the competitive theory of the 
broad legislation in front of this committee, the theory is that you 
are going to allow the Regional Bell companies to move into 
manufacturing, information services, burglar alarm services, cable, 
other areas, and that their potential for anticompetitive behavior is 
going to be checked because they are going to have competition. And 
then you look around, and who is going to prove that competition?
    And I would submit to this committee it is us. We are the other 
wire, and if we do not have the financial and investment environment to 
make those investments, those tens of billions of dollars, then the end 
result is that this committee and this Congress will have opened up a 
Pandora's box in terms of extending the regional phone companies' 
monopolies, and you will never close it again.\4\
---------------------------------------------------------------------------
    \4\ Statement of Decker Anstrom, National Cable Television 
Association Before the Committee on Commerce, Science, and 
Transportation, U.S. Senate, Mar. 21, 1995, S. Hrg. 104-216.
---------------------------------------------------------------------------
    While the cable industry has invested billions since the Act phased 
out cable rate regulation, industry revenue has increased by more than 
$14 billion per year,\5\ rates are up nearly 34 percent \6\ but less 
than 1 percent of consumers receive local phone service over a cable 
wire (see Appendix A at 6). Wireless is not a substitute for local 
phone, because it is not flat rate and because it is significantly more 
expensive for the same amount of usage. Other technologies that were 
supposed to obliterate the local phone monopoly have not materialized. 
In other words, the dream of wire-to-wire or other facilities-based 
competition has failed abysmally.
---------------------------------------------------------------------------
    \5\ In the Matter of Annual Assessment of the Status of Competition 
in the Market for the Delivery of Video Programming, CS Docket No. 00-
132, Seventh Annual Report, January 8, 2001, pg 102.
    \6\ Bureau of Labor and Statistics, Consumer Price Index for Cable, 
May 2001.
---------------------------------------------------------------------------
    Some have argued that flash-cut Bell entry into long distance (or 
data long distance) will spur retaliatory local facilities investment 
from long distance companies. They believe that these companies are 
hiding behind regulatory ``transition'' mechanisms designed to open the 
door to local competition, which in reality allow the long distance 
carriers to slow-roll investment in local facilities. However 
appropriate this skeptical attitude was a number of years ago, it makes 
no sense in today's economic climate.
    It now appears that not only small competitive carriers, but the 
likes of Sprint, Worldcom and AT&T long distance are either on the 
ropes financially or likely to be taken over by one of the large local 
phone companies.\7\ So long as the high costs and technical problems 
related to cable, wireless, Internet telephony or other technologies 
persist, the only way to sustain potential facilities competitors is to 
prohibit Bell entry into long distance until competitors are able to 
use the Bell infrastructure in approximately the same manner and under 
the same financial conditions as the Bell company itself.
---------------------------------------------------------------------------
    \7\ Legg Mason, ``The Coming Communications Consolidations,'' June 
2001.
---------------------------------------------------------------------------
    As we point out in Appendix A, so long as the Federal 
Communications Commission (FCC) and State regulators pursue rigorous 
oversight of the Bell companies' pricing and market-opening practices, 
there is some chance that consumers will receive the benefits of local 
telephone competition promised in the 1996 Act. If the careful 
oversight of Bell practices initiated and ongoing in New York were the 
norm in other States considering Bell entry this year, we estimate that 
consumers could save as much as about $7 billion a year on their local 
and long distance calling (see Appendix A at 15). In New York this 
rigorous oversight and fact checking has translated into local and long 
distance price reductions ranging from 5 to 20 percent (see Appendix A 
at 13).
    Of course, the New York process involves considerable regulation of 
Bell company facilities, enabling competitors to take advantage of a 
monopoly infrastructure to jump-start retail competition. Will this 
lead to full-blown facilities build out and broad based competition? We 
do not know. However, if Congress believes the ``cost'' associated with 
this ongoing regulation of the Bell companies is too severe, we urge 
you to consider the alternatives.
    Relaxing regulation of the Bell company infrastructure is likely to 
lead to the demise (or consolidation) of the major residential long 
distance and small local phone competitors. While Verizon in New York, 
and SBC in Texas, entered the long distance market offering significant 
long distance savings--up to 50 percent for low volume consumers--(see 
Appendix A at 15) it is extremely unlikely that these savings would 
exist in a significantly less competitive long distance market. In 
fact, in States where non-Bell local phone companies have entered the 
long distance business, without the market-opening obligations that the 
1996 Act imposed on the Bell companies, long distance companies have 
lost substantial market share to local carriers that did not need to 
discount their rates at all (see Appendix A at 16). If the Bell 
companies end up dominating both the local and long distance 
residential markets, Congress will face the need to impose a much more 
extensive regulatory oversight model than currently exists, to prevent 
local and long distance price gouging.
    Unfortunately, in this economic environment, we find no ``silver 
bullet'' to deliver local phone competition through multiple facilities 
to consumers in the foreseeable future. We therefore believe Congress 
should direct the FCC and urge the States to follow the paths of New 
York and Texas, using careful regulatory oversight to at least test the 
notion that non-discriminatory sharing of local monopoly infrastructure 
can ultimately lead to full-blown facilities competition.
                                 ______
                                 
   Appendix A--The Status of Residential Local Telephone Competition

[Prepared by Dr. Mark Cooper, Research Director Consumer, Federation of 
                                America]

I. The Failure of Local Competition

A. The Paradox of a ``Level Playing Field'' and One Hundred Years of 
        Government-Sanctioned Monopoly--Why Facilities Based 
        Competition Does Not Exist
    The central public policy embraced by the 1996 Telecommunications 
Act was the introduction of competition into all telecommunications 
markets in a measured and structured fashion. Congress recognized that 
the most difficult area to accomplish this goal was in the local 
exchange market of the monopoly Regional Bell Operating Companies 
(RBOCs, also known as the Bells). The insurmountable barrier to entry 
in this market has been the paradox of attempting to create a ``level 
playing field'' when the incumbent leader has enjoyed nearly one 
hundred years of government-sanctioned monopoly as well as seven 
decades of public policy and subsidies directed at making that 
company's network ubiquitous.\8\
---------------------------------------------------------------------------
    \8\ The FCC took the opportunity of its first 271 decision to 
outline in detail the competitive advantage the local companies have in 
entering the long distance market compared to other companies entering 
the local market. The most crucial observation is to recognize, as the 
Antitrust court had, the power inherent in the incumbent monopoly 
status of the local exchange companies; Federal Communications 
Commission, Memorandum Opinion and Order In the Matter of Application 
by Ameritech Michigan to Section 271 of the Telecommunications Act of 
1934, as amended, to Provide In-Region, InterLATA Service in Michigan, 
CC Docket 97-13, August 19, 1997 (hereafter FCC Michigan) para 10).
    The court found that, if the BOCs were permitted to compete in the 
interexchange market, they would have ``substantial incentives'' and 
opportunity, through their control of local exchange and exchange 
access facilities and services, to discriminate against their 
interchange rivals and to cross subsidize their inter-exchange 
ventures.
    These advantages include a history of legal barriers, economic and 
operational barriers, the fully deployed, ubiquitous network of the 
incumbents which lowers their incremental cost of entering other 
markets, and the need for interconnection. (FCC Michigan, paras. 11-
12).
    For many years the provision of local exchange service was even 
more effectively cordoned off from competition then the long distance 
market. Regulators viewed local telecommunications markets as natural 
monopolies, and local telephone companies, the BOCs and other incumbent 
local exchange carriers, often held exclusive franchises to serve their 
territories. Moreover, even where competitors legally could enter local 
telecommunications markets, economic and operational barriers to entry 
effectively precluded such forays to any substantial degree.
    These economic and operational barriers largely are the result of 
the historical development of the local exchange markets and the 
economics of local networks. An incumbent LEC's ubiquitous network, 
financed over the years by the returns on investment under rate of 
return regulation, enables an incumbent LEC to serve new customers at a 
much lower incremental cost than a facilities based entrant that must 
install its own network components. Additionally, Congress recognized 
that duplicating the incumbents local networks on a ubiquitous scale 
would be enormously expensive. It also recognized that no competitor 
could provide a viable, broad-based local telecommunications service 
without inter-connecting with the incumbent LEC in order to complete 
calls to subscribers served by the incumbent LECs network.
---------------------------------------------------------------------------
    It is also important to remember that the Bell System ran afoul of 
the antitrust laws. In settling a decade long antitrust case against 
the Bell system with the 1984 Modification of Final Judgment (MFJ), 
these companies agreed to stay out of long distance services in markets 
where they had local monopolies. They agreed to be subject to very 
demanding antitrust tests should they seek to provide long distance to 
their local customers.
    When Congress stepped in to replace the MFJ, it laid out an 
elaborate plan for opening the markets of all local exchange companies 
(LECs) (in sections 251, 252 and 253 of the Act). In the case of the 
RBOCs, Congress required that they meet a specific set of additional 
conditions in the local market before they are allowed to sell long 
distance (InterLATA) service to their home territory customers (in 
Sections 271 and 272 of the Act).\9\
---------------------------------------------------------------------------
    \9\ In light of this structure of the Act, the Department of 
Justice (DOJ) succinctly summarized the public policy balance that 
Congress struck in the 1996 Act when it addressed the issue of RBOC 
entry into in-region long distance (Evaluation of the United States 
Department of Justice, Federal Communications Commission, In the Matter 
of Application of SBC Communications, Inc., Southwestern Bell Telephone 
Company, and Southwestern Bell Communications Services, Inc., d/b/a 
Southwestern Bell Long Distance for Provision of In-Region InterLATA 
Services in Oklahoma, CC Docket No. 97-121, May 16, 1997 (hereafter, 
DOJ, SBC), p. 4.: InterLATA markets remain highly concentrated and 
imperfectly competitive, however, and it is reasonable to conclude that 
additional entry, particularly by firms with the competitive assets of 
the BOCs, is likely to provide additional competitive benefits. But 
Section 271 reflects Congressional judgments about the importance of 
opening local telecommunications markets to competition as well. The 
incumbent local exchange carriers (LECs), broadly viewed, still have 
virtual monopolies in local exchange service and switched access, and 
dominate other local markets as well. Taken together, the BOCs have 
some three-quarters of all local revenues nationwide, and their 
revenues in their local markets are twice as large as the net interLATA 
market revenues in their service areas. Accordingly, more considerable 
benefits could be realized by fully opening the local market to 
competition.
---------------------------------------------------------------------------
    Reflecting the more highly developed level of competition in the 
long distance industry and the fact that local exchange markets are a 
bottleneck input for long distance markets, Congress placed its 
emphasis on ensuring that local markets would be competitive. While 
today's long distance oligopoly could be expected to perform better if 
greater competitive forces were brought to bear in it, the crucial 
barrier to competition in the telecommunications industry is the local 
monopoly.\10\
---------------------------------------------------------------------------
    \10\ DOJ, SBC, pp. 4-6. Section 271 reflects Congress' recognition 
that the BOCs' cooperation would be necessary, at least in the short 
run, to the development of meaningful local exchange competition, and 
that so long as a BOC continued to control local exchange markets, it 
would have the natural economic incentive to withhold such cooperation 
and to discriminate against it competitors. Accordingly, Congress 
conditioned BOC entry on completion of a variety of steps designed to 
facilitate entry and foster competition in local markets.
---------------------------------------------------------------------------
    More than 5 years after the passage of the 1996 Act, it is evident 
that those Congressional concerns were well founded. Predictably the 
incumbent monopolists resisted opening their markets to competition, 
while they sought to get into long distance as soon as possible. The 
campaign to get into long distance without opening their local markets 
started with a constitutional challenge to the section that required 
them to open their local markets. Failing that, they repeatedly filed 
applications to enter long distance markets before coming near to 
treating competitors at parity with their own operations for the 
critical functions of ordering and billing, installation and repair 
and, above all, in pricing elements of the network.
    Prospects for facilities-based, wire-to-wire competition--the 
promise that led many legislators to support the 1996 Act to the 
public--are dim at best.\11\ The industrial organization and regulatory 
oversight of the communications industry are a shambles from the point 
of view of competition for residential consumers.\12\ Across the 
nation, new entrants to the local phone market have been unable to 
crack the local telephone monopoly to any significant extent. 
Competitive local exchange carriers (CLECs) have captured about 8 
percent of the total local lines in the country, but for residential 
and small business consumers the figure is about 4 percent.\13\ Worse 
still, most of this competition is not with new wires. Wire-to-wire 
competition accounts for only about 1 percent of the total number of 
lines nationwide and in the residential and small business sector, it 
is less than 1 percent.\14\ In other words, the incumbent monopolists 
still have a complete stranglehold on local telephone wires.
---------------------------------------------------------------------------
    \11\ The only facility mentioned in the Conference report on the 
Telecom Act was cable (see p. 148).
    \12\ The Consumer Federation of America has charted the unfolding 
failure of local competition at the national level and in a series of 
State-specific studies. See, Cooper, Mark N., Last Chance for Local 
Competition: Policies to Open Markets Before Baby Bells Begin to Sell 
In-Region Long Distance Service (June 17, 1997); Affidavit of Mark N. 
Cooper on Behalf of the Consumer Federation of America, before the 
Public Utility Commission of California R.93-04003, I.93-04-002, R.95-
04043, R.85-04044, June 1998; Consumer Federation of America and 
Consumers Union, ``Reply Comments,'' before the Federal Communications 
Commission, In the Matter of Deployment of Wireline Services Offering 
Advanced Telecommunications Capability, Etc., CC Docket Nos. 98-147, 
98-11, 98-26, 98-32, 98-78, 98-91, CCB/CPD Docket No. 98-15, RM 9244, 
October 18, 1998; The Consumer Stake in Vigorous Competition in the 
Illinois Local Telephone Market, March 1999). See also, Cooper, Mark, 
Situation Report on Local Competition in New Jersey, November 1998. See 
also, comments filed by the Consumer Federation of America in ``Reply 
Comments Of The Consumer Federation Of America,'' The Matter Of The 
Application By SBC Communications, Inc., For Authorization Under 
Section 271 Of The Telecommunications Act Of 1996 To Provide In-Region, 
Interlata Service In The State Of Missouri, CC Docket No. 01-88 May 16, 
2001: ``Reply Comments Of The Consumer Federation Of America 
Massachusetts Consumer Coalition,'' before the Federal Communications 
Commission, In the Matter of the Application by Verizon New England, 
Inc., for Authorization Under Section 271 of the Telecommunications Act 
of 1996 to Provide In Region, InterLATA Service in the State of 
Massachusetts, CC Docket N. 01-9, February 28, 2001; ``Comments Of The 
Consumer Federation Of America, In the Matter of Application of SBC 
Communications Inc. and Southwestern Bell Telephone Company and 
Southwestern Bell Communications Services, Inc. D/B/A Southwestern Bell 
long Distance for Provision of In-Region, InterLATA Services in Texas, 
Before the Federal Communications Commission, CC Docket No. 00-4, 
February 28, 2000; ``Comments Of The Consumer Federation Of America,'' 
In the Matter of Application of New York Telephone Company (d/b/a/ Bell 
Atlantic--New York, Bell Atlantic Communications, Inc. NYNEX Long 
Distance Company and Bell Atlantic Global Networks, Inc., for 
Authorization To Provide In-Region, InterLATA Services in New York, 
Before the Federal Communications Commission, CC Docket No. 99-295, 
October 20, 1999;; ``Reply Comments of the Consumer Federation of 
America,'' In the Matter of Application by BellSouth Corporation, 
BellSouth Telecommunications, Inc., and BellSouth Long Distance, Inc., 
for Provision of In-Region, InterLATA Services in Louisiana, Federal 
Communications Commission, CC Docket No. 97-231, December 19, 1997; 
``Reply Comments of the Consumer Federation of America,'' In the Matter 
of Application by BellSouth Corporation, et. al. For Provision of In-
Region, InterLATA Services in South Carolina, Federal Communications 
Commission, CC Docket No. 97-208, November 14, 1997; ``Comments of the 
Consumer Federation of America, before the Federal Communications 
Commission, Memorandum Opinion and Order In the Matter of Application 
by Ameritech Michigan to Section 271 of the Telecommunications Act of 
1934, as amended, to Provide In-Region, InterLATA Service in Michigan, 
CC Docket 97-13, August 9, 1997 ``Comments of Consumer Federation of 
America,'' before the Federal Communications Commission, In the Matter 
of the Local Competition Provisions of the Telecommunications Act of 
1996, 1996.
    \13\ Industry Analysis Division, Common Carrier Bureau, Local 
Telephone Competition at the New Millennium (Federal Communications 
Commission, December 2000) (hereafter, Local Competition 2000, p. 1.
    \14\ Based on ratios in Industry Analysis Division, Common Carrier 
Bureau, Local Competition: August 1999 (Federal Communications 
Commission, August 1999) (hereafter Local Competition 1999), which 
gives the most recent available data on residential versus business 
wire-to-wire competition.
---------------------------------------------------------------------------
    In addition to the shelter afforded the Bells by the immense costs 
of building an entirely new network, the Bells have protected their 
local monopolies with more overt anticompetitive practices, such as by 
promoting legislation against building new networks. For example, 
Bristol, a rural Virginia town, saw that a high-speed network would 
help spur development in their area and realized that the Bell company 
serving them was not likely to provide it to their community (because 
they were either too remote or had demographics that did not support 
the case for the Bells to build a network in their area). They chose to 
build a municipal high-speed network, but in response, Verizon 
successfully lobbied the State legislature to pass a law that prevented 
municipalities from building such networks. Such laws have been passed 
at the Bells behest in nine States.\15\
---------------------------------------------------------------------------
    \15\ Wigfield, Mark. ``Rural Virginia Town Fights for Broadband 
Access,'' Dow Jones Newswires, June 7, 2001.
---------------------------------------------------------------------------
    The failure of new entrants to break the monopoly of the incumbents 
is reinforced by the failure of incumbents to compete against one 
another. It was hoped that the large incumbent local monopoly companies 
might attack their neighbors' service areas, as they are the best 
situated to do so. But such competition has not happened.\16\ The 
incumbent local exchange carriers (ILECs) have simply not tried to 
enter each other's service territories in any significant way. In fact, 
they have done quite the opposite. Rather than compete, they have 
merged. Before the 1996 Act was passed, the largest four ILECs owned 
less than half (48 percent) of all the lines in the country.\17\ Today, 
the largest four local telephone companies--Verizon (made up of NYNEX, 
Bell Atlantic and GTE), SBC (made up of Southwestern Bell Telephone, 
PacTel, Southern New England Telephone, and Ameritech), BellSouth and 
Qwest--own about 85 percent of all the telephone lines in the 
country.\18\
---------------------------------------------------------------------------
    \16\ Reply Comments Of The Consumer Federation Of America, 
Consumers Union, And AARP, before The Federal Communications 
Commission, Proposed Transfer Of Control SBC And Ameritech, CC Docket 
No. 98-141, November 16, 1998); Citizen Action of Indiana, et al., The 
Consumer Case Against the SBC-Ameritech Merger (January 20, 1999).
    \17\ FCC, Statistics of Common Carriers, 1995/1996, Tables 1 and 
2.5.
    \18\ FCC, Statistics of Common Carriers, 1998.1999, Tables 1 and 
2.5, adjusted for Bell Atlantic/GTE merger and CLEC line count.
---------------------------------------------------------------------------
    Ironically, although the market power of the incumbent local 
exchange companies has not been significantly reduced, at his first 
press conference as Chairman of the Federal Communications Commission 
(FCC) Michael Powell made the striking statement that ``deregulation is 
not like dessert,'' suggesting that deregulation should come before 
competition is established.\19\ The Bells have redoubled their efforts 
to cut back on obligations to open their markets.\20\
---------------------------------------------------------------------------
    \19\ The Cato Institute Daily Dispatch, February 7, 2001, reported 
the comment as follows: Clinton administration officials had maintained 
that many large telecommunications companies like the regional Bell 
operating companies should be deregulated only after their markets were 
sufficiently competitive, but Mr. Powell approached the subject from 
the opposite direction today.
    ``I do not believe,'' he said, that ``deregulation is like a 
dessert that you serve after people have fed on their vegetables and is 
a reward for the creation of competition. I believe that deregulation 
is instead a critical ingredient to facilitating competition, not 
something to be handed out after there is a substantial number of 
players in the market.''
    \20\ The Tauzin Dingell bill would allow them into long distance in 
the data market without meeting the market opening conditions of 
section 271 of the Act.
---------------------------------------------------------------------------
B. Wooing the Bells into Opening Their Local Markets Has Not Worked--
        The Failure of Sec. 271

1. The Design of Sec. 271

    Regardless of his personal preferences, as Chairman of the FCC, Mr. 
Powell is duty bound to enforce the Telecommunications Act of 1996 (the 
Act or the 1996 Act), which does not take that point of view.\21\ The 
provisions of Sec. 271 seek to redress the imbalance of market power 
between local companies and their potential competitors.\22\ The 
Department of Justice and the FCC adopted a common sense approach to 
the implementation of the Act. At least until recently, these agencies 
have insisted that meaningful local competition actually exists as the 
standard for a central component of the Sec. 271 approval process. The 
Department of Justice has also pointed out that the failure of 
competition to spread beyond a very small number of select markets is a 
concern. The FCC has noted that it was this competitive imbalance that 
Congress sought to address in Sec. 271.
---------------------------------------------------------------------------
    \21\ Conference Report on the Telecommunications Act of 1996, No. 
104-458, p. 1.
    \22\ DOJ, Michigan, pp. 32-33.
---------------------------------------------------------------------------
    By requiring BOCs to demonstrate that they have opened their local 
markets to competition before they are authorized to enter into the in-
region long distance market, the 1996 act enhances competition in both 
the local and long distance markets.
    If the local market is not open to competition, the incumbent will 
not face serious competitive pressure from new entrants, such as the 
major interexchange carriers. In other words, the situation would be 
largely unchanged from what prevailed before the 1996 act. That is why 
we must ensure that, as required by the Act, a BOC has fully complied 
with the competitive checklist. Through the competitive checklist and 
the other requirements of section 271, Congress has prescribed a 
mechanism by which the BOC may enter the in-region long distance 
market. This mechanism replaces the structural approach that was 
contained in the MFJ by which BOCs were precluded from participating in 
that market.\23\
---------------------------------------------------------------------------
    \23\ FCC Michigan, paras 15-18.
---------------------------------------------------------------------------
    Without Sec. 271, there was little in the Act to give the BOCs 
incentives to open their markets.\24\
---------------------------------------------------------------------------
    \24\ FCC Michigan, para 14. A salient feature of these market 
opening provisions is that a competitor's success in capturing local 
market share from the BOCs is dependent, to a significant degree, upon 
the BOCs' cooperation in the non-discriminatory provision of 
interconnection, unbundled network elements and resold services 
pursuant to the pricing standards established in the statute. Because 
the BOCs, however, have little, if any, incentive to assist new entrant 
in their efforts to secure a share of the BOCs' markets, the 
Communications Act contains various measures to provide this incentive, 
including section 271. Through these statutory provisions, Congress 
required BOCs to demonstrate that they have opened their local 
telecommunications markets to competition before they are authorized to 
provide in-regions long distance services. Section 271 creates a 
critically important incentive for BOCs to cooperate in introducing 
competition in their historically monopoly local telecommunications 
markets.
---------------------------------------------------------------------------
    Congress was not satisfied that the general requirements placed on 
the local exchange companies to open their networks to competition 
would be effective in the case of the RBOCs because of their dominant 
position and history of abuse of monopoly. Congress required additional 
conditions and oversight by other agencies before the RBOCs would be 
allowed to sell in-region long distance. Congress required the FCC to 
make findings in four areas before RBOCs were to be allowed into in-
region long distances.
    Part III of the Act, ``Entitled Special Provisions Concerning Bell 
Operative Companies,'' which includes section 271, deals almost 
entirely with the additional steps Bell Companies must take in opening 
their markets before they are allowed into in-region long distance. 
Together Section 271 and 272 includes a number of conditions:

     a requirement that actual, facilities-based competition 
for both business and residential customers exist within a State;
     a checklist of 14 technical conditions and services that 
had to be provided to competitors on rates, terms and conditions that 
are just, reasonable and nondiscriminatory;
     safeguards to prevent abuse of transactions between local 
companies and their affiliates; and
     satisfaction of a public interest test.

    These findings were to be made in consultation with the States and 
the Department of Justice (whose advice was to be given substantial 
weight).\25\
---------------------------------------------------------------------------
    \25\ DOJ, SBC, pp. 7-8. Section 271 establishes four basic 
requirements for long distance entry. The first three such 
requirements--satisfaction of Section 271 [c] (1) (A) (Track A) or 
Section 271 [c] (1) (B) (Track B), the competitive check list, and 
Section 272--establish specific, minimum criteria that a BOC must 
satisfy in all cases before an application may be granted. In addition, 
Congress imposed a fourth requirement, calling for the exercise of 
discretion of the Department of Justice and the Commission. The 
Department is to perform competitive evaluation of the application. 
``Using any standard the Attorney General considers appropriate.'' And, 
in order to approve the application, the Commission must find that 
``the requested authorization is consisted with the public interest. In 
reaching its conclusion on a particular application, the Commission is 
required to give ``substantial weight to the Attorney General's 
evaluation.''

---------------------------------------------------------------------------
2. Resistance from the Bells to Opening Their Local Networks

(a) Verizon
    It took more than 2 years after the Telecom Act became law before 
any of the Bells would accept the fact that they were going to have to 
open their markets. Verizon in New York (originally NYNEX and later 
Bell Atlantic) finally agreed to take the necessary steps to open its 
local market in its ``Prefiling Statement.'' \26\ This document, 
negotiated between the New York Public Service Commission, the DOJ and 
Verizon, outlined the steps necessary to achieve legitimate market 
opening.
---------------------------------------------------------------------------
    \26\ PSC Chairman Supports Conditions for Bell Atlantic's Entry 
into Long Distance and Irreversible Opening of the Local Telephone 
Market, April 6, 1998, p. 2; ``Pre-filing Statement of Bell Atlantic--
New York, In the Matter of Petition of New York Telephone Company for 
Approval of Its Statement of Generally Available Terms and Conditions 
Pursuant to Section 252 of the Telecommunications Act of 1996 and Draft 
Filing Petition for InterLATA Entry Pursuant to Section 271 of the 
Telecommunications Act of 1996, Case 97-C-027, State of New York Public 
Service Commission, April 6, 1996.
---------------------------------------------------------------------------
    The prefiling statement did not end resistance to market opening, 
even for Verizon. Verizon continued its strategy of resisting opening 
while insisting it should be allowed into long distance. It delayed 
implementing tariffs for months, thereby denying entrants access to the 
market opening measures to which it had agreed. The test of operating 
support systems (OSS) had not even started, but it repeatedly declared 
that it would immediately apply for entry when the test was complete. 
These tactics of delay cast serious doubt on Verizon's ability to pass 
the public interest test of market opening. By restricting the 
availability of the market-opening measures, those markets that were 
least developed were retarded the most upstate and residential markets. 
Resistance to market opening also continued in other States. When the 
Chairman of the New York PSC endorsed the prefiling statement, he noted 
four key elements of the agreement as indicators of the progress that 
had been made. Unfortunately, when Verizon was asked to adopt the same 
conditions in Pennsylvania, it refused to commit to implementing every 
major market opening concession.\27\ The repudiation of the New York 
roadmap by Verizon-PA is stunning. Verizon has taken essentially the 
same approach in New Jersey.\28\
---------------------------------------------------------------------------
    \27\ ``Comments of Bell Atlantic--Pennsylvania, Inc.,'' In Re: Bell 
Atlantic- Pennsylvania Entry Into In-Region InterLATA Services Under 
Section 271 of the Telecommunications Act of 1996, Docket No. M-
00960840, I-00980075, June 11, 1998.
    \28\ ``State Regulators Tell Bell Atlantic-New Jersey to Share 
Market,'' The Record, Oct. 22, 1998.
---------------------------------------------------------------------------
    Verizon's lack of good faith in extending the New York approach to 
other locations and its continued devotion to getting away with 
anything it can was demonstrated when it filed its application in 
Massachusetts. It filed an initial application based on unbundled 
network element (UNE, described in detail below) prices that were 
completely unjustified--as much as $20 per month for usage.\29\ Faced 
with certain denial, it threw in unbundled network element prices from 
another State, which, themselves, were based on a methodology that has 
been demonstrated to be faulty.\30\ Instead of presenting the 
Commission with legitimate, reasonable and efficient rates from 
Massachusetts, it threw in old rates from New York, which the New York 
Commission had already begun to revamp.
---------------------------------------------------------------------------
    \29\ ``Recommended Decision, by Administrative Law Judge Joel A. 
Linsider,'' Proceeding on Motion of the Commission to Examine New York 
Telephone's Rates for Unbundled Network Elements, Case NO. 98-C-1357, 
May 16, 2001.
    \30\ ``Reply Comments of the Consumer Federation of America, 
Massachusetts. The decision to allow entry has been appealed by 
MCIWorldcom and the Massachusetts Attorney General.
---------------------------------------------------------------------------
    Verizon used a similarly flawed application in Pennsylvania. After 
years of litigation the Pennsylvania Commission was severely divided 
over whether Verizon had complied with the Act. In other words, 3 years 
after making the open market commitment in New York and a year and a 
half after being granted entry in New York, two of the five 
Commissioners in Pennsylvania were still not convinced the market has 
been opened in their State.\31\
---------------------------------------------------------------------------
    \31\ June 26, 2001.
---------------------------------------------------------------------------
(b) SBC
    SBC was the second company to gain entry into long distance, 
starting in its flagship State, Texas. In a pattern similar to New 
York, after months of collaboration, the Texas Public Utility 
Commission found 129 things that SBC had not yet done to open its 
markets. SBC resisted, but when the commission held its ground, it took 
another 2 years to get the application in order. Moreover, agreeing to 
open the Texas market did not ensure other markets would be opened 
rapidly. SBC continues to drag its feet in its other States, trying to 
gain entry with applications that fall far short of what was done in 
Texas.
    SBC has pushed forward a series of applications that fall 
considerably short of the Texas standard in a number of ways. SBC 
resists extending the same conditions to other States, until the last 
moment. After it agrees to implement similar conditions, it then seeks 
immediate entry, denying competitors an opportunity to establish 
business plans on the basis of a final set of conditions. As a result, 
SBC has gained entry under conditions that are much less conducive to 
competition than New York. Seriously flawed applications were given 
eleventh hour approval by the William Kennard-led FCC. There is growing 
evidence that the Kansas/Oklahoma applications were seriously flawed, 
in that they contained substantial misrepresentations, notwithstanding 
the fact that SBC has claimed those misrepresentations were accidental 
and inadvertent. SBC has recently withdrawn an equally flawed 
application in Missouri.
(c) BellSouth and Qwest
    BellSouth and Qwest (formerly US WEST) have yet to have a request 
for entry into long distance approved in any of the States that they 
serve. Early on, BellSouth pressed several very premature applications, 
but was rebuffed. Its efforts currently are focused on Florida, North 
Carolina and Georgia.
    Qwest appears to be the farthest aware from gaining entry, due to 
its failed attempts to explain Operating Support Systems (OSS, i.e. the 
systems that enable subscription, billing, installation, repair and 
customer transfer) problems for its competitors.
C. Alternative Technologies Have Failed to Provide Effective 
        Competition for Local Phone Service

(1) Cable Telephony Has Not Been Deployed at Promised or Significant 
Levels

    Wire-to-wire competition has been a bust in another very evident 
way--the promise of alternative technologies such as cable telephony to 
deliver residential local phone competition has not been borne out by 
business reality. Where big cable companies once guaranteed they would 
deliver all communications and entertainment services on a single 
platform with a single bill, business reality intruded and they found 
it was more efficient and they could extract more value from consumers 
by offering distinct service offerings.
    Throughout October 2000, AT&T conducted a flurry of board meetings, 
press conferences and conference calls with Wall Street analysts to 
explain its decision to break itself up into three companies.\32\ The 
admission that its business strategy had failed was obviously bad news 
for AT&T stockholders, but it was even worse news for telephone 
consumers. It signaled the failure of the Telecommunications Act of 
1996 to deliver local phone competition.
---------------------------------------------------------------------------
    \32\ Cooper, Mark, ``Picking Up the Public Policy Pieces of Failed 
Business and Regulatory Models,'' presented at Setting The 
Telecommunications Agenda, Columbia Institute For Tele-Information, 
(November 3, 2000).
---------------------------------------------------------------------------
    AT&T justified its purchases of cable TV companies to regulators 
and bankers by claiming that local telephone competition over cable 
wires could be provided only as part of an integrated package of voice, 
video and data services.\33\ It promised to use the tens of millions of 
cable lines it was buying to compete for local telephone service.\34\ 
Now AT&T is going in the opposite direction. The company is splitting 
the cable business from the telephone business from the wireless 
business, and creating a separate tracking stock for its consumer long 
distance business. The difficulties of providing switched telephone 
service over cable networks render such activity uneconomic.\35\ It 
appears that two separate networks, each optimized around very 
different functionalities, make perfect economic sense, for three 
reasons.\36\
---------------------------------------------------------------------------
    \33\ Application for Consent to Transfer of Control of Licenses and 
Section 214 Authorization from Telecommunications, Inc., Transferor, to 
AT&T Corp., Transferee, Public Interest Statement, Federal 
Communications Commission, CS Docket No. 98-178; Application for 
Consent to Transfer of Control of Licenses and Section 214 
Authorization from MediaOne Group, Inc., Transferor, to AT&T Corp., 
Transferee, Public Interest Statement, Federal Communications 
Commission, CS Docket No. 99-251.
    \34\ This was always a dubious proposition, see Consumers Union, 
Consumer Federation of America and Media Access Project, Breaking the 
Rules: AT&T's Attempt to Buy a National Monopoly in Cable TV and 
Broadband Internet Services (August 17, 1999). AT&T's promise to 
deliver service to about half a million residential households, which 
it labored to try to keep constitutes less than one half of 1 percent 
of all households in the nation.
     \35\ The local exchange companies recognized the difficulty that 
cable companies would have in providing telephone service. Bell 
Atlantic described the problems in detail in its aborted attempt to 
purchase TCI. (See Bell Atlantic's Request for an Expedited Waiver 
Relating to Out-of-Region Interexchange Services and Satellite 
Programming Transport, United States of America v. Western Electric 
Company, Inc., and American Telephone and Telegraph Company, Civil No. 
82-0192 (HHG) January 20, 1994. The request consists of six parts, the 
request itself and five affidavits ( Affidavits in Support of Bell 
Atlantic's Request for an Expedited Waiver Relating to Out-of-Region 
Interexchange Services and Satellite Programming Transport, January 20, 
1994. Individual affidavits include Alfred E. Kahn and William E. 
Taylor; Gary S. Becker; Robert W. Crandall; Robert G. Harris; and Brian 
D. Oliver. Ironically, prior AT&T management apparently reached the 
same conclusion. However, current AT&T management confesses to being 
unaware of these analyses (Cauley, Leslie, ``Armstrong's Vision of AT&T 
Cable Empire Unravels on the Ground,'' Wall Street Journal, October 18, 
2000). At least one cable company has publicly admitted that it cannot 
pursue a typical telephone service (circuit switched telephony) and 
will have to try to provide Internet telephony, although there are no 
guarantees when, or whether, this approach will be viable for basic 
telephone service (Comments of Joe Waz at Setting The 
Telecommunications Agenda, Columbia Institute For Tele-Information, 
November 3, 2000).
    \36\ It was always a dubious proposition. See Cooper Mark, 
Expanding the Information Age in the 1990s: A Pragmatic Consumer 
Analysis (Consumer Federation of America and American Association of 
Retired Persons, January 1999); Developing the Information Age in the 
1990s: A Pragmatic Consumer View (Consumer Federation of America, June 
8, 1992)
---------------------------------------------------------------------------
    (1) Functional specialization (letting the network do one thing 
well rather than several things poorly) is a sound economic principle, 
especially when there are diseconomies of integration between switched 
(i.e. telephone) and non-switched (cable TV) services. At present, it 
costs too much to make one network do very different things.
    (2) ``One-stop-shopping'' sounded like a good idea but it was not 
compelling when one-click shopping is available for almost anything. 
Consumers are not clamoring for one huge package of voice, video and 
data services.
    (3) Business goal planning, setting and achieving is much more 
difficult. It is EXTREMELY challenging to sell three distinct services 
to very different kinds of customers. Specialized networks that do not 
compete directly for their core businesses pose a problem for 
policymakers. Without wire-to-wire competition, the plain old problem 
of monopoly power in cable TV and local telephone networks still 
exists.\37\
---------------------------------------------------------------------------
    \37\ Consumer Federation of America and Consumer Action, 
Transforming the Information Superhighway into a Private Toll Road 
(September 1999), looks at problems in both the cable TV and the 
telephone industries from the point of view of advanced services.

---------------------------------------------------------------------------
(2) Wireless Does Not Compete with Basic Service

    Wireless telephone service technologies have not solved the problem 
of lack of competition for local service and will not solve it any time 
soon. Cellular phones have become popular, but this service has not 
emerged as a substitute for basic telephone service for several 
reasons.
    (1) Even though the price of wireless has come down, for the 
average consumer wireless costs about five times as much as local 
service.\38\ The average flat rate telephone is in use for local 
calling about 1300 minutes per month.\39\ The average monthly charge is 
about $20 per month. The average cost per minute of use is $.015. 
Assuming half the usage is outgoing, the cost per minute of a call made 
is $.03. This is much less than average cost of cellular calling plans, 
which run in the range of $.10 to $.15 per minute.
---------------------------------------------------------------------------
    \38\ See Comments of the Consumer Federation of America, Lousiana.
    \39\ Industry Analysis Division, Trends in Telephone Service, 
December 2000.
---------------------------------------------------------------------------
    (2) Cellular service is measured service; local exchange service is 
generally flat rate.
    (3) Cellular service does not allow multiple phone hookups on the 
same phone number, in contrast to wireline service.
    (4) Cellular charges not only for outgoing calls, but also for 
incoming calls, which is never the case with wireline service.
    The proof that wireless and basic wireline services occupy 
different product spaces can be seen in the numbers of consumers 
subscribing to each. Both wireless and wireline have been growing at 
strong rates. In fact, since the 1996 Act was passed, the number of 
local access lines has grown faster than at any time since the 1984 
break-up of the AT&T system. Local exchange revenues have been growing 
twice as fast as other wireline revenues, and faster than they had in 
the in the first half of the 1990s.\40\ Thus, although cellular has 
achieved a high market penetration, it does not represent an economic 
substitute for wireline local telephone service.
---------------------------------------------------------------------------
    \40\ Federal Communications Commission, Trends in Telephone 
Service, 2000 (March 2000); Federal Communications Commission, 
Statistics of Common Carriers (various issues).
---------------------------------------------------------------------------
D. Resale Markets Are Broken
    Congress realized when it passed the 1996 Act that the Bell 
companies' near century of government sanctioned monopoly gave them a 
tremendous competitive advantage--it allowed them to build out a vast 
network without fear of a competitor coming in and forcing them to 
lower their prices--market conditions that cannot be replicated today. 
Accordingly, in addition to providing incentives for facilities-based 
competition, Congress provided for the resale of unbundled network 
elements (UNEs). That is, the piece parts of the local network must be 
made available to new entrants to create competition. However, the 
RBOCs have used a host of subtle and not-so-subtle tactics that have 
hampered the development of UNE resale. Making unbundled network 
elements (UNE) available on prices, terms and conditions that will 
support competition is the primary battleground at the public utility 
commissions in the year ahead. These UNEs were the central focus of the 
14-point checklist.
    Vendors need two things to succeed in the UNE market: operating 
support systems (OSS) that treat competitors equally and reasonable, 
cost-based prices for unbundled network elements. The subtext here is 
that competitors need certainty. By making life difficult for their 
competitors with respect to OSS and pricing, the Bells have been able 
to introduce market uncertainty that has made it nearly impossible for 
CLECs to raise needed funding in the capital markets. Faced with 
uncertainty, competitors find it extremely difficult to raise funds and 
make major commitments to invest in local competition.\41\ Uncertainty 
is most likely to inhibit their entry into the less attractive markets.
---------------------------------------------------------------------------
    \41\ DOJ, SBC, pp. 61-62.

(1) Bells Leverage Operating Support Systems (OSS) to Their 
Competitors' 
---------------------------------------------------------------------------
Disadvantage

    In order to win customers, competitors must be able to seamlessly 
transfer new subscribers from the incumbent. The Bells, through control 
of OSS, are able to block entry through institutionalized incompetence. 
The Bells refused to allow competitors to use their operating support 
systems to sign up customers. Instead they set out to develop new 
systems to give competitors access. They have been unable, or 
unwilling, to develop those systems to treat competitors equally.
    It is critical for customers to be smoothly transferred when they 
decide to switch telephone companies. Consumers will not tolerate loss 
of service, misbilling, or being left out of customer data bases 
because telephone service is too important for consumers to do without. 
Competitors have found that interfaces are not in place and have not 
even been tested in some instances. They are not automated, so that 
customers seeking to change service providers are forced to experience 
serious delays.\42\
---------------------------------------------------------------------------
    \42\ DOJ, SBC, p. vii., p. 27.
---------------------------------------------------------------------------
    A recent Wall Street Journal article \43\ noted that the FCC is 
investigating how SBC provided incorrect information regarding OSS to 
regulators who were considering allowing SBC into the long distance 
markets of several Southwestern States. Apparently, SBC knew for at 
least 2 years that when competitors tried to put in a help or repair 
request into its support system, they would receive an incorrect error 
message saying that the customer in question belonged to SBC (when the 
customer in fact belonged to the competitor). In order to process the 
order, the competitor would have to fax or phone in the repair request. 
While this may seem trivial with respect to any particular order, over 
the course of thousands of requests this could serve to practically 
shut down a competitor's operation.
---------------------------------------------------------------------------
    \43\ Dreazen, Yochi. ``FCC Probes Incorrect Data in SBC Phone 
Bid,'' Wall Street Journal, June 15, 2001.
---------------------------------------------------------------------------
    While it is difficult to quantify the current level of OSS 
functioning across the nation, in a broadly comparative framework, it 
is clear that most of the large States that are being targeted for 
entry by the Bells (see Exhibit 1) have not satisfactorily solved the 
problem of providing non-discriminatory access to the business and 
technical features and functions necessary to allow competition.

(2) Bells Charges for Unbundled Network Elements (UNE) Are Unfair and 
Anticompetitive in Many Cases

    UNE pricing has been a second major leverage point for the Bells to 
block entry into their local markets. By including items in UNE prices 
that are unfair to competitors, those competitors are unable to squeak 
by on the thin margins offered by UNE resale. Establishing fair prices 
for competitors to use unbundled network elements has been a monumental 
struggle. Although the courts have upheld the FCC's decision requiring 
prices to be based on efficient, forward-looking costs, the final 
decision is pending a ruling by the Supreme Court. This resistance has 
resulted in protracted proceedings that have resulted in prices in many 
States that make competition impossible.
    Assessing the current status of the pricing of unbundled network 
elements is a complex task. At the current stage of development, most 
competitors need to purchase a complete unbundled network element 
platform (UNE-P). This comprises the wires (loop), the port into which 
the wires are connected, local switching services, and transport of 
calls in the local area. The pricing of these four elements varies 
widely from State to State.
    As a practical matter, in the large States identified in Exhibit 1, 
there is not a great deal of difference in the cost of the service or 
in the total revenue per line. In these States, when basic local rates, 
access revenues and additional features are included, telephone bills 
converge. However, Commissions have arrived at dramatically different 
prices even when there are not large differences in costs. This is 
especially true for the switching costs, which should not be subject to 
a great deal of variation.
[GRAPHIC] [TIFF OMITTED] T8969.005

    In fact, in the past few months, the FCC and utility commissions in 
Illinois, Florida, Michigan and Pennsylvania, as well as an 
Administrative Law Judge in New York, have all pegged the cost of 
switching at a much lower level than had been the case. In these 
States, switching costs will be in the range of $2 to $3 per month for 
typical levels of local usage. New Jersey, California, Arizona, and 
Massachusetts have rates in place that would cost three to four times 
that much, $8 to $10 per month.
    The pricing of other unbundled elements also remains a problem. In 
some States fixed monthly costs have been the problem. Very high 
charges for loop stand out in Arizona, Colorado and Louisiana. In other 
States, there are also very large differences for non-recurring 
charges.
    There is no end of Bell shenanigans in UNE pricing. For instance, 
Verizon adds ``Annual Cost Factors'' into its loop rate, a 12 percent 
charge that includes the cost of Verizon's wholesale marketing 
organization. That wholesale marketing organization includes a stable 
of technical experts that testify for Verizon at State proceedings. In 
other words, competitors are forced to pay the salaries of the very 
people that fight against them in State proceedings when they want to 
try and provide service in Verizon's territory.

II. Elements of Effective Market Opening

    Although the Bells have resisted lower in the barriers to entry 
into their local markets, there have been a couple of successful market 
openings. These are the exceptions that prove the rule and indicate the 
direction that public policy should follow.

A. Success Stories

    Although Verizon in New York resisted opening its local markets 
across its service territory, when regulators in New York and at the 
Department of Justice insisted on genuine market opening, Verizon was 
forced to comply. New York has proved different from other States' 
attempts at market opening because the New York Public Service 
Commission insisted on rigorous market opening conditions, implemented 
an effective performance assurance plan, provided detailed oversight 
over the process, and was committed to ensuring that pricing was fair.

    As many other States, New York started out with high UNE prices, 
but the New York Commission made them interim in nature, when it became 
clear that the data the Commission had been given was faulty. It made 
the rates subject to refund and immediately instituted a new cost 
proceeding to address outstanding questions. As noted, an 
administrative law judge recently ordered a dramatic reduction in 
switching rates to bring them in line with other States like Illinois, 
Michigan and the Federal Communications Commission.

    Although fewer residential/small business customers have switched 
to CLECs in Texas, the extensiveness of competition is strong. Texas 
switching rates have been low throughout. Loop rates are almost 
identical in the two States. It should be stressed that these markets 
were opened without raising basic service rates. New York is a ``high'' 
priced basic service State. Texas is a ``low'' priced basic service 
State. They were both able to open their markets without basic rate 
increase.

    Consumers do not think the path to competition is to raise rates to 
attract competition in the hope that rates will come down at some time 
in the future. The consumer view is that incumbents should charge and 
new entrants should compete against efficient, forward-looking prices. 
We do not believe it is necessary to produce inefficient redundant 
facilities just for the sake of competition, especially when captive 
customers will bear the burden of that redundancy. If current 
deployment of distribution facilities (loop) is less expensive that new 
deployment of competing facilities, then those facilities should be 
made available at forward looking economic costs.

    It also is a mistake to focus on basic service rates for 
competitive analysis, for one simple reason--competitors do not. When 
competitors determine whether to enter a market, they calculate the 
profit margin on all the services they are likely to sell to the 
customer, not just basic service.

    When a competitor wins a customer (or the incumbent retains that 
customer), he will get not only the basic service revenue but also the 
Federal subscriber line charge and any Federal access revenues that the 
customer generates. The local service provider will also capture any 
revenues for vertical services (like call waiting or Caller ID) that 
the line is likely to generate. The competitor also is likely to 
capture intraLATA toll revenues. Many of the competitors also hope to 
capture the interLATA long distance business too. Most companies are 
also planning to capture Internet (high-speed data) revenues and some 
even have expressed interest in cable TV revenues. It is the total 
local bill against which the entrants are competing and the loop is 
used to provide all of these services.

B. New York-Style Competition

    New York has been extremely successful compared to the rest of the 
country in fostering competitive entry into the local exchange market. 
Competition is much more intense in New York than elsewhere, with 
almost 20 percent of residential customers having switched. It has 
among the highest number of zip codes with six or more competitors. It 
has among the fewest zip codes that are not being served by a 
competitor. We believe that this is the model toward which all States 
should strive. Few have come even close.
    On a national average basis, competition for local residential 
service is about one-fifth the level of New York. Texas ranks second, 
with New York having a bout two and one-half times as many residential 
consumers who have switched. The competition in the local markets in 
the other States that are being touted by the Bells for entry is 
nowhere near as developed. For example, in California and Florida, the 
two most populous States awaiting entry, competitors have achieved only 
one-fifth the market share among residential customers as in New York.
    After 5 years of finger pointing it is clear that the fundamental 
problem in the local market is a failure of incumbents to open their 
networks and regulators to set prices that will allow competition to 
gain a foothold (see Exhibit 1). Although New York has certain 
characteristics that make it an attractive market, it is not unique by 
any means. Many of the theoretically attractive characteristics that 
are found in New York are absent in Texas, which also has a much higher 
level of competition than the other large States we have examined.
    New York has a relatively low percentage of residential lines, but 
so do Massachusetts, Pennsylvania, New Jersey and Maryland. It has a 
relatively low TELRIC cost, but so do Massachusetts, Illinois, 
California, Florida and New Jersey. Average household income is lower 
in New York than most other States under study. New York has relatively 
low intraLATA long distance usage, but relatively high interLATA usage. 
Nevertheless, several other State are close to or exceed New York on 
interLATA long distance usage, including Illinois, Ohio and Maryland.
    Rather than blaming the competitors for not going to these States, 
where the telecommunications market is as attractive as in New York, 
the obstacles to competition lie in prices that are too high for 
unbundled network elements and operating support systems that do not 
treat competitors fairly. We conclude that there is no reason to 
believe that New York style competition could not be implemented in 
these other States. Not only would consumers save substantially on 
their telephone bills, but the potential base for a residential CLEC 
industry be much larger and stronger.

C. Consumer Savings in New York

    As a result of genuine market opening in New York, new entrants 
offered statewide local rates at a substantial discount. One major 
competitor offered a statewide discount of at least 5 percent and when 
bought in combination with long distance (any plan) an additional $5 
was taken off the bill. Given the rates in New York, this constituted 
an additional discount off the typical local bill of 10 to 15 percent. 
Customers, who want a bundled local and long distance company, could 
save between 15 and 20 percent off their local bill.\44\
---------------------------------------------------------------------------
    \44\ Comments Of The Consumer Federation Of America, In the Matter 
of Application of New York Telephone Company (d/b/a Bell Atlantic--New 
York) Bell Atlantic Communications, Inc. NYNEX Long Distance Company 
and Bell Atlantic Global Networks, Inc., for Authorization To Provide 
In-Region, InterLATA Services in New York, Before the Federal 
Communications Commission CC Docket No. 99-295, November 8, 1999.
---------------------------------------------------------------------------
    In the long distance market, Verizon entered with a range of 
competitive offerings, anchored by an anytime, anywhere rate of $.10 
per minute. Compared to the products in the market at the time, this 
was about a 50 percent savings for low volume customers. Other products 
offered by Verizon were attractive as well.\45\
---------------------------------------------------------------------------
    \45\ The Telecommunications Research and Action Center, A Study of 
Telephone Competition in New York, September 6, 2000.
---------------------------------------------------------------------------
    As a result of genuinely open markets, consumers in New York have 
switched companies in droves (2.7 million local and 1.5 million long 
distance). Companies have engaged in ``tit-for-tat'' competition, 
matching each other's offers. Prices for both local and long distance 
service have dropped substantially (approximately 20 percent for those 
who shop).

D. Creating a Competitive Industry Would Benefit Consumers

    Real market opening in New York has produced substantial benefits 
for consumers, but it is also critical to the development of a 
competitive local exchange carrier (CLEC) industry. Exhibit 2 shows a 
number of large States that have recently been mentioned as near-term 
candidates for RBOC requests for entry into long distance. These 
States, representing each of the regional bell operating companies, 
include 50 percent of all the residential lines in the country. In 
short, the future of the industry is in play. The difference between 
achieving a New York-level of competition compared to the current level 
of competition would be huge. Note that New York alone has almost as 
many CLEC residential lines as the other twelve, closed States 
combined.


                           Exhibit 2--Characteristics of Key States in the 271 Process
                               [Residential & Small Business Lines (in thousands)]
----------------------------------------------------------------------------------------------------------------
                                                                                                  Competitors'
                                                                                                      Lines
                                                                     CLEC in     CLEC if at NY   ``missing'' due
                                          TELRIC ($)   ILEC LINES   Dec. 2000        Level       to lack of NY-
                                                                     (actual)   (extrapolated)        level
                                                                                                   competition
                                                                                                 (extrapolated)
----------------------------------------------------------------------------------------------------------------
VERIZON:
    MA.................................        17.33         2849          178            581                403
    MD.................................        18.52         2434           17            471                454
    NJ.................................        17.28         4521           74            882                808
    PA.................................        19.84         5853          339           1189                850
SBC:
    CA.................................        16.77       19,008          716           3786               3070
    IL.................................        17.10         5944          316           1202                886
    OH.................................        18.74         5617           69           1092               1023
    MO.................................        22.09         2997           39            583                544
BELLSOUTH:
    FL.................................        17.12         9587          222           1883               1661
    GA.................................        21.37         4339          198            871                673
QWEST:
    AZ.................................        17.94         2398           69            474                405
    UT.................................        18.33          869           33            173                140
    WA.................................        18.75         2952           87            583                496
Total..................................                    66,371         2357         13,377             11,412
    NY.................................        16.31         7345         1745           1745           (Actual)
----------------------------------------------------------------------------------------------------------------
Source: FCC, Local Competition 2001.
Source: Lines and CLEC penetration from Industry Analysis Division, Local Telephone Competition: Status as of
  June 30, 2000 (Federal Communications Commission, December 2000); TELRIC based on Hybrid Proxy Cost Model; In
  the Matter of Access Charge Reform, Price Cap, Performance Review for Local Exchange Carriers, Low Volume Long
  Distance Users, Federal-State Joint Board On Universal Service, Before The Federal Communications Commission,
  CC Docket Nos. 96-262, 94-1, 99-249, 96-45, Comments Of Texas Office Of Public Utility Counsel Consumer
  Federation Of America, Consumers Union, November 12, 1999.

    If a New York-type outcome could be achieved in these other States, 
the residential CLEC industry would reach just over 13 million lines in 
these States, compared to just 2 million today. That is to say that 
because New York-level competition is absent in these populous States, 
about 11 million lines that should be in the hands of competitors are 
effectively ``missing.'' Including New York, the residential CLEC 
industry in these States would consist of over 15 million lines, 
compared to four million today. A 15 million-line industry would have a 
substantial base for national residential competition.

    If the approximately $6 per month saving on the total local bill 
were achieved by the additional customers won by CLECs in these States, 
consumer savings would be over $750 million per year (see Exhibit 3). 
Adding in long distance savings of $4 per month, would push the total 
to over $1.25 billion. As ``tit-for-tat'' competition spread to the 
whole local market, the total savings could rise to more than $7.5 
billion. The larger States, like California would experience very large 
savings, $220 million in the local market gained by customers who 
switch and potentially over $2.25 billion as competition spreads across 
both local and long distance. Even in a smaller State like Washington, 
the local market savings for consumers who switch would be about $36 
million and the total market impact could be over $350 million.

                      Exhibit 3--Potential Consumer Savings from New York-style Competition
----------------------------------------------------------------------------------------------------------------
                           Customers Who Switch Competition
---------------------------------------------------------------------------------------                 Total
                                                                               Long        Total     Market Tit-
                                                              Local (@ $6/   distance                  for-Tat
                                                                 month)     (@4/month)
----------------------------------------------------------------------------------------------------------------
MA..........................................................        $29.0        $19.3        $48.4       $341.9
MD..........................................................         32.7         21.8         54.5        292.1
NJ..........................................................         58.2         38.8         97.0        542.5
CA..........................................................        221.0        147.4        368.4       2281.0
IL..........................................................         63.8         42.5        106.3        713.3
OH..........................................................         73.7         49.1        122.8        674.0
MO..........................................................         39.2         26.1         65.3        359.6
FL..........................................................        119.6         79.7        199.3       1150.4
GA..........................................................         48.5         32.3         80.8        520.7
AZ..........................................................         29.2         19.4         48.6        287.8
UT..........................................................         10.1          6.7         16.8        104.3
WA..........................................................         35.7         23.8         59.5        354.2
----------------------------------------------------------------------------------------------------------------

E. Competition Must Exist Before Allowing the Bells to Enter the Long 
        Distance 
        Market
    Claims that competition can be promoted by just letting the Bells 
into the long distance market without properly opening their local 
markets do not pass close scrutiny. Two States--Connecticut and 
Hawaii--experienced early entry because the principal statewide 
incumbent was not a Bell. Connecticut is particularly interesting in 
this regard, since it borders New York. As the figures on the 
intensity, extensiveness, and balance of competition in Exhibit 1 
indicate, the results for consumers with respect to local competition 
are disastrous. Connecticut is well below the national average for the 
amount of competition available to residential consumers. Hawaii, which 
is the second State that was not served by a Bell and had immediate 
long distance entry, has virtually no local competition.
    The root cause of the success in New York is not the mere fact of 
entry by incumbents into long distance. The cause of the success in New 
York is the irreversible market opening that took place prior to 
allowing the company entry into long distance.
    Prematurely allowing incumbent local companies into the in-region 
long distance market undermines the prospects for competition. If the 
incumbents are allowed into long distance markets before their local 
markets are irreversibly open, local competition will not develop and 
long distance competition will not be vigorous. Bundling, or selling 
more than one telecommunications service to a particular customer (e.g. 
local and long distance) produces a much higher take rate for 
individual services and dramatically decreases churn rates, making it 
difficult for entrants to capture new customers. For example, Sprint 
long distance has a take rate of about 10 percent nationally. However, 
in regions where it sells local service, the take rates are 
approximately 40 percent. Similarly, when Southern New England 
Telephone entered the long distance market in Connecticut, it quickly 
captures about a 35 percent share of the residential market without 
offering prices that were more attractive than existing long distance 
competitors.\46\ It was the bundle of local and long distance that gave 
it the edge.
---------------------------------------------------------------------------
    \46\ See CFA, ``Reply Comments, Louisiana.''
---------------------------------------------------------------------------
    If the local market is not irreversibly open, only the incumbent 
can effectively offer the local/long distance bundle and that badly 
distorts competition. The incumbents can capture long distance 
customers without having to compete on price because barriers have not 
been removed. They face little real local competition and their hold is 
reinforced by their unique ability to offer a bundle of services. The 
risk that arises from a rush to approve 271 is that the incumbent can 
exploit the anticompetitive conditions, or ``competitive imbalance,'' 
in the critical early days of the bundled telecommunications market. It 
can then rapidly capture long distance customers by bundling local and 
long distance service, while competitors are unable to respond with a 
competitively priced bundle.
F. The Important Role of State Public Utility Commissions
    In addition to downplaying the importance of having competition 
well established before entry into long distance, the Bells have been 
attempting to pressure the States--principally via public utility 
commissions or PUCs--into supporting their applications for entry by 
downplaying the important role that the States play.
    The State PUCs can use independent judgment and standards to decide 
whether to support an application for entry into long distance. The New 
York prefiling statement and collaborative process, which created the 
first and by far the most successful road map to Sec. 271 entry was 
developed largely without FCC input. Given the stunning success in New 
York, it is certainly reasonable for the other State commissions to 
press for a model similar to New York.
    In fact, the FCC has never approved an RBOC application without the 
support of the State utility commission. Although no RBOC has brought 
an application over the objection of the State, the Michigan 
application did not have the full support of the Commission, and it was 
rejected. Obviously, the State PUC must exercise reasonable judgment in 
determining whether an RBOC has opened its market to competition, but 
there is considerable leeway.\47\
---------------------------------------------------------------------------
    \47\ The framework was substantially defined in the rejection of 
the first two applications, in addition to the earlier discussion of 
Michigan and Oklahoma, see including Michigan Public Service 
Commission, In the Matter of the Commission's Own Motion to Consider 
Ameritech Michigan's Compliance with the Competitive Check List in 
Section 271 of the Telecommunications Act of 1996, Case No. U-11104; 
Federal Communications Commission, In the Matter of Application by 
Ameritech Michigan to Section 271 of the Telecommunications Act of 1996 
to Provide In-Region, InterLATA Service in Michigan, CC Docket 97-1 
Oklahoma Corporation Commission, Cause NO. PUD 97-64) Federal 
Communications Commission, In the Matter of Application of SBC 
Communications, Inc., Southwestern Bell Telephone Company, and 
Southwestern Bell Communications Services, Inc., d/b/a Southwestern 
Bell Long Distance for Provision of In-Region InterLATA Services in 
Oklahoma, CC Docket No. 97-121.
---------------------------------------------------------------------------
G. Conclusion
    The clear--though unfortunately unusual--success of market opening 
in New York provides strong affirmation for the decision of Congress in 
the Telecommunications Act of 1996 to require not only that rigorous 
conditions to support local competition be in place before the Bells 
are allowed into the long distance market, but also that substantial 
competition be in place. The real world experience is consistent with 
common sense. A century old monopoly that continues to enjoy massive 
market power and crucial strategic assets will not easily, or 
willingly, relinquish its hold on the market.
    Deregulating a dominant monopolist in the hopes of spurring 
competitors to enter the local phone market, when the competitors are 
at a severe competitive disadvantage, is not likely to lead to more 
competition. Rather, such a course is much more likely to lead to 
significant re-monopolization of both the local and long distance 
markets. Should that result, consumers will be denied the substantial 
benefits of a competitive market.

    The Chairman. Very good, sir.
    Mr. Sullivan.

               STATEMENT OF HON. DAVE SULLIVAN, 
                  STATE SENATOR FROM ILLINOIS

    Mr. Sullivan. Thank you, Mr. Chairman. My name is Dave 
Sullivan. I am a State Senator from Illinois from the northwest 
suburbs of Chicago in Congressman Henry Hyde's district.
    As you know, Illinois has had an extensive history of 
having very forward-looking telecommunications policy, dating 
back to the days when now-U.S. Speaker of the House Denny 
Hastert was a State Representative in Illinois and he headed 
the effort in the mid-1980s to get our telecommunications law 
moving forward.
    We have just completed a nearly 2-year process to rewrite 
that legislation that dates back originally to the mid-1980s. 
We made it a very bipartisan, bicameral effort. I chaired a 
working group that included all four caucuses and industry 
leaders from throughout Illinois, as well as consumer groups, 
to make sure that we were going to come up with a fair package. 
I think all sides were heard and they were heard well. We made 
sure of that.
    I think the testament that it was truly a bipartisan effort 
is the vote total when the bill went up in front of the Senate 
and the House was 45-to-2 in the Senate and 112-to-1 in the 
House. We anticipate that Governor Ryan will sign this 
legislation next week.
    Let me touch on a few points in this bill in response to 
some of the issues that have been discussed this morning. We 
were faced with the quandary of what do we do about advanced 
technologies, what do we do about DSL. Our largest incumbent, 
SBC-Ameritech, did not like an order that they had received 
from the Illinois Commerce Commission, so they basically 
publicly and privately told us that they would not be deploying 
their advanced technologies in Illinois. As you can imagine, 
you would not want to hear that in your State. We did not like 
to hear it in our State.
    We literally mandated in this legislation that they will 
deploy advanced technologies in Illinois to 80 percent of their 
market by 2005, which is 6 months before the sunset of this 
bill. We have a 4-year sunset on this bill simply because as we 
went through this process and we asked the industry to describe 
their industry to us just 5 years from now, none of them could 
effectively do it. So we did not want to go too far out into 
the future. We wanted to make sure that we would take another 
look at this.
    We did in this legislation recognize that in Illinois, in 
most areas of Illinois, the business market is competitive, and 
in this legislation the business market is declared competition 
in the Ameritech region.
    We also wanted to make sure that enforcement was increased, 
so we give the ICC, the Illinois Commerce Commission, greater 
powers to enforce provisions to open the network. We want to 
make sure that we have full network availability to all CLECs, 
so the ILECs open their markets. We want to make sure that that 
happens in Illinois.
    To go along with those enforcement provisions, we felt the 
need that we needed to increase the penalties. We chose to do 
it across the board for the companies on a percentage of their 
intrastate revenue, annual revenue. We chose the percent of 
.00825 percent, which comes out for Ameritech-SBC, the largest 
carrier in our State, to be about a $250,000 fine.
    That is per day and that fine can start accruing from the 
date that the carrier is notified that a violation has been 
posted before the ICC, that someone has filed a complaint.
    So that is a quarter of a million dollars a day. That is in 
line with what Chairman Powell has suggested federally, taking 
the Federal penalties from $1.2 million to $10 million, an 
eightfold increase. We are taking it from $30,000 to $250,000, 
approximately an eightfold increase.
    Earlier there was discussion about the digital divide and 
how do we approach that, what should we do to make sure that in 
Illinois, in the Chicago area, urban poor as well as downstate 
Illinois rural poor have the access to high technology. We have 
set up two digital divide funds through this legislation, one 
to take care of the rural, one to take care of the urban, to 
make sure that nobody is left behind, that as digital advances 
move on there will not be a divide, so that we can take care of 
it and limit it and make sure the all Illinoisans are properly 
taken care of.
    I would be happy to answer any questions you might have.
    [The prepared statement of Mr. Sullivan follows:]

               Prepared Statement of Hon. Dave Sullivan, 
                      State Senator from Illinois

    Thank you Chairman Hollings and Members of the Committee.
    I am State Senator Dave Sullivan. I represent Illinois Senate 
District 28 in the northwest suburbs of Chicago. I am pleased to appear 
here today at Senator Hollings' request to describe provisions of 
recent Illinois legislation related to competition in local 
telecommunications service markets.
    During the past 2 years, I served as Chairman of a 
Telecommunications Study Committee in the Illinois Senate. This spring, 
I was the Chief Senate sponsor of revisions to the Illinois 
telecommunications act, which Governor Ryan is expected to sign into 
law in the next 2 weeks.
    First, let me begin by telling you a little about Illinois. In the 
past couple years there have been many changes in Illinois. In 
particular two significant mergers, Ameritech Illinois, which is 
Illinois' largest telephone company, merged with SBC to form SBC/
Ameritech and GTE merged with Bell Atlantic to form Verizon. Verizon is 
the next largest telephone company in Illinois. Therefore, in re-
writing this Telecommunications Article, we were in many ways working 
with two new companies to Illinois.
    In 1986, the Illinois General Assembly enacted a major rewrite of 
the Telecommunications Article of the Public Utilities Act, causing 
Illinois to become one of the first States in the Nation legalizing 
local competition. US Speaker Denny Hastert was a major force in that 
rewrite when he was a member of the Illinois House. In 1992, the 
General Assembly revised the 1985 Act to permit the Illinois Commerce 
Commission (ICC) to implement alternative regulation plans, as opposed 
to the rate of return regulation. Thus far, Ameritech/SBC is the only 
ILEC to choose the alternative regulation plan in Illinois. In 1997, 
Illinois passed SB700 (P.A. 90-185) in order to implement provisions of 
the Federal Telecommunications Act of 1996 (TA'96). The bill encouraged 
competition, and prohibited carriers from knowingly impeding the 
development of competition in any telecommunications service market. 
Other revisions included empowering the ICC to impose penalties of up 
to $30,000 per day for a violation of a Commission order pursuant to 
impeding competition.
    Hence, Illinois has held a strong record of encouraging and 
attempting to develop competition in the local telecommunications 
market. In 1997, in particular, it was envisioned that competition 
would have developed at a much more rapid pace that it is currently 
developing. There is competition in the city of Chicago and in a small 
number of Chicago suburbs; however, outside of those particular 
localities, competition is lagging. There is certainly more competition 
in the business market than in the residential market in Illinois.
    In addition to delayed competition, there was a recent outcry over 
the deterioration of service quality in Illinois. SBC/Ameritech has had 
many service quality difficulties, particularly for installation and 
repair. To be fair, SBC/Ameritech has worked very hard to meet their 
service standards set by their merger conditions. However there was 
clearly a problem, and their customers were outraged.
    Together, these conditions made the climate ripe for a re-write.
    Many of the telecommunications carriers proposed their view of a 
re-write. Ameritech believed the law contained unnecessary regulations 
and rules, which leads to less innovation, less investment and less 
benefit for consumers. They wanted to avoid micromanagement of the 
marketplace.
    Many of the competing carriers wanted stronger enforcement 
provisions. They were satisfied with the current law, but did not 
believe it was being abided.
    The General Assembly recognized that regulation should only be a 
surrogate for competition, and that the marketplace should oversee 
whenever possible. However looking at the current marketplace in 
Illinois, competition has not developed to the extent by which the 
marketplace can be the sole determining factor of telecommunication 
prices with no regulation whatsoever.
    Hence, the General Assembly conducted numerous hearings and 
negotiating meetings to develop an ``intermediary'' bill to help us 
reach the goal of accelerating competition in the local market. This 
bill, HB 2900, is an attempt to meet that end.
    By the time of our investigations last year and this--the 12th year 
after local telecommunications competition was authorized in Illinois 
and the 5th year after passage of TA96--the total local market share of 
competitors in Illinois had grown to less than 10 percent. In the 
residential and small business markets, this share was under 3 percent. 
In addition, the number of competitors operating in Illinois diminished 
during the period; and the financial condition of those that remained 
deteriorated . This information, taken from FCC and investment 
analysts' reports, confirmed our common sense observations about the 
fundamental lack of competition in the market for basic telephone 
service. It also contrasted dramatically with information from New York 
and Texas where Section 271 market opening requirements had been met 
and competitors had won as much as a 20 percent share by the end of 
last year.
    Five years ago, Illinois was a leader in the effort to introduce 
competition in local telecommunications markets. In June 1996, the 
Illinois Commerce Commission concluded an investigation that resulted 
in the nation's first order requiring an incumbent local exchange 
carrier (``ILEC'') to lease the elements of the public network to 
competing carriers both on an unbundled and on a bundled, or platform, 
basis. That Illinois order, like the Federal Act passed 4 months 
earlier, established that the initiation and development of local 
competition depended on new market entrants having the right lease and 
use the ubiquitous local public network without discrimination and at a 
fair price.
    Within 18 months after that June 1996 order, over 300 companies 
received certification to offer local exchange telecommunications 
services in Illinois. But competition and customer choice did not 
follow. Among those 300 certificated competitive local exchange 
carriers (``CLEC s ''), only 54 proceeded to the next step of filing 
tariffs for local service, and only about a dozen went on to provide 
service. Actual competitive choices have remained limited to a few 
services in certain high-density areas of the State, offered primarily 
to high-volume users.
    What happened in Illinois? Why didn't competition develop more 
completely? Was there something wrong in the premise that competition 
might begin in local markets the way it had in long distance--through 
requirements that incumbent monopolies allow new market entrants 
nondiscriminatory access to lease and use the public network to provide 
services? Or, did the failure of local competition result from the 
failure to properly implement those requirements?
    The New York Public Service Commission implemented an Illinois-type 
platform in the Verizon territory in December 1998. According to the 
U.S. Department of Justice, over 1,000,000 consumers were served by 
CLECs by the following July, most of whom were residential consumers 
served on the platform. And, the Texas Public Utility Commission 
ordered an Illinois-type platform in the Southwestern Bell territory in 
August 1999. The U.S. Department of Justice found that by September 
2000, over 569,000 Texas consumers were served by CLECs, primarily 
through the use of the platform.
    The successful introduction of competition in these two States 
using the framework of market-opening requirements developed in 
Illinois was critically important to our General Assembly's decision to 
explicitly codify those requirements.
    There were many key provisions in the bill. The bill codifies 
several Ameritech/SBC obligations existing mostly under current Federal 
laws, Federal orders, and ICC orders. These obligations are all based 
upon making the ILECs network available to competing local exchange 
carriers (CLECs). The bill obligates Ameritech/SBC to make available 
its network to CLECs on reasonable and non-discriminatory terms. These 
provisions are not new. They have been mandated through orders and 
Federal law. Several of them have been tied up in the Court systems. 
The intention is to accelerate the availability of the ILEC network 
thereby increase the opportunities for local competition. By placing 
these obligations in this bill, Illinois has clearly stated the 
legislature's intentions to open the market to competition, and most 
importantly tied these obligations to the enforcement provisions of the 
bill.
    In looking toward this competitive environment, the General 
Assembly declared all business services of a company under alternative 
regulation, ``competitive''. However, it protects small businesses by 
capping the rates of businesses with 4 lines and under until July 1, 
2005 (the sunset date of the Act). Vertical services, excluding caller 
ID and call waiting, are also declared ``competitive'' as of June 1, 
2003.
    The bill also added four new per se impediments to competition 
which include (1) unreasonably refusing, providing inferior systems to 
or delaying access to the provisioning of OSS; (2) unreasonably failing 
to offer network elements that the ICC or FCC has determined must be 
offered on an unbundled basis; (3) violating the new obligations of 
incumbent carriers (Section 801); and (4) violating the order of the 
Commission concerning matters between carriers. These provisions are 
all tied to the enforcement provisions and the expedited complaint 
processes (rocket docket) of the bill.
    This leads to the increased enforcement provisions of the bill. 
Under our current law, the penalties for violating the Act had not been 
revised since sometime in the 1920s. There was strong consensus that 
the $500-$2000 dollar penalties for violating the Act and the $30,000 
penalty for impeding competition was out-dated, and clearly not high 
enough. In addition the penalty structure, which the ICC must abide by, 
was extremely cumbersome and overly restrictive. To date, no carrier 
had been fined of violating the Act.
    Penalties under this bill may be assessed for up to 0.00825 percent 
of a carrier's intrastate gross revenues for each day of a violation. 
In the case of SBC/Ameritech, this penalty amount could be as much as 
$250,000 per day per violation. This coincides with FCC Chairman 
Powell's recent request to Congress for fines of up to $10 million per 
violation, noting that, for a multi-billion dollar company, fines of 
lesser amounts are meaningless as enforcement incentives.
    The goal of our bill was to streamline this penalty process, 
provide the ICC with the teeth needed to have sufficient incentives for 
companies to comply with the Act, and to give ICC the tools needed to 
enforce the Act.
    The bill increased the penalty amounts which carriers must pay for 
violating the Act or for impeding competition.
    All penalties begin to accrue as soon as notice is provided to the 
carrier that they are in violation, and each day is considered a new 
violation.
    Establishes certain mitigating factors for the Commission to 
consider in determining the amount of the penalty to be assessed upon a 
carrier Injunctive Relief--Authorizes the ICC to seek injunctive relief 
without first having a hearing before the Commission to stop egregious 
conduct of a telecommunications carrier. Also, the bill allows the 
carriers to seek injunctive relief in circuit court against another 
carrier found by the Commission to be in violation of the Act, an order 
or a rule.
    In intercarrier disputes, allows for the Commission to issue a 
cease and desist order from violating the Act, rules or regulations. 
Provides that the Commission can award damages, attorney's fees, and 
costs to any telecommunication carrier in violation.

                          CONSUMER PROVISIONS

    Service quality has been deteriorating in Illinois, particularly 
with out of service and installation. I will note that Ameritech/SBC 
has recently made many strides in correcting the problems. However the 
public outcry was overwhelming, and the legislators did not want such a 
serious problem to occur again. This bill provides strong service 
quality standards such as requiring installation within 5 business days 
and restoring service within 24 hours. The bill also provides automatic 
credits to consumers for violations and in cases of extended 
violations, the company must provide alternative phone service.
    The bill outlines three flat rate packages which companies under 
alternative regulation (Ameritech/SBC) must offer at a savings to 
customers. The packages basically outline a budget package, a package 
for average telephone users, and a high-speed package.

                                SUMMARY

    In conclusion, Illinois' HB 2900 is an attempt at accelerating 
competition in the local marketplace, by outlining specific incumbent 
carriers obligations for opening their networks to competitors, deeming 
business service competitive, streamlining the regulatory process, and 
giving the Illinois Commerce Commission more enforcement tools. 
Hopefully together these provisions will help to create a climate in 
which competition in the local market will thrive.

    The Chairman. Senator Sullivan, your testimony is dramatic 
because that is out there where, as we say, ``the rubber meets 
the road,'' a local legislature. They are all very competent 
folks. They have experienced what we have experienced at the 
Washington level, namely they have told us, just like they told 
you, they are not going to comply with the 14-point checklist, 
271.
    So, Mr. Kimmelman, it is either one of two ways. We either 
do it Senator Sullivan's way, the Illinois way, or you and I go 
back to price controls and reregulate them, one or the other. 
You have either got to mandate it--there is no use to tippie-
toe around. That there 1996 Act should have been the ``Free 
Employment of Lawyers'' or ``Lawyers Free Employment Act'' or 
whatever it is, because all it has been is one legal morass to 
try to avoid 271, which in a sense was not an incentive.
    The incentive was there. They had the incentive. They came 
to us begging during the 1980s and 1990s, please let us into 
long distance. So we said: Well, fine; we want you to get into 
long distance anywhere in the country, save and except where 
you have a monopoly, because we just do not want you to extend 
it. And they agreed and they wrote it out, and now they act 
like they cannot understand it, it is technical, it is 
confiscatory, it is unconstitutional.
    They have been into every court in the land and do 
everything except get into long distance.
    Senator, we want to look carefully at your rule approach, 
mandate approach and the fine approach and everything else in 
there. You can see the interest amongst us here on the panel is 
definitely to try to take care of the rural areas and the 
universal service fund that we have and which is necessary.
    Let me ask, because the hour is late, Mr. Rolka, explain to 
me when I ask, because I understood from the Bells that you 
could not do this functional, or functional structural or full 
structural separation. What is exactly the difference? I am an 
auditor and I am going out to audit the books of SBC in 
Illinois, and I come in and I am trying to audit and find out. 
The witness said, Ms. Greene, that we have already got that 
separation. But then she said, if you separate it it is going 
to add costs. If they have already separated it, but if we 
require then to separate it, it is going to add costs, you 
know, I am not understanding her correctly. See if you can 
straighten me out.
    Mr. Rolka. I am sorry, Senator, that I think I probably 
have some of the same fog that you do. I proceedings that we 
had in Pennsylvania when we were trying to establish what the 
cost of unbundled network element loops and things like that 
were, the company came in and explained to us how much it was 
going to cost to set up the business units that would be 
responsible for providing services through the OSS systems and 
things like that, and they gave us some estimates of what it 
was going to cost to set up those business units.
    We rolled that case into the case that we had in front of 
us when we ultimately came up with structural separation and we 
had an experience from that case that told us what their 
estimate was of how much it cost to set up that business unit. 
They were really just going to be a separate set of operators, 
telephone operators, that were going to be plugged into their 
ordering and billing and provisioning and maintenance and 
repair systems that were going to do this work, but they were 
going to be dedicated to the wholesale CLEC community. They 
gave us a figure for that.
    When we went through the structural separations case, we 
had that figure in mind. We were very well acquainted with it. 
So we said, well, look; we have had, at this point, an unending 
litany of problems. We have had CLECs come to us time after 
time after time after time and say: Well, you never really 
asked me that question. You did not tell me, you did not 
explain, you did not set a rule, you did not do this and you 
did not do that about what is actually required to get from 
here to there, the kinds of things that were important in 
defining things like platforms, unbundled network element 
platforms.
    There are a lot of parts in there. But if you do not 
identify every one of them and put them all together from tail 
to end, you are not really sure what all you need. The CLECs 
had this never-ending litany of problems tripping across those 
things.
    When we looked at the record in front of us, we said: The 
only way we are going to make this work is if we set up a unit, 
a company, whose existence really depends on satisfying its 
customers, just like the telephone company says it is their job 
to do, is to satisfy their customers. We need a wholesale 
entity whose job it is to deal with the retail arm of the ILEC 
the same way it deals with the CLECs who are trying to provide 
service to end user customers. That is the only way we are 
going to uncover all those thousands--and at this point there 
are literally thousands of questions that nobody except the 
ILEC knew how to ask.
    So we demanded that we wanted them to go forward and set up 
that kind of business structure. After they found out that that 
is where we settled, then they came back to us and told us 
these wildly exaggerated stories of how it is going to cost 
billions of dollars now to set up a unit that previously was 
going to cost a very few million dollars to do.
    The difference between the two of them is the functional 
unit exists within the existing company. You keep accounting 
records of where to charge the expenses associated with 
providing that service, and different sets of people service 
different entities. The structurally separated entity has to 
handle them both the same way. They have a contractual or an 
agreement that's set out in an interconnection agreement that 
specifies what they are supposed to do, and you can look at it 
in black and white and see whether or not they are providing 
the same things. You can look at it and you can say, the retail 
arm of the ILEC is ordering A, B, C through Z. You can see the 
piece parts of the network that they have to order, so somebody 
else that wants to provide comparable service can say: I really 
need A through Z, I do no need A, Q, D, P, M, and R, and find 
out that it does not work because I do not have all the other 
missing letters of the alphabet.
    Those are the differences. Those are some of the major 
differences.
    I was amused recently. My former colleagues in Pennsylvania 
issued a request to the CLEC community to find out why it is 
they cannot serve, why it is they cannot provide service in 
rural Pennsylvania. The answer is black and white in front of 
them. When they established the price of a loop, one of the 
basic ingredients for reaching the rural customers, the cost of 
the loop in rural Pennsylvania is greater than the retail price 
that the ILEC is charging its customers.
    How in anybody's name can you provide service when the 
wholesale ingredients that go into your business cost more than 
your competitor's retail price? It cannot be done.
    The Chairman. The business unit, you say that was pretty 
well studied out and the determined cost was in the millions. I 
do not want to sound frivolous, but, of course, millions is 
nothing, because we have got Verizon coming up here just 
recently with $233 million worth of fines and it did not make 
any difference to them. So it seems like they could sort of 
spend this amount and not have all the fines and maintain their 
reputation.
    Mr. Rolka. Senator, if I may.
    The Chairman. They could provide more service here in 
comparison to, say, going overseas, down to Peru, if I have got 
to set up a whole separate thing and I have to put it up in 
Spanish in order to understand the blooming thing.
    Mr. Rolka. Senator, if I may. To take you in a slightly 
different direction, but I think still related, I have heard 
people talk this morning about the necessity to increase the 
size of the stick that the regulator has to enforce penalties 
and create bigger fines and things like that. I would just call 
your attention, I guess, to a couple of from my perspective 
observations you should keep in mind.
    One is that several of the State commissions around the 
country do not have the authority at all to levy fines. You can 
talk about any of those large--and from my perspective, 
relatively astronomical numbers that catch the headlines, but 
many of the State commissions do not have the authority to levy 
fines.
    Second, as I sat here and listened to it I had to think 
back and recall. I have three children and I think about how 
frustrated I get every once in a while with my children, and 
every once in a while, I levy some ungodly penalty on my 
children or one or more of them, because I am so frustrated at 
what they have done, only to turn around and realize that, you 
know, I cannot really enforce it because it is too draconian. I 
cannot really ground my kid for the summer because of the 
consequences to me of grounding my kid for the summer.
    The corollary is, if I make the fine so big that the 
ordinary guy on the street whose job it is to figure out 
whether or not the infraction has actually occurred to levy 
that penalty, you have brought a shotgun to kill a gnat.
    From my perspective of being in the trenches and doing this 
and being trained to deal with this, from people what are 
responsible in many respects, who play roles in some of the REA 
things that happen in the rural electrification, you need not 
to increase the size of the gun. We do not need to move to the 
Cold War mentality of enforcing the Telecom Act provisions. But 
what you do need is when they step out of line a little bit you 
need to get on them right away so that they know that you mean 
it. You cannot wait until the problem is so big that none of us 
is brave enough to impose the larger fines that people are 
talking about.
    What you really need is you need to be able to get on them 
when the things occur, you need to be able to get on them early 
and often with a fine that is commensurate with the problem. If 
you bring a shotgun, I am afraid that the people who are 
responsible for the enforcement are going to be afraid to pick 
it up.
    The Chairman. Well, the Bell companies really belong to the 
people, and so when we put in 251 we required them to open up 
so that the CLECs could spawn and grow and provide services. 
The reason we did not make mandatory the 271 is they promised, 
they represented, they begged. That is all I heard, and I have 
got the statements here before me and the letters and 
everything else: We will be in within 6 months time, we will do 
this, we will do that, with no idea of complying with their 
promise and what they outlined in the 14-point checklist 
themselves.
    I see, rather than going to $150 million fines, that shows 
me that there is an inadequacy in the Act and that it ought be 
mandatory. It ought not to be voluntary. If we made them comply 
and really opened them up, then you would see some prices, Mr. 
Kimmelman, come down, just like they did in the 1980s in long 
distance. AT&T reduced itself to about one-third of its size 
and increased its profit when mandated by Judge Greene.
    It looks to me that is the kind of thing that Congress 
ought to be looking at, and not take an end run around the Act 
claiming that what we are trying to do is to get data, and we 
are trying to get Internet services to the poor people of 
America, and the Bells are the only ones ready to do it, and 
that kind of thing, and therefore repeal the Act, and then 
enlarge, fortify, and extend the monopoly. That is all they are 
saying is what they want done.
    I want to keep the record open because I know that many 
Members will have some questions, and if you have any additions 
please submit them. The Committee is indebted to each of you 
three. We appreciate it very much.
    The hearing will in recess subject to the call of the 
Chair.
    [Whereupon, at 12:20 p.m., the hearing adjourned.]
  

                                  
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