[Senate Hearing 107-1105]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1105

                  PROMOTING LOCAL TELECOMMUNICATIONS 
         COMPETITION: THE MEANS TO GREATER BROADBAND DEPLOYMENT

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 22, 2002

                               __________

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



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND 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
      Jeanne Bumpus, Republican Staff Director and General Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 22, 2002.....................................     1
Statement of Senator Allen.......................................    23
Statement of Senator Breaux......................................     4
Statement of Senator Brownback...................................    20
Statement of Senator Burns.......................................     4
Statement of Senator Dorgan......................................    25
Statement of Senator Hollings....................................     1
    Prepared statement...........................................     2
Statement of Senator McCain......................................    12
Statement of Senator Rockefeller.................................    15
    Prepared statement...........................................    18
Statement of Senator Smith.......................................    17
    Prepared statement...........................................    18

                               Witnesses

Cannon, Hon. Chris, U.S. Representative from Utah................     4
Lynch, Loretta M., President, California Public Utilities 
  Commission.....................................................    41
    Prepared statement...........................................    43
Markey, Hon. Edward J., U.S. Representative from Massachusetts...     8
Nelson, Robert B., Commissioner, Michigan Public Service 
  Commission.....................................................    33
    Prepared statement...........................................    35
Vasington, Paul B., Chairman, Massachusetts Department of 
  Telecommunications & Energy....................................    27
    Prepared statement...........................................    29
White, Hon. Mary Jo, Senator, Pennsylvania State Senate..........    31

                                Appendix

Alameda Power & Telecom, prepared statement......................    55
Baldassarre, Sebastian M., President, Public Utilities Board, 
  Alameda Power & Telecom, letter dated June 3, 2002 to Hon. 
  Ernest F. Hollings.............................................    55
Cleland, Hon. Max, U.S. Senator from Georgia, prepared statement.    54
Hollings, Ernest F., U.S. Senator from South Carolina, Dear 
  Colleague letter dated May 1, 2002.............................    53
Reed, Mark L., NSTAR Electric, letter to Chairman Vasington and 
  Commissioners..................................................    57

 
 PROMOTING LOCAL TELECOMMUNICATIONS COMPETITION: THE MEANS TO GREATER 
                          BROADBAND DEPLOYMENT

                              ----------                              


                        WEDNESDAY, MAY 22, 2002

                                       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. If we can save a little time, 
one of the witnesses, Congressman Cannon, wanted to be 
recognized first, in that he has a markup at 10:00. But let me 
start with my opening statement. I'll file for the record.
    This is Part II of Tauzin-Dingell--oh, there's the 
distinguished Congressman. We welcome you. This is Part II 
Tauzin-Dingell. At the time, my good friend, Congressman Tauzin 
said, ``Wait a minute there. You've got Markey and these other 
witnesses. You're sandbagging me.'' And before he was 
cancelling out, I cancelled him back in by saying, ``Look, 
we'll just have you and Congressman Dingell, because we're not 
trying to sandbag anybody.'' So thus, we have Part II. I'll 
complete my statement for the record.
    As we all know, we did our best to promote local 
competition, which is the subject of this hearing, in that we 
followed the AT&T pattern back in the eighties, whereby Judge 
Greene opened up AT&T and made available their particular 
networks, in addition to separating out the seven RBOC's. We 
provided that with 251 access to the local exchanges. 
Otherwise, we had 271 written by the Bell companies. We said, 
you've got access anywhere in the country, except where you've 
got a monopoly, and we both agreed they didn't want to extend 
their monopoly, so they outlined a 14-point checklists before 
they could have that access.
    As of now, 6 years later, there are only 13 states where 
they are qualified. The others have tried, namely the long-
distance folks. I'll never forget, MCI spent about $600 
million, and the British Telecom that had merged with them 
said, this is too expensive an association, and they quit. Bob 
Allen and AT&T spent a little over $4 billion, and they got a 
new president, and AT&T spent another $100 billion trying to go 
around there in the cable way.
    But what has happened is, they have been slaughtered, 
particularly the CLEC's, at every particular turn. For example, 
Bell South has been fined $20.5 million. Quest has been fined 
$878.7 million for violations of these opening up. SBC has been 
fined $639.1 million, and Verizon $300.4 million. You can 
understand why they treat their fines casually when, for 
example, with a $300 million fine, Verizon actually has a net 
income of $67.19 billion, so even Chairman Powell has said 
we've got to increase fines.
    We think there is a better approach perhaps than increasing 
the fines. Let us see if we can get order out of chaos with a 
functional separation. If that is not adhered to or obeyed, 
then we might have to move to a structural separation. That is 
provided in S. 1364 that I introduced last August, and this is 
the first discussion of it. Otherwise, we can understand that 
broadband services are really available in 85 percent of the 
homes in America. Actually, the Bell companies have had it 
since the early eighties, and they are only now deploying it.
    I was very interested in Mr. Whitaker of SBC coming to the 
office earlier this spring and said for the first quarter he 
has got 183,000 broadband customers he is going to put on in 
the first quarter. Well, we know there is no prohibition. There 
is no restriction whatever, but the various bills, namely 
Tauzin-Dingell, you would think there was some restriction or 
prevention to it. It is a matter of demand.
    With that said, let me yield first to Senator Burns.
    [The prepared statement of Senator Hollings follows:]


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

    The over riding principle that has govern telecommunications policy 
during the past three decades has been competition. Congress, 
regulators, and the courts since the 1970's have all held fast to the 
principles of competition, and as a result we have a dynamic and 
vibrant telecommunications marketplace--one superior to that of any 
other country.
    However, we are at a crucial juncture in telecommunications 
policy--are we going to hold steadfast to the goal of competition, and 
allow it to continue guiding our decision making, or are we going to 
allow groups with other objectives in mind to guide our actions? These 
groups include today's local market monopolies, who are seeking to use 
the issue of broadband to stave-off implementation of competition 
policy, so as to preserve their local market monopolies, while 
simultaneously working to extend that monopoly into the emerging 
advanced services markets, such as broadband.
    As we fight legislatively to promote competition, last week the 
supreme court reaffirmed its own commitment to competition. In support 
of the claims of the FCC and competitors, the supreme court rejected 
arguments of the Bells and upheld the FCC's methodology for 
establishing the rates Bell companies can charge competitors for access 
to their network. The Bells had argued before the Supreme Court as they 
have argued before Congress that the FCC established rates are too 
high. Justice Souter stated that the existing investments of over $100 
billion by the Bells affirm the common sense conclusion that so long as 
the FCC's rate structure brings about some competition, the incumbents 
will continue to have incentives to invest and to improve their 
services to hold on to their existing customer base.
    I most certainly support the deployment of broadband nationwide and 
it can be accomplished without compromising competition. In fact, I 
believe it is through a combination of policies such as--competition, 
loan programs, tax credits, consumer privacy protections, and 
addressing the ``demand'' problem--that broadband can be achieved. 
There is no silver bullet here, and an approach that destroys 
competition will undoubtedly undermine the deployment of broadband and 
other innovations. Such an outcome would set communications policy back 
for decades.
    We have come too far to regress at this point. The 1970's became a 
turning point in telecommunications policy. It was at this point that 
legislators, regulators, and the courts began to work to limit the 
power of AT&T's monopoly and promote competition. In 1984, the court 
took the step of requiring AT&T to divest its local network creating 7 
regional Bells. As a result of this action, consumers obtained improved 
service quality and lower prices in the long distance market, and AT&T 
invested heavily in its network upgrading its lines from copper to 
fiber.
    Congress continued this competitive approach when it passed the 
Telecommunications Act of 1996. As we expected, the work Congress did 
in 1996 to promote competition has driven the monopolies to innovate 
and provide broadband service. According to Probe Research Inc., 
Verizon already has 79 percent of their lines DSL capable, BellSouth 
has 70 percent and SBC and Qwest have 60 percent. Bell companies have 
invested over $100 billion and competitive carriers have invested over 
$56 billion in deploying new facilities and upgrading their existing 
facilities. As a result of these investments as well as the investments 
of cable companies, approximately 85 percent of U.S. households have 
access to broadband.
    However, as competitors have exited the marketplace, incumbent Bell 
and cable monopolies have increased prices and have demonstrated no 
real desire to compete head to head. Recently, when asked whether 
Verizon would lower the price for broadband service from $50 to compete 
with cable which charges about $40, Ivan ``Seidenberg said no, that 
Verizon wouldn't `discount' to match cable prices.''
    With that said, my concern is twofold. First, that we not accept 
the unfounded legislative and regulatory proposals of the bell 
companies that destroy competitors and have nothing really to do with 
broadband deployment. Congress and the courts certainly did not 
conclude that AT&T had to maintain its monopoly in order for it to 
upgrade its long distance network from copper to fiber. In fact in the 
1980's, AT&T was under a consent decree to divest its local network 
when it spent millions of dollars to upgrade its copper network to 
fiber. Incumbent cellular companies began upgrading their networks from 
analog service to digital service when Congress introduced competition 
into the marketplace from PCS carriers who built new digital networks. 
Wireless companies are now seeking to provide third generation service. 
They haven't based this facilities upgrade on gaining some new 
regulatory scheme from Congress.
    My second concern is that policy makers commit to maintaining 
competition as the cornerstone of communications policy and that we 
conduct an honest examination of what it will take to really ensure 
that competition takes hold in the local telecommunications market.

   Congress took the mildest approach to promoting competition 
        in the Telecommunications Act of 1996--that is it outlined what 
        monopolies needed to do to allow competition to emerge. In 
        response, Bell companies broke their promises, and have spent 
        their time litigating the act, stonewalling their competitors, 
        and misleading policy makers that somehow eliminating their 
        competitors will result in the deployment of innovative new 
        services. Even though the Supreme Court has upheld the 
        competitive provisions of the Act, Bell companies have not 
        slowed down their anti-competitive conduct.

   In contrast, in 1984, in order to foster competition, the 
        court required AT&T to divest itself of its local facilities. 
        This had the result of irreversibly introducing competition in 
        the long distance market.

   Also, the FCC has from time to time imposed structural 
        separation such as when it required, Bell companies to provide 
        cellular services through a separate subsidiary in 1981 and 
        enhanced data services through a separate subsidiary in 1980. 
        It has also required companies to divest properties during 
        mergers when competition would be harmed.

    As policy makers, we are protectors of consumers and the public 
interest. It is our duty to pursue and adopt real options that have 
been proven to promote competition in the local telecommunications 
market including functional separation. It is also imperative that we 
stay the course now that the Supreme Court has provided legal certainty 
by resolving that last major legal issues with respect to the 1996 Act.
    With that said, I welcome, our witnesses who will share the 
challenges faced by policy makers in promoting local competition and 
broadband deployment.

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

    Senator Burns. Mr. Chairman, thank you for this hearing, 
and I appreciate our witnesses today, and especially the first 
two--I am giving a quiz after you make your statement--and I 
look forward to hearing from the witnesses.
    Thank you very much.
    The Chairman. Thank you. Senator Breaux?

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

    Senator Breaux. I will put my statement in the record and 
look forward to hearing from the witnesses.
    Thank you very much.
    [The prepared statement of Senator Breaux follows:] *
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    The Chairman. Thank you very much.
    Congressman Cannon and Congressman Markey, the Committee is 
indebted to you both for being with us this morning, and 
Congressman Cannon, I understand you have got, momentarily, a 
markup over on the House side, so we welcome you and would be 
glad to hear from you at this time.

                STATEMENT OF HON. CHRIS CANNON, 
                 U.S. REPRESENTATIVE FROM UTAH

    Mr. Cannon. Thank you, Mr. Chairman, Senator Burns, Senator 
Breaux. I was interested to see, when I saw my draft of the 
statement this morning, that my staff had characterized this as 
one of my favorite subjects, broadband. And I guess, in a way, 
it really is. I believe that broadband, the point of the 
communications carriers, and cable companies and broadband 
adoption by businesses and consumers has the potential of 
bringing amazing things to our economy, our communities, and 
our homes. Whether we are talking about the potential for 
broadband to help improve the way the lesson plans are 
developed and brought to students of all ages, the potential 
for patients to remotely access the best that our healthcare 
system has to offer, both here in America and for folks abroad, 
the potential for businesses of all sizes to improve their 
efficiency and tap new markets, or the potential for 
residential customers to access new forms of entertainment, it 
seems that we pretty much all agree that broadband access is 
something that we want to encourage.
    In my view, the best way for us to do that is to do two 
things. First, we should tread carefully when it comes to 
altering the basic framework of the 1996 act and, second, we 
can tape steps to reduce the gap between broadband availability 
and broadband adoption. With regard to the first point, since 
the act was signed into law at the Library of Congress, we've 
seen a parade from the Jefferson Building to the FCC, and from 
the FCC to the courts all over the land.
    In just in the last two weeks, some six years after the act 
became law, we finally saw the U.S. Supreme Court issue a 
decision in Verizon versus FCC in which the Court voted 
overwhelmingly to uphold the FCC's authority to adopt forward-
looking pro-competitive pricing rules.
    Hopefully, that will be the last word. I hope that is, and 
I urge that we now give the industry time to digest that 
opinion and take advantage of the certainty it should provide. 
I am not suggesting that we, the FCC, and the States should 
never ask questions about the pace at which local competition--
long-distance entry in broad competition are progressing, but I 
am suggesting that when we ask questions merely for the sake of 
doing so, the industry and the financial community take notice 
and probably say, there they go again down there in Washington 
changing the rules in the middle of the game.
    If we want companies to invest, they need to know they can 
do so with a reasonable expectation of a stable legal 
framework. If our questions suggest a radical alteration of 
that framework that picks winners and losers, like the Tauzin-
Dingell Bill, rather than leaving that to the marketplace, we 
destabilize investor confidence and risk driving capital away 
from this critical sector at exactly the time we should be 
encouraging capital investment.
    While legislators are, by our nature, impatient, we must 
acknowledge that in spite of the uncertainty wrought by the 
overhang of litigation, there has been a tremendous amount of 
progress toward making local markets competitive and broadband 
access available. In the face of legal uncertainty wrought by 
the bill's ceaseless lawsuits, and despite the daunting task of 
competing against entrenched monopolists, CLEC's have raised 
and invested $65 billion, an investment that would be wasted if 
Congress changes the rules of the game without basis.
    As the U.S. Supreme Court said last week, a ``regulatory 
scheme that can boast such substantial competitive capital 
spending over a four-year period is not easily described as an 
unreasonable way to promote competitive investments in 
facilities.'' New entrants are not the only ones who have made 
big investments. In spite of the repeated arguments they cannot 
or will not make broadband available under the current 
regulatory regime, the incumbent local telephone companies have 
made very real progress toward making DSL available to their 
customers.
    From a standing start in 1997, when the Bells had yet to 
make any significant commitment to broadband, a majority of 
Bells' central offices are now equipped to offer broadband 
access. Just how pronounced this progress has been, given the 
nature of the regulatory yoke under which the Bells claims they 
operate, according to publicly available documents, most often 
the materials that the Bells provide the financial community:
    Bell South announced its first deployment in May 1998.
    Today, Bell South is capable of offering DSL to 71 percent 
of the households.
    SBC first offered commercial DSL in the fourth quarter of 
1997, and today, DSL is available to 25 million of its 
subscribers, or 60 percent of its customers.
    Verizon has a similar story, as does Qwest, which has a 
total of about 32 percent of its customers with access to DSL 
lines.
    What is clear is that in spite of the willingness--in spite 
of the wailing about the current regulator regime, the Bells 
are four of the ten largest broadband providers in the country. 
If you look only at the market for T1 and T3 services, they are 
the largest providers of those services.
    Each of the Bells has told the financial community that 
they are benefitting from strong double-digit and even triple-
digit growth rates in the broadband markets. They deserve 
credit for bringing broadband to a majority of their customers 
in just over four years, but we must also take note of the fact 
that they did so under the current statutory and regulatory 
regime.
    Again quoting the Supreme Court, the incumbent's investment 
of more than $100 billion since the act affirms the common-
sense conclusion that so long as TELRIC brings about some 
competition, the incumbents will continue to have incentives to 
invest and improve their services to hold onto their existing 
customer base.
    In the face of these facts, we hear that Congress should 
act to level the playing field and do more to promote broadband 
deployment. I want to comment on both of those notions.
    We are all for fairness and even application of the law, 
but this claim I keep hearing about the need for regulatory 
parity when it comes to broadband strikes me as something of a 
canard, a sham, or a red herring. There may come a day when 
regulatory parity will be appropriate, but I believe that 
before we seriously start considering regulatory parity, we 
should insist first on parity of situation, and parity of 
situation does not exist today in the telecommunications 
industry.
    No one would seriously argue that we should have absolute 
parity between the ILEC's and the CLEC's, because even though 
they both offer telecommunications services, they have very 
different levels of market power. Similarly, both cable and 
satellite companies offer video services, but we have not 
regulated them in exactly the same way because of the 
differences in their relative ability to leverage their market 
power.
    We should recognize that this difference also applies to 
the broadband market, where the ILEC's have the ability to 
leverage their rate pair-funded bottleneck facilities, 
particularly the local loops between their central offices and 
consumers' premises. Access to the last mile between the 
central office and a business or a residence is every bit as 
critical as a CLEC as access to programming is to satellite 
companies.
    Deregulating the ILEC's last-mile facilities in the name of 
promoting broadband deployment would threaten the ability of 
other parties to lease access to those last-miles facilities, 
to offer consumers innovative broadband service as well as 
traditional telephony. Put another way, deregulating as 
proposed by Tauzin-Dingell and Breaux is akin to a river-boat 
gamble. If we throw the States, who had a role in telecom for 
the past 70 years, out of the process, and we tie the FCC's 
hands and Tauzin and Breaux are wrong about the effect that 
deregulation will have, where does that leave us? Under both 
bills, it leaves us with little recourse, other than a 
subsequent act of Congress, and that is a very high standard.
    Let us be clear, the real result of the regulatory period 
mandate in S. 2430 would relieve the Bells of the market 
opening requirements of the 1996 act and turn our backs on 30 
years of Government policy that has, in that time span, opened 
the entire telecommunications industry to competition.
    In its effect, it is no different than the Tauzin-Dingell 
bill. Enacting S. 2430 would drive companies like Covad out of 
the market, and that is exactly contrary to what we should be 
trying to do. Additionally, deregulation of the sort proposed 
in S. 2430 would leave many consumers, including many of my 
constituents who live in rural areas. beyond the reach of 
cable, with but one choice of broadband service. I believe that 
leaving consumers with a choice of a singe unregulated monopoly 
provider in any market is a bad idea.
    So what can we do as policymakers to encourage this 
broadband revolution? First, we can commit to enforce the 1966 
act and the antitrust laws, which provide a solid framework for 
the deployment of competitive broadband. We should stop 
attempting to bifurcate the market into broadband and narrow 
band voice and data segments. Time and technology are rendering 
these distinctions obsolete. The act is a good template by 
which to open markets, encourage investment and competition, 
and, when appropriate, deregulate. All the tools necessary to 
do those things are found in the act.
    Second, to the extent that there remain pockets of the 
country where broadband is not available, some action may be 
necessary to help ensure that service does become available. 
There is a big contrast, however, in the various mechanisms 
that can be used to incentivize deployment of high-cost, hard-
to-serve areas. Loan guarantees, universal service support, and 
targeted tax credits all help make high-cost service more 
affordable and, as policymakers, you know what you are getting. 
Companies do not get the support unless they use it to make 
service available.
    In contrast to the type of deregulation proposed by Tauzin 
and Breaux, you get a promise of deployment, but without any 
guarantee, and high-cost areas are still high-cost areas. 
Deregulation does not change the fact that there are some areas 
where economies are tough, economics are tough, and the notion 
that deregulation--deregulating, either by eliminating TELRIC 
or by eliminating the unbundled access to loops will solve the 
problem is wrong.
    Third, we can take steps to alleviate the growing demand 
gap between broadband availability and broadband adoption. 
Consumers will adopt broadband when prices move down closer to 
the prices consumers now face for dial-up service. The way to 
drive prices down is to encourage as much competition as 
possible across and within the various service platforms. 
Consumers want broadband, but there is probably a limit to the 
number of consumers who can afford to pay $45 or $50 a month 
for broadband access. As price comes down, adoption rates will 
rise, just as has been the case in markets like wireless 
telephone service.
    Additionally, we can take steps to address critical issues 
like copyright protection, privacy, and music licensing that 
will make both consumers and content creators more comfortable 
in the broadband space. Consumers want access to a myriad of 
products, and content producers want to be able to benefit from 
their creativity. We should make sure the copyright, privacy, 
and music licensing statutes written in the 20th Century make 
sense in the 21st.
    You, Mr. Chairman, have certainly been active on the 
cutting edge of these issues. If we can find solutions in these 
areas and content creators from the single entrepreneur to the 
largest movie studio begin to make compelling content available 
to consumers online, we will see broadband adoption rates grow 
at exponential rates.
    Thank you again for the opportunity to share my views with 
the Committee. I apologize that I have to run to a markup in 
the Resources Committee, but I truly appreciate your 
willingness to accommodate my schedule.
    The Chairman. Well, we are very grateful to you, sir. Are 
there any questions?
    Congressman we really appreciate your appearance here this 
morning, and you can excuse yourself, as you wish, because----
    Mr. Cannon. Thank you, Mr. Chairman.
    The Chairman.--I think Congressman Markey will take you 
past your time. I hope so.
    Congressman Markey?

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

    Mr. Markey. Thank you, Mr. Chairman, very much, and I thank 
all the Committee Members for the invitation to be here today.
    Just a brief review of how we got here today. When I 
arrived in Congress in 1976, we were still in an era, or, in my 
house, and I think in your houses as well, when you were on the 
phone making a long-distance call, if it went over 2 to 3 
minutes, somebody in the house used to yell, hurry, hurry to 
the phone to talk to Grandma. It is long distance. You know, we 
cannot afford to be talking any longer than another minute.
    Now, AT&T had had 100 years to figure out how to bring down 
long-distance rates, and then somebody named Bill McGowan 
started to visit our offices to explain how you could actually 
have competition in long distance. That was a difficult 
concept, that there could be another company providing phone 
service, since one company provided all of our phone service, 
and it had 1.2 million employees, and the idea was difficult, 
for me, at least, to grasp, because, in my mind initially I 
saw, like, a 3-foot telephone pole going down the street 
competing against the tall telephone pole that AT&T had. How 
can you compete in long distance?
    And as McGowan explained it to Congress and to the 
regulators and to the courts, it became clear that if AT&T was 
forced to share its switches, its wires, you could actually 
have competition, and beginning on January 1st, 1984, with the 
decision to break up Ma Bell, all of a sudden once the local 
Bells no longer had a stake in long distance, they gave access, 
not only to MCI, but to Sprint and dozens of other companies, 
and across the country, cross-crossing the highways and byways 
of our country, we saw multiple fiberoptic networks being built 
by all of these companies and, finally, AT&T decided to invest 
in its first square foot of fiberoptic, but that was 1984. 
Fiberoptic had been invented by Corning decades before.
    Now, what forced them to do that? It was, without 
questions, the paranoia that someone else might now deploy a 
new technology and take their business. They did not have a 
monopoly, and once all these competitors got into the market, 
the price of long distance plummeted.
    The same thing happened when Congress and the regulators, 
in the early 1990s, decided to move over 200 megahertz of 
spectrum for cell phone competition. There had been a duopoly, 
two companies, that had cell phone service in each region of 
the counatry, but prices still were very high. It was an analog 
technology. There was very small penetration of the 
marketplace. We, as a matter of policy, decided that we would 
introduce a third, fourth, fifth, and sixth license into each 
marketplace, and the first two incumbents for that one market 
could not compete for those new licenses.
    Well, what happened? Well, the new licensees deployed 
digital. The old two licensees were still stuck in analog with 
very high prices. By 1994 and 1995, the prices of cell phone 
service started to plummet until we reach a point right now 
where 90 percent of the people sitting in this room have a cell 
phone in their pocket, walking around--oh, it is some kind of 
monthly pricing package that AT&T, the Bells, could never quite 
figure out how to provide to us before there was actual real 
competition, because the monopoly was broken up.
    The same thing is true when it came to equipment. AT&T was 
the only real manufacturer of equipment. It had a monopsony, it 
sold to itself, so you can imagine that was no surprise that we 
all still had black, rotary dial phones in our houses in 1980, 
because they did not have an incentive to develop the new 
technology. But once it was broken up in 1984, boom, out into 
the marketplace comes all of this new equipment, from Northern 
Telecom, from Siemens, from all of the rest of the companies 
that now had an opportunity to sell into the marketplace.
    That is our legacy. It is a very brief legacy. It is only 
25 years, but it has transformed our Nation and has made us the 
global leader in these technologies.
    Then, in 1996, this Committee, and on the House side, 
decided that they were going to take on the last monopoly, 
local telephone service. How do you provide the incentive to 
have that kind of a competition breakout and to force the 
deployment of broadband? We knew, going into 1996, that the 
Bells already had DSL, digital subscriber line service in their 
laboratories. Remember, for each one of these inventions, the 
Bells had already won Nobel prizes for basic research, but 
never for applied research, getting it out to consumers, 
because why would they? They always had monopolies in each one 
of these fields.
    So, in 1996, in its wisdom, the Congress decided that it 
would mandate that the Bells could now get back into long 
distance, because we now had so many companies providing long 
distance, and the prices had plummeted, if they would open up 
their local marketplace, and there would be a 14-point 
checklist that would prove that they had opened up their 
marketplace. And maybe, just maybe, if they felt the paranoia 
of more competition in the local marketplace, they would 
finally deploy DSL. Paranoia.
    Well, what has happened? Well, since 1996, when there was 
no broadband to anybody, we now have somewhere between 70 and 
85 percent of all American homes, depending upon how you want 
to analyze it, with broadband going down their street. Is that 
a crisis, or is that a remarkable event that you go for 100 
years, make you progress in providing broadband services to 
Americans, and then in 6 years you create a situation where the 
new competitors spent $60 billion, and the Bells, in response, 
have to spend $100 billion?
    Now, what is the crisis? The crisis is, in fact, for 
consumers, that they cannot afford it. The Bells are charging, 
or the cable companies are charging $60, $70 a month. For what, 
e-mail? Well, to get your local newspaper online? Well, we can 
still have narrow band for 25 bucks. So there is a crisis, but 
it is a crisis in price and in the content.
    Now, some people argue that the answer is to remove the 
protections which the competitors have been given so that they 
can get into the marketplace, and somehow or other we will have 
even greater subscription to broadband. I think it is just the 
opposite. I think we should pout our faith in competition. It 
worked for cellular. It worked for long distance. It will work 
here as well. The more competition is the lower the prices and 
the greater the increase in technological innovation, so yeah, 
the CLEC's, the DLEC's, they have a tough marketplace right 
now.
    Part of it is the legislative cloud which has been created 
over it. Part of it is the collapse in the capital markets. 
Part of it is that there was an overbuild. There is a whole 
myriad of reasons why it has occurred, but let us not kid 
ourselves for a second. This is a huge success story. Now, we 
are waiting for the public. Only 12 percent of the public 
subscribes to the broadband going down the street right now, 
although 70 to 85 percent could subscribe if they wanted to, 
because it was available.
    So Bill Gates says people will only subscribe the broadband 
when it is at $30 or $35 a month. Now, how do you get it to $30 
or $35 a month? Do you remove competition, and hope that the 
Bells will lower the price, or do you try to create more 
competition so that the Bells have to continually try to beat 
their competitor? Which is the smarter way of going?
    Now, if you have got a problem out in rural America, we can 
deal with that. If there are, in the most rural parts of the 
United States, just absolute, impossible to overcome logistical 
obstacles in deploying broadband, let us talk about that. We 
could have tax policies, universal service policies, State-
Federal Government cooperation to deal with that, but let us 
not take away an urban, suburban, and for a good chunk of rural 
America a policy that is already working, 6 years, and by the 
way, for most of those 6 years, the Bells were in court.
    Their first action after the 1996 act passed was, (1) we 
are going to the Supreme Court to say we do not want to comply 
with the requirements to open up the local market, that took 
all the way up to 1999, and (2) in the State courts and in the 
FCC we are not even going to provide for any of these market-
opening opportunities, so that New York, in December of 1999, 
almost the beginning of 2000, was the first State where the 
Bells had actually complied with the 14-point checklist. In 
other words, it has only been in place now for 2 years. That is 
the first State. We are up to 13 States right now.
    So let me say this in conclusion.
    (1) The bill is unnecessary. We have a policy which is 
working. It is in place. Broadband is out there. People are not 
subscribing, though, because it is too expensive for the 
services which are being provided. If there is a rural problem, 
let us deal with rural, but no more than that. Competition is 
where we should place our faith.
    (2) It is unfair. We have dozens, scores of companies who 
have gone to the capital markets, risked their economic lives 
to get out there into the marketplace in now very difficult 
economic times. It would be wrong to just pull the rug out from 
underneath all of these people who have, in fact, given the 
incentive to the Bells to finally go out and deploy broadband 
themselves.
    (3) It is undigital. You cannot separate voice and data 
from a regulatory perspective. The world of zeroes and ones 
would create an impossible regulatory burden upon the State or 
Federal regulators. There is a mechanism in place that has 
already been satisfied in 13 States for the Bells to get into 
voice and data simultaneously. We should continue to stay the 
course. It is not a crisis. In fact, it is quite remarkable, 
what has happened since the Telecommunications Act has passed 
in 1996, despite the Bells' first 4 years of foot-dragging. I 
thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Burns.
    Senator Burns. I do not have any questions. I congratulate 
you, and appreciate your remarks this morning, Mr. Markey. I 
have a question with regard to the parity bill that has been 
offered by our good friends Mr. Breaux and Mr. Nickles. Would 
you care to--and if you do not have all the information on it, 
I understand that, too. Would you care to comment on that and 
how that impacts what you believe to be a noncrisis?
    Mr. Markey. If by parity you mean that the Bell companies 
do not have any responsibilities to open up their markets, 
their switches, their wires because the cable companies do not, 
I do not think the answer is to move in that direction, but, 
rather, to more fully implement the 1996 act, which said that 
all telecommunications services should be regulated in a way 
that guarantees equal access, and we should wait for the 
California Federal court decision that is looking at whether or 
not the cable companies have to open up to competitors, so that 
ISP's and CLEC's can gain better access to the cable wires 
rather than shutting down the access which ISP's and CLEC's and 
DLEC's have to telephone wires, because if you move in the 
parity direction you are basically creating once again a 
duopoly, and we know that when the cable guy and the telephone 
guy coexist in a community, all you wind up with, and we are 
seeing it right now, is higher and higher broadband prices, 
higher and higher phone rates, and higher and higher rates for 
every other service.
    You need the third, fourth, and fifth competitor in the 
marketplace. We saw it in cellular. We saw it in long distance, 
and we are seeing it here as well, as the CLEC's flounder in 
economic difficulty, we are seeing the reduction of the 
pressure on the existing duopoly, and as a result prices are 
going higher, and ordinary people cannot subscribe.
    So I guess my answer would be that in almost all instances 
we will see the cable guy and the telephone guy having a stake 
in some kind of digital detente, where they both kind of 
coexist, getting a huge share of the market, and knowing that 
there is not going to be anyone else coming down the street. In 
the long run, that stifles job growth, it stifles innovation, 
and it stifles the kind of environment which will lower prices 
and increase services to consumers.
    Senator Burns. Is it your opinion that neither bill, either 
Tauzin-Dingell and the Breaux-Nickles approach would not get us 
to where we want to be?
    Mr. Markey. Well, again, we have a success story in the 
deployment of broadband, but we do not have a success story in 
the adoption of it by consumers, whose streets these wires now 
go down, or the switches have been deployed, so I think the 
only way that is going to happen is if the prices Bill Gates 
says drops down to $30, $35 a month. If you can get narrow band 
to $20, $25, but you have to spend $70 a month for broadband 
with no really significant additional services right now, you 
are just not going to have a success story.
    So yes, I think it is critical to ensure that the declining 
cost base of these new technologies continues to be given an 
incentive, and that each one of these companies be forced to 
deploy it in a way that benefits consumers. The consumers 
should be king here, and unfortunately I think two industries 
have a stake in trying to continue to increase the charges to 
consumers, and that is completely a historical in terms of what 
has happened in every other area of telecommunications 
services.
    Senator Burns. I thank the Congressman.
    The Chairman. Senator McCain.

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

    Senator McCain. Congressman Markey, what would be the 
immediate effect of the passage of Tauzin-Dingell, in your 
view?
    Mr. Markey. I believe that whatever is left of the 
competitive telecommunications marketplace would suffer such a 
serious blow that we would wind up with a de facto duopoly in 
the country, and we would have lost the benefits for the next 5 
to 10 years of this paranoia that would throw both of those 
industries to deploy.
    Senator McCain. Thank you, and I thank you for you rather 
eloquent testimony today.
    Thank you, Mr. Chairman.
    The Chairman. Senator Breaux.
    Senator Breaux. Thank you, Mr. Chairman. Thank our 
colleagues from the House for being with us. How are you doing 
with Tauzin-Dingell over there? Do you all talk?
    Mr. Markey. Oh, no, no, no, we love each other over there.
    [Laughter.]
    Senator Breaux. Well, we had the pleasure of having both of 
them over here a little earlier. I would just, Mr. Chairman, 
thank Ed for his statement. It is eloquent. He obviously knows 
his subject matter very well. We differ on the conclusions, but 
his intelligence in this matter is unquestioned.
    Senator--I mean, Congressman Cannon was not here. I almost 
said Senator Cannon, former Chairman of this Committee, and he 
used the term, Tauzin-Dingell and Breaux-Nickles almost 
interchangeably, and while Congressman Dingell is a great 
friend of mine, and Tauzin is like a brother, the legislation 
is not, and I would just say very quickly, our bill is only 
three pages if you take out the findings, which I am always 
happy to do. Findings are laudatory and sound good, but they do 
not really have a legislative effect, so the bill that we have, 
Breaux-Nickles, is only three pages long.
    It basically just says the FCC, the independent regulatory 
body, is instructed to come back with regulations and rules 
within 120 days to establish parity between the providers of 
broadband services, whether it is a telephone company, whether 
it is cable company, whether it is a wireless company, or 
whether it is a satellite company. That is it.
    It tries to take the politics out of it. It tries to take 
the politicians out of it, so that the decisions on this new 
and very exciting type of technology is, in fact, made by an 
independent regulatory agency. They are not politicians, and 
making political decisions based on our constituents, and I 
think that is probably the only way we are going to resolve 
this issue. I do not think that we are going to be able to do 
the nitty-gritty sentence-by-sentence, paragraph-by-paragraph, 
word-by-word, have the ability to establish a level playing 
field, so we say to the regulatory body do it with 120 days. 
That is it, three pages.
    What the bill does not do, and why I wanted to point this 
out, because of what Congressman Cannon was saying, that they 
are all the same. They are not. Our bill, for instance, does 
not affect section 271, which has been mentioned here this 
morning. The regional Bells will still be required to obtain 
FCC approval after getting approval from their respective 
States to provide any type of interLATA data or voice services. 
The bill will not affect the 271 checklist of 251 provisions 
that are required, will not affect that at all.
    The bill would not relieve the Bell Operating Companies of 
their obligation to open their local telephone markets to 
competition as a condition precedent to receiving the interLATA 
approval. It does not affect the e-rate, which Senator 
Rockefeller has worked on so long, to require that schools and 
libraries be able to have access. It does not affect the 
universal service obligations.
    So I mean, if you look at what Tauzin-Dingell attempted to 
do and pass the House, and what our bill, that simply instructs 
the FCC to come back with rules creating a level playing field 
among people that provide broadband services, that is it, and I 
think that is a vast difference between the two, and I just 
wanted to raise that, since Congressman Cannon had sort of 
implied that they were both the same bills. I do not know how 
many pages Tauzin-Dingell was, but it was a little bit more 
than three, and ours is not.
    Thank you, Mr. Chairman.
    The Chairman. Well, the Chairman then will take his time 
right now.
    What happens, and Congressman Markey, I think you and I 
agree on this parity as Senator Breaux, but I am reminded of 
Adlai Stevenson's comment. He says, it is not a question of 
whether I am a liberal or whether I am a conservative, but 
whether I am headed in the right direction. Now, that is 
exactly what is wrong with the Breaux bill. It heads us in the 
wrong direction. I think you and I, trying to open it up to 
competition, and Tauzin-Dingell categorically does away with 
251 and 271, the access and the requirements for the opening up 
in order to get the parity, everybody open, everybody 
competing, and I am ready to move--it is a timing matter with 
respect to cable. Cable has given the only competition. That is 
why they putting out the DSL. I do not want to kill off the 
little bit of competition to what, to the monopoly, because 
they have got 90 percent of that last line.
    Now, looking at the reality, and where it all exists today 
with that monopoly, when you go in the Breaux bill of parity, 
then what you do is you bring in and by gosh tell the cables 
they can have a monopoly, too, and one has about 70 percent of 
business, I think the Bells, on broadband, and I think cable 
has got about 70 percent of the home, or domestic personal use, 
and what we are trying to do is get competition into both.
    This Committee has just won out with the administration 
relative to the Federal Trade Commission, I think--and you can 
comment on it, that when the Federal Trade Commission approved 
the merger of AOL-Time-Warner, they put in there an opening up 
requirement, not a close-down requirement, and similarly, 
Comcast has opened up voluntarily some of it, not all of it, 
but as a move, they have been opening up, and that is the 
direction, as I say, we want to go in, and there is a 
difference between the Justice Department antitrust looking for 
crime, and the Federal Trade Commission, which has a broader 
mandate, looking for the public interest, so if you want to 
comment on that, I think that is the fundamental difference.
    And we agree with Senator Breaux on parity, but not a 
parity of a monopoly, let everybody have a monopoly. I mean on 
the contrary, we are trying to open it up and get the 
competition. Do you have a comment?
    Mr. Markey. Well, it all depends on how you see the 
revolution.
    The Chairman. Yes.
    Mr. Markey. If you see the revolution as being the same two 
companies that have had wires going down the street over the 
last 50 years, in the telephone company's instance for the last 
100 years, then parity between the two of them sounds fair, but 
if you see the revolution as being hundreds, thousands of 
smaller companies whose names we never heard of before 1996, 
that all went out into the marketplace, raised some capital, 
had a new technology, took some risks, and changed this 
country, then that notion of parity will ultimately stifle 
innovation.
    If you believe that parity means that all these young 
people with these great ideas who are out there have an equal 
shot at reaching all of the customers in the United States, and 
as a result they can convince some people to invest in their 
concepts, then that is a concept of parity around which I think 
our country can grow and thrive, so this ISP CLEC, DLEC 
revolution is really what the future is about.
    The Bells have been laying people off for the last 30 
years, and they are going to continue to do so. That is not 
where the job growth is. The job growth is going to be in these 
thousands of smaller companies that are in Virginia, they are 
in Oregon, they are in Massachusetts, they are in every State 
now, all across the country, and they are the ones that have 
really transformed the country, and only by ensuring that the 
smaller, newer companies whose names we do not know today but 
will in the future, will make a difference.
    We made a decision as a Government in 1987 to protect a 
little company called AOL, along with CompuServe and the couple 
of other information service companies so that they could not 
be put out of business by the Bells, which is what they were 
trying to do. Now, today, only 15 years later, look what 
happened because we made a decision we were going to not just 
allow the large single companies to control information 
services.
    So that is where I think we have to plant our flag. It is 
with the future. It cannot be about the past. The past is a 
duopoly, parity between two old monopolies. The future is 
parity in which thousands of companies can compete, and I think 
that is really what our country has to do.
    The Chairman. Senator Rockefeller.

           STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    Senator Rockefeller. Thank you, Mr. Chairman.
    Congressman Markey, that was superb testimony, but I 
expected no less from you.
    [Laughter.]
    Mr. Markey. A tribute from Caesar. Thank you.
    Senator Rockefeller. Yes, that is right.
    As John Breaux indicated, I am obsessed by universal 
service, and I would like to get some of your views on this, 
and it is obviously because of e-rate, but it is a lot more 
than that, and it has to do with the subsidization of little, 
poor States by bigger States, and it gets into many aspects. It 
is not just K through 12 and e-rate. It is a lot more than 
that.
    Now, you commissioned a GAO study which said in part that 
Internet technology may eventually become--I am quoting--an 
attractive alternative to voice service, and could affect the 
revenue base from which universal service programs are funded.
    Can you kind of walk us through how that happens, number 1, 
and number 2, can you describe what happens as you get a 
combining of voice, video, and interactive, and its effect, 
just using a plain old phone, and can you describe what the FCC 
can do without--if they can, in your judgment--can do without 
any congressional intervention at all through rules and 
regulations to undermine universal service, which I hold to be 
very sacred?
    Mr. Markey. Thank you, Senator. The concept of universal 
service, going back to the 1930's, was originally thought of as 
good social policy so that the most rural parts of the country 
would be connected to the most urban parts, and the urban parts 
would connect the rural by subsidizing.
    Now, it turned out to be not only good social policy but 
good economic policy as well, as we created national markets 
for all companies to reach all people in the country, and it 
turned out to be quite a brilliant policy, as did rural 
electrification and other policies of its sort, so we all have 
a stake, and obviously if you come from Boston we have been 
subsidizing the rural parts of New England for the last 60 or 
70 years. It has been good for us, as well.
    The question here now, as the Internet develops, is whether 
or not, as voice migrates over to Internet, there can be a way 
in which there is an escape from the responsibilities of 
ensuring that there is a contribution made to the universal 
service pool, and that was the reason that I asked for the GAO 
report, so that we could measure the time frame over which this 
is likely to happen, and then the impact of the quantitative 
size of that migration.
    I think that for our purposes we have to make sure that 
there is no escape from the responsibility of contributing to 
the universal service pool. As I said earlier, making these 
distinctions in zeroes and ones between voice and data is not 
going to be easy, but where companies are committed to 
providing voice service that can be clearly identified as those 
that historically would have been levied with the universal 
service charge, I think that we have to begin now to have the 
discussion before the revolution really unfolds so that the FCC 
is clearly instructed by Congress to extract the levy from them 
so that the schools, the libraries, the rural medical services 
and rural phone service continues to be subsidized.
    Senator Rockefeller. Congressman----
    Mr. Markey. Yes, I am sorry.
    Senator Rockefeller.--we had the commissioners before us 
for confirmation and for a hearing, and in each case I asked 
them individually, would they pledge to do nothing to undermine 
the universal service fund, and they all said, Powell, all of 
them said that they would do absolutely nothing. I do not trust 
that, and it makes me very nervous, because of the power of 
rules and regulations, and because of what I think I see as 
their intuitive disposition towards this.
    Mr. Markey. Well, here is what I would say, that I do not 
think it is the fear of God which motivates the FCC. I think it 
is the fear of the Senate on universal service----
    [Laughter.]
    Mr. Markey.--and it was my observation during the 1996 
Telecom Act deliberations that the wonderful compromise which 
Massachusetts and Virginia and Pennsylvania made in 1787 in 
allowing for each one of these smaller States to have two 
Senators apiece has now emerged as something which is a 
powerful protector of universal service for all of those rural 
States that are so well-represented, I might note, on this 
Committee, so if I were a member of the Federal Communications 
Commission, I would move forward with only the greatest of 
caution in undermining the historical commitment which our 
country has made for 70 years to that concept, so I just do not 
think it is likely to happen.
    What I would fear is that there was a legislative effort to 
remove the responsibility for contribution to universal 
service. I do not think the FCC has the nerve, apart from a 
congressional mandate, to allow for a depletion of the 
universal service pool.
    Senator Rockefeller. Thank you, Congressman. I have got the 
data before me which is put out by companies, and it shows that 
there are 16,697 users of high speed lines in West Virginia. 
That is mind-boggling to me if it is true. We have to accept 
those figures in the sense that those are the only ones that we 
have, but you indicated that 85 percent of--and you phrased it 
nicely, but you know, right down the middle of the street, 85 
percent of American streets----
    Mr. Markey. 70 to 85 percent.
    Senator Rockefeller. Yes. It is not even close to the fact, 
not even close to reality, and in West Virginia they sort of 
pick five most populous counties which all happen to be 
contiguous and say, this is what we are going to do, and then 
they shoot an occasional thing up to our university, or maybe 
up to some other place to sort of keep people happy, like 
railroads do with captive shippers. They will pick out an 
individual person who could cause some problem and settle with 
them, but then ignore the rest of the Staggers Act.
    So my question to you is this. In order to have that more 
effective, Senator Hollings has a bill which would do grants, 
and I have a bill for broadband which would do tax credits, 10 
percent, 20 percent, depending upon what you are uploading or 
downloading, and how fast it was, and all the rest of it, and 
it just occurs to me as I sit here that maybe neither one of 
them does it by itself, but joined they might, and I am 
interested in your view.
    Mr. Markey. They might. I mean, I am not an expert on rural 
America, but here is what I do know. In an urban and suburban 
America, where it is deployed, and it is available, only 12 
percent of those who have access to it actually subscribe to 
it, so what have we really gained, in other words, if we do 
have a tax bill or a grant program that then deploys this wire 
out into the most remote parts of our country, and then only 12 
percent subscribe to it? I do not think we are going to see a 
move here in the Congress to subsidize it like it was 
electricity or phone service.
    So you get into, again into this market situation, where I 
am willing to be very open, as we have always been in 
telecommunications policy, in kind of acceding to what the 
rural Members of the House and Senate want for their 10 
percent, the rural part of the country. I just do not want a 
policy to be put in place which affects the other 90 percent, 
where the success story is quite palpable.
    So I do not know the answer and again, I would have to rely 
upon your expertise, looking at analogies in other areas that 
may have been used to deploy other types of services in rural 
America, but just understand that at $70 a month, we see very 
small percentages subscribing in urban and suburban, so do not 
expect it to perform a miracle out there, unless we have some 
way of getting the price down to the $30 or $40 range.
    Senator Rockefeller. Thank you, Congressman.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Smith.

                STATEMENT OF HON. GORDON SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, Mr. Chairman. I wonder if I can 
have included in the record my opening statement.
    The Chairman. By all means.
    Senator Rockefeller. Same here.
    The Chairman. The same for Senator Rockefeller.
    [The prepared statement of Senator Smith and Senator 
Rockefeller follows:]

   Prepared Statement of Hon. Gordon Smith, U.S. Senator from Oregon
    Mr. Chairman, thank you for this hearing today and continuing to 
discuss the important issues surrounding broadband deployment. As we 
move further and further into the new world of technology, access to 
broadband will determine whether a community flourishes in the new 
economy or is left behind.
    Since our last hearing on broadband, I want to once again 
underscore the importance of widespread affordable broadband on 
consumers and businesses. Broadband deployment is especially essential 
to the future of the information technology and the telecommunications 
sectors which are continuing to suffer thousands of layoffs. Broadband 
deployment is absolutely vital to our economy.
    We need to be working toward closing the Digital Divide and help 
ensure that all Americans have choices for high-speed Internet 
services. I am still concerned that as broadband is deployed to some 
cities, service disparity may be growing wider and wider throughout 
this country and potentially affecting rural areas and inner-city 
neighborhoods.
    Public policy needs to encourage all potential providers to deploy 
new last mile broadband facilities--and that includes the incumbent 
telephone companies and the competitive local exchange carriers. We 
need to continue to debate the issue to finds ways to encourage more 
investment and competition.
    It will be a particular interest for me to find out the opinions of 
the other technology industries affected by the deployment of 
widespread affordable broadband. We need to hear from industries like: 
consumer electronics, personal computer and semiconductor 
manufacturers, software companies, and telecommunication equipment 
manufacturers. Because at the end of the day, these companies only 
benefit from broadband if it is widely available to the consumer and 
the consumer sees real value to buy it.
                                 ______
                                 
          Prepared Statement of Hon. John D. Rockefeller IV, 
                    U.S. Senator from West Virginia

    Mr. Chairman, I would like to thank you for holding this hearing on 
how best to promote broadband deployment.
Why Broadband is Important
    It's become fashionable lately in some quarters to suggest that 
broadband isn't terribly important. A fad, some call it, important only 
to dot-corn speculators.
    This is short-sighted. Broadband is important not because some 
stock analysts or tech gurus say it is. It's important because it will 
be the great opportunity equalizer of this century. To take just one 
example, broadband promises a student in Mingo County, West Virginia, 
access to the very same educational materials as a student at MIT, 
which has announced that it will make nearly all its course materials 
available free on the Internet. With broadband, limits that have 
constrained West Virginians for generations will disappear.
    This is why today's hearing is so important. And this may help 
explain my perspective on the issues we're going to discuss.
Competition and Other Ways to Promote Deployment
    Today, we're going to talk about the relationship between telecom 
competition and broadband deployment. And it is clear that this is an 
important subject. Bell companies claim that rules in the 1996 Telecom 
Act hinder them from deploying broadband facilities in rural areas of 
West Virginia. And competitors to the Bells claim, with just as much 
force, that only through vigorous enforcement of these rules will there 
be any chance for deployment of broadband facilities such areas.
    I find this debate incomplete. What neither side seems to want to 
discuss are the rural and underserved communities where broadband 
facilities (apart from maybe satellite) are unlikely to be deployed 
regardless of how the deregulation debate turns out. These communities 
are the ones for whom broadband has the most to offer. And these 
communities are why I chose to address the problem of broadband 
deployment directly through tax credits, rather than indirectly through 
regulation or deregulation.
    My Broadband Internet Access Act of 2001 would provide tax credits 
for those who bring broadband to places where the market, unaided, will 
not. It has 65 cosponsors from both sides of the aisle, including 17 
Members of this Committee. If we're really concerned about the hardest-
to-serve communities, our approach strikes me as a pretty good way to 
solve the problem. Senator Hollings, in his Broadband 
Telecommunications Deployment Act, takes a similar approach--using 
loans and grants instead of tax credits. I think his approach is a good 
one as well, and that is why I am an original cosponsor of his 
legislation.
Deregulation and Universal Service
    There is, however, one aspect of today's deregulation debate that 
concerns me a great deal. That is how deregulation would affect 
universal service. Congressman Markey a few months ago requested a GAO 
study that described the challenges to universal service posed by the 
advent of Internet technologies. I am troubled by this report, and 
would like to explore whether broadband deregulation would exacerbate 
the challenges it describes.
    Proponents of deregulation argue that we should have ``old rules 
for old equipment'' and ``new rules [or, perhaps more accurately, no 
rules] for new equipment.'' A challenge arises, however, because it is 
possible to offer ``old equipment services'' over new equipment. In 
other words, it is increasingly possible to offer voice services over 
unregulated data networks. In some cases, it's more efficient to this, 
so some companies are ``migrating'' voice services onto data networks.
    Would such ``migrated'' voice traffic still be subject to universal 
service contributions? The lawyers tell me that this is not an easy 
question, particularly if voice is combined with other capabilities, 
such as video or interactive data. If not, how can the Universal 
Service Fund--and, indeed, the idea that technology must be made 
available to all Americans--be preserved in the coming years?
    This is not a universal service hearing--that is in two weeks. But 
this is becoming a serious problem, and one that, in my view, has not 
been sufficiently examined in the broadband debate. I look forward to 
hearing the views of both proponents and opponents of deregulation on 
how to address this problem, both today and over the coming weeks.

    Senator Smith. Thank you for your testimony. I share 
Senator Rockefeller's concern about getting to rural places. I 
am from a rural part of this country, and I guess my question 
was first what forces are in play to get more than 12 percent 
to sign up?
    Mr. Markey. The forces were in place to get more than 12 
percent to sign up at the point at which--I will be honest with 
you--the NASDAQ hit 5,000 in March of 2000, and we had 
companies that could raise capital. There was an incentive to 
continue to deploy by multiple competitors to the Bells and the 
cable companies.
    The question is, given the success story that we did have 
in making it accessible, at least, if not affordable for 70 
percent, at least, of the country, do you want to pull the 
plug, or do you want to hold tight, let the companies that are 
still out there know that we are not going to remove their 
legal right to gain access to all of these companies at 
affordable rates, while compensating the Bells for the 
reasonable use of those wires? Otherwise, I am just afraid that 
the vision of the future becomes the past.
    So a lot of these companies are in bankruptcy. Some of them 
are not, but a lot of them are. They are coming out of 
bankruptcy with new management, new owners. They are committed 
to continuing along on the same course, but I think they are 
looking for some regulatory certainty that the rules under 
which they played over the last 6 years, notwithstanding the 
Bells going to the Supreme Court for the first 4 years--and by 
the way, last week the Supreme Court basically upheld the 1996 
act, two decisions. They said it was right on the money in 
terms of the way in which those rules were being implemented. 
We have won every single decision so far on the act, and I 
think we must keep the course if we want to be successful.
    And again, I am willing, Senator, and I think every urban 
Member is willing to defer to the rural representatives in the 
Congress on the best way of dealing with that issue, but it is 
unlikely to produce a good result if all we rely upon is one 
company to go out there, because you will not get a low enough 
price so that the rural American can subscribe to it.
    Senator Smith. It truly is an enigma, how we get that done, 
when you have only got 12 percent signing up in the urban 
places of our country, but it does seem to me that if broadband 
is the way in which much of our communication will occur in the 
21st Century, that it in fact is closer to electricity than we 
might think, so that is a factor that is governing my 
sentiments in this whole issue in coming to a conclusion.
    Mr. Markey. Can I say, Senator, here in Washington I have 
narrow band at home. It costs $25, you can do your e-mail. I 
can pick up the Bostonglobe.com and read the Globe on line. I 
have a few other prosaic uses for it. But if I go to broadband, 
it costs $75 a month, I had better get a lot more than that, 
and right now it is hard to identify what those additional 
services are that really makes it a desirable service, so at 
$35, maybe I will pay for the extra speed. Maybe there are some 
little extra gilded edges to it that make it worthwhile, but at 
$70 it is really not a realistic option for a family making 
$40,000 or $50,000. That is a big additional expenditure per 
month.
    Senator Smith. Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Brownback.

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

    Senator Brownback. Thank you, Mr. Chairman. Thanks for 
holding the hearing. Congressman Markey, thank you very much 
for being here. You have answered all the questions eloquently 
and quite well, even though we may disagree on some of the 
conclusions that we come to on this point.
    The broadband issue I think is critical for our future 
growth as a country, and so how we wrestle with this is going 
to be very important.
    Mr. Chairman, I want to use a brief bit of the time that I 
have to talk about an equally, I think, important issue that is 
the wireless equivalent of broadband is 3-G services, and I 
will just make a quick observation, if I could, about an 
auction that we have coming up in 6 days on a number of the 700 
Mhz area that is being put forward.
    There are competing bills that have been put forward in the 
Senate. Senator Stevens has a bill that will proceed forward 
with the auction now. Senator Kerry and Senator Ensign have 
bills to delay the auction. The House has passed a bill 
virtually unanimously to delay the overall auction, and you 
have got an issue that I think is very key for us for the 
future of these types of services, and the reason I raise it, 
Mr. Chairman, is I think there is a compromise there to be had, 
where I think Senator Stevens is looking at the rural interest 
which I am a part of and a number of other groups, members on 
this dais are, to try to get this moved forward for rural 
deployment of some of these future services, and getting this 
spectrum out there, and I think that is laudable.
    I think as well Senator Ensign and Senator Kerry are 
saying, we need a future plan. We need an overarching 
architecture for the deployment of these megahertz, these 
services, and to do that, we are going to need some time to do 
that.
    I think there is a compromise to be had here where you 
would allow a certain portion of the auction to go forward on 
certain of the megahertz and delay the rest of it so that the 
deployment of this spectrum can be allocated in the rural areas 
but not in others while we are developing the overall 
architecture of the future of where should these spectrums go 
to.
    I understand some of the parties to the different bills are 
trying to work through this compromise effort, but it would 
auction, as I understand it, the C block licenses, the 734 RSA 
and MSA licenses contained in the lower 700 megahertz band, as 
well as possibly the unencumbered E-block licenses. It seems to 
me to be a pretty attractive sort of auction that we could move 
forward with, to where you get some of the spectrum out here 
and deployed, but yet you maintain the bulk of it that people 
are interested in for an overarching plan of how we deploy 
this.
    It is a big issue, it is an important issue, it has a rural 
component to it that is very important, as well as a very 
important national component to it, and I sit in the spot of 
being both a representative of a rural State, and then chairing 
the Wireless Caucus, or cochairing the Wireless Caucus, both of 
which have some competing interests on this, and that is why I 
am interested in trying to weave through this in a way that we 
can make this work.
    Mr. Chairman, I would urge us to take this up, if we could, 
and maybe work on pulling something together that could get 
these interests to pull together. In 6 days the auction is 
supposed to occur. It has been delayed previously a number of 
times. It could be delayed again, but I think maybe there is a 
compromise that could be had to where most interests could be 
met with this, and yet maintain this generally for the future 
deployment in the 700 megahertz area.
    I did not mean to take your time up with this, Congressman, 
but this is an issue that is in front of us, and it does 
involve the future.
    The Chairman. Senator McCain.
    Senator McCain. Could I have Congressman Markey respond, 
and then I would just like to make one comment.
    Mr. Markey. Could I just say in 1 minute, I think we should 
be open to compromise on that issue, an it is something that I 
think we have to be flexible on. I have not seen it, but I 
think it is something that is very important in terms of our 
ability to resolve it in a way, though, that creates the right 
policy, but I think we should be open to it, but in a larger 
sense you just have to keep a focus on the fact that because 
the digital TV transition has not occurred, that every one of 
these television stations in America has six additional 
megahertz that is locked up, and you cannot move to a 3-G 
revolution until you get back that 6 megahertz from every 
television station.
    So what you have got is a failed digital TV strategy and a 
failed 3-G strategy simultaneously. The one impacts the other, 
so we have just got to get moving on a policy with the 
broadcasters, the cable industry, the television set 
manufacturers, the satellite industry, to resolve this digital 
television transition, because it is delaying the return of all 
of the rest of that spectrum.
    Senator Brownback. Undoubtedly it is doing that. What I was 
putting out in front of you is what I thought a narrow 
possibility.
    Mr. Markey. I can compromise on that. On that I can 
compromise.
    Senator Brownback. Because you put your finger on the 
point. We have not got the digital--HDTV, the deployment is not 
out there to the degree that is required under the Act, and we 
need to maintain that spectrum. It should not be allocated 
until we get it back and we can do it in a national 
architecture policy, but there are some of these rural areas 
that I do not think would be competed on broadly that we could, 
I agree with you, move forward with now.
    Mr. Markey. I agree with you, Senator.
    Senator McCain. Mr. Chairman, just briefly, as we know, the 
revenues were supposed to be realized by September of 2002. The 
auctions have been delayed five times. I wrote a letter to 
Chairman Powell asking him not to delay and not to do it, but 
to make the decision that he believed was in the best interest 
of the taxpayers of America. We have a commission, the FCC, in 
which we place these responsibilities, and we placed these 
responsibilities, and I think the burden of proof is on those 
who would overturn Chairman Powell's decision to move forward 
after five delays with the auction.
    I do not know what the right thing to do is, to be honest. 
I am not sure. It is a very complex and difficult issue. Will 
we realize more revenues if it is delayed in the future? What 
is the future of the telecommunications industry as far as the 
value of the spectrum is concerned? The fact is, it has been 
delayed five times. There has to be the transition not only 
with the analog, but there also has to be an auction that takes 
place.
    There are legitimate concerns about rural America, and I 
think your concerns are very well-founded, but the chairman of 
the FCC has made a decision, and I hold him in very high regard 
and with great respect, so before we overturn the decision of 
the chairman of the FCC, I would like to see some very strong 
evidence that this just would not result in another delay and 
another delay and another delay, but I am open to those 
arguments, and I think we should all be, but just to 
arbitrarily overturn a decision which was certainly well-
thought-out by the chairman of the FCC, the burden of proof 
lies on us, I think, to make the case that that is necessary at 
this time.
    I thank you, Mr. Chairman.
    The Chairman. Senator Allen.
    Senator Brownback. Mr. Chairman, could I just, in brief, 
offer a quick response on that? I have spoken with Chairman 
Powell about this, and maybe it would be worthwhile to ask him 
to come up and see if he would address the topic, perhaps not, 
but I think there is a window, and I spoke with him just about 
this type of proposal it might be worthwhile to look at, 
because this is a current issue that is on us.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. I want to associate 
myself with the remarks of Senator McCain on the previous 
issue, and I am not going to use my time on that, but obviously 
if any legislation is going to come forward, obviously we 
should have the chairman of the FCC, who I think is, for those 
of us who like judicial restraint, and people following the 
laws rather than making laws, I think he is almost compelled by 
the law to make the decision he did, based on evidence but also 
on the statutes, and clearly the statutes and this auction 
needs to be looked at.
    Now, here we are talking about broadband, broadband 
Internet capabilities which are so important in education, 
medical services, health care, commerce, entertainment, and 
Government services, and it is obviously very important, 
looking at this landscape--and some have mentioned it already. 
You see that 11 million people subscribe to broadband services 
of some type. Two-thirds of them get it from cable modems, 
usually those are the ones at home, whereas the others get it 
from DSL.
    The fact is, only one out of eight households that have 
access to broadband currently subscribe. Now, I am mindful of 
the competitive carriers and the State's concerns regarding S. 
2430. The regulatory parity for DSL services can potentially 
create a monopoly for virtually all local telecommunications 
and voice services, as well as a monopoly in small to medium-
sized business markets where cable modem services do not have a 
presence.
    We see that about 70 to 75 percent of Americans have access 
to at least one type of broadband service, yet only 10 to 12 
percent actually subscribe. This would indicate a significant 
lack of either corporate or business or even consumer demand, 
and I think that has to be addressed if there is going to be 
the investment needed for future broadband deployment.
    This is not simply a question of, if you build it, they 
will come. We are eager to find ways to build out broadband 
capabilities, and there are a host of complex issues beyond S. 
2430 that we have to address, such as the availability of 
compelling content, spectrum allocation reform, and also 
copyright protections. We will disagree on how those ought to 
be done, but those I think are all very much related.
    I am Chairman of the Senate Republican High Tech Task 
Force, and we are all grappling with how best to do this. 
Senator Rockefeller's bill, the Broadband Internet Access Act I 
think is a good step of the Government providing incentives to 
rolling out broadband services in a technology-neutral manner. 
I also think there are some creative ways of marketing, and 
innovative approaches of doing this to encourage subscriptions 
to broadband services.
    In Scott County, which is in rural Southwest Virginia--it 
is on the Tennessee border--a large portion of the county has 
access to broadband services, whether it is cable or DSL. 
However, very few subscribe, only 5 percent. The Scott County 
Telephone Cooperative has developed a price packaging bundled 
marketing approach for their customers to increase broadband 
penetration and use, and it comes down to only $5 more. Now, 
for $5 more, I think a lot of us would like to have that, even 
if all you are doing is reading the newspapers and getting 
scores and stock updates and all the rest, and so they are 
coming up with a creative way of doing it.
    Now, your bill, Mr. Chairman, is similar to the thrust of 
the Rockefeller bill, to help build out broadband, and it 
utilizes for a 5-year period one-half of what I always refer to 
as the luxury tax that was put into effect to finance the 
Spanish-American War. I made promises during my campaign that, 
we have won that war, and that Spanish American War tax ought 
to be repealed altogether.
    Beyond the issue of whether this is really fair to this 
measure as far as the RBOC's to try to help put certain areas 
and certain governmental agencies to be running broadband 
services, maybe, maybe if you repealed the other half of that 
tax, Spanish-American War luxury tax, and then your half tax 
ends in the year 2007, which is the 400th Anniversary of the 
founding of Jamestown, the cradle of American liberty, there 
would be a conference of all sorts of historical approaches, 
and then that might be much more attractive to me, but my 
problem is, I think that the Spanish American War tax ought to 
be repealed, and maybe a partial repeal of it would be better, 
and maybe we can work out some of the other differences.
    But the point is, there are a lot of interests here. We do 
need to work together as best we can to determine the best 
approach to encourage deployment of broadband, whether that is 
rural suburban or urban, and I would only ask our very 
articulate and knowledgeable witness here, could you comment 
whether DSL or cable modem services as far as what you would 
see happening in small and medium-size business markets? Would 
some of these measures be creating monopolies in those markets?
    Mr. Markey. If I may, Senator, first I would like to 
respond, and this is a very serious point, on this historical 
debate between Jamestown, Virginia, and Plymouth, 
Massachusetts.
    [Laughter.]
    Mr. Markey. I cannot allow that to go uncommented on.
    Senator Allen. Yes, when did the Pilgrims arrive--13 years 
later.
    [Laughter.]
    Senator Allen. And the Mayflower Compact, if you will read 
it----
    [Laughter.]
    Senator Allen. They thought they were landing in Northern 
Virginia.
    Mr. Markey. Let us go back to John Cabot in 1501, coming 
down into New England and planting the flag right there----
    Senator McCain. The Vikings.
    Senator Allen. This is the first permanent English 
settlement.
    Mr. Markey. So I do not want to--Mo Udall used to say that 
everything has been said, but not everyone has said it, so I 
have got to be careful here, since I have already said it 
myself now twice, so for the third time, I do believe that 
unless we find ways of creating incentives for DLEC's, CLEC's, 
wireless-based companies to get into the marketplace, that we 
will not see an adoption of broadband technologies by consumers 
because there will not be enough competition in price and new 
services that will command their attention. We already know 
that out in the marketplace, and my own opinion is that the 
answer is more, not less competition.
    Senator Allen. I am in agreement with you there, but we do 
not also want to be creating monopolies in some of the smaller 
markets. Competition is important whether rural suburban or 
urban.
    Mr. Markey. Monopoly is a rear view mirror view of the 
telecommunications marketplace. It has taken us a long time to 
get over this notion that it is a natural monopoly to have only 
one telephone company.
    Having done that, having moved through this very difficult 
period, it would be an historic mistake to move back towards 
the model which did not lead to technological innovation or 
price competition. We should move in just the opposite 
direction, I agree with you, Senator.
    Senator Allen. Thank you.
    The Chairman. Senator Dorgan.

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

    Senator Dorgan. Mr. Chairman, thank you. It will not 
surprise you, Congressman Markey, that I agree with you. I 
missed your presentation, but since you recited it at least 
three times in answer to questions, I apparently picked up most 
of it.
    [Laughter.]
    Mr. Markey. It is coming around again.
    Senator Dorgan. I think just to make a comment, then ask 
you a question, in areas where there is robust competition I 
think we all understand you do not need regulation. Robust 
competition is not in need of regulation, but in areas where 
there is monopoly, or near monopoly, you must have some kind of 
effective regulation.
    On the next panel is Ms. Loretta Lynch, who testified 
before this Committee or Subcommittee last week dealing with 
the issue of California electric prices. In that area, we had 
the development of near monopolies and no regulation, and the 
fact is there was price-fixing and price-rigging to the tune of 
billions of dollars in my judgment, and if we ever get to the 
bottom of that, I think it will represent one of the largest 
business scandals in this country's history, but having said 
that, it makes the case for effective regulation until we have 
the forces of competition that allow us to back away some.
    Now, in North Dakota we have an incumbent Bell Company. 
They serve 24 exchanges. They in fact sold most of their local 
exchanges, the rural ones. They have 24 remaining, most of them 
in our cities, and in four of their 24 exchanges they are 
offering DSL service, only four. Why? They choose not to offer 
DSL services in the others, and do not seem to care much about 
it, so our experience here is not a very happy experience with 
the incumbent carrier, and my feeling is they either ought to 
serve these exchanges or sell these exchanges, one or the 
other, because in fact most of our local coops and independent 
telephone companies that are serving areas in the State that 
are less densely populated are moving much more aggressively to 
try to deploy broadband and advanced services.
    I have a Blackberry with me today, as many of us do, and 
this works great most of the time, but when you get on the 
airplane in Minneapolis and go to North Dakota or South Dakota 
or places like that, there is no service at all, none, and they 
will advertise they serve 94 percent of the country. Well, that 
is not true, not in terms of geography--perhaps population--but 
in most of the country you cannot get Blackberry service, so in 
terms of the deployment of broadband, advanced services and 
other kinds of things, much of the country is being left 
behind.
    Let me frame this question this way. Is it not the case 
that in 1996 we decided there are conditions under which you 
have to meet checklists in order to go and serve interLATA with 
long distance, and those conditions are described as conditions 
that we want to be met that describe local competition. What 
kind of competition in local exchanges exist today in the 
country? Does it in any way exceed your expectations, or have 
we fallen far short of having robust competition in local 
exchanges?
    Mr. Markey. That is an excellent question. Again, the 1996 
act was not a deregulation bill. It was a demonopolization 
bill, so counterintuitively, in order to break up a monopoly 
you actually need more regulations so that the new competitors 
have some confidence that the Government is going to open up 
the marketplace so that they can reach customers which they 
historically had never been able to reach. That is the famous 
14-point checklist that would be put in place that competitors 
could rely upon going to the regulators and the courts in order 
to pry open these markets.
    So since 1996, and after the 3 or 4-year battle by the 
Bells at the Supreme Court and other Federal courts that 
delayed implementation of that law, and beginning in December 
of 2000, unfortunately, when New York was certified as the 
first State which has been opened, we have moved to a point now 
where perhaps 7, 8 percent, 9 percent of the lines in the 
United States are now controlled by competitors, and that is a 
hell of a move after 100 years of zero.
    Now, it is not as far, I have to admit, as I wish we had 
gone, but I could not have predicted that the first resort of 
the Bells would be to try to first consolidate amongst 
themselves. That would be their corporate plan, to go from 
seven down to four, and then to go to the courts to try to 
block the implementation of the act.
    But given the fact that they did do that, 13 States are now 
open, 7 or 8 percent of the lines are controlled. If we hold 
the line, I could envision a day 5 or 10 years from now where 
we have got it up to 10, 15 percent of the lines, and every 
place that that happens the consumer is going to be a 
beneficiary.
    Senator Dorgan. And in your judgment, what happens if 
Congress adopts Dingell-Tauzin, for example, or Tauzin-Dingell, 
whatever it is called these days.
    Mr. Markey. I think that it would largely stop the current 
revolution in its tracks, and we would have to await some, 
perhaps wireless or satellite-based competition to manifest 
itself, but that is something that is now in the long distant 
future. It is not anything that is just over the horizon, and I 
think the consumers will be the loser.
    Senator Dorgan. Well, at least they have stopped 
advertizing. You know, every morning on television here in 
Washington, D.C. you hear Tauzin-Dingell this, Dingell-Tauzin 
that, and you know, if you do not know much about it, you think 
it is either a law firm or a foot powder.
    [Laughter.]
    Senator Dorgan. I frankly am a little tired of the ad, so 
my feeling is, as yours, that if we were to proceed with 
legislation of that type, we will slow down the ability to see 
more and more competition in local exchanges.
    Well, Congressman Markey, as always, the Senate is 
advantaged by having you appear, and I only regret that I 
missed your presentation, but I think I have been advantaged by 
hearing your responses to questions.
    The Chairman. It was the best, Senator Dorgan, and I am not 
a bit surprised. I have been here going on 36 years, and that 
is as good as I have ever heard. We, not just the Committee, 
the entire Senate is indebted to you, because you have given us 
a sense of history and understanding of where we are headed and 
how far we have come. I cannot thank you enough.
    If there are not any further questions, we have got a very 
important panel here to follow on. Thank you very much, Ed. We 
really appreciate it.
    Mr. Markey. Thank you, Mr. Chairman. Thank you, Byron.
    The Chairman. We now have panel number 2, Ms. Loretta 
Lynch, the president of the California Public Utilities 
Commission, Mr. Robert B. Nelson of the Michigan Public Service 
Commission, Hon. Mary Jo White, the Senator from Pennsylvania 
State Senate, and Mr. Paul B. Vasington, the Chairman of the 
Massachusetts Department of Telecommunications and Energy.
    While they are taking their seats, the Committee will just 
note that the hearing really is on competition, how they got us 
off on broadband, if there was something wrong with it, that 
there was some legal barrier to getting into broadband, there 
was some prohibition or otherwise. It is just economics of it. 
It is just the lack of local competition. That is how to get 
more broadband, and that is why we have got these distinguished 
members of the panel here today. We welcome you, and we will 
start over with Mr. Vasington. We will start from left to 
right. We have your full statements in the record, and they 
will be included, and you can summarize them as you wish.

           STATEMENT OF PAUL B. VASINGTON, CHAIRMAN, 
    MASSACHUSETTS DEPARTMENT OF TELECOMMUNICATIONS & ENERGY

    Mr. Vasington. Thank you, Chairman Hollings, Members of the 
Committee, for the opportunity to testify before you on the 
important topics of local telephone competition and broadband 
deployment. My name is Paul Vasington, and I am Chairman of the 
Massachusetts Department of Telecommunications & Energy. My 
testimony will focus on the following three points:
    First, there is no crisis in competition or broadband 
deployment.
    Second, Massachusetts has had both competition and 
investment.
    And third, investment does not require limiting or 
eliminating unbundling, but access to new infrastructure should 
be priced at market rates.
    Some have recently said that there is a broadband crisis. I 
do not agree. Broadband is widely available, but there just are 
not enough valuable services to justify the higher cost for 
most customers. In terms of competition, the bankruptcies of a 
number of competitive local exchange carriers and the closing 
of capital markets to telephone companies has been seen as 
demonstrating the failure of competition. I do not agree with 
that assessment, either.
    The number of CLEC's in business may have shrunk, but 
market share of CLEC's has continued to increase. Broadband 
services are available to a large majority of households, but 
subscription rates among that group are just over 10 percent. 
What we are talking about is not market failure. It is a 
situation where customers are not willing to pay more for the 
services that are offered, and that is perfectly normal.
    All of this does not mean that the Government cannot or 
should not do anything for broadband policy, but it does 
suggest where the policy focus should be. Government should 
focus on removing barriers to efficient investment. That is the 
appropriate Government role.
    Our experience in Massachusetts demonstrates that there is 
no crisis in competition, or broadband deployment. The 
Massachusetts Utility Commission has been promoting competition 
in all telecommunications markets since just after the break-up 
of AT&T, more than 10 years before passage of the 
Telecommunications Act of 1996. Competition has been present to 
some degree in Massachusetts since divestiture, and has 
continued to grow. Massachusetts was the fifth State in which 
the FCC authorized the local Bell company to offer long 
distance service, and at the end of 2001, CLEC served just over 
20 percent of all telephone lines in Massachusetts, and of 
these CLEC-served lines, over three-quarters are facilities-
based.
    In terms of investment in broadband availability, 
Massachusetts has more high-speed lines per 1,000 residents 
than any other State. The vast majority of customers in the 
Commonwealth have access to either DSL or cable modem service. 
Verizon has invested almost $4 billion in its Massachusetts 
network from 1996 to the end of 2001, and cable companies in 
Massachusetts have invested well over $1 billion in their 
Massachusetts networks.
    The policy debate about broadband investment and 
competition is too often framed as a choice. If you want more 
investment, you cannot have as much competition, or if you want 
more competition, then you cannot have as much investment. 
There is no need to choose between competition and investment. 
An open, competitive market, driven by decentralized decisions 
of consumers and suppliers should and will determine the most 
efficient pace and level of investment in broadband 
technologies.
    Unbundling should not lessen the incumbent's incentives for 
investment. There should not be any objection from incumbents 
about sharing any facilities, as long as they earn a return on 
those facilities commensurate with the risk of that investment. 
Attempts to eliminate unbundling requirements in the name of 
providing incentives for investment are solutions to a 
nonexistent problem.
    There is not a problem with competition and investment for 
voice services, and what is currently viewed as high-speed 
services. There is a legitimate concern, however, about the 
next generation of broadband services, most likely fiber-based. 
Unless the prices charged for access to this new infrastructure 
adequately cover the risk of the investment, network companies 
will be reluctant to provide next-generation broadband 
services.
    There are no legacy inefficiencies or monopoly profits 
associated with next generation broadband infrastructure, so it 
would be appropriate to price access to that infrastructure at 
market rates. Maintaining unbundling requirements, but allowing 
incumbents to charge market rates for new infrastructure, is a 
compromise that could form the foundation for a policy that 
truly promotes local telecommunications competition as a means 
to greater broadband deployment.
    I thank you all for your consideration of my testimony.
    [The prepared statement of Mr. Vasington follows:]

   Prepared Statement of Paul B. Vasington, Chairman, Massachusetts 
               Department of Telecommunications & Energy
Introduction

        1)  There is no crisis in competition or broadband deployment.

        2)  Massachusetts has had both competition and investment.

        3)   Investment does not require limiting or eliminating 
        unbundling, but access to new infrastructure should be priced 
        at market rates.

There is no crisis in competition or broadband deployment.
    Some have recently said that there is a broadband crisis. I do not 
agree. Broadband is widely available, but there just aren't enough 
valuable services to justify the higher cost for most customers. In 
terms of competition, the bankruptcies of a number of competitive local 
exchange carriers (CLECs) and the closing of capital markets to 
telephone companies has been seen as demonstrating the failure of 
competition. I do not agree with that assessment either.
    The number of CLECs in business may have shrunk, but the market 
share of CLECs has continued to increase. The problem may be that we 
are trying to judge the success of competitive markets based on our 
expectations from our long experience in a regulated environment. 
Regulation is characterized by stability, continuity of rates, consumer 
protections, and solvency of major players. Markets, on the other hand, 
are characterized by ``creative destruction.'' There is turbulence, 
customer dislocation, business failure, supply rushing ahead of demand 
and vice versa. Capital is abundant, and then it dries up completely. 
This creative destruction is not market failure, but the challenge for 
regulators is to sustain important customer protections while obtaining 
the dynamic benefits in terms of innovation, which we have been able to 
do.
    The situation for broadband services is one in which services are 
available to a large majority of households, estimated at around 70 
percent, but subscription rates among that group are just over 10 
percent for DSL and cable modems. The so-called ``problem'' is that 
most people do not want to pay what it costs to deliver the services 
because they don't see the value as being equal to the cost. What we 
are talking about is not market failure, it is a situation where 
customers are not willing to pay more for the services offered, and 
that is perfectly normal. If government steps in to correct this 
situation to tell people that they are making the wrong choices, then 
we may make the situation worse and more costly. Deployment is better 
when it is driven by consumers and suppliers making decentralized 
decisions about what they want, when they want it, and how much they 
are willing to pay for it.
    All of this does not mean that government cannot or should not do 
anything, but it does suggest where the policy focus should be. 
Government should focus on removing barriers to efficient investment. 
The question we should be asking is: Are there customers willing to pay 
what it costs to serve them who can't get services? If so, we should 
look for the barriers that are keeping suppliers from these customers. 
That is the appropriate government role. Alternatively, if the issue is 
just that people are not willing to pay for services that we think they 
should want, then there is little role for government.
    I think there is plenty to do to remove barriers. Some examples 
include:

   Create a sound economic foundation for competition and 
        investment.

   Allow better access to content by dealing with copyright 
        issues.

   Remove state and local barriers to use of rights-of-way for 
        wired infrastructure and tower locations for wireless.

   Develop better spectrum policy.

   Adjust tax policy, with accelerated depreciation for 
        technology with a short ``shelf-life,'' and reduced taxes on 
        communications services.

Massachusetts has had both competition and investment.
    We have had both competition and broadband deployment in 
Massachusetts. Massachusetts has been promoting competition in all 
telecommunications markets since just after the break-up of AT&T. In 
1985, the Massachusetts Commission found that ``there are benefits 
inherent in a competitive marketplace that encourage greater levels of 
economic efficiency and fairness than does a regulated monopoly 
environment.'' DPU 1731, page 25. Since that time, we have pursued 
policies to make the regulatory environment more in tune with market 
incentives and structure. For example, we rebalanced rates 
significantly in order to reduce subsidization, we have reduced entry 
barriers, and we have aggressively implemented the requirements of the 
Telecommunications Act of 1996.
    Competition has been present to some degree in Massachusetts since 
divestiture and has continued to grow. In 1991, Massachusetts became 
the second state to allow collocation, and was one of only seven states 
cited by the FCC as having switch-based local competition in 1996. See 
CC Docket No. 96-98, Notice of Proposed Rulemaking, FCC 96-182, at par. 
5 n.10 (rel. April 19, 1996). Massachusetts was the fifth state in 
which the FCC authorized the local Bell Company (Verizon in 
Massachusetts) to offer long distance service. At the end of 2001, 
CLECs served 21.1 percent of all land-line telephone lines in 
Massachusetts. And of these CLEC-served lines, 76 percent are 
facilities-based.
    In terms of investment and broadband availability, Massachusetts 
has more high-speed lines per 1000 residents than any other state. Only 
the District of Columbia has more high-speed lines per 1000 residents. 
Verizon offers DSL to around 60 percent of lines in the Commonwealth, 
and, by the end of this year, AT&T Broadband's cable modem service will 
be available to 95 percent of its customers. AT&T Broadband also now 
offers cable modem service to small business customers in over 100 
communities. Verizon has invested almost $4 billion in its 
Massachusetts network from 1996 to the end of 2001, with increased 
annual investment each year from 1993 to 2000 as competition grew. And 
cable companies in Massachusetts have invested well over $1 billion in 
their Massachusetts networks. Rural areas in Massachusetts have 
benefited from innovative programs to aggregate customer demand and 
thus give suppliers greater incentives to compete for these customers. 
The first of these programs was called Berkshire Connect.
    It is hard to underestimate how important telecommunications is to 
the health of the Massachusetts economy. In a 1994 article, then-
Governor Weld said, ``Telecommunications networks will be as important 
to Massachusetts in the coming years as roads, bridges, railroads, 
canals, and harbors were to Massachusetts when our economy was 
dominated by basic manufacturing industries such as textiles and 
leather.'' The importance of telecommunications is related to the four 
clusters of industries in which Massachusetts has a competitive 
advantage, as identified in 1991 by Harvard Professor Michael Porter. 
Those four industry clusters are health care, knowledge-creation 
services, financial services, and information technology. All four of 
these industries create and trade in knowledge and information, which 
rely on advanced telecommunications networks for transport.
Investment does not require limiting or eliminating unbundling, but 
        access to new infrastructure should be priced at market rates.
    The policy debate about broadband investment and competition is too 
often framed as a choice--if you want more investment, you cannot have 
as much competition, or if you want more competition, you cannot have 
as much investment. It does not have to be this way, and it certainly 
is not consistent with the goals of the Telecommunications Act of 1996: 
``to provide for a pro-competitive, de-regulatory national policy 
framework designed to accelerate rapidly private sector deployment of 
advanced telecommunications and information technologies and services 
to all Americans.'' There is no need to choose between competition and 
investment. An open, competitive market driven by decentralized 
decisions of consumers and suppliers should and will determine the most 
efficient pace and level of investment in broadband technologies.
    Unbundling should not lessen the incumbents' incentives for 
investment. As we have seen, investment in Massachusetts has not been 
held back by the unbundling requirements of the Telecommunications Act 
of 1996. There should not be any objection from incumbents about 
sharing any facilities as long as they earn a return on those 
facilities commensurate with the risk of investment. Attempts to 
eliminate unbundling requirements in the name of providing incentives 
for investment are solutions to a non-existent problem.
    Clearly there is not a problem with competition and investment for 
voice services and what is currently viewed as ``high-speed'' services, 
i.e., 200 kbps in at least one direction. There is a legitimate 
concern, however, about the next generation of broadband services--most 
likely fiber-based--which will be capable of delivering much higher 
speeds to customers. Unless the prices charged for access to this new 
infrastructure adequately cover the risk of the investment, network 
companies will be reluctant to provide next-generation broadband 
services.
    Current broadband services, DSL and cable modem, ride on the 
existing networks of telephone and cable companies. DSL works over the 
telephone companies' copper wires, and cable modem service works over 
coaxial cable. The FCC has priced access to the telephone companies' 
network elements based on a model that is designed to eliminate legacy 
inefficiencies and monopoly profits, which is a legitimate concern in 
terms of unbundling the existing network. New infrastructure is another 
story. There are no legacy inefficiencies or monopoly profits 
associated with next-generation broadband infrastructure, so it would 
be appropriate to price access to that infrastructure at market rates.
    In order to provide incentives for investment in new services, 
telephone companies must have an opportunity to earn a return that 
compensates investors for that risk. And the risk may be significant. 
Competition for next-generation broadband services is coming from 
several areas, including cable, satellite, and wireless. A 
Massachusetts-based company called Amperion is even working to provide 
broadband services over lines used to transmit electricity.
    Maintaining unbundling requirements but allowing incumbents to 
charge market rates for new infrastructure is a compromise that could 
form the foundation for a policy that truly promotes local 
telecommunications competition as the means to greater broadband 
deployment.

    The Chairman. Thank you very much. Ms. White.

               STATEMENT OF HON. MARY JO WHITE, 
               SENATOR, PENNSYLVANIA STATE SENATE

    Ms. White. Thank you, Senator. By the way, I am not the 
Mary Jo White who is U.S. Attorney for Manhattan. That is my 
disclaimer.
    In my testimony, I note that several years ago when someone 
in Pennsylvania was looking for a catchy slogan someone 
suggested two big cities with a lot of trees in between, and 
that is because Pennsylvania is largely known from Philadelphia 
and Pittsburgh, but I am here to tell you that in those trees 
is the largest rural population of any State in the country. I 
represent about a quarter-million of those people in the 
Pennsylvania Senate.
    I do not have to tell you here how important the Internet 
and broadband capability is to people. However, I am not really 
talking about just reading the newspaper or using your computer 
for your e-mail. I am talking about small business economic 
development, the kind of thing that is really the lifeblood to 
a community such as the one I represent.
    I live in the former GT service area now called Verizon 
North. We do not even have reliable telephone service, much 
less affordable access to broadband technology, and this is 
particularly frustrating because Pennsylvania has been a leader 
in promoting utility competition. I myself am a free market 
type person, so this is a rather unusual role for me.
    We were one of the early States to successfully deregulate 
electricity and natural gas, and in 1993, well in advance of 
the Federal Telecommunications Act, the Pennsylvania General 
Assembly enacted the alternative form of regulation of 
telecommunications services--we call it chapter 30--and the 
intention of that act was to foster, and I am quoting here, the 
accelerated deployment of universally available state-of-the-
art public-switched broadband telecommunications network in 
rural, suburban, and urban areas of the Commonwealth.
    The Incumbents were offered an alternative form of 
regulation if they committed to the construction of a broadband 
network. Unfortunately, the legislature made a few mistakes. We 
let the companies set the timeline, and they picked 2015 as 
their final date for compliance. We may all be using brainwaves 
by then. We also neglected to set interim milestones and 
timetables for the reports.
    Competitive pressures have accelerated the progress in the 
profitable urban and suburban areas, while rural improvements 
are proceeding at a snail's pace. Chapter 30 did not specify a 
technology, merely a performance standard. Currently, the 
Chairman of the Pennsylvania Public Utility Commission has 
instituted a proceeding to determine whether Verizon has 
repudiated its obligations by substituting DSL.
    In March of 1998, our PUC held a hearing on the state of 
local competition in Pennsylvania, and they found, not 
surprisingly, that the incumbents, the ILEC's controlled 97 
percent of the lines in their service territory. There were 
complaints by would-be competitors that they were being denied 
access to lines and services, and there was a log-jam of cases. 
Virtually every issue was being appealed at the commission or 
before the courts. Competition was stalled.
    Consumers who switched competitive service experienced 
service interruptions, billing nightmares, and some even found 
their business numbers left out of the telephone directory.
    The commissioners attempted a global settlement, but after 
several months the process collapsed. They then began--and this 
was very innovative. They wanted to consolidate all of the 
myriad of cases that were out there just miring us down. In a 
global proceeding we had 6 days of en banc testimony, 32 bound 
volumes, almost 10,000 pages of testimony, cross-exam and 
exhibits.
    The global opinion and order which was issued in September 
1999 resolved 19 proceedings before the commission that 
generated 12 State and Federal court proceedings. Among other 
things, the PUC found in their findings that Verizon had a 
virtual monopoly in the local exchange market, and had abused 
its market power by providing competitors with less than 
comparable access to its network, or engaged in other 
discriminatory conduct that deterred customers from switching.
    As a remedy, it ordered structural separation. It concluded 
that for purposes of this docket structural separation was the 
most efficient tool to ensure competition where a large 
incumbent monopoly controls the market.
    Now, I cannot possibly describe the course of that ruling 
in the time here. It has been through the courts, and 
ultimately our State supreme court upheld our power to issue 
such a structural separation order. Nevertheless, after a 
massive advertising campaign and a change in commission 
membership, the commission reversed itself and adopted for what 
it is calling functional separation a code of conduct and fines 
for noncompliance.
    I am here to suggest that that is not a particularly 
effective method of changing behavior when fines are regarded 
as a cost of doing business. I remain convinced that structural 
separation makes sense. Before you can allow free market forces 
to work, you have to deal with the de facto monopolies which we 
still have in our local telephone markets.
    Listening to discussion of parity, Representative Cannon 
very eloquently talked about something he called parity of 
situation. You have to have parity of situation, and I am 
reminded of a quote--I believe it is Anatole France--who said 
the law, in its majestic equality, forbids the rich as well as 
the poor to sleep under bridges. I suppose that is a sort of 
parody.
    I think it is too much to understand, or to believe, or 
hope, that companies that learn monopoly at Ma Bell's knee will 
cooperate with their competitors to benefit consumers. I think 
we need effective regulation until we have real cooperation, 
and I would urge you to hold the course.
    Thank you.
    The Chairman. Very good. Mr. Nelson.

         STATEMENT OF ROBERT B. NELSON, COMMISSIONER, 
               MICHIGAN PUBLIC SERVICE COMMISSION

    Mr. Nelson. Thank you, Mr. Chairman, Members of the 
Committee. I want to thank you for calling this hearing and 
inviting me to testify on behalf of the National Association of 
Regulatory Utility Commissioners, as well as my own State of 
Michigan. My name is Robert Nelson, and I am commissioner with 
the Michigan Public Service Commission and covice chairman of 
the Telecommunications Committee of NARUC.
    As you know, NARUC is the Association of State Utility 
Commissioners, and has supported the goals of the 1996 
Telecommunications act since its inception 6 years ago. NARUC 
believes that the essential provisions of the 1996 act are 
working, and that neither Congress nor the FCC should make 
wholesale changes in them at this time. After 6 years of 
arbitrations, contested cases, and costly court battles, local 
competition is beginning to flourish because of the vigorous 
enforcement of the act by the States. Now is not the time to 
tinker with this act.
    A recent report of local competition in Michigan shows that 
the number of access lines provided by CLEC's almost doubled 
from year end 2000 to year end 2001. In Michigan, we are 
approaching, if not exceeding 20 percent CLEC access lines in 
Ameritech, Michigan's territory. Approximately 70 percent of 
those lines are provided through leasing of unbundled network 
elements, as specifically provided for in the 1996 act.
    Moreover, the percentage of Ameritech service lines 
provided by CLEC's dwarfs the percentage of those in the 
territory of the other Michigan RBOC, Verizon, where less than 
1 percent of access lines are provided by CLEC's. This, in my 
judgment, is due to the leverage provided to the States in 
section 271 of the act, which requires Ameritech to seek State 
approval to provide interLATA long distance service in 
Michigan, but does not apply to Verizon, which does not need 
such a program in my State.
    As you know, NARUC strongly opposes the Breaux-Nickles 
bill, S. 2430, and the Tauzin-Dingell bill. It has serious 
concerns with several proceedings pending before the FCC. These 
proposals are intended to undo the work of State commissions in 
facilitating nondiscriminatory access to the public telephone 
network.
    S. 2430, for example, preempts States from asserting their 
jurisdiction over facilities and equipment used to provide 
broadband services. Although the purpose of this provision is 
intended to promote regulatory parity between DSL and cable 
modem service, it relies on a false presumption that voice and 
Internet traffic, and the facilities on which they travel, can 
be easily distinguished and regulated differently The truth is, 
they cannot.
    The same facilities used to provide DSL are the same 
facilities and equipment used to provide voice service. 
Preempting State jurisdiction over these facilities would, in 
my view, reverse the efforts of States to implement the 1996 
act and raise a myriad of cost allocation and universal service 
issues. Federal legislation and rules which so clearly favor 
just one class of providers does not reflect the even-handed 
public policy heritage which we tend to depend on in this 
country. It runs counter to the sense of fair play which 
permeates our public and private character, and it decimates 
the balance of interests that were crafted into the 1996 act.
    Instead of the preemptive approach of these bills, NARUC 
supports the use of loans and tax credits to spur demands and 
investment in broadband services in a competitively neutral 
manner, which is the approach of S. 2448, the Broadband 
Telecommunications Deployment Act of 2002, sponsored by 
Chairman Hollings. This is similar to an approach that was just 
taken in Michigan to provide low interest loans and tax credits 
for broadband deployment. It is also similar to Senator 
Rockefeller's bill.
    Incumbent carriers argue that it is too costly to make the 
necessary investments in the network to deploy fiber to the 
home. If the deployment barrier is cost, many of you on this 
Committee have wisely responded to this claim by creating a 
broadband loan program that was included in the recently 
enacted farm bill. We appreciate all your hard work to make our 
U.S. broadband program a reality.
    NARUC does not believe that Congress or the FCC will 
achieve the desired goal of stimulating demand in the broadband 
market through State preemption or deregulation of the 
bottleneck facilities, but rather through creative policies 
like the Hollings bill.
    Again, on behalf of NARUC, we applaud your efforts, Mr. 
Chairman, as well as many of your esteemed colleagues for their 
leadership in crafting a sensible procompetitive bill that 
promotes investments in all broadband platforms, not just DSL. 
It complements and does not undermine the 1996 act.
    The U.S. Supreme Court recently affirmed policies for 
pricing unbundled network elements and combining those elements 
through competitors. The goal of those policies are now being 
realized, with 13 States having received 271 approval, and 
increasing numbers of residents and businesses enjoying the 
benefits of local competition in the form of carrier choice 
envisioned by the 1996 act.
    The telecommunications industry has suffered through 2 
years of extraordinary financial distress, and our Nation's 
economy has been adversely affected as a result. Investors need 
certainty before they will provide the capital necessary for 
this industry to recover. That certainly is available now in 
the existing policies of the FCC and the enforcement of those 
policies by the States. Now is definitely not the time for 
Congress and the FCC to change the rules of the game. As 
someone who was in the trenches presiding over arbitrations and 
pricing decisions and doing the hard work of implementing the 
act, I can tell you that we do not need 6 more years of costly 
and time-consuming litigation, 6 more years of uncertainty, 6 
more years of foot-dragging, and 6 more years of waiting for 
the promise of widespread broadband deployment.
    Thank you for this opportunity to address you.
    [The prepared statement of Mr. Nelson follows:]

 Prepared Statement of Robert B. Nelson, Commissioner, Michigan Public 
                           Service Commission

    Mr. Chairman and Members of the Committee, I am Robert B. Nelson, 
Commissioner of the Michigan Public Service Commission and co-Vice 
Chairman of the Telecommunications Committee of the National 
Association of Regulatory Utility Commissioners (NARUC). I would like 
to thank you for providing me the opportunity to testify today on 
behalf NARUC. I will focus my remarks on the status of local 
competition in Michigan and my thoughts on how best to foster 
competition and investment in broadband infrastructure in Michigan and 
elsewhere. I will also discuss specifically NARUC's positions on 
several proposed congressional initiatives regarding broadband and 
competition and some related initiatives pending before the FCC.
    I would like to start by highlighting some basic facts: local 
telephone competition is much stronger in the service territory of one 
Regional Bell Operating Company (RBOC) serving Michigan, SBC Ameritech, 
than it is in the service territory of another, Verizon. The strength 
of local competition in the SBC Ameritech region is due, in large part, 
to the tools given to our Commission by the 1996 Federal 
Telecommunications Act (1996 Act) and by our State legislature. The 
anemic condition of local competition in Verizon's Michigan territory 
is, in my opinion, due in part to the fact that Verizon is not subject 
to the market opening requirements of Section 271 of the 1996 Act in my 
State.
    I believe the approach of the Breaux/Nickles bill contain 
provisions that are similar to several related proposals currently 
pending before the FCC. This approach to broadband deployment could 
well undermine several of the provisions of the 1996 Act, which we have 
used to open markets throughout the State of Michigan to benefit 
consumers. I am not alone. NARUC is on record opposing Breaux/Nickles 
and has filed comments at the FCC detailing the Association's concerns 
about the tentative conclusions in the related FCC proceedings.
    Our Commission recently released a report to our Governor and 
Legislature entitled ``Report on the Status of Competition in 
Telecommunication Service in Michigan.'' The report, which is attached 
to my testimony, indicates that for calendar year ending December 31, 
2001, 12.8 percent of the access lines in Michigan were served by 
competitive local exchange carriers (CLECs). This is a significant 
increase in the number of access lines provided by CLECs at year-end 
2000, when 6.5 percent of the lines were provided by CLECs and year-end 
1999, when only 4 percent of the access lines were provided by CLECs. 
The report also concludes that CLEC market share is approximately 17 
percent of Ameritech lines. Although not detailed in the report, our 
staff investigation reveals that less than 1 percent of the Verizon 
service area lines are served by CLECs. The vast difference between the 
percentage of Ameritech lines provided by CLECs and Verizon lines is 
due in my view, in large part to the fact that Ameritech has been 
attempting to secure approval for long distance authority in Michigan 
pursuant to Section 271 of the 1996 Act and Verizon, because they 
purchased the facilities of GTE, has not had to do so. Our experience 
demonstrates that the 1996 Act is working in Michigan!
    Moreover, the Michigan report reveals that of the 896,023 access 
lines served by CLECs at year-end 2001, almost half, or 411,404 lines 
were served via the unbundled network element platform (UNE-P). An 
additional 213,585 lines were served by unbundled network facilities. 
Service via UNE-P or unbundled network facilities, which account for 
nearly 70 percent of the CLEC access lines served in Michigan, are a 
direct result of the Michigan commission's implementation of the 
provisions of the 1996 Act which require RBOCs to provide to CLECs 
nondiscriminatory access to unbundled network elements. (See, e.g., 47 
U.S.C. Sec. 251(c)(3)).
    The UNE-P rates that we have adopted in Michigan are based on 
TELRIC cost models and are among the lowest in the nation. The results 
are impressive. In a resolution passed this February, NARUC also 
endorsed the concept of UNE-P as a viable business model for market 
entry. NARUC's position is based on the principle that one form of 
entry should not be favored over another.
    A majority of States, including Michigan, have utilized Sections 
251 and 252 of the 1996 Act to assure UNE-P is a realistic option for 
market entry. Any congressional or FCC initiatives that ultimately 
limit the State's ability to facilitate UNE-P would, in my view, undo 
all the progress we have made to create local competition.
    Specific legislation introduced this Congress will hinder the 
ability of States to ensure that the public switched network is 
irreversibly open. Both the Tauzin/Dingell bill (HR 1542) and the 
Breaux/Nickles bill (S. 2430) allow RBOCs to circumvent the market-
opening requirements of the 1996 Act. HR 1542 exempts DSL services from 
the requirement that all local telecommunications services provided by 
an RBOC, including DSL services, be considered in determining whether 
the RBOC has met the 14 point checklist in Section 271, even though 
data services are an increasing part of the telecommunications services 
provided by RBOCs. S. 2430 would effectively remove all State 
commission authority to ensure there is non-discriminatory access to 
the public switched telephone network, currently required by Sec. 251 
of the 1996 Act.
    Both bills incorrectly assume that voice and Internet traffic can 
easily be distinguished and, as a result, the underlying facilities can 
be regulated differently. The reality is that both voice and data 
traffic travel over the wire-line network in the same form, i.e., in 
packets of ones and zeros. They are indistinguishable. Eliminating 
State oversight of the facilities that carry both voice and data 
traffic raises a host of cost allocation and universal service issues 
that will take years to sort out.
    I am also concerned by the approach of several proposed rulemakings 
currently pending before the FCC because I believe they could also 
undercut State efforts to implement the 1996 Act. The FCC's NPRM on 
wireline broadband services tentatively concludes that broadband 
services offered by telecommunications companies are not 
``telecommunications services'' and therefore should not be subject to 
the market-opening requirements of the 1996 Act. This, and related 
proposals re-examining the rules for what network functionalities 
should be unbundled and available to competitors, seek to promote 
broadband deployment by minimizing the regulation of DSL and other 
Internet platforms. This is a laudable goal. New broadband investment 
should not be subject to the same degree of regulation as the existing 
network. However, in pursuit of this goal, the FCC's wire-line 
broadband services rulemaking threatens to erode the line-sharing 
requirements for the existing network designed to allow multiple 
providers to compete. It is ironic that in the wake of the recent U.S. 
Supreme Court opinion in Verizon v. FCC, which upheld the FCC's rules 
that require RBOCs to combine unbundled network elements for 
competitors, and the methodology for pricing those elements, that there 
should be any consideration of backtracking on a method of entry (UNE-
P) envisioned by the 1996 Act, even as it relates to advanced services. 
The FCC has been vindicated in its implementation of the 1996 Act and 
it should use the tools Congress has given it to promote competition. 
It should not remove advanced services from the list of services that 
Congress so wisely found to be subject to network-opening requirements 
in 1996.
    We are at a critical stage in our efforts to implement real 
competition in the residential telephone and broadband markets in both 
rural and urban communities. We are currently faced with a choice of 
whether we want to stay the course and enforce the non-discriminatory 
access provisions of the Act or endorse proposals that undo those 
provisions for the benefit one set of dominant providers.
    The competitive industry is struggling today, in part because it 
has been denied access to network facilities and has struggled to 
remain an attractive investment opportunity to financial analysts and 
institutional investors. Federal broadband policy should not enhance 
the market power of incumbent carriers.
    In the broadband market in particular, the bankruptcy filings of 
Covad, Northpoint, Rhythms and countless others have contributed to the 
modest levels of broadband DSL take rates that we are witnessing today. 
I believe DSL penetration can indeed keep apace with and could even 
surpass cable modem subscribership if incumbent carriers are willing to 
take certain steps to boost demand. Incumbent carriers have long argued 
that it's too costly to make the necessary investments in the network 
to deploy fiber from the remote terminal to the home. If the deployment 
barrier is cost, Congress has responded accordingly with the recently 
enacted farm bill, which provides up to $750 million in loans for 
broadband investment. Many of you on this Committee worked hard to make 
the broadband section in the farm bill become a reality and on behalf 
of NARUC, we applaud your efforts.
    In addition, the Chairman of this Committee, along with many of you 
introduced legislation a couple of weeks ago that would authorize the 
use of technology-neutral loans, grants, tax credits and pilot projects 
to stimulate investment and demand in broadband services. NARUC 
supports this particular approach to broadband deployment and has 
advocated the merits of this method for the last three years as per our 
resolution, which is attached. We do not believe that Congress or the 
FCC will achieve the desired goal of stimulating demand for broadband 
services through State preemption or deregulation of bottleneck 
facilities, but rather through creative policy proposals like S. 2448, 
sponsored by Senator Hollings.
    Furthermore, promoting multiple competitors in the broadband market 
will also drive down the price of broadband and make it more affordable 
to millions of Americans. In Michigan, we have recently enacted 
comprehensive legislation, which, among other things, creates a 
financing authority that will make low-interest loans to private and 
public entities for backbone and last-mile solutions and everything in 
between. Multiple providers will not only reduce the cost of 
telecommunications services and spur innovation; they will enhance the 
security of our networks by building in needed redundancies.
    States have made great strides, pursuant to the 1996 Act, to 
enhance competition and deploy advanced services. Although progress has 
been uneven, it has been steady, as evidenced by the competitive 
landscape in Michigan and other States like New York, Texas, and 
Georgia. We should not respond to the statements issued by those who 
were ordered by Congress in 1996 to open their systems that doing so 
will threaten our nation's economic and national security. Congress 
should continue to have faith in the market-opening tools it crafted 
1996 and give deference to the wisdom of the Supreme Court in affirming 
the States role in setting the rates and terms for access to the 
network. The evidence in Michigan indicates that vigorous enforcement 
of Section 251 and 271 of the 1996 Act stimulates investment in 
broadband across all platforms and reduces prices for consumers.

      Resolution Supporting Legislative Proposals That Encourage the
Deployment of Broadband Technologies and Advanced Services

 WHEREAS, The deployment of infrastructure to provide broadband 
    deployment has become a concern for several states and consumers; 
    and

 WHEREAS, Several bills have been introduced in the House and Senate 
    that seek to encourage deployment of advanced services. While NARUC 
    has opposed S 877 and HR 2420 and similar bills, other proposals 
    seek to address the issue of ensuring that markets remain open to 
    competition pursuant to the 1996 Act; now, therefore be it

 RESOLVED, That the Board of Directors of the National Association of 
    Regulatory Utility Commissioners (``NARUC''), convened at its 
    Summer Meeting in Los Angeles, California, supports legislation 
    that would encourage the deployment of broadband technology and 
    advanced services to underserved areas (areas without affordable 
    broadband deployment) without removing RBOC incentives to meet 
    Section 271 requirements; and be it further

 RESOLVED, Any legislative proposal promoting the deployment of 
    broadband technologies and advanced services to rural and 
    underserved areas should consider the following concepts:

   low-interest, technology and carrier neutral loans to those 
        seeking to deploy broadband services to rural and under served 
        communities;

   additional financial incentives, such as tax credits, to 
        carriers that are deploying advanced services where existing 
        incentives and support, including high cost loop support, are 
        inadequate;

   effective enforcement tools to ensure that carriers meet 
        their obligations with respect to broadband deployment; and be 
        it further

 RESOLVED, Legislation should keep intact the market-opening 
    requirements contained in the 1996 Act.

      Resolution Concerning the States' Ability to Add to the National 
Minimum List of Network Elements

 WHEREAS, The States have traditionally provided the leadership needed 
    to advance local competition and have evaluated a variety of 
    approaches; and

 WHEREAS, The Federal Communications Commission (FCC) has previously 
    recognized the important contribution of State Commissions to local 
    competition, expressing its intention to ``foster an interactive 
    process by which a number of policies consistent with the 1996 Act 
    are generated by the States'' which may then be incorporated into 
    national minimum requirements; and

 WHEREAS, The FCC has initiated a triennial review of which network 
    elements shall be included in the national minimum list of 
    unbundled network elements (``UNEs'') on a going-forward basis; and

 WHEREAS, The level of local competition in each State is directly 
    affected by which UNEs are available in that State; and

 WHEREAS, The analysis to determine which network elements should be 
    unbundled in a State is fact specific and must consider conditions 
    in each particular State; and

 WHEREAS, The State Commissions are in a better position to consider 
    other factors, including the level of competition presumed by that 
    State's system of retail price regulation; and now therefore be it

 RESOLVED, That the Board of Directors of the National Association of 
    Regulatory Utility Commissioners (NARUC), convened at its February 
    2002 Winter Meetings in Washington, D.C., urges the FCC to 
    recognize that States may continue to require additional unbundling 
    to that required by the FCC's national minimum; and be it further

 RESOLVED, That such additional unbundling is consistent with the 
    purposes of the federal Telecommunications Act of 1996, and in 
    accordance with State or federal law; and be it further

 RESOLVED, That the NARUC General Counsel be directed to provide the 
    FCC comments consistent with this resolution.
                                 ______
                                 
  Report on the Status of Competition in Telecommunication Service in 
                         Michigan (April 2002)
    Section 103 of the Michigan Telecommunications Act (MTA) as amended 
in July of 2000 provides that the Commission submit an annual report 
describing the status of competition in telecommunication service in 
this state, including, but not limited to, the toll and local exchange 
service markets in this state. The report required under this section 
shall be submitted to the Governor and the House and Senate standing 
committees with oversight of telecommunication issues. This is the 
second report pursuant to Section 103.
    Prior reporting of this nature occurred as a result of information 
gathered in Case No. U-10177 and Case No. U-10085 in 1992. The 
information was presented as part of the Final 1994 Report to the 
Governor and Legislature. Last year's report was submitted as part of 
the Commission's Annual Report to the Legislature. This year, in order 
to provide results with the latest and most current data, the report 
was delayed to capture 2001 data and information.
TOLL MARKETS
    The toll market is commonly referred to as long distance and the 
providers of such services are referred to as interexchange carriers 
(IXCs). In 1994, it was reported that the IXCs who owned their own 
facilities were required to provide very little information to the 
Commission related to their operations. The Commission does not license 
them and the primary requirement is that they file tariffs consistent 
with the provisions of the MTA. IXCs providing toll service via resale 
were exempt from this tariff filing requirement as well. As a result, 
there is little information available regarding market share, customer 
numbers or revenues.
    The same analysis holds true today for the toll/long distance 
marketplace. Last year it was reported that on May 1, 2000, the Federal 
Communications Commission (FCC) ordered the detariffing of the 
interstate, domestic interexchange services of non-dominant IXCs to 
become effective after a transition period. Detariffing means that the 
IXCs do not file their rates and terms of services with the FCC. 
Beginning July 31, 2001, interstate long distance companies began 
providing service without filing tariffs with the FCC. They provide 
information to consumers via other means such as their websites. The 
FCC concluded that detariffing would enhance already vigorous 
competition among providers of interstate, domestic, interexchange 
services and promote competitive market conditions.
    In Michigan, there are more than 45 carriers registered as 
facilities-based toll carriers for the year 2001. The reselling of toll 
services is unregulated and the Commission has registered more than 490 
carriers as resellers of toll service in Michigan. This is a self-
registration process but it does indicate that there are numerous 
providers of this service. The Commission=s web site provides a link 
for rate comparisons among providers. This information is largely 
consistent with the FCC's findings issued on January 24, 2001 in its 
report, Statistics of the Long Distance Telecommunications Industry.
    This year's analysis is basically the same as last year's in that 
information available to the Commission indicates that despite an 
increase in the number of toll providers, prices of basic toll 
schedules have in fact increased in the last several years. Results of 
competition appear to be more evident in the number of toll package 
alternatives available and the number of providers who offer them as 
well as declining prices for higher usage customers who do not utilize 
basic toll schedules. It is worth noting that innovative bundling of 
services and new pricing plans are blurring the distinction between 
toll and local services. Some providers are offering unlimited local 
and long distance services plus unregulated features at one combined 
price.
BASIC LOCAL EXCHANGE MARKET
    The Commission issued a report and made recommendations to the 
Legislature and the Governor in February 1998 involving the issues, 
scope, terms, and conditions of telecommunication providers offering 
basic local exchange service. This report concluded that the 
participants in the telecommunications market appear to be relying more 
on the regulatory and judicial process than market forces to determine 
the availability, prices, terms and other conditions of 
telecommunications services. The marketplace for local 
telecommunication services in Michigan continues to be dominated by 
Ameritech Michigan (an affiliate of SBC Communications, Inc.) and GTE 
(now Verizon) and a truly competitive marketplace still remains a goal, 
not a reality.
    To get a more accurate picture of the competitive marketplace in 
Michigan for local service, the staff of the Commission has conducted 
surveys of Ameritech Michigan and all licensed Competitive Local 
Exchange Carriers (CLECs) for 1999, 2000, and again this year for 2001 
data which included incumbent local exchange carriers (ILECs) that also 
operate as CLECs in Michigan. CLECs are providers that compete in the 
same geographic area as ILECs. This year's survey was sent out to 173 
licensed CLECs in the state of Michigan as of January 1, 2002. The 
survey was conducted as an information/data request. The data collected 
was for the period ending December 31, 2001. This information was 
gathered to assist the Commission staff in evaluating the scope of 
local competition in Michigan.
    The survey vehicle was developed through a collaborative process 
set forth in the Commission's order in docket U-12320. Through the 
surveys the staff requested some information that the companies 
considered confidential. The results of most portions of this survey 
were reported as total CLEC numbers to maintain the confidentiality of 
the individual company numbers. For 2001, of the 173 CLECs that the 
survey was mailed to, 102 companies filed a response with 52 of those 
companies reporting that they were actually providing local service. Of 
that group of 52, 42 CLECs reported actual local customers (the 10 
companies that reported no customers had just begun to offer service 
and had no lines to report for 2001). The individual staff reports for 
1999, 2000 and 2001 can be found on the Commission's website.
    From the data compiled through this year's survey for 2001, staff 
found that the number of lines provided by CLECs (including over their 
own facilities or through resale of incumbent providers services) was 
896,023. The staff report indicates that the total number of lines 
provided in Michigan (ILECs including Ameritech and CLECs) was 
7,014,263. The number of CLEC lines compared to total lines represents 
12.8 percent. Ameritech's share is 72.2 percent (5,071,300 lines) while 
GTE's share is 11.5 percent (803,728 lines). The small independent 
telephone companies represent the remaining 3.5 percent (243,212 lines) 
of the total lines in Michigan. The survey responses indicate that the 
geographic areas covered by CLEC lines encompass primarily the Detroit, 
Grand Rapids, Lansing and Saginaw areas with the majority of the 
competitive lines being provided in the Detroit vicinity. From the data 
that Ameritech provides, 63 percent of the competitive lines are 
provided in the Detroit area, 23 percent of the competitive lines are 
provided in the Grand Rapids area, 6 percent of the lines are provided 
in the Lansing area, 6 percent of the lines are provided in the Saginaw 
area and 2 percent of the lines are provided in the Upper Peninsula 
area. It should be noted that virtually all of the CLEC activity is in 
geographic areas that are served by Ameritech. As a percent of this 
market, the CLEC market share is approximately 17 percent of Ameritech 
lines.
    The Commission continues to license new CLECs, and at of the end of 
2001, the CLECs were serving 12.8 percent of the lines provided to 
customers by telecommunication carriers in Michigan. This is an 
increase over the previous year and indicates a positive trend in the 
competitive basic local service market in Michigan. These numbers are 
consistent with the trend that is represented in an analysis done by 
the FCC on information gathered through June of 2001. On February 27, 
2002, the FCC released its report on Local Telephone Competition: 
Status as of June 30, 2001. For the Michigan companies that are 
required to report this data to the FCC, the ILECs reported 6,027,730 
lines, and the CLECs reported 583,653 for a total of 6,611,383 lines. 
From the FCC's data, the CLEC share was reported at 9 percent. This 
data gathered by the FCC is from 6 reporting ILECs and 11 reporting 
CLECs for Michigan, and would represent the larger providers and a 
majority of the lines.

                   The 2001 Survey Results Show That:


------------------------------------------------------------------------
    CLECs With No Lines                                              60
    CLECs 1-1,000 Lines                                              16
    CLECs 1,001-10,000 Lines                                         12
    CLECs over 10,000 Lines                                          14
------------------------------------------------------------------------
        Total CLECs Responding to Survey                            102
------------------------------------------------------------------------

    The above information categorizes the CLECs according to the number 
of customer lines that they served in 2001. The data indicates that of 
the 102 CLECs reporting, 60 were serving no customers in 2001 and this 
represents almost 59 percent of the group, while the second group 
served 6 between 1 line and 1,000 lines, a group of 16 CLECs or almost 
15.5 percent. The third group served between 1,001 and 10,000 lines 
each and is comprised of 12 CLECs for an 11.8 percent share and the 
last group of CLECs served over 10,000 lines each and represents 14 
CLECs for a 13.7 percent share.
    A portion of the data gathered by the Commission for the last three 
years is presented below in a table format to allow a more 
comprehensive presentation for analysis.

         Michigan Public Service Commission CLEC Survey Results:
------------------------------------------------------------------------
                                          Data Survey of  Data Survey of
                          Survey of 1999       2000          2001 Data
------------------------------------------------------------------------
Licensed CLECs                       120             167             173
CLECs responding to                   59              69             102
 survey
CLECs actually providing              25              37              52
 service
CLECs with actual line                23              31              42
 counts
Lines Provided by CLECs          268,385         446,164         896,023
Total Lines in Michigan        6,726,971       6,901,813       7,014,263
CLEC %                                4%            6.5%            2.8%
Ameritech %                          81%             78%           72.2%
GTE %                              11.5%             12%            1.5%
ILECs %                             3.5%            3.5%            3.5%
------------------------------------------------------------------------

    As is shown, the actual number of CLEC providers and CLEC lines in 
Michigan has grown over the last three years that this information has 
been gathered and has grown from a 4 percent share to a 12.8 percent 
share at the end of 2001. These lines are mostly being provided by a 
smaller group of the licensed CLECs in Michigan.
AMERITECH INTERLATA APPROVAL
    Ameritech has been working for some time toward obtaining approval 
to offer interLATA toll service in Michigan. The Federal 
Telecommunications Act of 1996 requires 7 Ameritech to comply with five 
conditions regarding interconnections with competitors and with a 14-
item competitive checklist before the FCC can grant this approval. The 
consulting firm of KPMG has been working on conducting a test of 
Ameritech's Operations Support Systems (OSS) to help determine whether 
Ameritech complies with the federally mandated checklist requirements. 
This testing process has met with some delays and the final report on 
OSS testing is now expected later this year. After testing is 
completed, Ameritech intends to file its application for interLATA toll 
service in Michigan with the FCC. The Commission will have 30 days 
after the application is filed to provide comments to the FCC.
CONCLUSION
    In conclusion, based on available data that staff has gathered 
through its surveys over the three-year period, there is continued 
growth in the percentage share of CLEC lines in Michigan from a 4 
percent share in 1999 to a 6.5 percent share in 2000 and a 12.8 percent 
share in 2001. This is a positive trend. However, at the same time 
during 2001, the Commission had 21 CLECs go out of business in Michigan 
and surrender their licenses. As noted, of the 102 CLECs responding to 
the survey, 60 CLECs were not serving any customers in 2001, which 
represents almost 59 percent of the CLEC group that responded to the 
survey. Competition in the basic local exchange industry in Michigan is 
emerging. However, this has occurred with regulatory oversight to 
ensure that competitors are able to obtain the access to needed 
elements of the ILEC network without ILEC interference or obstruction. 
This indicates that the process that the Commission has established 
under the guidelines of the MTA is working to provide a smooth 
transition of the telecommunications market for basic local exchange 
service in Michigan to a viable competitive one.

    The Chairman. Very good. We thank you, and we welcome you 
again, Ms. Lynch. You are getting to be a regular here before 
our Committee, and we are indebted to you.

           STATEMENT OF LORETTA M. LYNCH, PRESIDENT, 
             CALIFORNIA PUBLIC UTILITIES COMMISSION

    Ms. Lynch. Thank you, Mr. Chairman and Senators. I 
appreciate the opportunity to testify about telecommunications 
competition with the view from California. Over the past year 
we have seen a variety of initiatives, both in the form of 
proposed legislation and in the form of new rules proposed by 
the Federal Communications Commission that have as their stated 
purpose to increase the deployment of broadband 
telecommunications services.
    I think we all agree that that is a good goal, but many of 
these proposals have a common theme which I do not agree with, 
which is that to spur broadband deployment we need to 
deregulate DSL and the other high-speed services offered by 
incumbent local companies. I believe that deregulation is the 
wrong way to go to promote broadband deployment. Deregulation 
will have dangerous consequences, certainly for the residences 
and businesses in California and, I believe, also in other 
States.
    Deregulation would provide a license to monopoly, or at 
best, duopoly, broadband providers who are going to run 
roughshod over their customers, through poor service quality, 
inflated prices, anticompetitive conduct, and violations of 
basic norms of consumer protection.
    I would like to focus on the serious consequences of 
preempting the States in this Federal regulation, particularly 
from the perspective of a State that is still reeling from the 
debacle of electricity deregulation. I do not know if you 
received a color copy of the charts attached to my testimony, 
but if you look at chart 1--I will just hold it up. It is a 
green and red chart.
    It shows that in California only a small portion of the 
State, 13 percent of the State, can choose between DSL and 
cable modem service. The remaining red, all the people in the 
remaining red only have either one choice, or no choice at all. 
Of course, broadband deployment, as you can see from the map, 
is clustered in urban areas, but even so, only half of the 
population in California, or over half the population in 
California must take broadband services that are available from 
the monopoly.
    But unlike in other States, California has many more DSL 
customers than cable customers. Based on the latest FCC data, 
DSL has 57 percent of he market, compared to 43 percent for 
cable modem, so DSL is doing well in California, and the 
company, of course, that has most of these DSL customers in 
California is SBC Pacific Bell.
    There is now only one significant competitive DSL provider 
in California, and that is COVAD Communications, but SBC owns a 
stake in that company, which is hardly a prescription for 
vigorous competition. In SBC's service territory, which is most 
of the State, SBC has 85 percent of the DSL lines, so in 
California, deregulating DSL would confer additional advantages 
on SBC, the company that already successfully dominates the 
broadband market.
    But the thing that I am most concerned about is that 
deregulating monopoly broadband providers will leave consumers 
unprotected from a number of abuses, some of which I list in 
this second chart. Deregulation under both Tauzin-Dingell and 
under Breaux-Nickles means that there is no ability for the 
State regulators to restrain prices, and once broadband has 
become a tool that customers cannot live without, deregulated 
providers I believe will hold their residential and business 
customers over a barrel and charge truly exorbitant prices.
    Deregulation also means that State regulators will be 
precluded from serving their traditional role of ensuring 
reasonable service quality. Under these bills, State regulators 
could not either make or enforce fundamental consumer service 
protection, for example, the time it should take to install or 
repair a service, or the quality of data transmission over 
broadband networks.
    Deregulation under these bills would prevent California 
from taking basic steps to prevent mistreatment of customers. 
Under these bills, California could not stop fictitious DSL-
related charges on bills. California could not stop intentional 
and unintentional overcharges on bills. California could not 
mandate and enforce full and fair disclosure of rates and terms 
and conditions of service in marketing materials, and 
California could not prevent providers from disconnecting 
service without notice.
    Let me tell you what the impact is. The California PUC has 
received over 750 customer complaints against SBC Pacific Bell 
for fictitious charges, overcharges, and misleading promotions 
and, as a result, we have opened a formal investigation to look 
into those charges.
    In addition, the California PUC's requirements to give fair 
notice before you get disconnected to customers I believe has 
provided important customer protection in this era of 
bankruptcies and troubles with certain communications 
providers. In fact, as DSL providers have pulled out of the 
California market, they have threatened to leave their DSL-
dependent customers, who are often small businesses, without 
any Internet access service.
    California's rules about fair notice have been crucial to 
those small businesses to make sure that they did not suffer 
business harm in transmigrating from one company to another. Of 
course, the harm from deregulation increases when we recognize 
that likelihood of deregulation would apply not just to 
broadband services but in the future also to traditional voice 
telephone service.
    Tauzin-Dingell and Breaux-Nickles provide incumbent local 
telephone companies the incentive, in fact, to migrate these 
services from traditional circuit switch networks to 
deregulated broadband services. Unfortunately, I speak with 
first-hand experience of the dangers of deregulating markets 
where the market participants retain significant market power. 
Of course, I am referring to the electricity deregulation 
nightmare that California has experienced.
    The architects of deregulation in California gave away the 
State's authority to regulate wholesale prices and protect 
their consumers, but, like electricity deregulation in 
California, both Tauzin-Dingell and Breaux-Nickles forces the 
States to give up their ability to regulate services that are 
essential to the State's economic well-being.
    Tauzin-Dingell I think is even worse, because it prevents 
both the States and the FCC from regulating most aspects of DSL 
services, but those bills would force all the States in the 
Nation to learn the lesson that California does not need to 
learn again. A market should not be deregulated where the firms 
in that market retain significant monopoly power, and I would 
urge you, Senators, to make sure that the States can protect 
their own businesses and families.
    Thank you.
    [The prepared statement of Ms. Lynch follows:]

 Prepared Statement of Loretta M. Lynch, President, California Public 
                          Utilities Commission

    Mr. Chairman, Senators, thank you for the opportunity to speak to 
this Committee about some very significant telecommunications 
legislation that you are considering.
    Over the past year, we have seen a variety of initiatives, both in 
the form of proposed federal legislation and new rules suggested by the 
Federal Communications Commission (FCC) that have as their stated 
purpose to increase the deployment of broadband telecommunications 
services. Two of the bills, the Tauzin-Dingell legislation that passed 
the House and the Breaux-Nickles bill that was recently introduced in 
the Senate, as well as the recent FCC proposals, have a common theme: 
to spur broadband deployment, we need to deregulate DSL and the other 
high-speed services offered by incumbent local telephone companies.
    I am not going to mince words: Deregulation is the wrong way to 
promote broadband deployment. Deregulation will have dangerous 
consequences for the residents and businesses in California and other 
states as well. Deregulation would provide a license to monopoly, or at 
best, duopoly, broadband providers to run roughshod over their 
customers through poor service quality, inflated rates, anticompetitive 
conduct, and violations of basic norms of consumer protection. I will 
discuss these serious problems in a moment, particularly from the 
perspective of a state that is still reeling from the debacle of 
electricity deregulation.
    Proponents of deregulation offer it as a solution to a 
telecommunications problem that has not been well diagnosed. Why is 
broadband deployment lagging behind expectations? Part of the answer is 
limited demand. As Senator Hollings noted in a recent letter to his 
colleagues, the majority of Americans do not see sufficient benefits 
from broadband to add $50 per month to their telecommunications bills. 
Deregulation does not address or remedy some Americans' reluctance to 
embrace this technology--certainly at this price. However, as Senator 
Hollings also stated in that letter, we as a nation need to do a better 
job of deploying broadband in rural and less affluent areas, so that 
educational institutions, health care centers and businesses in these 
areas can better serve their populations. Uneven broadband deployment 
is a specific problem that calls for a specific solution, not the crude 
deregulation of an industry with the hope that some benefits will 
trickle down to the currently underserved. Targeted grants, loans, tax 
credits and other funds, such as Senator Hollings has proposed in S. 
2448, are the right way to bring broadband to the institutions that 
need it in rural and underserved areas.

Broadband Deregulation Harms Residents and Businesses
    To understand the dangers and downsides of deregulation, we need to 
examine what the market for broadband service looks like to the basic 
residential or small business customer. If these customers are lucky 
enough to have a choice, they can choose only between DSL service and 
cable modem service in California. Although satellites and fixed 
wireless technologies are mentioned as possible competitors, 
operational and economic problems prevent them from being a viable 
option for most customers. And wireless handheld phones are still a 
long way from providing true high-speed service at comparable 
prices.\1\
---------------------------------------------------------------------------
    \1\ Most wireless phone offerings charge based on the size of the 
file transferred, when customers send large files, which is the point 
of broadband service, they will rack up huge bills quickly.
---------------------------------------------------------------------------
    If you look at slide one accompanying my testimony, you will see 
that in California, only a small portion of the state, 13 percent, can 
choose between DSL or cable modem service. The remaining areas either 
have only one broadband option, or in some instances, no choice at all. 
Of course, broadband deployment has clustered in urban areas. Even so, 
half of the population in California must take broadband service from a 
monopoly. Regulatory commissions such as the California PUC came into 
being precisely because of the dangers of allowing monopoly providers 
of essential services, such as train transport, electricity, gas and 
telecommunications to be unchecked in the market. Before I elaborate on 
some of the many problems a deregulated monopoly broadband provider can 
cause, let me share a few basic statistics about the broadband market 
in California.
    Unlike most other states, in California, there are many more DSL 
customers than cable modem customers. Based on the latest FCC data, DSL 
has 57 percent of the market compared to 43 percent for cable modems. 
So DSL is doing well in California. And the company that has most of 
these DSL customers in California is SBC Pacific Bell. There is now 
only one significant competitive DSL provider in California, Covad 
Communications, and SBC owns a stake in that company, which is hardly a 
prescription for vigorous competition. In SBC's service territory, 
which is most of the state, SBC has 85 percent of the DSL lines. So, in 
California, deregulating DSL would confer additional advantages on SBC, 
the company that already successfully dominates the broadband market.
    Deregulating monopoly broadband providers will leave consumers 
unprotected from a number of abuses, which are illustrated in slide 2. 
Deregulation under Tauzin-Dingell or Breaux-Nickles means there is no 
ability for state (or even federal) regulators to restrain prices. 
Right now, the broadband providers are trying to build a market for a 
service that has not yet become essential for most households. As a 
result, broadband providers have not attempted huge price increases 
yet. Even so, I would note that the goal of building a market has not 
stopped some providers from raising rates--SBC Pacific Bell has raised 
its DSL prices 25 percent in the last year. Once broadband has become a 
tool customers cannot live without, deregulated providers will hold 
their residential and business customers over a barrel and charge truly 
exorbitant prices.
    Deregulation under Tauzin-Dingell or Breaux-Nickles also means that 
state regulators would be precluded from serving their traditional role 
of ensuring reasonable service quality. State regulators could not 
either make or enforce fundamental customer service protections--for 
example, the time it should take to install or repair service or the 
quality of data transmission over broadband networks. Monopoly 
providers would provide customers the level of service quality that 
providers deemed to be in their interest, not the public interest. From 
the inception of DSL service, the California PUC has received a high 
volume of complaints about installation delays and service breakdowns.
    Deregulation under these bills also would prevent state regulators 
from taking basic steps to prevent mistreatment of customers.

   California could not stop fictitious DSL-related charges on 
        bills.

   California could not stop intentional and unintentional 
        overcharges on bills.

   California could not mandate and enforce full and fair 
        disclosure of rates and terms and conditions of service in 
        marketing materials.

   California could not prevent providers from disconnecting 
        service without notice.

    The California PUC has received over 750 customer complaints 
against SBC Pacific Bell for fictitious charges, overcharges, and 
misleading promotions. As a result, the California PUC has opened a 
formal investigation into these allegations. In addition, the 
California PUC's requirements to give fair notice before disconnection 
have proven to be an important consumer protection. As DSL providers 
have pulled out of the market, they have threatened to leave their DSL-
dependent customers, often small businesses, without any Internet 
access service.
    The harms from deregulation increase when one recognizes the 
likelihood that deregulation would apply not just to broadband service 
but also to traditional basic voice telephone service. Tauzin-Dingell 
and Breaux-Nickles provide incumbent local phone companies the 
incentive to migrate all services, including basic phone service, from 
traditional circuit-switched networks to deregulated broadband 
networks. Once migrated, these currently regulated services would be 
deregulated, and local phone companies would have a, free hand to 
engage in all of the unsavory behavior that is depicted on slide 2, not 
just for broadband service, but plain old telephone service as well.
    Unfortunately, I speak with first-hand experience of the dangers of 
deregulating markets where the market participants retain significant 
market power. Of course, I am referring to the electricity deregulation 
nightmare in California. The architects of deregulation in California 
essentially gave away the state's authority to regulate wholesale 
prices of a fundamental and essential commodity. When generators and 
traders gamed the market to drive up wholesale prices to exorbitant 
levels, California was forced to plead with federal regulators to 
restrain the ridiculous prices, pleas which fell on deaf ears for many 
months. As a result, one of the nation's largest utilities declared 
bankruptcy and we were forced to impose large rate increases.
    Like electricity deregulation in California, Tauzin-Dingell and 
Breaux-Nickles force states to give up their ability to regulate 
services that are essential to the states' economic well-being. Breaux-
Nickles leaves it to the FCC to decide what if any regulations to 
impose on monopoly broadband providers. Of course, that would force 
California and all of the other states to plead their case before a 
federal agency in order to protect their citizens and their economy 
from the unrestrained exercise of monopoly power. Tauzin-Dingell is 
even worse. It prevents both the states and the FCC from regulating 
most aspects of DSL services. Both bills would force states to learn a 
lesson California does not need to learn again--a market should not be 
deregulated where the firms in that market retain significant monopoly 
power.

Effective State Consumer Protection and Enforcement Must be Maintained
    As far as customers are concerned, when they have a problem with 
the DSL service provided by their local phone company, they expect 
their state regulators to assist them with that problem. To customers, 
the installation and repair of DSL service looks and feels like the 
installation and repair of basic phone service, and the latter is 
clearly the responsibility of the states to regulate. Likewise, when 
the local phone company markets, sells, and bills for DSL, customers 
direct complaints about marketing and billing to the same state 
regulators who address complaints about local phone service.
    The FCC appears to agree that state commissions, and not the FCC, 
should be responsible for assisting DSL customers with respect to these 
fundamental consumer protection issues. The FCC regularly refers to the 
California PUC written complaints from customers about DSL service with 
a note telling the customer to take the complaint to the California 
PUC.
    In addition to the consumer protection areas enumerated in slide 2, 
state commissions play an important role in enforcing state laws 
against unfair discrimination and anticompetitive behavior. The 
California PUC is now addressing a formal complaint filed by an 
association of California Internet Service Providers (ISPs) against SBC 
Pacific Bell. The ISPs allege that SBC discriminates in favor of its 
affiliated ISPs and against non-affiliated ISPs. For example, according 
to the complaint, SBC tells customers who wish to leave a non-
affiliated ISP and join SBC's affiliated ISP that the change can be 
made quickly. But if a customer wishes to move to a non-affiliated ISP, 
SBC says that the customer must disconnect its DSL service and wait for 
weeks before service can be restored. If these claims prove to be true, 
then California has a strong interest in preventing such behavior in 
order to prevent ISPs from being driven out of the market by unfair 
tactics and to maintain the benefits of diversity of choice among ISPs 
in California. California would be precluded from this enforcement 
action if Tauzin-Dingell or Breaux-Nickles passes.
    States should also continue to play the roles conferred by the 1996 
Telecommunications Act of setting rates and rules to enable competitive 
DSL providers to share the lines of incumbent phone companies. Line 
sharing offers the hope of sorely needed increased competition in a 
broadband market that is now characterized primarily by monopoly and at 
best a duopoly.
    Beginning last October, SBC has complained loudly that burdensome 
regulation has forced it to curtail broadband deployment, including 
Project Pronto. However, as slides 3 and 4 show, this assertion has 
been met with skepticism on Wall Street. Analysts view the cutbacks as 
a result of problems with DSL economics and SBC's own internal 
problems, issues that deregulation will not solve. In addition, some 
analysts view SBC's ``regulation rant'' as designed to pressure 
legislators to support the Tauzin-Dingell bill.
    Wall Street does not accept the claim that regulation is the cause 
for limitations in broadband deployment, and I would respectfully 
suggest that Congress too take such claims with a very large grain of 
salt.

Targeted Programs Will Increase Broadband Deployment in Rural and 
        Underserved Areas
    I return to the question I posed at the beginning of my testimony: 
why is broadband deployment slower than was expected a year or two ago? 
The answer lies in large part with the downturn in the economy, coupled 
with the unwillingness of households to part with an additional $50 per 
month just to send e-mails faster. Regulation is not responsible for 
this slowdown in consumer demand. Because regulation is not the 
problem, deregulation is not the answer.
    However, as I stated earlier, in rural and underserved areas, 
broadband is not being made available to the hospitals, educational 
institutions, and businesses that need it. Uneven broadband deployment 
is a focused problem that calls for a focused answer. Our nation, and 
the individual states, need targeted programs that will spur broadband 
deployment for these types of institutions.
    Senator Hollings' bill, S. 2448, takes the right approach. It uses 
a combination of loans and a variety of creative grants to funnel money 
directly into broadband deployment projects in rural and underserved 
areas. This approach wisely directs the money where it is needed, such 
as to build broadband infrastructure where phone lines are now too far 
from the central office to support DSL service. In this regard, S.2448 
is vastly superior to the Tauzin-Dingell and Breaux-Nickles bills, 
which leave to chance that deregulation will somehow translate into 
more broadband deployment when and where it is needed.

    The Chairman. Very good. Senator Burns.
    Senator Burns. Ms. Lynch, I am interested in your map of 
California. I notice you have competition in the Los Angeles 
area, the San Diego area, moving on up into the San Joachim, I 
would imagine around Kern County and on up to Fresno and 
Stockton, and then I see Sacramento, then the Bay Area, and I 
would imagine the northern reaches--what is that, Redding and 
Red Bluff?
    Ms. Lynch. Chico.
    Senator Burns. Chico, those areas up there.
    I am interested in, if we deregulated, who is providing in 
those areas wireless services in the green areas, or in the red 
areas, both, to the wire lines?
    Ms. Lynch. You know, I would need to study that for the 
particular geographically based areas. Certainly they are aware 
of our services, but the red represents services where people 
may have access to broadband service, but they have no choice, 
they have no competition.
    Senator Burns. Well, that was not my question. I mean, does 
wireless direct compete with wired lines telephone?
    Ms. Lynch. You mean, cell phone companies compete with land 
line companies? Sure, although I do not know if we have 
entirely, entire cell phone coverage throughout California.
    Senator Burns. It would seem to me that we have got new 
services coming along in the wired area, and it will not be 
long before we have broadband wireless. In fact, we are going 
to take a look at that through broadband legislation, and it 
seems to me that if the wired companies want to deploy 
broadband through DSL or BDSL, then you also have a cable 
company that offers a modem service, and then you also have the 
wireless services, that I can get in my car and dial up a 
computer in my car on the wireless services.
    Would you hold the regulatory burden on that telephone 
company?
    Ms. Lynch. Well, that may occur in the future, but the 
point is, that is not the California experience today, and just 
with electricity deregulation, where we all assumed that 
deregulation would then spur competition, with telephone 
regulation, where you have primarily one choice or no choice, 
and certainly the predominant choice is from your monopoly 
provider, I am concerned that you will kill competition by 
deregulation.
    Senator Burns. Tell me, would you subscribe to the thought 
that even though we are all very supportive of universal 
service, that there is a point of diminishing returns as far as 
the deployment and development of new technologies?
    Ms. Lynch. I am sorry, Senator, I do not understand your 
question.
    Senator Burns. Well, I mean, if I have got a company out 
here, and I am very complacent in what I do, and I receive 
universal service, what incentive do I have to invest in or 
deploy new technologies such as DSL and BDSL?
    Ms. Lynch. I am sorry to be so dense, but----
    Senator Burns. I am not communicating very good here. Let 
me see, how do I do this?
    I am starting to develop an idea that--I am the only 
telephone company here, right here in Washington, D.C., right 
here in this 17 square miles of logic-free environment.
    [Laughter.]
    Senator Burns. And I am receiving universal service. No 
matter what my wireless competitor may be doing, I am pretty 
comfortable. I can make my little 8 to 12 percent return for my 
investors, and I do not have to deploy new technologies or new 
devices, I do not have to do anything in order to turn a 
profit, because I am under your regulatory commands, so to 
speak, so I am not going to develop anything.
    Now, they can, and they may have to get a return, but 
whenever you take that regulatory regime off of them, and I 
have got to compete with them, am I going to take a look at 
deployment of new technologies, and maybe bring down the prices 
in the marketplace, rather than make the appeal to--because I 
can come to you and say, okay, my taxes went up, I have got to 
have a return, so you are going to grant them an increase in 
charges.
    Ms. Lynch. Well, I do not know how it works in Washington, 
D.C., but in California we have a new regulatory framework 
which provides an incentive for the monopoly to have as low a 
cost as possible so that they essentially share the profits 
between the shareholders and the ratepayers, so that the 
monopoly has an incentive to keep their costs low so that their 
shareholders get more of the profit.
    Senator Burns. I still do not--well, I am kind of coming 
down on the other side of the track on that, and we are not 
going to talk about your electric deregulation, because you did 
it and you did not do it, and kind of like that light bulb 
deal, but anyway, thank you very much, Mr. Chairman. I will 
listen to the rest of this, then I am going to go vote. I went 
to vote a while ago. I thought we had one light--we have got a 
bulb out.
    The Chairman. We are going to vote. Go ahead.
    Senator Breaux. Thank you, Mr. Chairman, thank the panel 
members.
    Let me maybe ask Mr. Nelson, who, I guess, represents an 
association of State regulators, I note that in your testimony, 
obviously you point to the Breaux-Nickles bill, the section 
that says that broadband services shall not be subject to the 
jurisdiction of any State and object to that.
    Would you be all right if the Breaux-Nickles bill, instead 
of saying that broadband services shall not be subject to the 
jurisdiction of any State, that instead of saying that the bill 
would say that States would have exactly the same jurisdiction 
and authority to regulate cable modem services and DSL services 
in the future that you have today?
    Mr. Nelson. Well, I think we would have to consider that, 
Senator. The language in the bill now is very disturbing 
because it says, notwithstanding any other part of the law.
    Senator Breaux. Suppose we just said you have the same 
regulatory authority in broadband services that you have today. 
Would that be okay?
    Mr. Nelson. Well, again, we want to consider that in the 
context of the rest of the bill, obviously, but that would be 
an improvement, in my view, over the language in 262(b) right 
now.
    Senator Breaux. So if we say that you have the same 
regulatory authority to regulate broadband services today, what 
does that mean to you? What authority do State regulatory 
agencies have in the area of regulating cable modem or DSL 
services?
    Mr. Nelson. Well, I think it varies. I think some States 
like California have gone further than States like Michigan and 
other States, but I think for most States what is important is 
that right now we have under section 251 of the act the ability 
to add unbundled elements to the list the FCC has developed.
    Senator Breaux. You are talking about voice transmission.
    Mr. Nelson. In some cases the States have added access to 
broadband as part of that list.
    Senator Breaux. Let me ask you this question. Didn't the 
FCC determine in 1998 that DSL was an interstate service and 
should be regulated by the FCC?
    Mr. Nelson. That was their initial determination--it has 
been challenged in court--that is correct.
    Senator Breaux. And didn't, in February of this year, they 
also concluded that the wire land broadband Internet access 
services were also interstate information services?
    Mr. Nelson. Yes, and that is still a tentative conclusion 
on their part that we are challenging.
    Senator Breaux. And didn't, on March 14 of this year, the 
FCC determine that cable modem services were also to be 
considered interstate information services?
    Mr. Nelson. They did, and I think that is subject to court 
challenge.
    Senator Breaux. Okay. So what I think we have here from 
your association that you object to saying that States would 
not have jurisdiction to regulate broadband services. I cannot 
find out any real place where you have that authority, because 
the FCC on several occasions have ruled broadband services are 
Internet services, both DSL and cable modem, and I am fine with 
saying look, you have the same authority you have today.
    I do not think you have any authority today, because it is 
interstate. You cannot regulate radio stations in the States. 
That is interstate service. You do not regulate television 
stations, even though they may be located in one State. That is 
interstate in nature. You have to have a national policy.
    Mr. Nelson. Well, the FCC did, Senator, say in 1999 that 
the incumbent carriers had to provide line-sharing to 
competitive carriers.
    Senator Breaux. I understand that the FCC said that.
    Mr. Nelson. And let the States implement those policies.
    Senator Breaux. Yes, the FCC said you had that authority, 
but the FCC, right now, as we sit here today, I mean, you can 
say we are appealing, we are negotiating, and everything else, 
but the fact remains that today broadband Internet services 
have been determined by Congress and through the FCC that it is 
an interstate service. It has to be regulated by the FCC.
    I am fine with saying, look, you have the same authority as 
you have today. I do not think you have a lot of authority 
today, and you object to legislation that says broadband 
services shall not be subject to the jurisdiction of any State.
    I am saying, look, let us say, okay, you have the same 
authority to regulate broadband services that you have today. 
Is that not all right?
    Mr. Nelson. Well, the other problem with that is that the 
way the language reads in the bill today, and again if you 
change it it might differ, but it says any facilities and 
equipment used for broadband, which would include facilities 
that are also used for voice, and if you preempt that, you 
preempt our ability to even regulate the voice network as well, 
and that undermines all of our ability to create competition.
    Senator Breaux. Well, you have jurisdiction over intrastate 
voice telecommunications, but you do not have it over 
interstate voice telecommunications, do you?
    Mr. Nelson. No, but this provision goes to section 251, 
which does provide us----
    Senator Breaux. Okay, say we say we are not doing anything 
to affect 271 or 251 requirements, period, does that make it 
all right with you? Because what I am thinking I am hearing 
from you, you want more authority than you already have.
    Mr. Nelson. No, that is not the case.
    Senator Breaux. Because are you satisfied--exactly what the 
authority you have, if we say that in the bill?
    Mr. Nelson. And I would dispute the fact that we do not 
have any authority over DSL.
    Senator Breaux. Okay. If I say in the legislation that the 
States are going to have the same jurisdictional authority over 
broadband services that you have today, is that not all right?
    Mr. Nelson. Yes. Assuming the rest of the bill does not 
change, yes.
    Senator Breaux. Thank you.
    Mr. Nelson. I think Ms. Lynch may disagree with that, 
though.
    The Chairman. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman.
    Back in my State, the Florida Public Service Commission has 
said that FCC analysis of the national unbundling requirements 
might benefit from State-specific evidentiary hearings, and I 
would like to know what you think, and would you support such a 
process? Any of you. Go ahead, Ms. Lynch.
    Ms. Lynch. Well, certainly I think that it would benefit 
from State-specific evidentiary hearings, because the States 
are different, and the way both broadband and telephone 
services are deployed are different.
    Mr. Nelson. I would agree with that.
    Mr. Vasington. We have the same position in Massachusetts.
    Senator Nelson. Now, according to the most recent advanced 
services report, the FCC determined that, quote, advanced 
telecommunications is being deployed to all Americans in a 
reasonable and timely manner, end of quote.
    From your perspectives as a State commissioner, would you 
agree with the FCC's assessment?
    Mr. Vasington. The only word in there I would object to is 
all, because I do hear from some of the few customers in 
Massachusetts who cannot get either DSL or cable modem who are 
real unhappy about it, so I would say it is not being deployed 
to all customers, but I think for the vast majority of 
customers it is reasonable and timely.
    Mr. Nelson. I would add to that that in Michigan we have a 
situation similar to California in that most of our DSL is now 
provided by the incumbent, and so there is not real competition 
in DSL markets, and so that is why I think in part the prices 
are higher than they should be, and why people are not signing 
up for it.
    Ms. Lynch. While it may be being deployed, if the various 
providers just carve up the various States, and the only have 
one choice, that is not much for consumers. It certainly does 
not protect consumers.
    But I do think for certain areas, and certainly the rural 
areas of California, Senator Hollings, S. 2448 would be helpful 
just for additional deployment.
    Ms. White. I think in Pennsylvania, outside of the typical 
suburban and urban areas, we have the typical situation where 
you have either one or no providers.
    Senator Nelson. Some have advocated identification of local 
economic development initiative and public-private partnerships 
that have been effective in spurring broadband demand at the 
local level. Tell us about your experience in your State and 
whether or not there have been any local initiatives to spur 
that broadband deployment.
    Mr. Vasington. I can tell you in Massachusetts we have had 
a very successful initiative that started out in the most rural 
part of the State, the Berkshires.
    This initiative was called Berkshire Connect, and it was a 
public-private partnership that was designed to aggregate 
demand of small and medium-sized businesses so that to the 
suppliers they would not look like small and medium-sized 
businesses. Together they would look like one big business, and 
that gave them a lot of leverage to go out and do a request for 
proposals and get some competitive bids to supply them with 
broadband services in a way that they might not have had if 
they had stayed separate, as just their own sized company.
    That initiative has been copied now in several parts of our 
State, including Franklin County on Cape Cod.
    Mr. Nelson. Yes, Senator, in Michigan we have just passed 
legislation which allows both public and private entities to 
take advantage of low-interest loans through the State. This is 
intended to help underserved areas, because there is a 
provision that makes it easier for underserved areas to take 
advantage of this fund, and so we think that is going to be a 
big boon to broadband deployment and should be copied by other 
States as well.
    Ms. White. I am aware of some individual success stories 
within Pennsylvania and, in fact, to give Verizon credit, I 
have a meeting set up next week with a consortium of businesses 
and with a consortium of providers which they have graciously 
taken the lead to convene.
    Ms. Lynch. California has taken a wide variety of 
approaches. California has a--it is called the California 
Teleconnect fund, which provides specific grants and subsidies 
for schools and hospitals and public entities, and also we have 
several public-private partnerships, most notably one in the 
Silicon Valley that was spearheaded by Sun Microsystems, and 
then last year the California legislature passed a few pilot 
programs specifically targeted to rural development.
    Mr. Nelson. Mr. Chairman, we have a vote, so I will cease, 
and thank you for the opportunity.
    The Chairman. I do not want the commissioners to think that 
their brief appearances will only be given brief consideration. 
On the contrary, let me thank each of you for the State 
commissions holding the line. With respect to trying to develop 
competition, there is no question, as Congressman Markey 
pointed out, it was not a deregulation bill, it was a 
demonopolization bill.
    You see, we had the experience of so-called deregulation of 
the airlines, and at the time we did away with the CAV, and I 
just had the new chairman of USAir, that serves in my 
particular area, and I had the Secretary in the next room. I 
said, now, just call up, not this weekend, that is too quick a 
notice, but next weekend, get a round-trip ticket from 
Washington to Charleston, leave on Friday, come back on Monday, 
$1,048. That is just coach class. It is dreadful.
    I had way better service 35 years ago, or 36 years ago when 
I first came. The service has gone down, the price has gone up, 
and the airlines have all gone broke, and they keep babbling 
around in the Congress, deregulation worked, deregulation 
worked. Look at all the people traveling. That is not the 
measure at all.
    What happens is that we try to demonopolize on the one 
hand, and get you folks to implement on the other hand, and had 
you not held the line with respect to these combining rather 
than competing Bells, we would be in dreadful circumstances. 
You can see the arrogance. I mean, they come across with the 
tricky questions trying to equate data and disregarding the 
regulations with respect to price and everything else of that 
kind. It is just unforgivable almost, what they have attempted 
to do, and had it not been for the State commissions we would 
be in a heck of a soup, so our Committee is really indebted to 
you, and we will keep the record open for further questions by 
the Members who had to go to that roll call.
    Thank you very, very much. The Committee will be in recess 
subject to the call.
    [Whereupon, at 11:39 a.m., the Committee adjourned.]


                            A P P E N D I X

                                         Ernest F. Hollings
                                                        May 1, 2002
Dear Colleague:

    Our friend, Senator Breaux, is fishing for cosponsors for a so-
called ``parity'' bill. While the arguments offered for cosponsorship 
are simple, the consequences of this legislation are anything but. This 
legislation in the name of ``parity'' is nothing more than a Trojan 
Horse to deregulate the Bells and extend their monopoly. The Bells and 
their CEOs are out and about arguing they need to be deregulated so 
they can fuel a broadband explosion and finally deliver on the promise 
of the Information Age. We've heard their promises before and we know 
the truth. There is not now, and there has never been, any prohibition 
on the Bells offering their customers broadband. In fact, SBC proudly 
boasts that it lined up 183,000 DSL customers in the first quarter 
alone this year--under the current rules the Bells decry. Their 
argument boils down to the claim that the Bell companies are regulated 
while cable is not, and Congress and/or the FCC should eliminate this 
``disparity.'' But the Bells are comparing apples and oranges.
    The two industries are markedly different, and have been treated as 
such by the Congress and the FCC for decades. If we are to up and 
change that now, we must look carefully at every area where the 
industries are treated differently, and not just pretend its only about 
regulatory ``disparity'' on broadband. Maybe the answer is to increase 
regulation on cable to create parity in the public interest. Maybe its 
not. Maybe we should look at parity between the Bells and the 
competitive carriers they want to squash. The Bells currently enjoy 
preferential access to buildings, local rights of way, quicker line 
provisioning and billions of revenues from their captive customer base. 
I'm sure competitive carriers would like parity in these areas. 
Regardless, the parity sought by the Bells is nothing more than their 
latest attempt at a monopoly grab.
    While the Bells claim they need ``parity'' to catch up to cable, it 
is the Bells who have had broadband technologies the longest. For near 
20 years, the Bells sat on a variety of broadband technologies--ISDN, 
xDSL,--you name it, all the while seeking deregulation at the state and 
federal level which they claimed would free them up to offer broadband 
services. A look at history shows their claims ring hollow. Prior to 
the 1996 Act, the Bells had no obligation to provide competitors access 
to their local networks. Their pitch to state regulators--let us raise 
prices, and we'll roll out broadband. While they raised prices in 
states where allowed to, the broadband almost never came--costing 
billions to the ratepayers and providing dividends galore to the 
shareholders. In their annual reports they promised Wall St. they would 
wire tens of millions of American homes with fiber (which would allow 
broadband speeds 25 to 50 times faster than the services today). Today, 
almost a decade later, one analyst report finds only 33,000 homes 
served by fiber, of which only 300 are served by the Bells. Then, with 
the 1996 Act, the Bells begged Congress to let them into long distance, 
so they would open their markets and compete across America. We gave 
them that opportunity and they decided to combine and litigate, rather 
than compete. As for broadband, it was only after cable and competitive 
phone carriers entered the market (after we passed the 1996 Telecom Act 
allowing them to do so) that the Bells finally started offering 
broadband in earnest.
    Now come the Bells calling again with their biggest charade. For 
those supporting deregulation in the name of ``parity'', keep in mind 
that the Bell companies still control over 90 percent of the last lines 
into every home and business in America according to the latest figures 
from the Federal Communications Commission. While Verizon and SBC have 
opened some of their markets to competition, Bell South and Qwest have 
not, and today, more than six years after we passed the 1996 Act, the 
Bells have complied with the market opening requirements of the Act in 
only 11 states. What is so disappointing about this record is that the 
Bell lawyers wrote the pro-competitive requirements that they now 
flout.
    And as if this were not enough, ``parity'' could have a devastating 
impact on universal service and a disproportionate impact on rural 
America, because broadband services will never be eligible for 
universal service support as contemplated by the 1996 Act. In 1996 we 
knew a broadband revolution was possible and didn't want rural America 
left behind. Thats why we included universal service and built in an 
evolving flexibility to help rural consumers keep up with the 
information age. Under ``parity'' however, broadband may no longer be a 
common carrier service and, therefore, may never be eligible for 
universal service support.
    Please don't be misled by the Bell claims for parity. If there were 
ever a bait and switch, this is it. Their lawyers and lobbyists have 
been at this for some time. I know them well. With this parity push, 
they want to avoid opening their markets to competition when it comes 
to broadband. With this approach, we can kiss competitive telecom 
carriers goodbye and extend the Baby Bells' monopoly into the lucrative 
broadband market for business customers. While cable may have an edge 
with residential broadband, only because they started first, they have 
never been a serious player in the business marketplace, where the 
Bells still dominate. Pass ``parity'' and you create at best a duopoly 
between cable and the Bells in residential America and an uncontrolled 
monopoly in the money rich business market. The result--higher prices, 
shoddy service and less innovation--the exact opposite of what the 
Bells claim and what Congress should be promoting.
    With the exception of rural America and underserved areas, there is 
no broadband deployment crisis in America, notwithstanding the Bell 
claims. 80-85 percent of Americans have access to broadband, but only 
10-12 percent are buying. Not many people want to pay $50 a month for 
faster access to their emails. On the other hand, rural businesses, 
hospitals, and educational institutions ought not be denied access to 
services the rest of America may soon take for granted. I'm working on 
legislation to promote broadband in these underserved areas which I 
hope to introduce soon. Let's focus on the real problems, and not those 
alleged by the Bell monopolies.
        Sincerely,
                                         Ernest F. Hollings
                                 ______
                                 
                Prepared Statement of Hon. Max Cleland, 
                       U.S. Senator from Georgia

    Mr. Chairman, I would like to bring to this Committee's attention 
to the issue ensuring that persons with disabilities have 
communications access equal to those without disabilities. The Internet 
has revolutionized this idea in a positive and exciting way. Today, I 
am privileged to introduce a report by Dr. Frank Bowe of Hofstra 
University which discusses the advantages broadband technology can 
bring to persons with disabilities. This report, titled ``Broadband and 
Americans with Disabilities,'' is being released today. I ask unanimous 
consent that a copy of this report be submitted for the record.*
---------------------------------------------------------------------------
    * The information referred to has been retained in Committee files, 
and can be found on-line at http://www.newmillenniumresearch.org/
archive/disability.pdf
---------------------------------------------------------------------------
    I would also like to take a few minutes to highlight the findings 
of the report. For persons who are deaf or hard of hearing, the report 
finds that broadband technology can aid in delivering seamless signing 
ability or other interpretive services to that person. This 
communication can occur in almost real time as well. For those persons 
with visual disabilities broadband offers a medium over which 
information can be read to users, again in almost real time. 
Additionally, the Internet enables all users to virtually visit places 
and people without leaving their office, school, or home. This ability 
is especially important to the segment of our society who may not have 
the mobility that others take for granted. Likewise, the network 
effects of bringing more people online can mean breaking down barriers 
and dispelling misinformation about disabilities.
    While the report is encouraging by stating that Internet use among 
persons with disabilities is increasing, broadband use among this group 
is lacking due to two factors cited by the study: affordability and 
accessibility. These are the areas in which I believe Congress can and 
must help out. I do not believe that we should rule out any angle from 
which to approach this problem but rather we must examine ways of 
combining several proposals to meet this important goal. Likewise, I 
believe we ought to be technology neutral in the policies we devise 
because there is not one method of delivering broadband that will work 
for all areas of this country.
    One area of the study that is encouraging is the relatively same 
broadband ``take rate'' of persons with and without disabilities. Dr. 
Bowe states that about 16 percent of persons with disabilities who have 
Internet service use one of the two main forms of high speed service--
cable modem and DSL service. However, if barriers to this service were 
to be removed, I am convinced this percentage could be higher.
    I agree with Dr. Bowe that the Internet can change the lives of 
persons with disabilities in a way that no recent technology has. 
Because of this ``unprecedented value,'' as Dr. Bowe puts it, the 
disability community can be a leader in pushing for high speed Internet 
service. Today, I would like to hear from our witnesses on what we can 
do to ensure no one is left behind or overlooked by broadband 
deployment. How do we in Congress and our counterparts at the State and 
local level address the issues of affordability and accessibility 
raised by this report, which are also faced by those outside the 
disability community as well? This is a question I have been concerned 
about since coming to the Commerce Committee, but I believe if we can 
do it with utilities and with telephone service, we can do it with 
virtually anything.
                                 ______
                                 
                                    Alameda Power & Telecom
                                          Alameda, CA, June 3, 2002
Hon. Ernest F. Hollings
Chairman,
Senate Committee on Commerce, Science, and Transportation
Washington, DC
    Re: May 22, 2002 Hearing Record on Broadband and Local 
                                                Competition

Dear Chairman Hollings:

    On behalf of Alameda Power & telecom. a locally-owned and 
controlled utility providing cable and Internet service to residents 
and businesses in Alameda, California, I respectfully request that the 
attached statement be included in the hearing record for the 
Committee's May 22, 2002, hearing on broadband and local competition.
    Living on the ``bleeding edge'' of broadband deployment, Alameda 
Power & Telecom has experienced first-hand the financial, technical and 
competitive challenges facing the industry. We look forward to working 
with the Committee in advancing telecommunications policies and 
programs that facilitate greater deployment of broadband. effective 
competition, and consumer service and protection.
    Please feel free to contact the staff of Alameda Power & Telecom at 
(510) 748-3908, if we can provide you with any additional assistance.
        Sincerely,
                                   Sebastian M. Baldassarre
                                  President, Public Utilities Board
                                 ______
                                 
             Prepared Statement of Alameda Power & Telecom

    Alameda Power & Telecom applauds the Committee's efforts to review 
the current state of the telecommunications industry and assess what, 
if any, additional steps should be taken to facilitate greater 
deployment, usage and competition in the provision of broadband 
services.
    As the Committee proceeds, Alameda Power & Telecom would urge you 
to follow these guiding principles:

   Maintain support for the basic framework of competition 
        established in the 19 percent Telecommunications Act;

   Resist efforts to limit or prevent municipalities or other 
        governmental entities from providing telecommunications 
        services;

   Limit the focus of federal regulation to consumer 
        protection; and

   Provide widely available financial assistance to help defray 
        the cost of infrastructure investment and promote more rapid 
        deployment of broadband--particularly to the ``last mile.''

Municipal Provision of Telecommunications Services
    Municipal governments are traditionally cautious and risk averse. 
One could question, then, why Alameda and others have entered into what 
has become a high-risk business. The answer lies in another of the 
attributes of local government; we exist to provide the community with 
services that they want and need at a rate they can afford.
    Customer dissatisfaction with incumbent providers led the citizens 
of our community to approve a ballot initiative amending the City 
Charter allowing Alameda Power & Telecom to provide telecommunications 
services. As a result of that community initiative, Alameda Power & 
Telecom provides the following services that were not previously 
available--digital cable, higher-speed Internet connections for homes 
and businesses, and networking of local schools and government offices.
    Municipal telecommunications systems provide needed competition and 
customer choice. Alameda Power & Telecom offers cable TV and Internet 
access of higher quality and lower cost than incumbent private 
providers. This competing service provides residents and businesses in 
Alameda with important alternatives and puts pressure on incumbent 
providers to improve service and reduce prices.
    Some have questioned the role of local government in a business 
enterprise and claimed that municipal utilities are unfairly 
subsidized. A careful study of local government services shows that 
virtually every local government function--police and fire protection, 
schools, roads, water and sewer service, etc.--can be provided by 
private businesses. Yet, the availability of privately run alternatives 
does not diminish the appropriateness of local provision of these 
services. It is the local citizens that decide the shape and reach of 
their local government. When public service is chosen, the determining 
factors tend to be: local control, non-profit service and community 
responsiveness. The same holds true for municipal telecommunications 
services.
    Nor are municipal telecommunications systems unfairly subsidized. 
While a portion of the Alameda Power & Telecom fiber-optic network was 
constructed using electric utility revenues for utility purposes, this 
is not a subsidy. The electric utility needs the fiber-optic system to 
monitor, manage and control its distribution system.
    Nor do municipal telecommunications systems displace private 
business. In fact, they provide new opportunities for public-private 
partnerships. For example, a portion of our underwater conduit is 
leased to Pacific Bell--the incumbent private telecom company in 
Alameda. Alameda Power & Telecom's investments will also pave the way 
for other, private competitors to enter the market and challenge the 
incumbent providers.
    Restricting municipal telecommunications service would: (1) preempt 
the decisions of local voters, (2) restrict customer choice in service 
providers, (3) limit the services available to residential and business 
consumers, (4) run counter to the intent of the 1996 Telecommunications 
Act, and (5) threaten the investments made to date in municipal 
telecommunications facilities, and the private bondholders of those 
investments.

The Role of Federal Regulators
    The Telecommunications Act of 19961cR to the states the primary 
role of regulating local telecommunications services. Alameda Power & 
Telecom believes this regulatory model is appropriate and allows for 
development of telecommunications policies that best reflect and 
respond to local conditions and needs.
    However, we believe there is a continuing role for federal 
regulation in the area of consumer protection. While individual states 
can act to prevent fraudulent and abusive consumer practices, national 
standards are appropriate to ensure consumer protection and prevent 
shady telecommunications providers from escaping effective regulation. 
One by-product of the competitive market model is the emergence of 
opportunities for market manipulation and consumer abuse. Enron's 
California trading practices is but the latest example of private 
industry exploiting the rules of an immature market. A strong federal 
hand in market oversight and enforcement of consumer protections is 
necessary and appropriate.

Financial Assistance Is Needed, But Must be Equally Available
    There is a growing recognition that federal financial assistance is 
needed to encourage investment in telecommunications infrastructure. 
Some proposals focus on investments in rural communities to overcome 
the ``digital divide,'' while others seek to encourage private 
investment in next generation technology.
    Alameda Power & Telecom believes that both approaches are sound--
yet both are unfortunately limited. Alameda is located in the heart of 
Silicon Valley and its demographic profile is that of an urban 
community, with a mix of homeowners, businesses and industries. 
However, as an island, Alameda faces many of the same challenges to 
infrastructure investments as those faced by rural communities. It was 
many of those factors--a limited customer base physically remote from 
the main backbone, and connected only by costly submarine cables--that 
led our citizens to choose the ``local option'' for telecommunications 
service.
    Similarly, our infrastructure needs and investment challenges are 
largely indistinguishable from those of private enterprise. 
Consequently, investment incentives--like tax credits--do nothing to 
address the needs of our community and our telecommunications system. 
We would encourage the Committee, as it considers investment 
incentives, to develop non-discriminatory mechanisms that provide 
comparable incentives to all segments of the industry. A model for 
accomplishing this objective already exists in the Senate-passed energy 
bill; tradable tax credits for investments in renewable technology made 
by consumer-owned electric utilities. We would encourage Congress to 
include such a mechanism in any package of incentives for 
telecommunications investment.
Conclusion
    As the Committee recognizes, high-speed broadband services have the 
potential to revolutionize commerce, education and government. Federal 
telecommunications policies should promote competitive entry, broadly 
available investment incentives and strong consumer protections.
    Alameda Power & Telecom looks forward to working with Congress to 
advance these objectives.
                                 ______
                                 
                                             NSTAR Electric
                                           Boston, MA, June 3, 2002
Paul B. Vasington, Chairman
James Connelly, Commissioner
W. Robert Keating, Commissioner
Eugene J. Sullivan, Jr., Commissioner
Deirdre K. Manning, Commissioner
                           Re: 2002 Summer Readiness Report

Dear Chairman Vasington and Commissioners:

    In accordance with the directives of the Department of 
Telecommunications and Energy (the ``Department''), NSTAR Electric 
hereby files the 2002 Summer Readiness Report (the ``Readiness 
Report'').* In addition to providing an overview of the Company's 
preparedness to meet customer requirements during the summer of 2002, 
the Readiness Report encompasses the first Quarterly Report (due on 
June 1, 2002) and the Company's report on the value and feasibility of 
including certain factors in the long-range planning process, as 
provided by the Department in NSTAR Electric, D.T.E. 01-65 (2002).
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    * The information referred to has been retained in the Committee 
files.
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    Please do not hesitate to contact me should you need additional 
information regarding the Company's reliability initiatives. Thank you 
for your attention to this matter.
        Sincerely,
                                               Mark L. Reed
                                           Director, Public Affairs

                                  
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