[Senate Hearing 107-1136]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 107-1136
 
                        FINANCIAL TURMOIL IN THE
                    TELECOMMUNICATIONS MARKETPLACE;
                MAINTAINING THE OPERATIONS OF ESSENTIAL
                       COMMUNICATIONS FACILITIES

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 30, 2002

                               __________

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




                    U.S. GOVERNMENT PRINTING OFFICE
92-189                      WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

       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 July 30, 2002.......................................     1
Statement of Senator Allen.......................................     9
Statement of Senator Boxer.......................................    10
    Prepared statement...........................................    11
Statement of Senator Breaux......................................     7
Statement of Senator Brownback...................................    12
    Prepared statement...........................................    13
Statement of Senator Burns.......................................     5
Statement of Senator Cleland.....................................     8
Statement of Senator Dorgan......................................     7
Statement of Senator Fitzgerald..................................    83
Statement of Senator Hollings....................................     1
    Prepared statement...........................................     2
Statement of Senator McCain......................................     3
Statement of Senator Nelson......................................    10
Statement of Senator Wyden.......................................     6

                               Witnesses

Legere, John, Chief Executive Officer, Global Crossing, Limited..    54
    Prepared statement...........................................    57
Mohebbi, Afshin, President and Chief Operating Officer, Qwest 
  Communications International, Inc..............................    70
    Prepared statement...........................................    71
Powell, Hon. Michael K., Chairman, Federal Communications 
  Commission.....................................................    14
    Prepared statement...........................................    23
Sidgmore, John W., President and Chief Executive Officer, 
  WorldCom.......................................................    62
    Prepared statement...........................................    64

                                Appendix

Rose, John, President, Organization for the Promotion and 
  Advancement of Small Telecommunications Companies (OPASTCO), 
  prepared statement.............................................    91


                        FINANCIAL TURMOIL IN THE
                    TELECOMMUNICATIONS MARKETPLACE;
   MAINTAINING THE OPERATIONS OF ESSENTIAL COMMUNICATIONS FACILITIES

                              ----------                              


                         TUESDAY, JULY 30, 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. The Committee will please come 
to order. Let the Committee note that our distinguished 
Chairman of the Communications Subcommittee, Senator Inouye, is 
also the Chairman of the Defense Appropriations Subcommittee, 
and he is busily getting that bill ready for the floor, and 
could not be with us, but the Committee thought it was 
important that we proceed with this hearing. We particularly 
appreciate Chairman Powell being with us. I will put my 
statement in the record.
    I would just note that one of the principal interests that 
this Senator has and, of course, the Committee has is with 
respect to all of these telecommunications companies going 
bankrupt, out of business, or otherwise in financial 
difficulty, and at the same time the commission and the 
Government is charged with keeping current lines of 
communications to ensure there is no disruption.
    I would like to know from the Chairman what laws, if 
necessary, are needed, in addition to his authority now. 
Otherwise I would like to know how the commission intends to 
handle the requirement that there be no disruption from a 
bankrupt entity that is feeding into a for-profit last line, or 
CLEC, or otherwise Bell Company. They have got to keep those 
lines going, concerning bankruptcy, and how they are going to 
be paid.
    Otherwise with respect to the regulations themselves. On 
the one hand, distinguished Chairman, I was noted as saying 
there is probably too much competition. You are now going in 
the other direction, particularly with respect to regulations. 
We found--and Congress is in a fever to strengthen the 
regulations and strengthen the requirements. There was too much 
flexibility given these accountants and auditors, and yet I 
find the commission having hearings to try to cut back on the 
auditing and the accounting and the regulations with respect to 
it. It should be explained to the Committee so we will 
understand what we are about.
    [The prepared statement of Senator Hollings follows:]

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

    We are here this morning to address the state of the communications 
industry. As it stands, the industry is in the midst of a financial 
crisis. It is also experiencing a crisis of confidence, as it concerns 
the integrity of many of its key players.
    The economic downturn that took hold of the American economy close 
to eighteen months ago indeed set back growth in a number of American 
industries. The telecommunications industry, however, has been 
especially hard hit. In 2001, the sector lost 317,777 jobs, and in the 
first 6 months of 2002, the sector lost 165,840 jobs an increase of 27 
percent from the same period in 2001. The magnitude of the sector's 
present depression is exemplified by the fact that within this same 
period the industry lost $2 trillion in stock value.
    This economic devastation, however, has not been limited to the 
wireline companies. Both the wireless and cable industries also have 
had to deal with the negative effects of the market regression.
    Unfortunately, and especially as it concerns the telecommunications 
sector, these economic problems have been exacerbated by allegations of 
accounting fraud by key entities in the industry, on both the long 
distance and Bell company sides. The most significant cases, of course, 
involve WorldCom--the number two long distance provider in the 
country--and Qwest--a major provider of local service in the Midwestern 
and western states. Both have been accused of doctoring their books to 
the tune of billions, with WorldCom alone having faked profits and 
earnings in an amount of $3.8 billion.
    Although these revelations have occurred in concert with incidences 
of massive corporate fraud across the spectrum of the American 
marketplace, this does not negate the particular devastation that has 
been experienced by the telecommunications sector and the 
communications industry as a whole. Not only were investors duped and 
cheated, so were the companies' competitors and potential competitors. 
By feigning earnings and profits, these companies were able to gain 
positions in the market that they otherwise may not have achieved. This 
is not right and cannot be tolerated.
    I helped write and remain a strong supporter of the 1996 
Telecommunications Act. However, it doesn't matter what act or law or 
philosophy governs the marketplace. When companies engage in out right 
fraud, no matter the particular industry, they gain the ability to 
upset the very purpose of those laws.
    As a consequence of the misdeeds that have occurred with these 
companies, millions of Americans risk a disruption of service. This 
hearing is designed to shed some light on this situation and to ensure 
that both the FCC and Congress are poised to take the appropriate 
action necessary to protect consumers, maintain stability in the 
market, and preserve the mission of achieving a dynamic competitive 
telecommunications marketplace.
    But we also cannot ignore the fact that part of the problems we are 
addressing involve larger policy issues--such as the broad policy of 
this Administration. We all know that the SEC has a major role in 
addressing the current crisis in the financial markets. This crisis has 
been precipitated not only by the fraud inside companies, but fraud 
that has been facilitated by accountants and financial analysts. But we 
should not be too surprised by the depth of restatements we are 
witnessing given that the current SEC chairman came into office making 
clear he would enforce SEC rules in concert with the Bush 
Administration's ideology--pursue massive deregulation at all cost. 
Well we can see what that policy has gotten us--Enron and billions of 
lost investments by average every-day working Americans. I want to make 
sure this policy doesn't destroy the telecommunications industry.
    As it stands, we must take at least three major actions. The first 
priority must be to ensure that consumers continue to receive service, 
especially as it concerns companies that are currently in, or may be on 
the brink of bankruptcy. Second, there must be efforts to address 
issues concerning the state of all industry sectors. At this point, 
these industries are so inter-connected that major problems in one will 
certainly affect the other. Lastly, we must also make sure that we 
ensure a dynamic and competitive telecommunications market. It would be 
tragic if regulators sought to use this current crisis as justification 
for forgoing the goals of securing competition in the industry.
    As noted, with regard to the financial troubles facing the 
telecommunications industry, my principal concern at this point is 
ensuring that consumers continue to receive service. This is 
particularly important since the nation's ability to engage in commerce 
is heavily dependent on communications. Also, residential consumers 
rely upon the communications network in emergencies as well as for day-
to-day activities. The U.S. communications network is the best in the 
world; thus, we, as policy-markers, must make sure that as we weather 
this difficult economic period, our communications network does not 
become a casualty of this period.
    The FCC has authority under Title Two of the Communications Act to 
intervene with respect to common carriers and work to maintain 
telecommunications service to consumers. I believe it will be useful to 
hear what actions the FCC is taking to address this issue in light of 
some of the existing bankruptcies. We also look forward to FCC guidance 
as to whether the FCC has sufficient authority, or needs additional 
authority, to ensure that consumers receiving communications services 
from companies that are not common carriers are, nevertheless, 
protected from abrupt service terminations. Most notably, with respect 
to Bell Broadband Service, I am concerned that the FCC is going down a 
path in which it could, in effect, relinquish its existing authority to 
intervene when a carrier terminates service.
    I look forward, as well, to hearing from the companies about what 
is being done to remedy improper accounting practices, in addition to 
having a better understanding of the difficulties that they are 
presently experiencing. An understanding of these difficulties 
hopefully will aid us in taking appropriate action as members of 
Congress to keep the nation's viable telecommunications network 
properly functioning.
    As I noted previously, the telecommunications network is an 
interlocking network. Carriers receive and hand-off traffic to other 
carriers. Therefore, if a carrier goes into bankruptcy and is required 
to continue service, but cannot pay its debts, this could have an 
adverse impact on other carriers if those carriers are required to 
continue carrying the traffic of the carrier in bankruptcy without 
compensation. The FCC should carefully examine these potential domino 
effects and the extent to which they could prevent carriers from 
serving consumers. A point that deserves considerable emphasis, 
however, is the fact that the FCC must actively guard against allowing 
carriers to use these unfortunate economic situations as a means to 
undermine competitors or competition in general.
    With that said, I welcome the witnesses and look forward to hearing 
their testimony.

    The Chairman. Senator McCain.

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

    Senator McCain. Thank you, Mr. Chairman. Thank you for 
holding the hearing on the turbulent state of economic affairs 
in the telecommunications industry. Today, we will hear more 
stories of hype and corporate greed, hype relating to the 
Telecommunications Act of 1996, and about the market for data 
traffic, and corporate greed by senior executives whose 
interests vastly diverged from that of their company's 
shareholders.
    There are many important issues to address in this hearing. 
We must ensure that despite the looming financial crisis within 
the industry, consumers can expect continuity of telephone 
service, and that the integrity of our telecommunications 
network is secure. I hope that is the first subject that 
Chairman Powell will address this morning.
    We must also examine what must be done prospectively to 
ensure that the misbehavior of these companies does not take 
down the entire industry, including those companies that have 
not lied to investors. And we must also examine what lessons 
are to be learned from this collapse.
    Last week, the Los Angeles Times reported that some experts 
now believe that the root of the meltdown now sweeping the 
industry may be the Telecommunications Act of 1996. The article 
states, and I quote, much of the vision of the 1996 Act was 
flawed, leading to more than $2 trillion in investment, much of 
it squandered in ways that may cause lasting economic damage. I 
do not need to remind anyone here I opposed the 1996 Act. I 
believe that by any measurement, it has not lived up to the 
promises of its sponsors when it was passed.
    We reached the extremes of rhetoric on the passage of that 
legislation. And it is not just the Members of Congress who 
hyped the bill. It was the lobbyists that wrote it, too. We 
must now review what has happened since the passage of the 1996 
Act, and learn from our mistakes.
    In the late 1990s, there was similar hype about the demand 
for data traffic. Trillions of dollars were invested in data 
networks by banks, pension funds, employees, and every day 
Americans. Wild expectations fueled unprecedented investment. 
Much of that investment went toward infrastructure deployment 
that now spans the country. Massive networks capable of 
carrying unimaginable amounts of data traffic now sit in the 
ground untapped.
    There are perhaps many reasons why that capacity lies 
fallow, many relating back to the thousands of regulations 
spawned by the Telecommunications Act. But the unfolding story 
of these networks reveals as much about corporate malfeasance 
as it does the hyper regulation of the telecommunications 
industry. Not all the money invested in telecommunications in 
the 1990s funded infrastructure. Much of it went to line the 
pockets of corporate executives who were paid to know better 
about the markets in which their companies operated. They 
conducted a confidence scheme unlike any ever seen before. Some 
corporate executives appeared to participate in systematic get-
rich schemes at the expense of unwitting investors. These 
executives hyped their product by reportedly overstating demand 
for their services. In the process, they ran up the stock 
prices of their companies to the point where they were worth 
many billions of dollars. These executives built a house of 
cards upon a foundation of their own overstated promises.
    Then, as this week's Business Week reports, ``a small group 
of CEOs and financiers managed to save the family silver before 
the house burned to the ground.'' They pillaged the assets of 
these companies by granting themselves and selling huge volumes 
of stock, which is going on today, paying themselves exorbitant 
compensation, and, in some cases, arranging sweetheart deals 
for family and friends.
    The way these executives cut and run on their employees 
when the going got tough simply reaffirms my belief that top 
executives should be precluded from selling their holdings in 
company stock until they no longer manage the company. These 
companies are the poster children for the need for reforms that 
would ensure that the financial fate of top executives is 
inextricably tied to the long-term health of their company, in 
line with the investors whose interests they have been charged 
to represent.
    While Congress has acted, not enough, on accounting reform 
legislation that is now at the President's desk, we need to 
establish more safeguards against corporate fraud in this 
country. This Committee has already heard too many stories of 
investors who lost their life savings due to fraudulent 
schemes. We will no doubt hear of more schemes today. 
Additional protections would help to ensure that such stories 
are not repeated. In my view, these changes are needed if we 
are truly committed to fully restoring the systemic checks and 
balances that will rebuild the faith of the American people in 
both our markets and the corporations who operate within them.
    Finally, Mr. Chairman, I would like to thank Chairman 
Powell for appearing before us today. Because of the mandates 
of this Committee he has had to cut short a much-deserved 
vacation to be here. I hope he can return soon. You have 
provided leadership at a tremendously challenging time. I 
commend you on the initiation of proceedings that attempt to 
answer the hard questions that have polarized the Congress.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Burns.

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

    Senator Burns. Thank you, Mr. Chairman, for this hearing 
today, and thank you for your leadership on this issue. My 
statement will be very short. As you know, we have already 
passed the Accountability Act, and the President signed it 
today. During that debate, I contemplated proposing an 
amendment to that legislation. However, after further 
reflection I determined that I wanted instruction and 
recommendations from the Department of Justice, so in response 
I wrote Attorney General Ashcroft on July 15 requesting to take 
a look at the forfeiture laws and how they could possibly be 
used against malicious corporate activity.
    Forfeiture has long been an effective enforcement tool in 
cases pertaining to narcotics and controlled substances, 
yielding hundreds of millions of dollars in revenue for the 
government from the resale of seized ill-gotten assets. 
Witnessing the damage done to our institutions, investor 
confidence and, of course, the every day American by these 
corporate scandals is it is in my thought that it is time to 
take aim on the untouchability of the wayward corporate 
executives, CEOs, and others who would imperil the life savings 
of their employees, their boards of directors, and send shock 
waves through the American economy should not be allowed to 
maintain a lifestyle that was bought by wealth achieved through 
deceptive practices. As I have said before, America must never 
reward deceit.
    Unfortunately, I have not yet received a response from my 
inquiry to the Justice Department, but I look forward to 
developing such an approach once they do respond.
    The bottom line is, those who play fast and loose with the 
life savings of hardworking employees and their lives and the 
ripple effects through supporting industries, see their lavish 
and luxurious assets confiscated, and this includes their 
second homes, their boats, or whatever, the enormous amount of 
cash that is tucked away in off-shore accounts. These corporate 
felons should be brought to justice and properly punished for 
their crimes.
    Finally, Mr. Chairman, today we look at the telecom 
marketplace, but it is important to remember that this 
financial fallback is not solely taking place in the telecom 
marketplace. It is throughout our economy. It is just not in 
one place. Life savings have been devastated. Consumer-end 
confidence has been swept away by an unprecedented avalanche of 
financial destruction. The very foundation of the American 
economy is at stake as we look to reform our system of 
corporate governance.
    I look forward to hearing from the witnesses today, and I 
appreciate the Chairman of the Federal Communications 
Commission in the middle of his vacation--I would just be 
madder than hell, to be right honest with you, but thank you 
for coming today, and we look forward to the testimony.
    The Chairman. Senator Wyden.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. I appreciate your 
holding this hearing as well. It seems to me that the companies 
that we are going to hear from today are important symbols, and 
important symbols of both the crisis in the telecommunications 
sector and for the accounting reform bill that Congress passed 
and is being signed today.
    My colleagues have been right to talk about the innocent 
investors that have been shellacked by the companies and others 
that we are going to be considering today and in the days 
ahead, but it seems to me we also have to focus now on the 
consequences of the telecommunications meltdown, and it seems 
to me that if this continues, and particularly if there are 
service disruptions, this is going to radiate enormous damage 
to the American economy, and I particularly--and I, too, join 
in thanking Mr. Powell for coming--want to hear about what he 
believes is the appropriate approach now, given the every 
different climate that we have compared to what it was when Mr. 
Powell assumed office. I think when Mr. Powell took on the job, 
the telecommunications sector looked very different, and he was 
hoping to chart a course to create more competitive waters. 
Instead, the Federal Communications Commission and Mr. Powell 
find themselves in the midst of a raging storm that has been 
sinking company after company and, in particular, I want to 
hear from the Federal Communications Commission and Mr. Powell, 
when is it going to stop? What can the Federal Communications 
Commission do now to help steer a course to calmer waters, and 
it seems to me that the current climate and the devastation we 
are seeing in the telecommunications sector requires a 
different approach than that that was envisaged early on, and I 
hope that Mr. Powell can tell us how, given the different 
situation, that the country faces today, what approach he can 
offer to help calm the waters and provide some assurance to 
consumers who are really up in arms about the prospect of 
losing service, seeing even more economic damage, and having it 
ripple, for example, to Internet connections and other areas 
that are so important to the public.
    Mr. Chairman, my thanks again to you and I look forward to 
working with you and Senator McCain and our colleagues on a 
bipartisan basis.
    The Chairman. Thank you. Senator Breaux.

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

    Senator Breaux. Thank you, and good morning. Thank you, Mr. 
Chairman, for having this hearing. I think it is very timely in 
the sense that I think that every day we pick up the paper and 
we have one more telecom company that is facing difficulties, 
Internet providers facing difficulties, and obviously, if you 
are looking at 21st century jobs and the industrial and 
communications age, I think really these industries that are 
out there are having a very difficult time, and no matter 
whether you are long distance provider or service provider or 
Internet provider or content provider, it looks like every day 
we find yet another one of these very important industries 
having incredibly difficult problems.
    I think that when they come to Congress to look for help 
and solutions sometimes they find a political bottleneck, where 
we spend a great deal of time arguing about the politics of 
what we should do and precious little time looking at the real 
substance of what we do.
    We have had an approach that says, look, when it comes to 
broadband, which is incredibly important, that the FCC ought to 
be the one that tries to create a level playing field, that it 
is almost impossible for, I think, Congress to get into the 
technical details of what actually is a level playing field for 
these industries to compete. An appropriate forum is the agency 
that has been set up to regulate these industries, to help 
create level playing fields, and take it outside the political 
world, and we are attempting to do that, and I will ask the 
Chairman some questions if I have the chance.
    Thank you. Thank you, Mr. Chairman.
    The Chairman. Very good. Senator Dorgan.

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

    Senator Dorgan. Mr. Chairman, thank you very much. Just 
briefly, and I know you want to get to Chairman Powell, I think 
we have had a good number of hearings on the issues of 
corporate governance, some of these scandals, bankruptcies, 
financial problems that have existed, and I think this hearing 
is a very important one in the context of what is happening in 
the telecommunications industry, especially with respect to 
some very high profile, very serious problems, and I would say 
to Chairman Powell I think the underlying message today, at 
least for me, is the importance of effective regulation, the 
importance of effective oversight.
    The market system is a wonderful thing, but the market 
system begs for effective regulation and oversight, and when it 
does not exist, whether it is at the FCC, the SEC, a dozen 
other federal agencies, FERC, when it does not exist, what 
happens is, we have very serious problems, and we likely will 
talk at some great length about the myriad of issues that are 
raised today with respect to accounting, accounting firms, law 
firms, CEOs--the one company that I have chaired hearings on I 
talked about a culture of corruption that existed inside that 
company.
    That was confirmed by the board of directors. There is not 
much a regulator can do about people with corrupt hearts who 
are running a company, but on the other hand, I think the 
underlying issue here must be that we need effective, 
aggressive regulation. Those who have the handle on the ability 
to do that in the executive branch of government must work with 
us to achieve that effective level of regulation and I hope 
this hearing is helpful in furthering that objective.
    Mr. Chairman, thank you very much.
    The Chairman. Thank you. Senator Cleland.

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

    Senator Cleland. Thank you very much, Mr. Chairman.
    In the 1960s in the Midwest, a small communications company 
used microwave technology to establish an internal 
communications system, just about the time that I was becoming 
a microwave radio officer in the United States Army Signal 
Corps.
    Twenty years later, this company, MCI, was one of the main 
reasons for the Department of Justice action and the resulting 
consent decree that ended Ma Bell.
    Today, almost 20 years later, this company, WorldCom, has 
become the Nation's largest bankruptcy filing after a downward 
spiral that would almost predetermined to end in bankruptcy 
when it declared that $3.8 billion had been, quote, 
misclassified.
    However, this corporate mistake translates into not only a 
loss of billions by investors and unemployment for thousands, 
many of whom are in my state, but potential problems for 
people's basic communications, upon which, Mr. Chairman, we 
thought the entire new economy of America was going to be 
built.
    WorldCom is the Nation's number 2 long distance provider 
and a large local service provider. I have heard from someone 
in the telecom industry that WorldCom has threatened to cut off 
service to another company if they do not receive payment by 
this week. In Georgia, that would translate into 25,000 
business lines. This is unacceptable, at the same time that the 
State of Georgia is thinking about a $2 billion contract with 
WorldCom to handle the internal telecommunications of the 
entire State of Georgia.
    How did we arrive at this point? A big part of this answer 
is the growth and promise of the Internet itself, and related 
economic trends that did not require actual assets, and allowed 
and even encouraged speculation and outrageous amounts of debt. 
Venture capital funds--I call them adventure capital funds--
were virtually giving away money to anything with a .com at the 
end of its name, while more traditional businesses struggled 
just to get a loan from the bank.
    I do not think policymakers fully understand the approach 
many Internet-based companies were taking while they were 
posting massive gains in paper value, and the results of this 
speculation are playing out today with only $2 trillion in 
telecommunications stock value being eliminated. It was an era 
of buy now, pay later, but this Internet accounting contained 
some fatal errors in its system.
    Today, investors and employees are left empty-handed by 
these Internet accounting practices, while some of these 
executives were able to cash in through stock options and 
bonuses. I have said it time and time again, particularly in 
terms of Enron--it certainly applies now to the telecom 
industry--in my experience in the military, officers eat last. 
Within this economic combat, officers ate first.
    I applaud the Department of Justice for acting last week to 
make the arrest of Adelphia executives, and I hope their 
investigations will continue and charges and arrests will 
follow in cases that warrant action. It was said in the 
newspaper that this particular family used that company as a 
billion-dollar piggy bank.
    Chairman Powell, you are here with us today. Hopefully you 
can shed some light on where we have come from, where we are 
now, and what we ought to be doing. I hope that you can 
reassure us that the FCC is on the case and will take the 
necessary action against these companies and help us through 
this muddled environment.
    Last week, Congress passed with my support--the President 
will sign it into law--legislation that will strengthen 
corporate accounting standards, and I would like to reassure 
the citizens of my state and of this country that the role of 
government as a law enforcement body, regulatory body, and law-
making body has been exercised recently to prevent these 
scandals from happening in the future and ensure current 
protections are enforced.
    I agree with Senator Dorgan, the marketplace is a wonderful 
thing, but without the countervailing power of government, it 
runs amok. This is an appropriate time to examine the role of 
the FCC in this telecommunications debacle, and I look forward 
to the Chairman's testimony.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Senator Allen.

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

    Senator Allen. Thank you, Mr. Chairman, and I very much 
appreciate your leadership and that of Senator McCain in 
holding this hearing. I will not refer to all of the concerns 
that were expressed by Senator Cleland, where the leaders are 
eating first and the troops last. The purpose of this meeting 
is to focus on that, but also, I think, to focus on the 
financial condition of Qwest Communications, Global Crossing, 
and WorldCom, and their ability to deliver services to 
customers through these financially trying times.
    Obviously, I care about this as Chairman of the Republican 
High Tech Task Force. I also care about this from my experience 
as Governor, where we worked very hard to get a lot of 
telecommunications companies and technology companies into 
Virginia. One of those was WorldCom. We in Virginia have a lot 
of technology. It is a strong technology state, but when 
something like this happens, obviously it adversely affects 
jobs as well as communications.
    Indeed, the Internet was invented in Virginia at the 
Pentagon, and 60 percent of all the world's Internet traffic 
currently travels through Virginia, so we in Virginia have a 
vested interest in this telecommunications policy debate, and I 
am hopeful that when we examine these telecommunications 
companies, we will have a better understanding not only of what 
went wrong financially in poor planning and deceptive 
practices, and stealthy and possibly criminal accounting 
practices, but also how we are going to keep their 
communications systems in operation so that they, or whoever 
takes it over, can deliver communications systems that are 
vital to our whole economy and our whole country.
    Obviously, there are consequences of these bankruptcies for 
creditors who are not paid, for employees who are laid off, and 
last but most importantly, I do look forward to hearing from 
our Chairman of the Federal Communications Commission, Mr. 
Powell, on their efforts to assure that the WorldCom bankruptcy 
does not mean customers will lose their services.
    It is important that the Commission examine and work with 
WorldCom to maintain interconnection and ensure that data 
networks remain operational, and I thank the Chairman for 
cutting his vacation short to be here for this very important 
hearing, and I thank you, Mr. Chairman, and the Ranking Member, 
Senator McCain, for your continued perseverance and leadership 
on this important matter.
    Thank you.
    The Chairman. Thank you. Senator Nelson.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Mr. Chairman, we are starting to examine 
how this particular part of America operates and how it does 
not operate very well. I think it is going to be a real 
challenge for us, specifically in this Committee, as to how 
this telecommunications industry is going to shake out over 
time, what kind of combines are there going to be as we look, 
for example, also in this Committee at the aviation industry 
and the kind of combinations that we are going to see there, or 
the kind of mergers. But one aspect of what is going to happen 
to this industry is the subject that you bring to the table 
today, and I appreciate that you have done it, the fact of us 
making sure that the FCC has the authority and the initiative 
necessary to stop these kind of crises that come up.
    We address part of it with the accounting reform 
legislation that we passed last week, but this Commission 
should not be afraid to use its section 214 authority to avoid 
service disruptions when problems arise and greater use of the 
Commission's accounting disclosure requirement should be used 
to eliminate fraudulent business practices.
    Some attribute all of these problems to competition, and 
seek to use that as the excuse, but we have got to get to the 
bottom of how the Government's appropriate oversight and 
regulatory authority is to keep these people on the straight 
and narrow.
    Thank you, Mr. Chairman.
    The Chairman. Senator Boxer.

               STATEMENT OF HON. BARBARA BOXER, 
                  U.S. SENATOR FROM CALIFORNIA

    Senator Boxer. I would ask my full statement be in the 
record. I would just like to speak for about a minute.
    The Chairman. It will be included.
    Senator Boxer. Mr. Chairman, Senator McCain, thank you for 
staying on top of these issues. When we first heard about 
Enron, we thought it was just a case of one bad apple, as 
President Bush likes to say, and then we see there are others, 
a lot of rotten apples. It is beginning to look like there is 
an orchard here, and I will tell you, it is very disturbing, 
and to put it into specifics, there is a WorldCom employee in 
San Ramon, California, whose name is Steve Vivien. He worked 
for the company for 19 years, and he accrued over $400,000 in 
his 401(k) plan, and he has lost almost all of it.
    In meetings with my staff, Steve said, ``I invested with 
WorldCom because I was a loyal employee who believed in the 
goals of the company and believed the company's stated 
financial results. I am shocked,'' he said, ``that WorldCom 
stock is worth pennies and the company has filed for 
bankruptcy. I am angry that I lost my hard-saved money due to 
apparent fraud'' and so it goes over and over, again and again, 
and in terms of my state CalPERS they invested in WorldCom 
bonds, $413 million. You know, how much can this go on with 
these pension funds.
    So you know, luckily we have diversity required in these 
funds, otherwise we could be in worse shape, but in any event I 
am looking forward to hearing from Mr. Chairman, and Chairman 
Powell. This has got to stop, because it is infecting our whole 
economy.
    Thank you.
    [The prepared statement of Senator Boxer follows:]

 Prepared Statement of Hon. Barbara Boxer, U.S. Senator from California

    Thank you, Mr. Chairman, for holding this hearing. The Commerce 
Committee, under your leadership, has taken a lead in investigating the 
recent corporate scandals in America.
    Before us today are FCC Chairman Powell and the heads of WorldCom, 
Global Crossing, and Qwest. In a sense, we have the watchdog and the 
foxes testifying here today. I assume we all know which side the foxes 
are on. The questions before us is: whose side is the watchdog on?
    I know where I stand. I stand with Steve Vivien. Steve is a 
WorldCom employee in San Ramon, California. He has worked for the 
company for nineteen years. During that time, he accrued a little over 
$400,000 in his 401(k) plan and now has lost almost all of it.
    In meetings with my staff, Steve said, ``I invested with WorldCom 
because I was a loyal employee who believed in the goals of the company 
and believed the company's stated financial results. I'm shocked that 
WorldCom stock is worth pennies and that the company has filed for 
bankruptcy. I'm angry that I lost my hard saved money due to apparent 
fraud.''

    I join Steve in his anger.

    And I am also on the side of The California Public Employees' 
Retirement System (CalPERS), California State Teachers' Retirement 
System (CalSTRS) and Los Angeles County Employees' Retirement 
Association (LACERA). These funds invested a combined $413 million in 
WorldCom bonds in May 2001 on behalf of California's public employees.
    In deciding to invest in these bonds, these public pension funds 
relied on the Registration Statement that WorldCom had filed. The funds 
now allege that the Registration Statement contained misleading 
information about the company and that the banks who underwrote the 
offerings should have known this. Everything that I have read leads me 
to believe that these allegations are accurate and that my state's 
pension funds were robbed.
    It is completely unacceptable that executives at these firms and 
others are floating to earth on golden parachutes while the savings of 
employees are plummeting to the ground without a safety net.
    All three of these companies, WorldCom, Global Crossing, and Qwest 
put out misleading numbers. As a result, investors and employees have 
lost billions of dollars and many Americans have lost faith in the 
system. And to add additional pain to this injury, these companies are 
crucial to our nation's telecommunication system. They are part of the 
backbone of our economy.
    It is up to the FCC to make sure that our communication system 
works. It is the responsibility of the FCC to be informed on the state 
of the industry and to make sure that these companies are abiding by 
the rules that govern telecommunications. A lack of enforcement of 
those rules may have led to a sense of disrespect for rules altogether 
at these firms, whether they are accounting rules or rules related to 
competition or quality of service. If the FCC needs greater authority 
to enforce the law or greater authority to provide for the stability of 
our country's communications system, then we should give them that 
authority.
    I have been amazed by the degree of arrogance with which various 
CEOs have come before us. Instead of contrition, we hear excuses. 
Instead of explanations and plans for making things right, we hear 
complaints that new reforms would be excessively burdensome. Instead of 
commitments to return ill-gotten gains, we find executives without any 
sense of guilt or shame holding on to their multi-million dollar homes 
and severance packages.
    Mr. Chairman, I commit to working with you to make things right. It 
is time we sided with the people. I know that is where you are and it 
is where I hope we will all end up.

    The Chairman. Very good. Senator Brownback.

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

    Senator Brownback. Thank you, Mr. Chairman. I would ask my 
full statement appear in the record. Thank you for holding the 
hearing. Thank you, Senator McCain, for your continued focus on 
this. I look forward to the presentations that will take place 
today.
    One of the things that I think is important for us to look 
at is the issue of fraud and lying that has taken place, and to 
call it for what it is in a number of cases. We must also look 
at and examine the Telecommunications Act of 1996. Some people 
are going to lay blame there, at the Telecommunications Act, 
and others will reject that. I would note that that act only 
promised people the opportunity to compete, and nowhere 
guaranteed any success, profitability, or reward, for what 
individuals would do.
    If we need to change that act to be able to address some of 
the issues in the market that have taken place, I hope the 
witnesses will bring that up, and address the specifics that 
should be addressed. I do not think we should lay corporate 
fraud or greed at the feet of the Telecommunications Act of 
1996. Some people claim it is deregulatory, others would point 
out that it is not, but I would hope, if there are specifics 
that we need to change in that act for this issue and this 
system--I would note that while the stock market may be down, 
although I am pleased to see some of the rallying taking place, 
the telecommunications that we are providing to our people 
across this country and across this world continues to be the 
envy of the world.
    We provide excellent telecommunications at very good 
prices, and some may suggest too good a price, with what is 
taking place today. I would simply want to note that if people 
want to look at and change the Act, because they think we need 
to for the benefit of telephone subscribers, let us address 
that. Let us put those on forward, but I do not think you can 
lay the issues of corporate greed, of fraud, at the feet of the 
Telecom Act of 1996. I would hope we would separate those out 
into different pools of issues that we need to resolve and deal 
with.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Brownback follows:]

   Prepared Statement of Hon. Sam Brownback, U.S. Senator from Kansas

    Today the Committee convenes to review the status of our nation's 
telecommunications market in light of the corporate accounting scandals 
that have rocked the foundations of the corporate world in America, as 
well as investor confidence in our nation's corporate business leaders. 
I'm pleased that the Bush Administration has taken the lead in pursuing 
corrupt business practices, investigating companies suspected of wrong 
doing, and prosecuting those parties accused of perpetrating fraud on 
their shareholders and the public. Strong action to deal with such 
wrongdoers is appropriate, and can have a soothing affect on the 
market, as witnessed by the markets rise following the first arrests of 
accused corporate wrongdoers.
    Two of the companies attending today's hearing have not been 
charged with wrongdoing, however they are under investigation. Another, 
WorldCom, has been charged with fraud for accounting certain expenses, 
like access charges, as capital expenses. As WorldCom's internal audit 
revealed, this had the effect of padding the company's books to the 
tune of $3.8 billion. Global Crossing and WorldCom are now in Chapter 
11, and there is speculation that Qwest is not far behind. These 
developments, as well as what I have seen referred to as the 
``cratering'' of the telecom sector in general, have raised questions 
about the stability of communications in the U.S. and the impact the 
current environment could have on consumers.
    While there can be no doubt that the telecom sector has been down 
for quite some time now, and this can be attributable to many factors 
such as increased competition and possible short-term over capacity, 
there can also be no doubt that the first priority in addressing what 
ails the telecom market today remains the issue of corporate 
governance.
    Fraud. Lying. These cannot and will not be tolerated. I am sorry to 
say that Mr. Sidgmore's submitted testimony to this Committee is only 
representative of the very arrogance that has created a need for 
today's hearing in the first place. For a company accused of such 
practices against its customers, investors, and competitors--to which 
WorldCom owes hundreds of millions of dollars--to come before this 
Committee, and lay blame for its current woes on any and everything 
other than it's own practices, is sad.
    The Telecommunications Act of 1996 promised only one thing--the 
opportunity to compete. Nowhere does the Act guarantee success, 
profitablity, or reward for inefficiency, nor should it. Unfortunately, 
some companies continue to believe the Telecom Act was social security 
for telecommunications companies--guaranteeing them profitability in 
new markets, and ensuring that they would make not only a minimum 
profit per subscriber, but guarantee them a minimum level of 
subscribership as well. The Committee is seeking to determine the 
status of the market. In my view, while the stock market may be down, 
the U.S. telecom market is still the envy of the world. We have the 
most seamlessly integrated and robust network of any nation. What we 
need to do to revive the market is to reintegrate reality back into it.
    Mr. Sidgmore's testimony often references the concept of 
innovation. I see little that is innovative about a company seeking to 
enter a new market, such as broadband, through the use of the 
facilities of its competitors. To be sure, Mr. Sidgmore, any questions 
about Bell compliance with the Act can be addressed through tough 
oversight and enforcement. But we must also raise tough questions--and 
provide answers finally--as to what is being enforced.
    In my view our telecom market is full of valuable and fully 
functioning facilities, even if some of the corporate structures that 
own them disappear or are required to undergo restructuring to make use 
of them. To the degree the current telecom doldrums continue, mergers 
and acquisitions may help to alleviate some of the market congestion 
that many believe continues to drag the industry down. Nobody prefers 
mergers to multiple competitors in a market, but let's not kid 
ourselves about the reality of business and markets, and developments 
that would occur if we continue to experience market failures. The 
facilities at play are too valuable to lie dormant.
    This is not to say that there is not the potential for upheaval 
where consumers are concerned, and that is the first duty of this 
Committee: protect consumers. The Federal Communications Commission has 
authority under section 214 of the Act to ensure that failing common 
carriers continue serving consumers so they may transition to alternate 
service providers. I have no doubt that the FCC is prepared to act if 
developments require.
    The lack of section 214's applicability to information service 
providers, such as cable companies that offer consumers cable modem 
service, is a different matter. As we have seen with @Home, the 
Commission has no authority to require them to continue serving 
consumers. Nor should the Commission reclassify information service 
providers as common carriers simply to address this deficiency in the 
law. I would certainly support legislation providing the Commission 
with the statutory authority to extend section 214-like protections to 
consumers subscribing to information services.
    Finally, while I am confident that the market will weather the 
current storm, and consumers will continue to be served, there are some 
developments associated with the bankruptcy of the second largest long 
distance company in the U.S. that need to be addressed. WorldCom is 
currently in arrears of several hundred million dollars in access 
charges and payments for the use of ILEC facilities. We must ensure 
that WorldCom's reorganization and subsequent shedding of debt does not 
also create mounting problems for incumbent local exchange carriers, 
not only forced to compete with a WorldCom made leaner and meaner 
through Chapter 11 protection and reorganization, but through defacto 
subsidization of their competitive efforts by ILECs who are prevented 
from collecting debts owed. I have 36 independent telephone companies 
operating in my state, and many of them are very small. They cannot be 
expected to bear the brunt of WorldCom's financial straits.

    The Chairman. Very good.
    Chairman Powell, let the record show we invited the CEOs of 
Qwest, WorldCom, and Global Crossing, Mr. Anschutz, Mr. 
Winnick, and Mr. Ebbers, and for obvious reasons they have not 
accepted our invitation. We have got the next best, we think, 
appearing on the panel just behind, otherwise we welcome you to 
the Committee and we will be glad to hear from you at this 
time. Your statement in its entirety will be included. You can 
summarize or deliver it, as you wish.

    STATEMENT OF HON. MICHAEL K. POWELL, CHAIRMAN, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Mr. Powell. Thank you, Mr. Chairman. I will try to do a 
little of both, if I could. I appreciate the full extent of it 
being put in the record.
    I want to wish all of you a good morning, and I want to 
particularly commend Chairman Hollings and Mr. McCain for 
holding this hearing, because I think it is doing something 
extremely critical, which is focusing more broadly not only on 
the horrific accounting scandals that have dominated the 
headlines, but what are the broader implications for critical 
telecommunications services on which our individual citizens 
depend and our economy rests, and so I applaud the focus of the 
hearing, and I am always anxious and able to be an active 
participant in that discussion.
    As the Chairman of the Federal Communications Commission, 
before I go forward with my formal remarks, I would like to say 
one thing, given the tenor of some of the remarks I heard. I 
grew up in a leadership culture where officers eat last. I find 
deplorable and despicable the drumbeat of stories in which 
individual leadership purporting to act on behalf of an 
organization and institution with a public trust profit 
handsomely at the expense of not only the employees and their 
shareholders. I find such conduct in my cultural background 
despicable.
    A WorldCom MCI employee who I respect greatly, when calling 
me informing me about the current crisis, stated to me, Bill 
McGowan would be turning over in his grave, and I suspect that 
he is, and I think that is a tragedy.
    Moving forward, I am going to focus my comments on two 
areas. First, I want to discuss the immediate challenges posed 
by the WorldCom bankruptcy filing, and try to outline the 
Commission's responses in areas which it possibly could improve 
in order to ensure the continuity of service.
    Second, just as importantly, I want to attempt to explain 
the current distress in the telecom market, how it came about, 
and the steps I believe are going to be critical for its 
recovery. Turning to the first topic, let me just state, 
protecting consumers from service disruption is the first and 
highest priority of the Government and the Federal 
Communications Commission, but I do want to say from the 
beginning, I am confident that we are not facing a crisis in 
the provision of service stemming from this bankruptcy.
    We have spent many hours reviewing the situation, and 
everything thus far confirms this view. We have had first-hand 
discussions with creditors and lenders, with senior WorldCom 
executives, with critical WorldCom customers and Government 
users. All are presently confident that there is no imminent 
threat of major service disruption, and as a personal 
endorsement, I am a customer of MCI WorldCom long distance, and 
nothing I have seen has prompted me to switch service at this 
time, and I do not plan to.
    In the last year, regrettably, the commission has had to 
cope increasingly with the specter of bankruptcy in this 
industry. Consequently, we have worked to develop responses to 
these situations in cooperation with our state colleagues that 
endeavor to do three things, first maintain the operation of 
the network, second, try to contain the fallout to prevent 
damage to other companies, and particularly consumers, and 
finally, to provide for an orderly transition of customers and 
assets should that become necessary.
    Our actions generally have four components, which I will go 
over briefly. The first I list as heightened alert. It has 
become more critical than ever that the Commission and the 
Government have significant advance warning of trouble in the 
sectors with respect to particular companies, and in 
anticipation of those dangers begin to prepare to ensure that 
it has adequate responses when and if bankruptcy comes about.
    In doing this, we have opened up many lines of 
communication that are relatively nontraditional for the 
Federal Communications Commission, particularly with lenders 
and creditors who are often calling the shots just on the eve 
of the bankruptcy filing in order to assess that imminency and 
possibility of a collapse. A day after the announcement of the 
problems at WorldCom, I traveled to New York City for the sole 
purpose of meeting with banks, investors, and others to discuss 
how critical the situation was and what the extent of possible 
collapse of the company was. We have increased our dialogue 
with the significant customer groups as well, particularly the 
Government, as a critical user in order to spot service 
degradation and service disruption.
    The second component that is vital is, the commission needs 
to be engaged actively in intergovernmental coordination. This 
is one of the first critical steps. For example, we immediately 
began discussions with the Department of Justice, which is 
charged with being our legal representative in any imminent 
bankruptcy proceeding. In the case of WorldCom, we have 
consulted with the Department constantly in preparing our 
responses to the bankruptcy court, and coordinating strategy in 
order to achieve those three objectives I mentioned. Those 
dialogues are continuing.
    In addition, the Commission has long had formal 
relationships with the Government that aid in the protection of 
critical infrastructure. For example, we have a formal 
relationship with the National Communications System, which is 
responsible for monitoring and responding to mission-critical 
communication needs of the Federal Government. I also sit as a 
member of that organization, and we have been discussing the 
risk and possible responses.
    In addition, we sit on the JTRB, which is an executive 
agency which considers emergency responses to preserve critical 
communications in time of emergency for the Federal Government, 
and the commission has discussed risk and responses with the 
Office of Critical Infrastructure.
    And finally, given that there are allegations of fraud and 
misdoings in the WorldCom matter, we have been active as a 
member of the Corporate Fraud Task Force created recently by 
President Bush to ensure that there is a Government-wide 
coordination of the investigation, and we have also been in 
regular contact with state commissions, who often play a 
significant role in the context of protecting service in their 
jurisdictions and their appearances in bankruptcy court.
    I personally have monthly conference calls, and more is 
needed in order to try to coordinate our response and share our 
experiences, and importantly, of course, we consult with this 
Committee and the U.S. Congress to keep them appraised of the 
situation and to advise them if any congressional action will 
become needed or is imminent, and I do have some suggestions in 
that regard, which I will get to near the end of my testimony.
    The next phase is always the active engagement of the 
commission in bankruptcy proceedings, which is where we find 
ourselves today with respect to WorldCom. Bankruptcy actions 
often move extremely quickly, and the Commission must act 
promptly to assure the interests of consumers are protected 
before the court.
    Our authority, as has been mentioned by a number of 
Members, stems largely from section 214 of the Communications 
Act. Briefly, our rules require that WorldCom, for example, 
needs to incorporate specific wording advising customers of 
their right to file comments with the Commission against any 
proposed discontinuance of service. WorldCom must then file a 
copy of that notice with the Commission, and the Commission 
then can issue a public notice of the filing. WorldCom may only 
discontinue service on the 31st day after the public notice, 
but it is important to note that this 30-day grace period is a 
minimum required by the rules and the Commission may extend 
this period should be public interest warrant such an 
extension.
    The day WorldCom filed bankruptcy, we took several 
immediate actions to ensure our regulatory requirements would 
not be neglected. I promptly sent a letter to John Sidgmore, 
the CEO, advising him of his regulatory obligations. 
Additionally, I sent a letter to the company asking them to 
commit in writing to provide notice to customers of the 
company's plans to exit the wireless resale business and to 
offer a transition plan for moving those customers to other 
networks.
    Our Interbureau Task Force stands ready to handle 
applications or other regulatory implications, and I am proud 
to say that at this point the company has been very forthcoming 
and cooperative in all of these regards.
    In addition to ensuring the company complies with the law, 
the commission will advise the bankruptcy court of our concerns 
with respect to the impact on consumers, and urge that any 
ordered shutdown provide for transition for customers. Given 
the significance of the bankruptcy involving WorldCom, our 
Deputy General Counsel flew to New York and appeared personally 
in the first hearing before the bankruptcy judge to urge 
consideration of important public policy objectives, which 
include, as I have noted, continuity of operations, the 
transition for any displaced customers, and due consideration 
of the impact on other telecommunications service providers 
that generally must continue serving bankrupt carriers.
    As an outgrowth of that participation, Judge Gonzalez last 
week granted interim approval for WorldCom to continue making 
its payments to the Federal Universal Service Fund. I know this 
is of significant importance to many Members of the Committee.
    Furthermore, the USAC, the Universal Service Administration 
Company, reports that presently WorldCom is current with its 
contributions to this important fund, that keeps high cost 
telephone service affordable. We have been advised that 
WorldCom expects to make its next payment, due in mid-August, 
and it will be made in a timely fashion. We will remain active 
in this bankruptcy phase.
    Finally, it is important to continue the dialogue with 
customers and consumers. In an effort to do so, the Commission 
believes it is important to use our resources to communicate 
with them about the risks and the options they have available. 
In this regard, recently we issued a consumer alert with 
respect to WorldCom that was reported widely by the media, 
advising citizens and consumers of the risks and the options 
available to them. We will continue to do so as needed.
    To date, I am proud to say, though, we are not prepared to 
sit at all on these laurels, that we have been fairly 
successful in managing the growing numbers of bankruptcy. In 
all of the 23 wireline or fixed wireless bankruptcy cases we 
have had since November of 2001, an orderly transition was 
achieved, and all but the most minor disruptions of customer 
service were avoided. In every major bankruptcy situation that 
we have encountered, we have been and we will continue to act 
vigorously as an active and aggressive participant in these 
proceedings.
    Let me now turn to the other focus of this hearing which I 
think is vital, which is the broad turmoil in the 
telecommunications industry. As I said, while the corporate 
scandals are dominating the headlines, it is important to focus 
broadly on the distress that has hit the sector. It is 
important to note, for example, 24 hours before any of us 
learned about the wrongdoings at WorldCom its stock was still 
trading around $1, down from somewhere in the sixties.
    The stress long preceded the current raft of corporate 
misdeeds. Clearly, the telecommunications industry is riding on 
extremely stormy seas. This is an industry where nearly 500,000 
people in the United States alone have lost their jobs, and 
approximately $2 trillion of market value has been lost in the 
last 2 years. By some estimates, the sector is struggling under 
the weight of nearly $1 trillion in debt, and most segments of 
this industry have seen precipitous declines in their 
individual stock values. The long distance industry alone is 
down 68 percent year to date, the wireless industry is down 71 
percent year to date, and ILECs are down nearly 40 percent.
    Clearly, there are very serious stresses on this important 
industry, but let me turn to an optimistic note. This market is 
not collapsing and is not going to fail over time in my 
estimation. Communications services remain vital to consumers 
around the globe. Communications traffic continues to increase 
at historically formidable rates if not the halcyon levels we 
have seen previously, and importantly the closing of time and 
distance barriers to information will continue to fuel global 
economic productivity and change all institutions of society, 
but again, albeit slower than once fantasized.
    It is in the interest of every citizen in the United States 
that this industry recover, and to ultimately succeed in 
bringing new and vital services capability to people's lives. 
Recovery, however, is not going to occur overnight, and it is 
likely to require very difficult, and I will even say painful 
choices. Successful recovery is dependent on the collective 
efforts of Congress, federal and state regulators, the private 
sector and, importantly, the financial markets.
    A number of you have asked that I describe a little bit of 
how we got here. There are varying views, but an image is 
beginning to come into focus. The story at bottom I think is 
quite straightforward. It begins simply with the Internet gold 
rush. The Telecommunications Act of 1996 and the 
commercialization and mass market adoption of the Internet led 
to near hysterical beliefs that the opportunities for growth 
were limitless, talk of the Internet doubling every 100 days, 
infinite bandwidth and Internet time. These were the phrases 
that dominated the pages of magazines and newspapers. Very few 
in this country did not get swept up in the cloud of hot air.
    Investors, too, bought into and fed the hype literally, as 
they flooded the market with capital that was consumed by 
thousands of companies in all sectors of the telecommunications 
industry from wirelines, undersea wireless across the globe, 
and with global ambitions set out to build global networks, to 
win the race, to stay ahead of the expected demand, and in 
doing so, companies throughout the world amassed staggering 
amounts of debt in building nearly identical networks.
    The business model of the day would have made Kevin Costner 
proud. It was premised on a field of dreams. There was a belief 
that demand would materialize overnight in Internet time. Build 
it and they would come was the business model of the day for 
long haul carriers and many new entrants. The fiber gold rush 
was on, with carriers building massive national and global 
networks with astonishing amounts of capacity, by some 
estimates a five hundredfold increase in capacity.
    The problem in the story line is, they did not come. The 
demand turnout was not doubling every 100 days, as pundits 
hypothesized, but rather, merely every year. Anxious companies 
began to see the problem, and began to race to gain market 
share to boost revenues and pay down debts in hopes of being 
one of the survivors. Hyper competition ensued in various 
markets across the industry, as they contained more industry 
participants than the market could support, and vicious price 
wars ensued, driving down overall industry and individual 
company revenues. At the same time, many companies learned the 
painful lesson that traffic growth did not necessarily lead to 
a concomitant growth in revenues, as their markets were largely 
saturated.
    These companies quickly found out there was simply not 
enough money to go around to pay down debt and generate a 
return on the investment. As we now know, the results were 
devastating. As some telecom companies began to fail and enter 
bankruptcy, others sadly resorted to fraud and deception to 
continue to mask the core fundamental problems facing their 
companies and their industries. Some went so far in their 
deception to not only mask failure, but to actually inflate 
artificially revenue growth to make it look like the dream was 
real.
    The bursting bubble leaves us today with several core 
problems in the market segments that must be rectified. 
Accounting scandals have rocked an industry already fraught 
with problems, mountains of debt, inefficient industry 
structure characterized by excess capacity, lack of investor 
confidence, capital markets closing to new investment, and 
companies that have pulled back on capital spending in this 
capital-intensive industry, and there is collateral damage. 
Given the extraordinary interconnected and interdependent 
nature of the network the industry fallout hurts many suppliers 
in the value chains.
    As telecom companies have dramatically had to scale back 
their expenditures, equipment suppliers and manufacturers have 
been brutalized, with their revenues and values falling 
dramatically. The access to capital crunch has taken the fuel 
out of many of the CLEC's operating in the industry, leading to 
bankruptcy in that segment as well. Long distance and wireless 
companies continue to face pricing pressures, along with cable 
companies' and ILECs' significant debt loads.
    Though the problems are significant, I believe recovery can 
be achieved, but several critical steps will have to be taken. 
If you will indulge me, I have brought a chart to try to 
illustrate the steps that I think are critical for recovery. 
They involve all sorts of players at all sorts of levels. Let 
me just explain it briefly as I go through each section. I have 
characterized it as a pyramid. At the top of that pyramid I 
think are our highest and most pressing obligations and tasks 
at hand.
    The first is to protect service continuity. As this hearing 
has tried to address itself to, we must work tirelessly as an 
institution with our state colleagues to absolutely ensure that 
service disruptions do not occur on a mass scale for our 
critical users and consuming public. This is our highest 
priority.
    Second, rooting out corporate fraud. The degree of 
deception and malfeasance that has been uncovered in recent 
weeks again is just deplorable. There is no hope for any sector 
of the economy if corporate leadership and government do not 
root out and stomp out such deception and breach of public 
trust. The Government must continue vigorously to seek out, 
prosecute, and jail corporate wrongdoers that have personally 
profited, often while defrauding the American public. Such 
actions have dealt a staggering blow to already suffering 
confidence levels. I commend the continuing swift and strong 
actions taken by the Government in bringing about those 
responsible for fraudulent actions. I commend the strong action 
taken by Congress in passing corporate oversight reform 
legislation which I understand the President is now signing 
into law.
    The new corporate leadership that is taking the helm has 
been put on notice. Our hope is, indeed our demand is that they 
lead with strong and ethical moral foundation. These actions by 
Congress, the Administration, and firms in the industry must 
continue not only to address core fundamental problems but to 
restore investor confidence in corporate America and in this 
industry.
    Third, restoring financial health and cleaning up the 
balance sheets. To address the capital shortage facing the 
industry, firms must work diligently to clean up the balance 
sheets to restore financial stability and reality to this 
industry. Companies have to become more transparent so that 
investors and buyers can assess the true value of their assets 
and their operations.
    As I said, they are laboring under $1 trillion in debt. 
Much of it will never be repaid, and will have to be written 
off by investors. As a result, capital markets are retrenching. 
Companies in need of financing to support their capital-
intensive enterprises are suffering. Until firms substantially 
pay down debt, much-needed capital will continue to sit on the 
sidelines and recovery will be stalled. Many industry 
participants are finding ways to cut costs downsizing, shedding 
assets, et cetera, to try to lower expenditures.
    These are very painful but vital steps. If the steps are 
taken, we have a chance. No matter what one's view of public 
policy and our ultimate objectives, they are simply unfunded 
mandates if capital will not flow to enforce the objectives we 
are trying to achieve.
    Finally, a cautious word in step 4 about prudent industry 
restructure. Candidly, it is difficult to imagine this industry 
stabilizing without some modest and prudent restructuring. The 
long haul markets are absolutely glutted with excess capacity 
that is exceeding demand dramatically, even given the strong 
growth in demand that we have seen. Additionally, in some 
sectors, revenues are being deleted as price wars and 
aggressive competition make it difficult to secure an adequate 
return on investment in a very capital-intensive enterprise. 
This is particularly acute in the long distance and wireless 
markets. The pressure will continue to mount for companies to 
restructure or exit the market completely by merger or Chapter 
7.
    Depending on the facts of given transactions, such 
restructuring is not adverse to consumer interest. I would 
simply say that one cannot think long term about consumer 
benefits without considering long term the prospects of 
carriers that provide quality service to those consumers.
    For other industry participants, survival and help will 
depend on some prudent restructuring, but let me state quite 
clearly at this hearing I emphasize the word prudence, because 
some mergers clearly could present a severe threat to 
competition and may not and would not be in the public 
interest. That can only be determined upon careful and thorough 
review of a particular transaction. Regulators will have to 
walk an extremely fine line to achieve stability while not 
squelching competitive alternatives and opportunities, and we 
are committed to trying to walk that line as best we can.
    Fifth, during the meltdown, carriers became acutely aware, 
as I said, that traffic growth did not directly correlate with 
revenue growth. Communication markets in many sectors have 
matured, or are doing so quickly respect to core services and 
the opportunity for further penetration is waning. Therefore, 
to grow and expand revenues, companies must find and offer new 
services, not just find new customers. In so doing, companies 
must strive to stimulate the demand that will help bring them 
into line with current oversupply of excess capacity.
    I believe for the average citizen in a residential home for 
America, that opportunity rests in developing new services 
around residential broadband capability. The reasons are a 
couple. First of all, the provision of broadband service to 
residential consumers has the greatest room for substantial 
subscription growth over the next several years than any other. 
Currently, about 65 million households pay subscription rates 
to access the Internet. Approximately 14 million of those do so 
through broadband connections, leaving at least more than 50 
million households who are in a near-term addressable market.
    This market provides a rich source of potentially new 
revenue to help service the industry and stabilize it for 
consumers, and the benefits of the capability are too numerous 
to measure here in this testimony, but we must learn from our 
past mistakes of inflated expectations that simply will not 
line up with consumer demand, and recognize that build-out will 
achieve time to achieve a broadband future and harness its 
opportunities.
    The construction project that has taken place over the last 
6 years must now focus intensely on uncorking the network at 
the last mile and regulatory policy needs to lead the way. Let 
me emphasize that uncorking point. We have massive excess 
capacity in the long haul data networks. If we could uncork the 
flood of data services to the mass market, much of that excess 
capacity would be consumed in new and vital services for our 
citizens.
    Finally, and perhaps rightfully at the foundation of the 
pyramid is economic and regulatory reform. The long term 
prospects of the industry will not be bright if state and 
federal policymakers do not continue the hard work and diligent 
efforts to create genuine and viable economic foundations for 
services growth and competition. I think nowhere is this more 
pressing than in the local markets. Currently, the cold fact 
remains that the economic foundations remain fairly weak in 
local competitive markets, especially for new entrants and 
increasingly for incumbents.
    We, along with our state counterparts, must work together 
to improve the foundations through regulatory reform. We must 
consider rate rebalancing at the state level to provide 
carriers with flexibility and pricing. We must continue to 
doggedly pursue the worthy goals of universal service, which 
are ubiquity and affordability, as networks and new networks 
are deployed, and we must also provide incentives for effective 
and sustainable competitive entry through our network access 
policy for providing incentives to entrants and incumbents 
alike to produce efficient wholesale markets. We must continue 
also to engage in effective oversight enforcement of our 
regulations to ensure that competition is not stifled at the 
gate by unethical or, indeed, illegal conduct.
    Finally, let me conclude with how I believe this 
institution can help. First, I would ask the Congress to 
seriously consider extending and clarifying our section 214 
discontinuance authority to bring it in line with the realities 
of today's tumultuous marketplace so that we can unequivocally 
limit any service disruption in these troubled times. I am 
happy to work with this Committee in pursuing such legislation.
    Second, I would once again respectfully call upon Congress 
to adopt Chairman Upton's proposal to help us put some real 
teeth in our enforcement authority by increasing the maximum 
fines allowable under the act from a meager $120,000 per 
incident to a million for a single violation, and from $1.2 
million to $10 million for continuing violations, and to 
lengthen the statute of limitations for common carrier 
enforcement. It has remained my strong view that these 
increased penalties, along with stepped-up enforcement, will 
have a solid deterrent effect against illegal activities.
    While the House has adopted these measures, sadly, the 
Senate has yet to adopt a similar increase, and I would 
respectfully ask this Committee's consideration of such 
legislation and assist us in obtaining it.
    Finally, I would urge the Congress to continue its 
deliberation and discussions to try and craft and implement 
legislation that would produce a healthy regulatory environment 
for the provision of broadband services. The importance of the 
development and deployment of broadband to all Americans is too 
important, in my mind, for Congress to ignore, and it must play 
a vital role in its deployment. Broadband very likely holds the 
key for the long-term recovery of the telecommunications 
industry and, indeed, our Nation's long-term economic growth, 
and its ability to compete on the global stage.
    The Commission is committed to demonstrating leadership in 
this area by seeing through our core broadband policy 
proceedings, initiated at the end of last year. The importance 
of the development, however does merit that Congress take a 
look at the Telecommunications Act of 1996 and provide the 
regulatory framework for those services.
    Let me make clear, I take no position on the myriad 
proposals that are currently before the body. I only wish to 
emphasize my professional judgment that the importance of 
residential broadband to improving revenue growth, stimulating 
demand to drain excess capacity, merits the attention of this 
august body.
    I would welcome the opportunity to work with the Committee 
on these issues in the context of our longstanding bipartisan 
and productive approach to telecommunications reform. I thank 
the Committee for indulging my lengthy statement, and I am 
happy to take any questions you might have.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Powell follows:]

    Prepared Statement of Hon. Michael K. Powell, Chairman, Federal 
                       Communications Commission

    Good morning, Mr. Chairman and distinguished Members of the 
Committee. I applaud your decision to hold this hearing--one that looks 
more broadly at the turmoil in today's telecommunications market and 
assesses its implications for the sector, public policy and consumers. 
I am pleased to participate in this important discussion.
    I will focus my comments in two areas: First, I will discuss the 
immediate challenges posed by WorldCom's bankruptcy filing and outline 
our response, which will largely serve as a template for future 
bankruptcies, should they unfortunately occur. Second, I will attempt 
to explain the current distress in the telecom market--how it came 
about, and the steps I believe critical for its recovery.
I. Protecting Consumers From Service Disruption
    Protecting consumers from service disruption is our first and 
highest priority. Let me say at the outset that I remain confident that 
we are not facing a crisis in the provision of services stemming from 
WorldCom's bankruptcy. We have spent many hours reviewing the situation 
and everything, thus far, confirms that view. We have had first- hand 
discussion with creditors and lenders, with senior WorldCom executives, 
and with critical WorldCom customers and government users. All are 
confident that there is not an imminent threat of major service 
disruption. I am a MCI WorldCom residential long distance customer and, 
for what its worth, have no plans to change my service based on what I 
have seen.
    In the last year, regrettably, the Commission has had to cope 
increasingly with the specter of bankruptcy in this industry. 
Consequently, we have developed responses to these situations, in 
cooperation with our state colleagues, that endeavor to achieve three 
goals (1) maintain the operation of the network, (2) contain the 
fallout to prevent damage to other companies or consumers, and (3) 
provide for an orderly transition of customers and assets, should that 
be necessary. Our actions generally have four components, all of which 
we have employed in addressing the WorldCom situation.

    A. Heightened Alert

    It is now more critical than ever to have significant advanced 
warning of trouble. In order to anticipate possible danger areas, the 
Commission is employing its industry analysts and other resources to 
keep close track of the financial health of the sector and individual 
companies. We have opened up new lines of communications with lenders 
and creditors--who often are calling the shots just before bankruptcy--
in order to assess the imminency of possible collapse. This was the 
purpose of my trip to New York days after the accounting scandal was 
revealed. We have increased our dialogue with significant customer 
groups, who can also warn of difficulty, by spotting service 
degradation and service disruption.

    B. Inter-governmental Coordination

    One of the first critical steps is to coordinate our actions with 
other government entities. The Department of Justice represents the 
Commission in bankruptcy proceedings, thus we have been in constant 
contact with the Department in preparing our responses to the court. 
Additionally, in cases such as this it is vital to understand what 
risks are presented to critical government operations and discuss 
responses with other federal agencies. The Commission has a formal 
relationship with the National Communications System (NCS), which is 
responsible for monitoring and responding to mission critical 
communication needs of the Federal government. The FCC is a member of 
that organization and has had discussions about the risks and possible 
responses, should any disruption become a serious threat. The FCC is 
also a member of the JTRB, which considers emergency responses to 
preserve critical communications needs of the government. Additionally, 
the Commission has discussed risks and responses with the Critical 
Infrastructure Protection Board. Finally, given that there are 
allegations of fraud, in the WorldCom matter, we have been active as a 
member of the Corporate Fraud Task Force, created recently by President 
Bush, to ensure government-wide coordination of the investigation.
    We also have been in regular consultation with State Commissions in 
an effort to assess the impact of bankruptcy on local markets and 
consumers, and coordinate our regulatory responses. State Commissions 
often play a key role in ensuring the continuity of operations and 
reconciling tensions between regulatory policy objectives and 
bankruptcy law. These efforts will continue throughout this proceeding.
    Importantly, we also consult and inform the Congress as to the 
status of these matters and advise where legislative action may be 
required. We have engaged in an important dialogue with Members of 
Congress to help them better understand developments in the 
telecommunications sector and to further explain the Commission's role 
in the bankruptcy process. We have been asked to explore and have 
provided insight as to whether we believe the Commission needs any 
additional authority in the context of protecting consumers while 
carriers undergo bankruptcy proceedings. I renew that call for 
additional legislation today. Although it may be that Congress, in its 
good judgment, finds it appropriate to provide the Commission with 
additional authority in this area, as I have demonstrated and as I 
pledge to you today, the Federal Communications Commission will be 
unwavering in our use of each and every tool at its disposal to protect 
the interests of consumers in these difficult times.

    C. Active Engagement in Bankruptcy Proceedings

    Bankruptcy actions often move quickly and the Commission must act 
promptly to ensure the interests of consumers are protected before the 
court. Our authority stems largely from section 214 of the 
Communications Act. The Commission's rules require WorldCom for 
example, to incorporate specific wording advising customers of their 
right to file comments with the Commission against such discontinuance. 
WorldCom must then file a copy of its notice with the Commission, and 
the Commission will then issue a public notice of the filing. WorldCom 
may only discontinue service on the thirty-first (31st) day after the 
issuance of the public notice. It is important to note, however, that 
this thirty (30)-day grace period is a minimum period required by our 
Rules and that the Commission may extend this period should the public 
interest warrant such an extension.
    The day WorldCom filed for bankruptcy, we took several immediate 
actions to ensure our regulatory requirements would not be neglected. I 
promptly sent CEO John Sidgmore a letter advising him of his regulatory 
obligations. Additionally, I sent a second letter to the company asking 
them to commit in writing to provide notice to customers of the 
company's plan to exit the wireless resale business and to offer a 
transition plan for moving those customers to other networks. Our 
inter-Bureau task force stands ready to handle applications or other 
regulatory implications of WorldCom's bankruptcy.
    In addition to ensuring the company complies with the law, the 
Commission will (as it did with WorldCom) advise the bankruptcy court 
of our concerns with respect to the impact on consumers and urge that 
any ordered shutdown, provide for a transition for customers. Given the 
significance of WorldCom, our Deputy General Counsel flew to New York 
for the initial hearing and worked with the Department of Justice to 
urge the Court to consider important public policy objectives; which 
include continuity of operations, a transition for any displaced 
customers, and due consideration of the impact on other 
telecommunications service providers that generally must continue 
serving the bankrupt carrier.
    As an outgrowth of this participation, Judge Gonzalez, last week, 
granted interim approval for WorldCom to continue making its payments 
into the Federal universal service fund. Furthermore, the Universal 
Service Administrative Company reports that WorldCom is current with 
its contributions to this important fund that keeps high-cost telephone 
service affordable. We have been advised by WorldCom that it expects 
that its next payment, due in mid-August, will be made in a timely 
fashion.
    In this bankruptcy phase, we will remain an active participant in 
the court proceedings and make additional preparations for possible 
questions and issues that arise. This may include a possible transfer 
of assets to other providers, which must be approved by the FCC.

    D. Consumer/Customer Awareness

    The Commission also believes it is important to advise consumers of 
the risks, if any, they are facing and remind them of options they may 
have. In this regard, we recently issued a consumer alert with respect 
to WorldCom that was reported widely by the media. (See Attachment A.)
    In sum, if companies in the telecom industry enter into bankruptcy, 
either to restructure or to cease operations completely, there will be 
no greater role for the Federal Communications Commission than to 
ensure the continuity of operations for consumers, and for critical 
government users. To date, we have been fairly successful. In all of 
the 23 wireline or fixed wireless bankruptcy cases we have seen since 
November 2001, an orderly transition was achieved and all, but the most 
minor, disruptions of customer service were avoided. In every major 
bankruptcy situation that we have encountered we have been, and will 
continue to vigorously be, an active and aggressive participant in the 
bankruptcy proceedings.
II. The Broader Turmoil in the Telecommunications Industry
    While the corporate scandals are dominating the headlines, it is 
very important for us to focus on the broader distress that has hit the 
telecommunications sector. I again applaud the Committee for taking up 
this important discussion. Clearly, the telecommunications industry is 
riding on very stormy seas. This is an industry where nearly 500,000 
people in the United States alone have lost their jobs and 
approximately $2 trillion of market value has been lost in the last two 
years. By some estimates, the sector is struggling under the weight of 
nearly $1 trillion in debt. And, most segments have seen precipitous 
declines in stock values: The long distance industry is down 68 percent 
year-to-date, the wireless industry is down 71 percent, the ILECs are 
down 40 percent. Clearly, there are very serious stresses on this 
important industry.
    However, this market is not collapsing and is not going to fail 
over time. Communications services remain vital to consumers around the 
globe. Communications traffic continues to increase at historically 
formidable rates. And, importantly, the closing of time and distance 
barriers to information will continue to fuel global productivity and 
change all institutions of society, albeit slower than once fantasized. 
It is in the interest of every citizen for this industry to recover and 
to ultimately succeed in bringing new and vital communications 
capabilities to people's lives. Recovery, however, is not going to 
occur overnight and is likely to require difficult--even painful--
choices. Successful recovery is dependent on the collective efforts of 
Congress, federal and state regulators, the private sector and the 
financial markets.

    A. How Did We Get Here?

    In order to facilitate a recovery, we must understand what led to 
the current turmoil in the market. The story at bottom is quite 
straightforward. It begins with the Internet Gold Rush. The 
Telecommunications Act of 1996 and the commercialization and mass-
market adoption of the Internet led to a near hysterical belief that 
the opportunities for growth were limitless. Talk of the Internet 
doubling every 100 days, infinite bandwidth, and ``Internet time'' 
dominated the pages of magazines. Very few did not get swept up in the 
hot air.
    Investors, too, bought into and fed the hype--literally--as they 
flooded the market with capital that was consumed by thousands of 
companies. Companies in all sectors of the telecommunications industry, 
from wireline to undersea to wireless, across the globe and with global 
ambitions, set out to build national and global networks--some, as we 
all undoubtedly recall, by digging up streets to lay fiber, some 
through acquisition, some by bidding billions of dollars for spectrum, 
some by investing in foreign markets--to win the race to stay ahead of 
expected demand. In so doing, telecommunications companies throughout 
the world amassed staggering amounts of debt in building nearly- 
identical networks.
    The business model of the day was one of which Kevin Costner would 
be proud--it was premised on ``A Field of Dreams.'' There was a belief 
that demand would materialize almost overnight. ``Build it and they 
will come'' was the business model of the day for long-haul carriers 
and many new entrants. The fiber rush was on, with carriers building 
massive national and global networks, with astonishing amounts of 
capacity. (By some estimates, a 500-fold increase in capacity.) The 
problem is they did not come--demand turnout was not doubling every 100 
days, but rather every year.
    Anxious companies began to race to gain market share to boost 
revenues and pay down debt, in hopes of being a survivor. Hyper-
competition ensued in various markets across the industry, as they 
contained more industry participants than the market could support and 
vicious price wars ensued, driving down overall industry and individual 
company revenues. At the same time, many telecommunications companies 
learned the painful lesson that traffic growth did not necessarily lead 
to concomitant growth in revenues, as their markets were largely 
saturated.
    There were not enough untapped customers from which to derive new 
revenue. To make matters worse, many of these companies had to write 
off revenues as many of their customers (namely, bankrupt ISPs and dot-
coms) disappeared through bankruptcy. These companies quickly found out 
that there was simply not enough revenue to go around to pay down debt 
and generate a return on investment for all of the vast number of 
competitors that had previously flooded to the market.
    The results were devastating. As some telecom companies began to 
fail and enter bankruptcy, others resorted to fraud and deception to 
mask these core fundamental problems facing their companies. Some went 
so far in their deception to not only mask failure, but to inflate, 
artificially, revenue growth--to make it look like the dream was real. 
The bursting bubble leaves us today with several core problems in 
several market segments that must be rectified:

    Accounting scandals that have rocked an industry already 
        fraught with problems;

    Mountains of debt--estimated at $1 trillion worldwide;

    Inefficient industry structures characterized by excess 
        capacity;

    Lack of investor confidence;

    Capital markets closing to new investment; and

    Companies that have pulled back on capital spending in this 
        capital- intensive industry.

    Given the interconnected and inter-dependant nature of the telecom 
network, the industry fallout has caused collateral damage across the 
industry worldwide. As telecommunications companies have dramatically 
scaled back capital expenditures, equipment manufacturers and vendors 
have struggled as sales have fallen precipitously. The access to 
capital crunch has taken some of the fuel out of the CLEC industry 
leading to many bankruptcies over the past two years and increasing 
liquidity concerns. Long distance and wireless companies continue to 
face pricing pressures and along with cable companies and ILECs, 
significant debt loads. Though the problems are significant, recovery 
can be achieved if several critical steps are taken.
    I believe that there are six critical elements to managing the 
current turmoil and stabilizing the industry over time (See Attachment 
B):
1. Protect Service Continuity
    The road to recovery begins with our tireless efforts to protect 
consumers by ensuring continuity of service and in maintaining the 
integrity and reliability of our Nation's telecommunications network in 
light of the risks and realities stemming from current and continued 
bankruptcies. The Commission and our State counterparts will continue 
to work together and with telecommunications firms facing financial 
difficulties to stay well ahead of any service disruptions. We will 
also constantly keep the American public informed so that they too can 
take action to protect themselves if and when the need arises.
2. Root Out Corporate Fraud
    The degree of deception and malfeasance that has been uncovered in 
recent weeks is deplorable. There is no hope for any sector of the 
economy if corporate leadership and government do not root out and 
stomp out such deception and breach of public trust. Governments must 
continue to vigorously seek out, prosecute and jail corporate 
wrongdoers that have personally profited (often) while defrauding the 
American people. Such actions have dealt a staggering blow to already 
suffering confidence levels. I commend the continuing swift and strong 
actions taken by the government in bringing those responsible for 
fraudulent actions to justice. I also commend the strong actions taken 
by Congress in passing corporate-oversight reform legislation, which 
the President is now signing into law. The new corporate leadership 
that is taking the helm has been put on notice. One hopes--and 
demands--that they lead with a strong ethical and moral foundation. 
These actions by Congress, the Administration, and firms within the 
industry must continue not only to address core fundamental problems, 
but also to help restore investor confidence in corporate America and 
in the telecommunications industry.
3. Restoring Financial Health: Cleaning Up the Balance Sheets
    Next, to address the capital shortage facing the telecommunications 
industry, telecom firms must work diligently to clean up their balance 
sheets to restore some financial stability and reality to this 
industry. Companies will also have to become more transparent so that 
investors and potential buyers can assess the true value of the 
company's assets. It is estimated that telecommunications companies 
worldwide are carrying approximately $1 trillion in debt, much of which 
will never be repaid and will have to be written off by investors. As a 
result, capital markets are retrenching and telecommunication companies 
in need of financing to support their capital-intensive enterprises are 
suffering. Until firms substantially pay down their debt, much needed 
capital will continue to sit on the sidelines and the recovery will be 
stalled. As we have seen, many industry participants are finding ways 
to cut costs, by downsizing, shedding assets, and significantly cutting 
back on capital expenditures to pay down debt. These are painful, but 
necessary steps. But, if these steps are taken, we must ensure that the 
integrity of the telecommunications network and the quality of service 
provided to consumers does not suffer. Alienating consumers during this 
time will only serve to further the pain as consumers turn away and 
take with them much-needed revenues.
4. Prudent Industry Restructuring
    It is difficult to imagine the industry stabilizing without some 
modest and prudent restructuring. The long-haul markets are glutted 
with excess capacity that dramatically exceeds demand (even given the 
strong growth in demand that we have seen). Additionally, in some 
sectors, revenues are being diluted as price wars and aggressive 
competition make it difficult to secure an adequate return on 
investment in very capital intensive enterprises. This is particularly 
acute in the long distance and wireless markets. Pressure will continue 
to mount for companies to restructure or exit the market completely by 
merging with another.
    Depending upon the facts of any given transaction, such 
restructuring is not necessarily adverse to consumer interests. One 
cannot think about long-term consumer benefits without also considering 
the long-term prospects of carriers that provide quality services to 
consumers. For other industry participants, survival and health will 
depend on prudent industry consolidation. I emphasize ``prudence'' 
because some mergers clearly could present a threat to competition and 
may not be in the public interest. That can only be determined upon 
careful and thorough review of a particular transaction. Regulators 
will have to walk a fine line to achieve stability, while not 
squelching competitive opportunity.
5. New Revenue Through New Services
    During the meltdown, carriers became acutely aware that traffic 
growth did not directly correlate with revenue growth. Many 
communications markets have matured (or are doing so quickly) with 
respect to core services and the opportunity for further penetration is 
waning. Therefore, to grow and expand revenues companies must offer new 
services. In doing so, companies must strive to stimulate the demand 
that will help bring it into line with the current over-supply of 
excess capacity. In the residential space, all indications are that the 
opportunities to develop new services and sources of revenue will come 
from residential broadband. The reasons are twofold.
    First, the provision of broadband services to residential consumers 
has room for substantial subscription growth over the next several 
years. Currently about 65 million households pay a monthly subscription 
rate to access the Internet. Approximately 14 million are doing so 
through broadband connections, leaving more than 50 million households 
as a near-term addressable market. With the deployment of broadband 
over the next five to ten years, a whole new generation of the 
consuming public that will have grown up with the Internet as an 
integral part of their daily lives will enter the market, increasing 
the potential addressable market.
    Second, the development and deployment of broadband infrastructure 
will provide firms--from telecommunications to entertainment to 
information to equipment vendors--with the opportunity to develop new 
services that will use the broadband infrastructure to reach consumers. 
Today we envision, and companies are beginning to provide, home 
networking, telemedicine, distance learning and home security; 
tomorrow's visionaries will take the infrastructure to new heights not 
understood or appreciated today.
    We must, however, be sure to learn from our past mistakes of 
inflated expectations that do not line up with consumer demand and 
recognize that the build-out will take time. To achieve this broadband 
future and to harness the opportunities it provides, the construction 
project that has taken place over the last 6 years must now focus on 
uncorking the network at the last mile, and regulatory policy must lead 
the way. Today, with the proliferation of cable modem services, DSL 
services and increasingly wireless platforms and other innovative 
networks, such as powerline, we are beginning the process of bringing 
capacity to the edges of the network--where it is needed most.
6. Reform Economic and Regulatory Foundations
    Finally, the long term prospects of the industry will not be bright 
if state and federal policymakers do not continue to work hard and 
diligently to create genuine and viable economic a regulatory 
foundations for communications services growth and competition. Nowhere 
is this more pressing than in local markets. Currently, the cold fact 
remains that the economic foundations remain weak in local markets, 
especially for new entrants and increasingly for incumbents. Local 
firms, many of whom are being tasked with the chore of upgrading 
networks to provide one of the platforms to deliver broadband services, 
have little pricing flexibility for retail services. We, along with our 
state counterparts, must work together to improve these foundations 
through regulatory reform. For instance, we must consider rate 
rebalancing at the state level to provide carriers with greater pricing 
flexibility. We must continue to pursue doggedly the worthy universal 
service goals of ubiquity and affordability as new networks are 
deployed, based on sound economic principles. We must also provide 
incentives for more effective and sustainable competitive entry through 
our network access policies by providing incentives to new entrants and 
incumbents to produce an efficient wholesale market and by providing a 
regulatory framework that promotes competition, investment and 
innovation to deploy advanced networks.
    We must continue to engage in effective oversight and enforcement 
of our regulations to ensure that competition is not stifled at the 
gate. We must engage in better spectrum management that promotes more 
efficient use of spectrum while continuing to find ways to get more 
spectrum into the markets.
    If we accomplish these objectives, it will be the consumer that is 
the ultimate beneficiary through the proliferation and adoption of new 
innovative services that the consumer demands and values. For the past 
year, the Federal Communications Commission has initiated proceedings 
to effectuate this reform and we will work diligently to implement 
these fundamental policies that will provide regulatory clarity and 
certainty, survive judicial scrutiny and promote long-term sustainable 
competition and growth to serve the public interest. I pledge to you 
that we will accelerate our efforts to complete the task before us.
III. How Congress Can Help
    We must all take the steps necessary for recovery and I ask that 
Congress also assist us in our efforts by providing the Commission with 
more tools to protect and promote the public interest.
    First, we ask that Congress extend and clarify our section 214 
discontinuance authority to bring it in line with the realities of 
today's marketplace so that we can limit any service disruption in 
these troubled times. Our authority under section 214 is at best 
unclear and, at worst, does not extend to certain critical services 
such as the Internet backbone.
    Second, I once again, respectfully, call upon Congress to adopt 
Chairman Upton's proposal to help us put some real teeth in our 
enforcement authority (as I did 15 months ago to the House and over a 
year ago to the Senate) by increasing the maximum fine allowable under 
the Act from $120,000 to $1 million for a single violation and from 
$1.2 million to $10 million for a continuing violation and to lengthen 
the statue of limitation for common carrier enforcement. It has 
remained my strong view that these increased penalties along with the 
stepped up enforcement of our rules will have a solid, deterrent effect 
against illegal activities. While the House adopted these measures as 
part of H.R. 1542, the Senate has yet to adopt a similar increase in 
our enforcement authority. I respectfully urge you to pass legislation 
that would provide the Commission with increased enforcement authority 
to attack illegal activities.
    Third, I urge Congress to continue its deliberations and craft and 
implement legislation that produces the right regulatory environment 
for the provision of broadband services. The importance of the 
development and deployment of broadband services to all Americans is 
too important for Congress to ignore and it must play a vital role in 
its development. Broadband very likely holds the key for the long-term 
recovery of the telecommunications industry and for our Nation's long-
term economic growth and its ability to compete on the global stage. 
The Commission is committed to demonstrating leadership in this area by 
seeing through our core broadband policy proceedings initiated at the 
end of last year and the beginning of this year, and we will strive to 
complete those proceedings by year-end. The importance of the 
development, however, merits that Congress take a hard look at updating 
the Telecommunications Act of 1996 to provide the proper regulatory 
framework for broadband.
    I take no position on the myriad proposals that currently are 
before this body. I only wish to emphasize that the importance of 
residential broadband to improving revenue growth and stimulating 
demand to drain excess capacity, merits the attention of Congress. I 
would welcome the opportunity to work with the Committee on these 
issues, in the context of its longstanding bipartisan approach to 
telecommunications reform.
    I thank you for your time and I look forward to working with you 
all to implement our plan for recovery for the telecommunications 
industry.
                              Attachment A

Federal Communications Commission Assures WorldCom Customers 
        Concerning Continuation of Phone Service

    Washington, DC--The Federal Communications Commission (FCC) has 
issued this Consumer Bulletin highlighting the rights and protections 
consumers have in light of WorldCom's bankruptcy filing.
    Michael K. Powell, Chairman of the FCC said, ``Our consumer bureau 
has heard many consumer concerns about the WorldCom situation and its 
effect on telephone service. The FCC will not permit a cut-off of a 
customer's service in the wake of WorldCom's bankruptcy filing. The FCC 
has regulations in place to protect consumers' telephone service, and 
we will vigorously enforce those rules.''
    The Consumer & Governmental Affairs Bureau (CGB) advises consumers:

    The WorldCom bankruptcy does not mean subscribers will lose 
        their service.

    FCC rules prohibit abrupt cut-off of subscribers' telephone 
        service.

    FCC rules require a telephone company to provide written 
        notice to affected consumers of any planned discontinuance of 
        service. The notice must specifically state the customer has 
        the right to file comments with the FCC.

    After notifying affected customers, telephone companies 
        must file for permission from the FCC to cut-off service.

    The telephone company would not be permitted to terminate 
        service until a minimum of 30 days after the FCC issues a 
        public notice.

    The FCC can extend the termination date.

    During the bankruptcy proceedings, WorldCom may sell its customer 
base to another company. If that occurs, consumers are protected by FCC 
regulations:

    The new company must provide the customer 30 days' advanced 
        notice of the transfer, including information about its rates 
        and services.

    The customer may accept the new company or choose another 
        company without penalty.

    A customer transferred to a new company without receiving 
        notice is entitled to relief under the FCC's slamming rules.

    K. Dane Snowden, Chief of the FCC Consumer & Governmental Affairs 
Bureau, said, ``Recent developments indicate WorldCom has the necessary 
funding available to continue operations during bankruptcy proceedings, 
without disruption of telephone service or interruption of the 
operation of its Internet backbone facilities. The FCC will continue to 
monitor the situation closely.''
    Chairman Powell has put WorldCom on notice of the FCC's 
requirements and stressed the company's obligations to its customers 
during the bankruptcy process.
    In a July 22 letter to WorldCom President and CEO John Sidgmore, 
Chairman Powell said, `` . . . The [FCC's] process is intended to 
provide customers with a reasonable opportunity to find and transition 
to a new service provider, and the Commission will act promptly and 
vigilantly to ensure that customers are provided this opportunity. We 
will intervene in bankruptcy proceedings to advise the court if 
WorldCom or any other party to the proceedings takes steps that would 
result in an unnoticed termination of service.'' (The full text of 
Chairman Powell's letter is on the FCC Web site at http://www.fcc.gov/
commissioners/powell/72202--sidgmore.pdf.)
    The FCC was represented at the first bankruptcy hearing in New York 
on July 22 and is a party to the proceeding.
    State law may offer additional protections. Consumers should 
contact their state public utility commissions for additional 
information.
    Consumers with questions about the WorldCom situation can visit the 
FCC's Web site at www.fcc.gov or call the FCC's Consumer Center at 1-
888-225-5322 (CALL FCC).

                              Attachment B




    The Chairman. Thank you, Chairman Powell. That is an 
excellent statement.
    Let me ask, when you say--that is what I was really 
interested in, the amendments to section 214, that you would 
greatly benefit, as you say, from a more definitive and concise 
statement of authority, for example, elaborate on that thought. 
Is it to regulate broadband like common carriers, or what?
    Mr. Powell. Senator Hollings, section 214, which was the 
provision enacted with the original Communications Act of 1934, 
has been generally interpreted to apply mostly to carriers 
regulated under title 2, which are generally the 
telecommunications common carriers. There are increasing 
classes of service providers who do not have to obtain 214 
licenses to be in operation, for example, cable service 
providers, Internet backbone providers, and other service 
carriers that are providing critical services.
    We have been successful to date, through the force of our 
own formal and informal actions, to provide orderly transitions 
in these cases, but there are questions marks as to whether, if 
we were in a serious dispute, whether section 214 would be 
sufficiently comprehensive to assert legal jurisdiction to 
insist on discontinuance procedures in the context of 
bankruptcy proceedings, so coverage, the scope of the provision 
should be considered as to whether we can more clearly make it 
applicable to other classes of critical service providers.
    Additionally, while I do not have immediate suggestions 
today, I think one could consider what other kinds of steps, in 
addition to the simple notice and discontinuance obligations, 
maybe perhaps more forceful authority the Commission may have 
in order to assure operations.
    I would highlight the Committee one source of tension in 
the context of the cases, which is conflict between the 
bankruptcy laws and the communications laws. It is not always 
entirely clear that the bankruptcy judge would necessarily 
accept our protestations of the need for discontinuance, and 
might nonetheless order shutdown. I can tell you I have 
personally been involved in a few bankruptcies, and we had a 
very close moment when the bankruptcy judge came very close to 
ordering shutdown precipitously, regardless of our assertion of 
214 jurisdiction.
    The Chairman. There is one on appeal right now.
    Mr. Powell. Indeed, there is, and fortunately to date we 
have usually been able to wrestle these situations to ground, 
usually through the regulated entity themselves, but I think 
why should we continue to stumble on this when we could 
potentially close that loophole.
    The Chairman. I am in agreement. Could you have yourself or 
your staff at the FCC just outline both ideas with respect to 
214 on the one hand to give you the proper authority and 
otherwise a conflict between the bankruptcy court and the 
Federal Communications Commission? We need that immediately so 
we can try to include it here this summer before we leave. We 
will make every effort possible to do so.
    With respect to--well, let me put it this way. What change 
would you make to the 1996 act, if any?
    Mr. Powell. Senator, as I stated, I think in my formal 
remarks, I do think there needs to be some serious 
consideration about some of the convergent emerging services 
that are broadly clumped.
    The Chairman. Well, specifically broadband, I agree with 
you. The only thing is that the present broadband they are not 
subscribing to. It is $50 a month, and I have tried and tested 
out, and we are presently looking at the next generation 
broadband to see if we could not finance it, subsidize it with 
the auction moneys. What do you think of that?
    In other words, I look at Korea, and they have subsidized 
broadband and they have got it around to everyone. I am trying 
to subsidize that last mile with the next generation broadband 
with the combination of not only the fiber but Wi-Fi and 
others. Can I get your comment on that?
    Mr. Powell. Yes, Senator, I will try. I think there are 
only a handful of ways in which Government can be effective 
when you are talking about a massive private capital 
expenditure to build new services. One is, the Government can 
help try to stimulate and aggregate demand. To the degree that 
the U.S. Government, as perhaps one of the largest purchasers 
of communications services committed itself, or obligated 
itself to the use of broadband services, it made efforts to do 
so as a permanent proactive matter, and if state governments 
and state institutions did a similar thing, the stimulation of 
demand certainly would help pool and lower the cost of 
deployment.
    I think the other area is, can you help pay for it somehow? 
It seems to me in government that can occur in one of two ways, 
directly subsidizing services either at the customer producer 
level, or indirectly doing so by providing tax or other 
investment incentives for the construction and deployment of 
those. I am not an expert on the merits of those traditional 
government vehicles, but I do think that they are certainly 
worth some consideration.
    Finally, I think that it is important to note that 
regulatory policy is important here, though this can be complex 
and esoteric at times, because it is not easy enough to say 
something is a demand problem or a supply problem. Economics 
101 teaches supply and demand are intrinsically linked. If 
demand is soft at high prices, part of the problem is the 
supply is not being provided at a price that stimulates demand, 
and that can have a lot to do with the cost, and the burdens 
associated with deploying service. Then you have a tragedy if 
the cost of providing such services far exceeds the consumer's 
willingness to pay for them, and so one of the things that we 
are willing to tackle and consider more thoroughly, and there 
could be a legislative component to it, is the degree to which 
one can minimize or lower the regulatory costs or obligations 
associated with building and construction of that narrow 
infrastructure.
    I think one of the challenges presented to the Congress and 
presented to us is, it is very difficult to try to narrowly 
contain such kind of targeted limitations, but I still think 
that that effort is particularly worthy.
    The Chairman. Senator McCain.
    Senator McCain. In your remarks and recommendations you 
cite a need to increase authority under section 214 in order to 
prevent disruption of telecommunications services. Do you 
believe that there is a possibility that without that increase 
in authority some services may be disrupted, i.e., WorldCom, or 
some other major bankruptcy?
    Mr. Powell. At present, I do not think there is a 
circumstance that presents itself in that way, but I could 
hypothesize that a carrier not covered by 214, when the 
Commission tried to assert its requirements for discontinuance 
would refuse to comply, arguing that they were not covered by 
that provision, possibly with the aid and assistance of the 
bankruptcy court.
    One of the real struggles we often have is, we are trying 
to get blood from a turnip. Often, the bankruptcy judge, whose 
interest is protecting debtors and creditors, wants the service 
shut down to stop the bleeding, and when a regulator walks in 
and wants the operations to continue, it is interpreted as 
wanting the bleeding to continue, and it is a very difficult 
thing to try to strike a balance to continue to preserve 
transition disruption at the same time that an enterprise might 
be losing assets and revenue at a rapid pace, but yes, the 
short answer to your question is, I can imagine a situation 
where there would be a problem, but the answer is no that I do 
not presently see that situation in the context of WorldCom.
    Senator McCain. Many believe that we are in a major crisis 
in the telecommunications sector. Do you agree with that?
    Mr. Powell. Well, I have gotten into trouble for calling it 
a crisis, but I think you have to be naive not to suggest that 
it is a market in extremely fundamental duress. I mean, the 
statistics simply roll off the page in every measure you can 
imagine of the difficulties facing this issue. The reason I 
believe that it is not a crisis in the traditional sense of the 
word is, I do not believe that it is on the verge of complete 
failure. I do believe that it actually has real prospects for 
recovery, and will recover.
    I do think many of the fundamentals are presented, but I 
think none of them are achievable without many years of painful 
change, and I think that it would be naive and optimistic and 
probably drinking the same Kool-Aid we drank 5 years ago to 
suggest that there was any quick or magic bullet to that, or 
that policies that we genuinely believed in before do not 
deserve to come under equal amounts of scrutiny to try to 
prevent it happening in the future.
    Senator McCain. We will have another set of witnesses that 
will give us their views, but I am concerned, and I think that 
all of us who serve are worried about a severe perception 
problem amongst average American citizens. Mr. Winnick of 
Global Crossing received $735 million in stock, plus millions 
in compensation, Mr. Cook $36 million, three members of the 
board, $516 million combined, Mr. Anschutz, $1.5 billion, Mr. 
Slater, $18 million, Mr. Nacchio, $226 million. The list goes 
on and on. The numbers are really staggering.
    At the same time, thousands of employees are now out of a 
job, and in many cases retirees have had their entire 
retirement wiped out. This strikes many American citizens as 
patently criminal. I was in a grocery store Saturday morning. 
Five people came up to me and said, why should these executives 
of bankrupt corporations be receiving hundreds of millions or 
billions of dollars?
    We had a witness, Mr. White, who made $70, $80 million, who 
was asked by Senator Dorgan whether he should give some of the 
money back, and he said no, of course not, because he did not 
do anything wrong. These employees and these retirees did not 
do anything wrong, either.
    I guess I am asking you a general question as a person who 
has served, but also deals with these people on a daily basis. 
I believe you were up on Wall Street just not long ago. Have 
you got any ideas as to what we should do about that? Should we 
require them to give some of that money back? Should we take 
them to court? Should we have just these class action suits, 
where the lawyers seem to get most of the money and the average 
stockholder does not, and how do you cure this? Do you think 
Congress should pass a law limiting the amount of compensation 
that a chief executive should receive?
    I do not think so, but yet in 1975 I believe the average 
executive compensation was some 20 times that of the average 
employee. Now, it is 500, or 1,000. The numbers are 
astronomical, and it is terribly exacerbated by the fact that 
employees are not working. I mean, there is no difference in 
their salary now. It is infinity now, because so many thousands 
of them have lost their jobs, and I know it is not exactly in 
your area, but you are a voice for the consumer. That is what 
one of the Federal Communications Commission's primary 
responsibilities is.
    I wonder if you could just give us some of your overall 
views on this issue, perhaps in preparation for our next set of 
witnesses, and in preparation for perhaps further legislation, 
because I do not think the bill that we just passed goes nearly 
far enough, particularly in the area of stock options, which we 
did not even have a vote on, much less a determination on the 
part of Congress whether stock options should be treated as an 
expense or not, as Mr. Greenspan and Mr. Buffett and others 
believe they should.
    Thank you. Go ahead, Mr. Powell.
    Mr. Powell. Yes, sir. Well, I have to confess as a public 
employee who makes $133,000 and is prohibited by law from 
owning any stock, these sorts of drumbeats and stories are 
mind-boggling to me, and beyond any ability I have to 
understand or rationalize the choices, even try as I might just 
to simply understand it.
    I think what is more offensive, less than the aggregate 
amounts, is the timing, when there is relatively clear evidence 
that stock, employees' pensions and things are plummeting, but 
senior officials are permitted to withdraw value while 
individual employees are prevented from doing so. That is like 
closing the gates on the bottom of the Titanic and heading for 
the lifeboats, so on a personal level I would just share your 
deep offense about the whole thing.
    Do I think it requires government intervention? Yes, I do, 
for simple reasons and others more complex. Simply put, because 
it is not just affecting those particular individuals. It is 
not just a private sector problem. It is a problem that affects 
society quite broadly on an individual wealth basis, but from 
my perspective, which I do know something about, I cannot tell 
you what a kick in the stomach the scandal has proven to an 
industry that could not take it.
    An industry that was already on the ground trying to get 
back up has been kicked mightily by the actions of a few 
individuals that have compromised the ability to recover for a 
very long time, so the economic health of the country and the 
recovery of the sector is extraordinarily dependent on a 
perception, not only a perception but a reality that that 
credibility is restored and such actions are prevented.
    I am not an expert on corporate governance or salaries or 
the appropriate measures. I do see things there that trouble 
me, but I do believe the bottom line is oversight. I think I 
continue to be amazed where the boards of directors are in the 
United States when these situations and judgments are being 
made about withdrawals and payments and compensation.
    I think they need to also be under the appropriate amount 
of scrutiny in their fiduciary responsibilities, and I think 
that everything that I have read and followed in the actions of 
this Congress demonstrate a remarkably swift response by the 
people's House in an effort that seems to me to be generally on 
the right track, and I think that probably the institution will 
have to continue to monitor it and see whether additional 
actions are needed, but certainly I can only speak as a 
citizen, and I would be pleased and applaud the efforts of my 
representatives to tackle that problem.
    Senator McCain. Thank you, Mr. Chairman.
    The Chairman. Senator Burns.
    Senator Burns. Thank you, Chairman Powell, for appearing--
my questions, I just have a couple of them--and your response 
to them, Mr. Chairman.
    The accountability act is being signed today by the 
President, and in your testimony you alluded that you need more 
transparency in your ability to audit and to gauge activities 
of those corporations that fall under the common carrier 
clause. Does the accountability act that the President is 
signing today, does that give you enough authority, or does it 
present some answers to the challenges you have?
    Mr. Powell. A quick answer is, I do not believe anything in 
that act goes directly to our authority, the Federal 
Communications Commission. I do not know of any provision in it 
that expands or alters----
    Senator Burns. It may expand to the Department of Justice, 
where maybe you could require it. I mean, I am vague on that.
    Mr. Powell. I understand. Yes, to that extent, that it may 
mean that we as an institution have an opportunity to see 
things at an early stage, which could be appropriately referred 
to an institution that had the specific responsibility.
    I take an opportunity to explain that we have done a few 
things to try to increase those channels. For example, we have 
proposed a Memorandum of Understanding with the SEC that would 
create a mechanism by which, if in the course of our 
jurisdiction of regulatory activity we came upon things that 
looked to be at least prima facie problematic, we could make 
referral and share resources in pursuit of that.
    And then our role on the corporate task force, fraud task 
force created by the President I think also provides an 
opportunity to have a better flow of what we come into contact 
with, the agencies that would be responsible for the 
prosecution and investigation.
    Senator Burns. In your remarks with regard to section 214, 
and I look forward to working with you and visits with you and 
the FCC. I think with the Chairman's leadership and help on 
this, I think we can look at a way to approach 214. That is not 
the only area of 214 that maybe we have to take a look at the 
one we are providing here, but nevertheless, we look forward in 
working with you on that, but those are the two areas I think 
that are the building stones of everything else, before we do 
anything else.
    The other parts of it are the fraud and all of that. That 
is out there in the Department of Justice or whatever, but I 
think with you being here today and pointing out those 
particular areas, those key areas where reform and some, let us 
say, tinkering around may enable us to solve future problems 
should they arise in the same way, and with the free market 
they will arise, it is inevitable, and that is Economics 101.
    So I appreciate you coming in today, and answering these 
questions, and I look forward to working with you on 214 and 
any other suggestions you might have from your position, and I 
thank the Chairman.
    The Chairman. Very good. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Thank you, as well, 
Mr. Chairman, for your helpful statement.
    Let me turn to the question first of fraud in the 
telecommunications sector. You mentioned the FCC is 
participating in the overall effort to root out corporate 
fraud, and I think that makes sense, because there is a lot of 
pressure out there, and when that is ratcheted up, you 
certainly have people trying to cut corners. What are the 
particular types of fraudulent practices in the 
telecommunications sector that you are especially concerned 
about now?
    Mr. Powell. That is a good question, because it is 
important to try to distinguish whether there is anything 
particularly acute or unique to the telecommunications sector 
that is leading to this problem being more prominent than some 
other sectors, though I think a fair evaluation of the number 
of companies that have come under scrutiny crosses the wide 
range of spectrum of companies in corporate America, and is not 
limited to telecommunications.
    I think it is also interesting to note, at least for the 
moment, that the vast majority of telecommunications carriers 
that have come under scrutiny, or many of those carriers, as I 
said earlier, were most aggressive in their pursuit of the 
Internet gold rush. That is the extraordinary expectations and 
pressures to continue to deal with the ever-expanding 
competitive environment for those things may have put more 
pressure and led to a willingness to start cooking books in 
order to cover the previous actions of the Committee, so to my 
extent, I just always have a generalized concern about whether 
that kind of environment or culture would have reproduced 
itself in other companies, so I think that it is generally 
prudent to sort of be looking quite carefully at the sector, as 
well as related sectors in which these pressures might have 
been simulated.
    We have also undergone some internal efforts to sort of 
relook at any information or data that has come into our 
possession over the past year or so to consider whether we 
would want some of it recertified in the context of what we 
know about some companies' willingness to cook the books on the 
financial side.
    Senator Wyden. Are there companies now that you are looking 
at with an eye toward requiring them to recertify, because that 
strikes me as very important, and I really do want to know what 
you bring to the table in terms of this overall administration 
effort. I think there is a concern that there are other 
examples of books being cooked, and to hear that the Federal 
Communications Commission is looking to see whether there does 
not need to be a recertification of some companies I think 
could really give consumers some confidence that this is going 
to be tackled in a serious way. So can you confirm, is there an 
examination of whether some are going to have to be 
recertified?
    Mr. Powell. I would describe it as, there is a 
consideration, because we are presently reviewing the kinds of 
accounts we have and the kind of data we have received in 
trying to make some thoughtful judgment about which kinds of 
things might be implicated.
    Senator Wyden. I would urge you to be very vigorous on 
that.
    Let me talk about the consumer situation, and I have 
divided it into short term and long term. Short term, it seems 
to me what the consumer wants is no chaos with respect to 
service, and no disruption. You have described steps that are 
being taken, but long term for the consumer. What I am 
concerned about is the prospect that we are going to have far 
fewer choices and significantly less competition. What are you 
looking at to try to avoid that?
    Mr. Powell. Well, as I mentioned, I would like to note a 
few things. First, with respect to the pressures for mergers 
and consolidations, as I mentioned, one of the most difficult 
tasks the commission will have, as well as the Antitrust 
Division or any other entity that is charged with considering 
those transactions, it is going to have to be extremely careful 
with regard to what kinds of combinations would have the 
beneficial effects of stabilizing the market, but not in a way 
that seriously damages or forecloses competitive opportunity. 
That would be a case-specific merger evaluation in the context 
of that.
    In addition, the Commission has initiated a number of 
proceedings in the hope and expectation that it would be able 
to create more sustainable economic and regulatory foundations 
to create more viable competitive entry in a way that would be 
more sustainable, given the severe constraints of capital that 
exist in the market. Those proceedings we have made an effort 
to try to accelerate, hopefully closer to the end of the year 
to try to bring some clarity and certainty in that area.
    We have also been particularly vigilant, I think, in the 
context of 271 applications to make sure that the large 
incumbent carriers continue to abide by those applications. I 
would note that in our first year we rejected just as many 271 
applications as we approved, and maintained the line on a 
number of important elements in considering pricing, and then 
two final things I would mention, one which I have asked this 
body to consider.
    The first is, we have a proceeding which we are focusing 
intensely on trying to require real strong performance measures 
so that elements will be provided to competitive entrants in a 
much more timely and effective way that proceeding is underway 
as a part of the trilogy of proceedings we are doing.
    And then lastly, I have emphasized over and over again, I 
continue to think it is an important function that I do not 
think we are yet up to speed on, which is much stronger 
enforcement. To do that, I think we have created the 
organization and structure for doing that, but the resources 
for doing that in terms of not only money and personnel, but 
whether we have effective penalties, is an important question.
    Senator Wyden. Let me if I might, Mr. Powell, ask one last 
question, and to contrast it to when you came to this room at 
your confirmation hearing.
    When you came to this room for your confirmation hearing, 
you described how you wanted to chart a course to new, more 
competitive waters in telecommunications, and my own view, and 
I think you could tell it from my desire, for example, was to 
have you review the books of a number of those that you have 
said are now under consideration by the Commission. I think 
that the current climate requires a very different regulatory 
approach than the one you envisaged when you came here for your 
confirmation hearing, and what I would like you to tell me is, 
what different regulatory tools, if any, are you using now than 
what you envisaged when you came to this room for confirmation?
    Mr. Powell. Well, let me take it in two parts. First of 
all, I continue to think the course we charted continues to be 
a productive one. The course we charted was to create vehicles 
for the consideration of important questions about economic and 
regulatory foundations for effective and sustainable 
competition. When we charted that course, the stresses on the 
market were not unknown to us. Indeed, the CLEC market had 
begun collapsing long before we had even initiated the 
proceedings.
    I had held a number of very significant CLEC CEO summits 
with the leaders of many of the competitive industries to get a 
strong assessment of the kinds of problems they were facing and 
try to find ways to deal with them. From that effort is where 
the enforcement initiatives were born, the performance measures 
were born. These were things they specifically identified as 
critical, so that part of the course I think was a response to 
a growing recognition that the economic foundations continued 
to need work.
    Additionally, we are always buffeted by the winds that come 
blowing out of judicial judgments and litigation, which are 
constantly putting the commission back on its heels to relook 
at, reexamine decisions that are made in the context, and as 
early as a few months ago we are still dealing with massive 
decisions coming out of the Supreme Court and the DC Circuit 
over a statute passed 6 and 7 years ago, and I have got to tell 
you, it is an extraordinarily challenging and frustrating thing 
to be halfway down and be constantly having to start over.
    So I think the vehicles are there. People will have 
legitimate and honest debates about what the outcome should be, 
but those outcomes are yet predetermined, and we have been 
looking at every one of those proceedings to consider questions 
that we might add, or additions that we might put on it to take 
into account the growing body of information that we are 
having.
    Finally, I would say that the current environment does give 
us pause to be cautious in a number of areas that seemed less 
problematic before.
    Senator Wyden. It is correct that we need to look a bit 
more carefully at some of the streamlining of accounting 
functions that was originally contemplated at a time when there 
wasn't apparent evidence of a need for some of those accounts. 
I think that we will now proceed much more slowly and consider 
whether any of those judgments that have already been made or 
were being contemplated continue to merit direction in that 
regard. That's something we'll do that is a change.
    We have had to spend, as we've talked about here today, a 
lot of time and resources developing a much more robust 
response and jurisdictional basis for managing disruption of 
service and bankruptcy proceedings. That's taken an enormous 
amount of our attention and resources. That has now been added 
as a major component of our tenure and what we're going to have 
to be focused on, sadly. But that's where I think we're going, 
and I think that we have most of what we need underway to that.
    Thank you, Mr. Chairman.
    The Chairman. Senator Breaux?
    Senator Breaux. Thank you, Mr. Chairman. Thank you, 
Chairman Powell, for being with us, and for your statement. 
Early on in your statement, you said that WorldCom is still 
providing you your telephone service. I would just observe when 
WorldCom cuts off the telephone service to the Chairman of the 
FCC, we can probably all plan to attend a funeral in the very 
near future.
    Chairman Powell. It happened once, but I'll leave that out.
    [Laughter.]
    Senator Breaux. Oh, it did. Hmmm, that's a story.
    You mentioned several times in your testimony about 
potential for broadband services to really be a bright spot for 
the telecommunications industry in residential areas. The 
indications are that opportunities to develop new services will 
come from residential broadband.
    You talk about approximately 50 million households in the 
near term would be a potential broadband market that could be 
provided for and that there's a great opportunity in all of the 
broadband services. It seems to me that we have a situation in 
broadband where almost 70 percent of the services are provided 
basically through cable services, which are generally 
unregulated, to a large extent. And the competition being the--
for digital subscriber lines being basically the phone 
companies, which are heavily regulated as to what they can do 
and cannot do.
    As you know, we've introduced legislation that basically 
says--look, I don't think Congress is ever going to be able to 
decide the nitty gritty of what is the proper approach in some 
of these new technology areas--and the legislation basically 
says to the Federal Communications Commission to try and come 
up with some rules and regulations that create a level playing 
field in this new and exciting technology that you speak to.
    So I guess my general question would be, can the FCC, if 
given the appropriate amount of time, comply with a requirement 
like that to try and attempt to come up with a level playing 
field for the broadband services?
    Mr. Powell. Well, if that were our task, I'm confident we 
could do it, yes.
    Senator Breaux. In trying to figure--I'm glad to hear you 
say that--but in trying to figure out what would be an 
appropriate time--I mean, legislation, I think--I forgot what 
he said on 180 days--is there a timeframe that the FCC would 
need to embark upon that type of a process?
    Mr. Powell. Well, I'd put it this way. I think, at the very 
minimal, it would need to be 6 months. And I think, at the 
optimal, when you consider enormous amount of notice and 
comment and administrative procedures that would have to be 
followed to get the kind of full and complete record necessary 
to make those judgments prudently. But this body, when it 
created the Telecom Act in 1996, I believe gave the Commission 
6 months to introduce the local competition rules.
    And to the credit of Chairman Hunt and all the hardworking 
employees who were running the show back then, they were able 
to accomplish that. But I would urge the Committee, as I must 
as the leader of the institution, to keep cognizant of the 
wide-ranging amount of portfolio we're dealing with and 
whether, you know, we actually have the resources to have too 
many major efforts. We have 17,271 applications pending right 
now. We have five, six major proceedings hoping to conclude by 
the end of the year. We've been consumed by bankruptcy 
proceedings. So all of that would have an affect on timing.
    But I think, you know, given, you know, no other additional 
catastrophic drain of resources, that we could probably 
accomplish something like that in a, you know, eight to 10 
month time.
    Senator Breaux. Can you comment--I'm not sure you can--but, 
I mean, on the advisability? I'm just trying to figure out how 
we create a level playing field. I mean, I'm happy to do it 
from a congressional standpoint, which I think is really very 
difficult because of the battles that occur when you attempt to 
do some of these things. Can you comment on the advisability? I 
mean, our legislation that I'm part of basically says, ``You do 
it.'' And my question is really--from a policy standpoint is, 
is that something that makes policy sense--I mean, or not, or 
can you comment on that?
    I mean, we set policy, you carry it out, but I mean, you 
also head up the agency that supervises these industries. I 
mean, is that something that, not only as you said, you could 
do it, is it something that makes sense to attempt to do?
    Mr. Powell. Yes, I suppose so, but I--I think I would 
answer this way. This commission, your commission, is best when 
it's making technical and economic judgments that underlie 
broad policy conclusions by the people's representatives, 
broadly represented by the Congress. And so I think one of the 
most difficult areas is when the commission is in grayer 
territory, when there isn't a clearly demonstrated consensus in 
the legislature, and then we take the buffeting, too, of trying 
to make those very difficult decisions in an unambiguous 
environment. And I think that there would--there are some very 
fundamental threshold questions that I think would probably 
benefit from Congress in its wisdom making judgments initially 
about----
    Senator Breaux. Assuming that Congress said that, look, we 
want to have a level playing field. And it's hard to say what's 
a level playing field, but basically we're talking putting 
everybody on an equal competitive basis. And it seems like a 
lot of the things that are needed to be done in order to 
accomplish that are very technical. I mean, there are pages of 
regulations that apply, I think, to the local phone companies 
if they're going to get into this area. And a lot of it's very 
technical. I mean, a lot of us really probably don't know the 
details of what each one of those require. So it does seem to 
be a great deal of technical adjustments that would be made in 
order to create that level playing field. And as you've 
indicated, one of the things that the FCC is supposed to do is 
to handle the technical issues. I mean, am I correct in talking 
about that, or am I missing the point somewhere, or do you----
    Mr. Powell. No, I think you're correct, but I also think 
that all those technical judgments have to stem from some very 
fundamental conclusions. For example, will there be a--will 
parity include wholesale access by other competitors on an 
intermodal basis? Right? I mean, if you really wanted to confer 
that judgment to me, we'd figure it out, but it's one of the 
most fundamental things that I think is probably decided by 
this institution. Now then, whether we could technically figure 
how and what manner that is done, I am quite confident that we 
could.
    Senator Breaux. Well, I'm not sure the policy direction is 
enough. I mean, policy direction is fairly simple, and our 
effort is to create a level playing field so everybody can 
compete with the same rules. And the question is, is that 
enough of a policy direction, or do you have--would we have to 
do more than that?
    Mr. Powell. Well, I'd like to think about that more, but 
generally I think that I would lean toward wanting to discuss 
with Congress more fully slightly more than just a simple 
mandate to achieve parity, which is a relatively--bit of a----
    Senator Breaux. It's in the eyes of the beholder, to a 
certain extent.
    Mr. Powell. Yeah.
    Senator Breaux. And I understand that. It's very difficult 
to say, look, make it fair. I mean, how do you do that? I mean, 
you know, that's what we're struggling for.
    Mr. Powell. But I will only offer to you that this is 
something we have worked on, thought about in the most 
exhaustive terms, and I know that you've often asked me to come 
and talk to you about it, and I openly and happily commit to 
any member to do that. I think it's a very, very difficult 
area, and I think it's very, very hard to think through, and--
but we have done a lot of thinking about it and would be more 
than happy to engage in----
    Senator Breaux. Thank you.
    The Chairman. Senator Dorgan?
    Senator Dorgan. Mr. Chairman, thank you.
    Mr. Chairman, I could ask some questions--lengthy questions 
about all of these companies who will follow your WorldCom, 
Global Crossing, and Qwest. But let me, for purposes of this 
discussion, ask some questions about Qwest. Qwest serves 24 
exchanges in North Dakota. Let me also say to you that I had a 
rather lengthy discussion with the new CEO of Qwest. I believe 
it was the week before last, and I was impressed. He comes from 
a no-nonsense side of the industry--many, many years steeped in 
that side of the industry. I was impressed with him, and I 
think he wants to take this company in the right direction.
    Having said all that, I want to try to get you to tell me 
and tell North Dakotans who are customers of Qwest who they 
should rely on, who they should look to for these kinds of 
problems. And I'll give you an example. Qwest is in 24 
exchanges in North Dakota. It offers DSL service in only four 
of them--4 of 24. Question, why?
    Qwest is also working in 27 other countries, has 
investments in 27 countries. Qwest, as you know, while it 
couldn't provide DSL service in 20 of the 24 exchanges it works 
on in North Dakota, it had the folks at the top of the company 
making a substantial amount of money even as they were making 
investments in foreign countries. Mr. Anschutz reaped $1.9 
billion from company stock sales since 1998; Mr. Nacchio, over 
$300 million. And when he left the company, he was given a $15 
million bonus on top of his $1.2 million salary and then given 
a $10 million severance check as he went out the door. Now, 
that's--for stewardship at a time when we are now told by the 
new CEO that it appears the company, during the 3 years most 
recent--2 years, rather--has exaggerated revenue and 
understated costs, and they will have to restate their 
earnings.
    Now, so here's a company that says, ``I want to invest in 
27 other countries, but don't want to do DSL in 20 of the 24 
exchanges in the state of North Dakota. I want to sell $300 
million worth of stock, some of them within 60 days after 
saying that the company would meet its targets, and then 
failing to meet the targets by 10 percent.'' He sold all that 
stock. In addition, it now appears that they were cooking the 
books, that the new CEO has to restate all these earnings and 
expenses. And if I'm a customer in Qwest in an exchange in 
North Dakota where I'm not able to get DSL service because 
Qwest says, ``We're not going to offer it,'' who do I look to 
to see that this company is doing what it ought to be doing 
accounting-wise, in terms of executive compensation, service, 
DSL, and so on? Do I look to the FCC? Do I look to the SEC? Who 
do I look to? I'm a customer, and I see all this, and I think 
it stinks. I mean, it's just disgusting. So who do I look to?
    Mr. Powell. There was a lot in there. I'll try to get 
through them. You don't have DSL, I think you look to, one, the 
company. Why do I say them first? Because whether one thinks, 
regrettably, there is no provision I know of that compels a 
company to deploy service somewhere. That's regrettable 
perhaps, but that company ought to account for the citizens in 
the state that it operates, why isn't it providing a certain 
kind of service to them.
    But just as importantly, I think the North Dakota 
Commission, which is quite notable, has a lot to do with the 
conditions and the local exchange markets and can consider 
whether in the context of its regulatory responsibilities at 
the local level is complying fully or that citizens would 
prefer other judgments being made by that--by that group, 
particularly when that group is fundamental to questions like 
whether it will grant 271 approval within the state, whether it 
will continue to consider regulatory requests of the company as 
it continues to operate. I think that they sit at the fulcrum 
of many of those decisions.
    Us, depending on what it involves, to the extent that it 
has an interstate component system, I think the Federal 
Communications Commission ought to serve them as well.
    On the accounting stuff, you know who I think they should 
have called is the state prosecutor and the Department of 
Justice if they are things that constitute criminal or other 
kinds of regulatory violations.
    And if it turns out that there are not sufficient laws that 
cover the kinds of conduct that creates that sort of outrage, 
they turn to you and they turn to this institution, which I 
think that the public has, and they ask for these conducts to 
be incorporated into a legal regime that would permit 
prosecution.
    Senator Dorgan. Would you agree that everyone has failed 
these customers at this point, given the recitation I've just 
offered you? For example, on 20 of the 24 exchanges, no DSL 
service. I guess it costs about, what, $100,000 to set up a 
station to extend beyond the station for DSL. They say, ``Well, 
we don't intend to spend the $100,000,'' but then they give Mr. 
Nacchio a $10 million severance check on top of his $1.5 
million bonus, on top of his $1.2 million salary, on top of his 
$300 million from the sale of stock, all during a period in 
which they apparently cooked the books. Do you agree that, if 
you're a customer, you must think that everybody failed you and 
probably also would agree that if you're a stockholder, you 
certainly think everybody has failed here?
    Mr. Powell. Oh, yes.
    Senator Dorgan. And the reason----
    Mr. Powell. They probably do.
    Senator Dorgan.--the reason I asked the question earlier 
when I made the statement is--you know, first of all, I like 
you personally. I voted for your confirmation, but sometimes I 
get heartburn when I read the things you say in the newspapers 
and the speeches. You say, ``I believe we should trust that the 
market will lead to the most beneficial outcomes.''
    I'm a great believer in the market. I've studied economics, 
and I taught economics, and I'm a great believer in the 
marketplace. I'm a firm believer that in many instances, you 
must--must--have effective regulation. For if you don't have 
effective regulation, you will have a perversion of the market. 
And I worry very much about a philosophy that says, ``Well, let 
me go take a break here and watch things for awhile.'' I worry 
very much that that--when the part of the FCC--the SEC, FERC, 
the FCC--I worry very much that that gives people in this 
country less than they ought to get in terms of regulatory 
oversight.
    So I hope, Chairman Powell, that you are a tiger on these 
issues and you ratchet up an effort to say that on my watch, 
your watch, you're going to use all the tools at your disposal 
to prevent these kinds of things from happening again. I regret 
all of this has happened, and it's not--you know, I don't know 
that you lay the blame to one particular location. There's 
avarice and greed and, you know, some folks that are crooked 
and have a heart that doesn't respect honesty and fairness and, 
you know, there's a whole series of reasons. But I think it's 
also the case that in hearings in here and the Energy Committee 
and elsewhere, we've seen federal agencies that have not done 
their job as--in their oversight role. So my hope is that you 
will be very aggressive.
    I wanted to ask about universal service here, but this is 
not the hearing to do that. And, as I said, I could have asked 
questions about the other two companies. I chose Qwest only 
because they serve 20 of 24 exchanges in North Dakota. You 
might want to respond to that, Mr.--Chairman Powell.
    Mr. Powell. Sure, I'd be happy to. I make no apologies for 
believing in the importance of market principles in economics, 
but I often think that this is widely misperceived as not 
believing that regulation has a place in the operations of 
economic activity in the country. I don't think I've ever said 
such a thing. I wouldn't be doing the job I'm doing if I was a 
complete libertarian and believed in laissez faire.
    Indeed, I think that if you really look at our rhetoric 
rather than the reportage of it in trade magazines, you'll find 
that we often employ our regulatory authority quite effectively 
to protect the interest of consumers. As I said, almost on any 
metric--people may not be happy with every 271 we've approved, 
but we've disapproved just as many because they have not met 
their regulatory obligations.
    In our call for stronger enforcement to punish wrongdoing 
of incumbent local exchange carriers that violate merger 
conditions and violate the conditions, we are calling for 
regulatory power to aid in enforcement efforts. Under our--
under my leadership at the commission, we've brought more 
enforcement actions than any previous commission and have 
brought the largest and first fines against Bell operating 
companies of any Commission. That's, to me, an important 
regulatory function that we serve, and serve proudly, and, 
indeed, want more of that authority to do so effectively.
    I think that I also believe deeply that most of these 
policy judgments are first minted by you. And I have a very 
profound and sincere commitment to trying to be faithful to the 
objectives of that. Much of it, however, has been left to us 
for implementation. We struggle sometimes to find the balance 
in that. But I do believe that when we're done, our record will 
show a good balance of understanding that it is not regulation 
versus deregulation. We need both, and we need to do both well.
    Senator Dorgan. Chairman Powell, thank you for that 
response.
    Let me just say, in conclusion, that what Senator Wyden 
talked about is important to many of us, as well. Fewer 
choices, by definition, almost always means less competition, 
and I worry about that in the context of all of this, as well.
    Mr Chairman, thanks for your indulgence.
    The Chairman. Surely.
    Senator Cleland?
    Senator Cleland. Thank you, Mr. Chairman, and thank you, 
Chairman Powell.
    I've been sitting here listening to this, and several 
thoughts have come to mind. A line by William Butler Yeats that 
life is like a spiral staircase; we keep coming back to the 
same point, but always from a different perspective.
    When I was a young signal officer in Vietnam, particularly 
with an infantry battalion, I was the communications officer. 
It was my job to provide communications. It was my job to do 
job No. 1, service the battalion in terms of communications. If 
I didn't, I got relieved, because somebody got hurt.
    And I think what we see now, as they say in my part of the 
country, there's something bad wrong. I don't know what it is. 
I wasn't here--in government here when MCI, which is the 
precursor of WorldCom, ultimately took the Bell system to court 
and you had the breakup of the Bell system. Now WorldCom itself 
is bankrupt. I wasn't here in the 1996 Telecom Act which 
glorified competition in the marketplace, and that was going to 
make it all well. Something's bad wrong.
    We now have an implosion in the telecom industry that's not 
only hurting our economy, it's hurting America, and we are 
beginning to compromise job one. We're coming back to this 
point of service, and that is our mission, but we're coming at 
it at a different perspective. Some things have changed in the 
last 10, 20 years, and something is wrong, because we're 
winding up with Adelphia, where that family company was charged 
with, in effect, misappropriating a billion dollars. WorldCom 
misplacing $4 billion. Qwest accused of cooking the books. 
Global Crossing was going down. Something is bad wrong.
    I would like your opinion as to what went wrong and what 
you, the guardian of the telecommunication industry in this 
country and making sure that service is, indeed, the number-one 
priority of your agency and of this government, what we do to 
restore that service to the American people so they're not 
threatened either with unemployment in the telecommunication 
industry, losing their 401(k) plans to heartless CEOs, or being 
disrupted in their telecom service without which you can't do 
personal business or regular business. What went wrong, and 
what do you propose to do about it?
    Mr. Powell. Well, I would just abbreviate what I said in my 
statement about what went wrong. I think there was a gold-rush 
mentality in the 1990s. People rushed aggressively to be the 
winners. I think they over expended. I think they raised debts 
to staggering levels, and I think they couldn't service them 
with revenue, and they destroyed themselves in that regard. I 
think the most fundamental crossing of the Rubicon was that 
some companies, under those unrelenting pressures, chose to 
cheat, and they chose to cheat in order to keep the party 
going, a party that was ultimately doomed to fail, but 
nonetheless, we were going to keep it going.
    I think the blame for that rests in lots of places, but in 
differing degrees. I think it certainly has to, first and 
foremost, rest with the failure of leadership of those units, 
failure of leadership in the governance of those units and 
those fiduciaries, like accounting firms and lawyers, who are 
charged with the sacred responsibility of trying to prevent 
that from happening. All of that fell apart in these cases. I 
think everybody's doing the right thing to try to root out why 
that went wrong and how to prevent it in the future.
    From a matter of telecommunication policy, I think that we 
have an obligation to look at how did it get this far? Did we 
do anything to contribute to, stimulate, inadvertently 
facilitate the kinds of business judgments that led to getting 
to that moment of crossing the Rubicon? I think we're looking 
at that hard.
    I think that we have to be aggressive and learn to be very 
effective in this bankruptcy context, something that's new to 
the commission. As you were alluding to in the days of Ma Bell, 
you know, we didn't have bankruptcies. This is a relatively new 
phenomenon to regulatory agencies at the state and at the 
federal level, and we're working quickly to adopt responses so 
that as the transitions that need to take place to recover take 
place, consumers are not the ones who pay the price in terms of 
service.
    Those are some of the things that we're going to do, and we 
keep looking tirelessly for other ways to do it. But we take 
seriously our responsibility and role to use our resources and 
our jurisdiction to do what we can to restore that confidence 
and credibility.
    And just as importantly, because I think the--it's 
important to highlight that the commission does not have 
authority to regulate securities and banking questions, but 
that we do work as a sister agency with those institutions that 
do so that we can bring not only information as necessary, but 
expertise. The role I've played to date on a corporate task--
fraud task force and with the SEC is to help explain what are 
access charges, how does this happen, why does the telecom 
carrier do this--help us be better at our job of investigation 
and prosecution, something that had not revealed itself to 
communication policy before, but I suspect is here with us from 
this point out.
    And we have opened up, as I said, Memorandums of 
Understanding. We're working to develop our interagency 
participation with Justice. And I hope and pray and we'll spend 
every effort we have trying to make sure that that bears fruit.
    Senator Cleland. Thank you, Mr. Powell. Thank you, Mr. 
Chairman.
    The Chairman. Thank you.
    Senator Allen?
    Senator Allen. Thank you, Mr. Chairman. And thank you, 
Chairman Powell, for your, in my view, very logical, 
outstanding statement and prioritization of the tasks of those 
issues that are within the jurisdiction of the FCC.
    I, first of all, agree with your approach of service 
continuity being No. 1, job No. 1. And that is important to 
make sure that our nation's communications system stays 
reliable and useful. I also commend your more of the long-
term--as you get down these priorities, your long-term vision 
of what needs to be done.
    There is also a thread of optimism there that it is still 
going to be good some day, somehow, in the future. Of course, 
right now we see this corporate meltdown. You see the fraud. 
You see the scandals. And I appreciate that you recognize the 
importance that all of this has on a lot of vendors and 
suppliers and others that are involved in it.
    Now, when you get to the--your second point, the rooting 
out corporate fraud, a lot of that's, I think, going to be 
addressed by the bill that President Bush signed today: The 
Corporate Accountability Bill. When you get into three and four 
and five--restoring financial health, prudent industry 
restructuring to restore a competitive supply and demand matter 
and all, and revenue sources, services and so forth. You look 
at this as an economics matter in that obviously a tremendous 
amount of investment went into communications infrastructure. 
Clearly, either because the prices were not high enough to 
consumers or consumers did not demand the added access or the 
added services, they're not recouping that investment. Thus, 
the bankruptcy, beyond all of the fraud and deception and so 
forth.
    Now, when you talk about these three companies and indeed, 
the rest of the industry, one of the reasons you mentioned as 
to why the industry is suffering so badly is it's a supply and-
demand matter. Now, the rate of consumer and business demand is 
continuing to grow. That's staying stable and growing, not--
albeit not at the rate they projected. None of this 
infrastructure is perishable. In other words, you can have 
fiber optics, and it's not going to perish, it's not going to 
atrophy from a lack of use. So the question is, is that--with 
the expectations never materializing, when you look--and this 
is my understanding--that an estimated 39 million miles of 
fiber have been laid in the United States as part of this 
massive build out in the industry, yet only 10 percent of that 
fiber is use today. The CLECs, the ILECs, the cable carriers 
have spent billions of dollars, yet only 10 percent of the 
fiber capacity that is available is being used.
    Now, can you, from your perspective, comment on why this is 
the case? It clearly is a lack of demand. Is it cost? Is it 
content? Why, in your view, does this lack of demand exist? 
Because that's what's going to eventually, when you get into 
restoring financial health, restructuring revenue and so forth, 
that's what's going to have to come--either they're going to 
have to drop their process or something is going to happen. But 
why do you feel that there is this lack of demand for this 
expanded investment in opportunity?
    Mr. Powell. Sure, Senator. Let me start with something you 
alluded to which is, it's a little bit of a mischaracterization 
to say that there really is a lack of demand. Doubling--
Internet doubling every 100 days may be fanatical, but it is 
doubling every year. It's an extraordinary growth rate by any 
historical measure of other services. So there is demand out 
there. People do want services. What's astonishing is the 
incredibly quick way that the competitive pressures and carrier 
optimism led to infinite belief in the amount of supply that 
would be needed to meet demand. And we say demand is out of 
whack, but I don't think any level of demand could swallow the 
kinds of capacity that has been put in the ground, certainly in 
the short-term, and of some question, ever.
    The thing that we haven't had in this discussion is the 
relentless power of technology, which I think is the other part 
of the story that I didn't allude to specifically, which is, 
whether we like it or not, no matter what the economy is doing, 
the laws of physics are dramatically increasing capacity and 
microprocessing power while simultaneously cutting costs, which 
means that every carrier out there has got a serious problem 
all the time.
    The minute I lay this fiber, the minute I throw this box on 
the end of it, you know, within a matter of months or a year, 
or if you follow Moore's Law, 18 months, somebody's going to be 
able to do twice as much at half the price. It's sort of this 
declining cost curve forever phenomenon in which the technology 
is relentlessly undercutting the investments. And I think that 
one of the things is not only the physical capacity of the 
fiber, but the extraordinarily powerful exponential increases 
in its capability. Now we can light not 16, but 280 more and 
constantly increasing capacity. Technology is just on a more 
vicious curve than consumer adoption and demand. And this is a 
big problem in the market on a going-forward basis.
    So, we should be careful not, I guess, not to fall for the 
false premise that, oh, all that capacity will always be 
usable; it's just a matter of finding the killer app. I do 
think that part of the market's going to have to fix itself, in 
terms of restructuring, to some degree, to cut out excess 
supply as opposed to just utilize it.
    But back to the other half of your question. I do think 
there's still a lot of demand stimulation. This is the classic 
chicken-and-the-egg problem of new technologies, which is 
people don't want to build it until there's something to do 
with it; nobody wants to make anything to do with it until 
there's something to do it on. And I think that it's an 
iterative process. There'll be a little of one, and then a 
little more of the other, and a little of one, and a little 
more of the other, until it hits a tipping point which it 
really finds something sweet. I've always believed that 
consumers generally do not think of themselves as ever buying 
pipes. I don't think they care what's in the ground. I don't 
think they pay attention to where their NID is. I don't think 
the average consumer knows what a NID is. All they want is that 
thing to work when it turns on.
    What they are buying is Amazon.com. What they are paying 
attention to, where they are gaining their value is in the 
services and content information they come to. I do think that 
stimulation of content and applications is a critical part of 
our modern economy and it's a critical part to making this 
work. And I think that most have recognized that. I know 
Senator Burns and the Internet Caucus and the Congress talk a 
lot about that. Senator Hollings is trying to consider 
questions about copyright policy. All are integrated into the 
question of how to make content and applications sufficiently 
viable and cost effective so consumers will buy this thing. And 
when a consumer sits down and the computer is $50 for 
broadband, there's a lot of people who say that's not worth it. 
Let me tell you something. When I bought my wife my network for 
$150, and suddenly that $50 could serve every computer in my 
house and I could wow my neighbors by surfing my Internet on my 
back deck, which I do regularly, it's suddenly worth it to me. 
And that's something nobody every heard of almost a year and a 
half ago.
    So those things have got to keep coming, that suddenly 
slash what seems like ridiculous propositions into really 
value-added propositions. The danger is if everybody stops 
playing, or takes large hiatuses, it's hard to keep that 
iterative process going.
    Thank you. My time's up. Thank you, Mr. Chairman.
    The Chairman. Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman.
    Mr. Powell, I was particularly intrigued by your comment 
about No. 4, the prudent industry restructuring in which you 
stated, ``Survival and health will depend on prudent industry 
consolidation. I emphasize prudence, because some mergers 
clearly could present a threat to competition and may not be in 
the public interest. That can only be determined upon careful 
and thorough review of a particular transaction. Regulators 
will have to walk a fine line to achieve stability while not 
squelching competitive opportunity.''
    I certainly agree with those words that you spoke to the 
Committee. Could you give us some specific hypotheticals of 
what would be the--as this shakes out--as this industry shakes 
out, as combinations occur, which I said in my opening 
statement, which are inevitable, just like the airline 
industry?
    How are you, other than these words which are, I commend 
you, which are the watch words that you have to strive for as a 
regulator. But what do you have in mind as you see this 
industry on down the line so that we protect--through 
competition, protect the interest of the consumer?
    Mr. Powell. Yes, sir. The--I should be quite frank and say 
that I'm asked this question a lot, and I always feel 
incompetent and unable to answer it effectively. Why? Because I 
don't know how to hypothesize on what is a good combination and 
eminently thinkable, and what's a bad combination eminently 
unthinkable. I can generalize about what the risks and possible 
dangers are and the possible benefits.
    But I was trained in antitrust and competitive policy and 
feel extremely strongly that these are enormously fact-
intensive and case-specific reviews. The Department of Justice, 
when it reviews a transaction, often is collecting 800 and 
thousands of boxes of documents in an effort to assess the 
market and the particular strengths of the actual carriers and 
what services they have. And I think the understandable desire 
to be able to have a vision and know in advance that, if I were 
king for a day, I would put these two guys together and not let 
those two guys--one, is an arrogance that I don't subscribe to. 
I don't personally believe that I'm capable of doing that 
effectively. And even if I was, I don't think that's what you 
pay me to do. I think that the only thing we can do is be 
guided by those watch words and the process which we employ 
when they are presented to us and ensure that the proof is in 
the pudding of our implementation of it. And I hope that, if 
and when this occurs, that I'll sit here and you will be 
pleased with the results, but I--I don't know how to say 
unequivocally what they would be.
    Senator Nelson. All right, I'll accept your answer----
    Mr. Powell. I don't have any other ones.
    [Laughter.]
    Senator Nelson.--recognizing that you can't go out and lay 
out a scenario. But by me asking the question----
    Mr. Powell. Sure.
    Senator Nelson.--we're going to be watching you like a 
hawk.
    Mr. Powell. You won't be the only one.
    [Laughter.]
    Senator Nelson. But there are others who watch you for 
their own self-interest----
    Mr. Powell. That, I know as well.
    Senator Nelson. Are you going to be looking out for the----
    Senator Burns. And you're not?
    Senator Nelson. No, I'm looking out for the interest of the 
average Joe Citizen who has benefited as a result of the 
increased competition that occurred. The fact of the cost of 
long-distance service today, the fact of the multiplicity of 
cell phones and wireless transmissions, I think has been a 
benefit of the increased competition. And that's what I'm 
looking out for, Senator Burns.
    Now, let me ask you this. We are going to see some shake 
out from telecommunications bankruptcies. And as companies 
emerge from Chapter 11 having shed their debts, there's always 
the possibility that they are going to undercut their debt-
laden rivals, causing further collapses. Give me the benefit of 
your thinking with regard to how does the FCC take this 
scenario into account.
    Mr. Powell. That is actually an excellent question to which 
I think a lot of discussion is ensuing. I don't think there are 
a lot of great answers to that at the moment, in this sense, 
that, one, it's not clear how genuine or imminent that kind of 
scenario is, but it is a possibility. It has occurred in 
industries in the past. I mean, we have a wonderful system that 
allows people to go into Chapter 11 bankruptcy and reemerge 
having shed their assets. That ought to be a consumer-enhancing 
prospect. A company emerges healthier, more financially 
capable.
    It works really well on an individualized basis, but when 
you're looking at a total industry, it runs the risks, as you 
point out, that I think are relatively legitimate, that that 
carrier emerges free of a lot of its debt that was burdening it 
before, but it is in competition with carriers that have 
successfully managed to stay out of bankruptcy, but are 
nonetheless struggling to maintain financial health while 
continuing to carry that sort of debt. And if what happens is 
the emerging carrier unleashes yet another price war with other 
carriers unburdened by the restrictions it had prior to 
bankruptcy, there's always the danger that the other carriers 
simply cannot compete on those unfair premises, that they 
simply cannot match prices with a company that has shed all its 
debt while you're carrying $30 billion of it. And there has 
been scenarios postulated, at least in the press and among 
analysts, that other carriers could be forced into bankruptcy 
in an effort to compete.
    I don't yet know how possible or imminent I think that is. 
I'm a little skeptical of this scenario happening on a large 
scale basis--just out of instinct, to be honest, and sort of a 
look at the industry and whether--you know, how much more room 
in the bottom is there in long-distance pricing, for example. 
Will WorldCom emerge and charge 2 cents a minute? I doubt it. 
Although I'd like it on my bill, but----
    So we don't--we don't know how imminent that scenario is, 
and we're not quite sure what the government responses could be 
to it. It could be one--if it were really genuine, it could be 
one of these spiraling things that would be very difficult to 
figure out how to prevent. This is another area we'll just have 
to continue to think about and----
    Senator Nelson. In your mind, is there a role for the FCC 
in that scenario?
    Mr. Powell. I'm not sure what it is, but I wish there was. 
I mean, I wish we could think of an effective way within our 
jurisdiction to help dampen that. I think one of the things 
that gets into painful areas is if there are restructuring and 
consolidations that provide price stability, if there are rules 
or procedures that could help minimize the rising costs of 
infrastructure or provide a more productive way for companies 
to both pursue financial health and remain competitive, I think 
we'd be very open to trying to pursue those rules and 
regulations, whether prices could be allowed to do things that 
they previously were not allowed to do, or impose new 
restraints that we previously wouldn't have imposed. But I 
think it's early in the thinking to offer specifics at this 
point.
    Senator Nelson. Thank you, Mr. Chairman.
    The Chairman. Chairman Powell, my colleague, Senator 
Dorgan, teaches me better tact or better manners or otherwise, 
because you have given me heartburn. But Senator Dorgan says he 
voted for you. So did I. And I've been always a good friend of 
the--and admirer of the Powells. Ms. Alma and my wife are good 
friends. The General and I got our honorary degrees together 
down at Tuskegee, and I work with him very closely as Secretary 
of State. I've got his appropriation.
    But the statements, as Senator Dorgan says, that you came 
on saying that the public interest was just too vague, it was 
hard to really determine, and otherwise that market forces, the 
market forces were going to operate--I can tell by your 
statement this morning that, I had an idea that you really 
didn't know, but I can tell that's an excellent statement. 
You're a highly intelligent individual. But what really bothers 
me is, when you make these statements--when this thing 
occurred--I've got the quote where you thought that maybe the 
whole matter was as result of too much competition. We believe 
these markets didn't need to be natural monopolies, and they 
could be competitive. Nevertheless, Chairman Powell went on to 
say that the--to permit the competitors access to the Bell 
networks may have contributed to the current telecommunications 
crisis by encouraging an ever proliferation of competitive 
entrants that together couldn't justify the collective capital 
investment.
    Well, that's just bootstrapping the fraud that's been going 
on in the stock market that you rushed to, and Chairman 
Abernathy. That's why I'm glad to see you here--Commissioner 
Abernathy--she noted, quote, ``The previous Commission seemed 
intent on stimulating competition as quickly as possible 
without regard to the kind of competition that was being 
promoted and whether or not it would be long-lasting and 
beneficial.''
    You see, it hadn't been too much competition. The CLECs 
have gone, like you noted in your statement, from 300 down to 
80, and everybody are back on their heels hardly able to 
survive, much less compete. But when you indicate there's too 
much competition, that you're streamlining the Class A 
accounting, cutting in half the requirements, giving 
flexibility, that's exactly what we had too much with the 
Securities Exchange Commission--too much flexibility. And now 
we're trying to tighten it.
    And then that, you've got hearings that communications 
really get out from under the regulations themselves by 
classifying them as information. That's what's been bothering 
me. But now that's off my mind. Let me ask this.
    [Laughter.]
    The Chairman. With respect to actually getting to the 
point, you can see the interview that's going on. That Bell 
Company cloud. Ranking Member McCain is exactly right. We did 
have the lobbyists' lawyers write the bill. But we oversaw 
every bit of it. We asked them over a 4-year period. This 
communications law is very, very complicated. And so they would 
meet on a Friday, the Bell Companies, and on long distance on 
Tuesday morning, and they'd go back and forth to each lawyers 
checking each other. They all wanted to get into long distance, 
the Bell Companies. And instead, they didn't want to compete at 
all, they wanted to hold on to their particular monopoly. They 
questioned what they had written, actually, as their own 
lawyers, the constitutionality. They kept us tied up in the 
courts. And here, 6 years later, now, we're still--they've 
still got 90 percent of the last line, so there's not too much 
competition. They've still got a monopoly.
    And what the gentleman from Louisiana says, that we want 
parity, we want parity. Parity? They've got parity. One, we've 
got a monopoly, the cable crowd, going into the residents, and 
the DSL crowd into the business. Both of them have got about 80 
percent of it. Now, what we have resisted here on the Senate 
side is extending the monopoly. All this idea of giving them 
parity is giving them both a monopoly. That's not competition 
at all, and we're not about to vote for it.
    And even though this Tauzin-Dingell and the parity bill and 
the Bell Companies buying up all the lobbyists--every friend 
I've got in South Carolina has a lawyer that has been bought 
and come to see me, ``What can we do to get together,'' and 
that kind of stuff. You have to smile, and I have to smile. I 
go through it. It's the full employment act.
    [Laughter.]
    The Chairman. But it's the Tauzin-Dingell intermural and 
now called parity and everything else to extend the monopoly. 
They don't want to compete. And what we have got to do doesn't 
go along with that parity and--they think you--as a result of 
your market bent that you'll do what they can't to get through 
Congress. That's what they really--that's what the Senator from 
Louisiana wants you to do. Please don't do that, and don't 
worry about--some of these things here still bother me.
    When you talk about the fines, for example, we know 
irrespective of their fines or the amount, they just pass them 
on into the ratepayers. For example, Bell South has a total 
fine of $20.5 million, but they had total revenues of $20.13 
billion. And Qwest had $878 million in fines, but that's onto 
revenues of $19.7 billion. And similarly, SBC had $639 million 
in fines, but that's on $45.91 billion. And similarly, 
Verizon--Verizon paid $300.4 million in fines, but Verizon has 
$67.19 billion in revenues."
    So they're playing a sordid game. Here we are. We've got 
the demise and the downfall now of telecommunications. My idea 
and comments here this morning is to plead with you, as the 
chairman of that Commission, to continue on with competition, 
try to shortstop, and don't let's use the demise of 
telecommunications to be used to extend the monopoly. If they--
if Bell Companies have lost any moneys--my Bell South is in the 
22 countries. There's Qwest and so forth was into all of these 
other countries. They've been investing everywhere. They're not 
extending the competition.
    The only reason we didn't re-regulate cable--and I would 
think maybe the next Congress will; I don't mind saying that. 
But the only reason we haven't done it is that's been the only 
competition to the Bell Companies on getting out the broadband. 
That's the actual fact here at this particular level in the 
Congress.
    So we're trying to continue the competition. We want to 
make sure that the Bell Companies are not just increasing the 
fines. You've got to watch them more closely than that. And 
otherwise, I had some other notes here to comment on, but we'd 
be glad to yield to you for your comment. You can see what I'm 
getting at. They're trying to get you to extend the Bell 
Company monopoly. That's all it is. And they have held onto it 
and held onto it and thwarted at every turn anybody to try to 
get into that 251 and compete. And now they've even written you 
with respect to advance payments. Here the CLECs, like 
everybody else, are just teetering financially. And they say, 
``Well, if we can get the Commission, by gosh, to get advance 
payments and everything else like that and additional 
securities in order to do business, even though we have had a 
good financial picture all along, then that additional advance 
payments and financial securities being pledged and everything, 
that'll really put the--40 of the other--remaining 80 under. I 
hope the Commission doesn't go along with that particular--
they've got every gimmick in the book to extend their 
monopolies, take you over and take me over, and I want to plead 
with you, you won't allow it.
    Mr. Powell. You left me speechless.
    [Laughter.]
    The Chairman. Yes, sir. You've got all the time. I'm going 
to be here. The rest of them can leave.
    [Laughter.]
    Mr. Powell. I'm not so easily rolled over. I'll just leave 
it at that.
    The Chairman. Very good, thank you very much.
    [Laughter.]
    The Chairman. Senator Burns?
    Senator Burns. I am done with this witness. I'm looking 
forward to the next panel, sir.
    The Chairman. Good. I am, too.
    Senator Allen?
    Senator Allen. Mr. Chairman, I enjoyed listening to your 
questions. And in conjunction with what Senator Nelson said, 
the solution to this is not more monopolies or more regulation. 
Deregulation has generally been very, very good. Look at all 
the advancements. And I loved listening to you, Chairman 
Powell, on all the advancements. And maybe it won't be all 
fiber optics. It may be wireless, satellites, other ways of 
delivering broadband or Internet services. And so my view is 
while these decisions that were made were obviously on poor 
business assumptions, wrong economic forecasts, and, on top of 
it all, the fraudulent or misleading statements, the solution 
is--in my view, is not a curtailment of competition.
    Competition is good. I think people will go into it now 
with eyes wide open. That is one of the reasons why some of the 
capital markets have shrunk, because they want to make sure 
there's a rate of return. And through it all, what we do need 
to do, though--and this is what your role is--we have 
deregulation and regulation. We are for free markets. We trust 
free enterprise, but it is all under the rule of law, which is 
the regulations here, to make sure that people are complying 
with the laws.
    And I do appreciate, Mr. Chairman, that I find that this 
chairman of the FCC uses an attitude that I like to see in our 
judges, and that is he does not create law. He understands that 
elected leaders, whether in the Senate or the House, bills 
signed by the President, are the laws, and then he executes 
them. And where there is discretion and implementation, he uses 
it, but he's a strict constructionist, so to speak, and I'm 
confident that the Chairman will do that.
    And I thank you, Mr. Chairman. You're the right man at the 
right time in a time of crisis, but nevertheless I think you 
have the right principles, the right attitude, and the right 
priorities to get us through this and keep our communications 
the strongest in the world. Thank you.
    Mr. Powell. Thank you.
    Senator Allen. Thank you, Mr. Chairman.
    The Chairman. Senator Dorgan?
    Senator Dorgan. Mr. Chairman, just an observation. Strict 
constructionism, I hope, means something different with respect 
to the courts than it does with the respect to regulators. I 
remain, of course, concerned that regulators use all of the 
tools at their disposal to address the kinds of things that 
we've seen recently in this country, which represents a 
carnival of greed, something that undermines our economic 
system. So I don't quite understand the term ``strict 
constructionist'' with----
    Senator Allen. If I may, Mr. Chairman?
    Senator Dorgan. Yes.
    Senator Allen. In light of what the Chairman was talking 
about and worries about what the SEC might do that exceeds its 
authority as per laws passed--duly passed, is what I'm talking 
about. Now, the Chairman, of course, has asked for increased 
fines to make these disparities in profits, versus the fines 
more meaningful to get compliance. He cannot have fines that 
exceed what is allowed by law, nor can he change competition 
rules when investments have been made by companies such as 
CLECs without authority from the Congress. I'm one who's not 
real thrilled about changing those. But nevertheless, he cannot 
do what is not allowed by the legislative branch.
    Senator Dorgan. Yeah, I understand. The only reason I took 
the bait was that as I've watched the SEC, FERC, and other 
agencies, I have not seen any agency in danger of finding the 
limits of their authority. The problem has been just exactly on 
the other side. You know, an impression of a statue, while all 
the other things are going on around them.
    And I just--I want agencies--well, I don't need to repeat 
it. I want agencies to be aggressive, using all of the tools at 
their disposal to deal with the kinds of things that we have 
now been confronting: avarice, greed, manipulation, cooked 
books, criminal behavior. And the result is people at the top 
left with a pocket full of gold, they got incredibly wealthy, 
and the people at the bottom lost their shirts, lost their 
jobs, lost their investments. And I just want regulators to use 
all the tools at their disposal. That's the only point I make.
    The Chairman. Chairman Powell, I know you've interrupted 
your break to be with us, and you favored the Committee, and we 
appreciate it very, very much.
    Mr. Powell. My pleasure, sir.
    The Chairman. Thank you.
    Mr. Powell. Thank you.
    The Chairman. Next appearance will be the panel of John W. 
Sidgmore, the Chief Executive Officer and President of 
WorldCom; Mr. John Legere, Chief Executive Officer, Global 
Crossing, Limited; and Mr. Afshin Mohebbi, President and Chief 
Operating Officer of Qwest Communications International.
    We appreciate your patience, and we apologize for the long 
delay, but it was necessary. You could understand the questions 
we had of the chairman of the Federal Communications 
Commission. We welcome you, and each of your full statements 
will be included in its entirety, and you can summarize it, 
perhaps. That's what I would suggest, the hour is late, a five 
or slightly over 5 minute summary. Or if you really want to, 
just go ahead and deliver the full statement.
    Mr. Legere, we've got a street named after you in 
Charleston, South Carolina. We call it Legere. It's a French 
pronunciation. We welcome you, and we'll be glad to hear from 
you first.

   STATEMENT OF JOHN LEGERE, CHIEF EXECUTIVE OFFICER, GLOBAL 
                       CROSSING, LIMITED

    Mr. Legere. Good morning, Chairman Hollings and Members of 
the Committee, and thank you very much for inviting me here 
today. We have a submitted a longer statement, and I'll make a 
few summary comments in my opening remarks.
    Before I commend--before I begin, I really want to commend 
this group for holding this hearing to address, in a serious 
and thoughtful way, the financial turmoil facing the 
telecommunications industry, an industry that is vital to our 
Nation's health and well-being. Since my last appearance before 
a congressional committee this past March, the industry-wide 
crisis has deepened, and several of our competitors have filed 
for bankruptcy. The time is right for congressional attention 
and expression of congressional confidence in the country's 
telecommunications infrastructure.
    Having filed for bankruptcy protection in January, we've 
made significant progress at Global Crossing toward turning 
around the company. We hope that our experience and 
perspectives will be useful to the Committee as it assesses the 
prospects for the future of the telecommunications industry.
    Now, how did our Nation's telecommunications industry, with 
its unparalleled infrastructure, advanced telecommunications 
service, and vigorous competition find itself in a state of 
financial crisis? Before attempting to answer that question, 
I'd like to talk briefly about Global Crossing and our 
experience.
    Our company was launched in 1997. And in just a few years, 
we've completed a global fiber optic network that spans 101,000 
miles and is operational now in 220 cities in 27 countries. We 
provide some of the world's most advanced telecommunications 
services to tens of thousands of customers, both in the United 
States and around the world. Many of the world's 
telecommunications carriers, multinational corporations and 
governments depend on us for their communication needs. And 
even in bankruptcy, we continue to sign up new customers based 
on the strengths of our state-of-the-art Internet protocol-
based network and our industry-leading advanced services as 
well as continued superior network performance and customer 
service. And, on behalf of Global Crossing and its employees, 
let me say how proud we are of that accomplishment.
    So what has happened to our industry over the last year or 
so? I believe we were caught in what I'll call the ``perfect 
storm'' of unexpected drops in demand, rapidly declining 
prices, a perception of capacity glut by our customers, an 
economic and financial downturn, a closure of capital markets, 
and, finally, the debt we incurred to build our unprecedented 
global network. These factors cannot be oversimplified, and 
they have forced telecommunication companies of every sort--
domestic as well as international, local as well as long 
distance, wireless as well as wireline, into the protection of 
the bankruptcy laws.
    Going into last year, the telecommunications industry and 
analysts who studied the industry foresaw a nearly unending 
appetite for capacity fueled by customer demand for broadband 
applications. At the time, the growth of the Internet usage was 
astonishing, posting gains of several hundred percent a year. 
New bandwidth-consuming applications seemed to be just around 
the corner, and the capital markets were providing funds to new 
telecommunications and Internet companies.
    Global Crossing as well as other next-generation 
telecommunications companies relied on these forecasts, as did 
capital markets that supplied the funds to build our 
businesses. We built our networks to meet this expected demand. 
In fact, we built ahead of demand by necessity, given the long 
lead times required to build new capacity. But demand forecasts 
were predicated, in part, on hurtling the last mile, deploying 
broadband to the home and to the office. And, for various 
reasons, take-up of broadband has taken a lot longer than 
industry experts had expected.
    In the middle of 2001, our customers began to perceive that 
there was an oversupply of capacity. Many of them decided to 
wait out the market hoping for prices to drop. And drop they 
did, much more rapidly and dramatically than had been forecast 
by all the industry analysts.
    Finally, the larger economic crunch hit our industry and 
hit hard. The economy slowed worldwide, affecting our business 
customers. And, at the same time, many of our carrier customers 
faced both slowing demand and financial difficulties of their 
own. Short-term demand for our network and services began to 
decline rapidly in the last half of last year, and the cash 
needed to support our cost structure and business plan did not 
materialize.
    It has been suggested that our company and the industry's 
financial issues were caused by accounting irregularities. 
Speaking for Global Crossing, it's this perfect storm that I've 
described, not how we accounted for a relatively small portion 
of our overall revenues, that left us no choice but to file 
bankruptcy. We take very seriously the accounting allegations, 
and we're cooperating fully with the SEC and other 
investigations in their inquiry into our accounting practices. 
But accounting practices are neither the cause nor the cure for 
the business problems that we faced at Global Crossing.
    Since I joined the company last October, through our 
bankruptcy filing and to this very day, we've taken aggressive 
measures to turn the company around. We reduced operating 
expenses by over 50 percent, and capital expenditures by over 
90 percent since last year, and far greater when compared to 
expenditures in 2001. We're changing our cost structure. We're 
redesigning our business model. But, importantly, we are not 
compromising at all on the quality of our networks or our 
service. We've focused on customer retention and lost very few 
customers. In fact, we've gained new ones.
    Despite all the odds, we're delivering on our promises. We 
have--thousands of dedicated and loyal employees have 
maintained service across our network. We've maintained--we've 
met or surpassed every operational financial target this year. 
And the future of our company is looking far brighter than it 
did in January, in a large measure due to some very painful but 
necessary actions that we've taken during the past year. We're 
proud not to have compromised on the integrity of our expansive 
telecom infrastructure during these times, and customers in 
this Nation will benefit enormously from this in years to come.
    Now, is there a role for public policy as the industry 
moves through this painful period of transition? First, there 
should be a commitment to encourage fair competition in the 
telecommunications marketplace. Second, we urge the remaining 
telecommunications bottleneck, the local market, to be opened 
up to the extent possible by enforcing and monitoring 
compliance with current regulations. Third, we believe that 
Congress ought to look at ways to ensure that fees and policies 
for access to public rights of ways are reasonable and also to 
ensure that competitors have access to buildings. Fourth, it's 
essential to promote competition and, most important, bring 
down the price of local access so that promise of broadband can 
be realized.
    And maybe I can illustrate the last point by simply noting 
that sending a signal from London to New York on our network 
costs a fraction of the amount we pay to a local incumbent to 
terminate that same signal in Manhattan for the last-mile 
connection to a customer.
    In closing, we remain confident of the original vision of a 
global, seamless, fiber optic-based IP network with a full 
suite of advanced services. And when we emerge from bankruptcy, 
which we hope will be early next year, we fully believe that we 
will be in a position to create jobs and create value.
    With the cooperation of our industry partners, the 
financial markets, and the Congress, we can work together to 
restore the confidence of the American people. We believe that 
our industry can recover from this current financial crisis and 
will continue to serve as an integral part of the engine for 
economic growth. And on behalf of thousands of Global Crossing 
employees and customers, let me reaffirm that we very much 
expect to be a part of that recovery.
    Thank you once again for the opportunity to share our 
perspective.
    [The prepared statement of Mr. Legere follows:]

  Prepared Statement of John Legere, Chief Executive Officer, Global 
                           Crossing, Limited

    Chairman Hollings and Members of the Committee, thank you for 
inviting us here today to discuss the state of the telecommunications 
industry. We want to commend you and this Committee for holding a 
hearing on the critical issue of how the industry's financial health 
can be restored. This hearing will make a significant contribution to 
the continuing public dialogue on how we can ensure that the 
communications infrastructure on which the American people have come to 
rely is not compromised while the industry makes its way through a 
period of transition. By holding this hearing, you are sending a 
positive signal to the financial markets and to the public that 
Congress is confident that our Nation's telecommunications companies 
will weather the financial turbulence that we face and that government 
and the private sector can work together to address the issues in a 
cooperative and constructive manner.
    Despite the much-publicized economic problems of the 
telecommunications sector, we should not lose sight of the fact that 
our country has the world's most sophisticated and advanced 
communications infrastructure and services. Propelled by our 
enterprising culture and funded by private capital, America's 
communications companies have created networks that are unparalleled 
anywhere in the world--networks that are critical to maintaining our 
Nation's security and our leadership in the world economy. Every day, 
Americans are able to reap the substantial benefits of innovation, 
efficiency and competition that are the product of these investments.
    Global Crossing and its thousands of employees are proud 
participants in this competitive market. We have completed a global 
fiber optic network that spans 101,000 route miles. We provide some of 
the world's most advanced telecommunications services to tens of 
thousands of customers, both in the United States and abroad. For our 
company, for our employees and, most of all, for every one of our 
customers, which include many of the largest telecommunications 
carriers in the world, we ask that this Committee and the Congress do 
what they can to ensure that competition in the telecommunications 
industry remains healthy. Ensuring that the industry remains strong and 
competitive is vital to delivering the innovation and cost efficiencies 
on which the global economy depends.
    We are here today because America's telecommunications industry is 
threatened by a financial crisis of enormous and unexpected 
proportions. I hope to share some observations on the sources of this 
crisis and on how the industry can best survive it. Global Crossing 
believes that government can play an important role in helping those 
segments of the communications industry that are in a state of turmoil 
to recover. Today's hearing is part of our collective opportunity to 
restore confidence and rebuild the industry.
    Given the expressed interests and responsibilities of this 
Committee, today I intend to address the following: (i) the formation 
and growth of Global Crossing; (ii) the profound changes in the 
telecommunications industry, which began in mid-2001, and have brought 
us to where we are today; (iii) the status of the various governmental 
inquiries into Global Crossing; (iv) Global Crossing's performance 
since it filed for bankruptcy on January 28 of this year; and (v) our 
vision for the future.
    I believe that the industry-wide crisis we are experiencing is a 
product of the interplay among the overall business environment, 
changing patterns in the supply and demand for network capacity, 
marketplace perceptions, access to capital and the regulatory 
environment. These are among the principal industry-wide factors that 
have caused not only Global Crossing, but also many other companies, to 
declare bankruptcy within the past 15 months. The pandemic nature of 
the problem we are facing is demonstrated all-too-clearly by the broad 
range of telecommunications companies that are now in bankruptcy: they 
are U.S.-based, as well as international; they own subsea cables, as 
well as terrestrial systems; they provide long distance services, as 
well as local access; and they are built on wireless, as well as 
wireline, technologies.
    It is important to emphasize that despite the popular perception 
that this industry's problems stem from alleged accounting 
irregularities at a handful of companies, the turmoil we are 
experiencing is far more complex and more fundamental than the media 
have led many to believe. Allegations of accounting irregularities 
properly need to be addressed and may play larger or smaller roles in 
the difficulties faced by particular companies. Only by understanding 
the fundamental business factors underlying today's crisis, however, 
can we all work together to restore the strength of this vital sector.

Formation and Growth of Global Crossing
    Global Crossing was created by visionaries who saw an unmet need in 
the marketplace for an integrated global high-capacity, fiber-optic 
network under common control. Throughout the history of the 
telecommunications industry, international traffic had been handed off, 
from one national carrier to another. As the world entered the age of 
the Internet, some saw that these legacy networks had neither the 
capacity nor the functionality to provide adequately for the envisioned 
Internet-based services. The vision of the founders of Global Crossing 
was to facilitate, in a more cost-effective manner, the worldwide 
transport of the surging traffic flows stimulated by the emergence of 
the Internet.
    Global Crossing was launched in 1997 and became a publicly traded 
company in 1998. The founders of the Company successfully raised 
substantial amounts of private capital, capital that was essential to 
Global Crossing's ability to compete with the huge incumbent players 
(such as, AT&T) and to the construction of a new fiber-optic network 
that reached most of the world. Based on the widespread belief in 
multiple independent forecasts of rapid growth in demand for data 
services, the capital markets supported the project and construction 
was completed in record time.
    Today, as a result of these efforts, Global Crossing has 101,000 
route miles of fiber worldwide, fully operational in 220 cities in 27 
countries. In addition, the Company has built a large and loyal 
customer base of public and private entities of all sizes. Our 
customers range from Kay Bee Toy Stores, with hundreds of stores 
worldwide, to the British Foreign Commonwealth Office, with over 240 
embassies around the globe. Just last week, we announced that we are 
now linking research telescopes around Europe over our fiber-optic 
network, allowing research institutions worldwide to advance the 
science of astronomy. We connect thousands of financial institutions, 
completing millions of transactions every day over our network.
    Our backbone network makes it possible for Americans to phone their 
relatives and friends in Europe, Asia, Latin America and Australia for 
dramatically lower costs because those calls can be transmitted over 
our fiber-optic backbone. And, our network is an important backbone for 
the Internet, enabling people and businesses to communicate in ways we 
simply could not have imagined just a decade ago. Despite our Chapter 
11 filing and the substantial cost restructuring that we have 
undertaken, the size and reliability of our network continues to 
attract some of the world's most important companies, financial 
institutions, and governments as customers. As a major supplier of 
wholesale capacity and services, our network supports nearly every 
major carrier in the world.
    As our operations have continued without interruption, even as we 
proceed with our Chapter 11 reorganization, we are fortunate to have 
lost very few of our customers. We are enormously grateful for the 
loyalty of the thousands of customers who have understood that the 
value of Global Crossing's services was not diminished simply because 
we had to restructure our finances. That new customers are willing to 
trust us with their critical communications needs validates the vision 
of Global Crossing's founders and gives us confidence for the future. 
Our experience suggests that continuing to focus on customers and 
service is essential if the industry is to emerge from the current 
crisis with renewed vigor.
    Although we are a global concern, the vast majority of our 
customers and most of our employees reside in the United States. Our 
corporate headquarters are in the United States and we have network 
operations centers here. Global Crossing is an integral part of the 
Nation's vital communications infrastructure, and we are doing 
everything we can to keep it that way. Our future as a company depends 
on it.

Changes in the Telecommunications Industry
    The Committee has asked how we got to where we are today. To answer 
that question, we need to take ourselves back to how the 
telecommunications world looked just a few short years ago, when 
optimism--and demand forecasts--appeared nearly unbounded. Throughout 
the late 1990s and well into 2001, the telecommunications industry and 
those in the financial world who analyzed the industry foresaw an 
unending appetite for additional bandwidth capacity. Growth of Internet 
usage was astonishing, posting gains of several hundred percent a year, 
increases that were forecast to continue for some time, both in the 
United States and around the world. Enterprise customers were moving 
toward feature-rich, IP (Internet Protocol)-based networks of just the 
sort that we have built at Global Crossing. Many observers foresaw a 
world in which graphics, music and movies, with other gigabit-rich 
content, would flow directly to the home, and where new applications--
games, virtual reality, distributed computing--would consume huge 
quantities of bandwidth.
    In part, these expectations relied significantly on overcoming the 
last hurdle in the telecommunications world: the last mile. High-
bandwidth intercity and international networks were constructed to 
facilitate commerce and satisfy consumer demand. Consumers and 
businesses, we all thought, would embrace broadband applications. But, 
those applications depend on making sure that broadband networks go 
right to the home and office. And, although Global Crossing serves few 
individual consumers, we are an important supplier of network 
facilities and services to other telecommunications providers and 
businesses who count individuals among their retail customers.
    Even leaving aside the slow deployment and take up of broadband to 
the home, today there remain significant constraints on local access 
for thousands of businesses. This is particularly so for those outside 
the main metro areas. For new telecommunications competitors, who want 
to satisfy that demand, the costs of local access are still high, given 
the current structure of the industry.
    Global Crossing and other next-generation telecommunications 
companies relied on forecasts of explosive demand for bandwidth, 
forecasts that were based on expectations of new applications and on 
hopes of addressing and resolving the issues of access and cost of 
local infrastructure. We built out our networks to meet this expected 
demand. Creating bandwidth, whether across oceans or land, is not 
instantaneous. Due to the long lead times necessary to plan, finance 
and construct new facilities, companies such as ours always have to 
build ahead of actual demand, which requires that our planning for new 
facilities looks ahead for several years. With actual and projected 
growth rates for capacity that approached 100 percent annually, it is 
clear that planning ahead for even one year implied the need to build 
massive amounts of capacity ahead of actual demand. For these reasons, 
we always have more capacity than we would need to serve our present 
customers. In short, at any point in time and in any one market, supply 
may well, and quite appropriately, exceed the existing demand.
    For this reason, Global Crossing, like other large 
telecommunications companies, understood that, as new capacity came on-
line, there might well be a temporary excess of the supply of capacity 
over demand in some markets and for a limited period of time. Multiple 
independent studies undertaken at the time, however, suggested that 
demand would continue to increase at very high rates and that any 
temporary oversupply would be extremely short-lived. The reports of 
experienced industry analysts indicated that any overcapacity would be 
swallowed up within a year or two in all geographic areas. Multiple 
industry experts and analysts predicted that the temporary oversupply 
in trans-Atlantic capacity would be consumed by 2003, and in trans-
Pacific capacity by 2004. These same studies suggested that even after 
this supply had been exhausted, demand would continue to grow by leaps 
and bounds for years to come.
    What happened in the middle of 2001, however, is that our customers 
increasingly perceived that there was an oversupply of capacity. In 
fact, competing systems were built, while many more were announced, but 
never built. Carrier and enterprise customers decided to wait out the 
market because they thought that if they held off on making purchases, 
they could negotiate a better deal from telecommunications providers. 
In addition, deployment of broadband across the last mile was turning 
out to be slower than had been forecast by industry experts. For these 
reasons, demand for our network and services did not increase as much 
as we had planned, in significant measure because our carrier customers 
did not continue to buy capacity to serve their retail users.
    At the same time, and partly as a consequence of the perception of 
a supply glut, prices dropped more rapidly than had been expected in 
many of the major markets that we serve. Our industry had been 
accustomed, of course, to price declines that were driven by advances 
in technology that were even more rapid than those experienced in the 
computer industry in recent decades. In the market for broadband 
telecommunications capacity, the declines in prices had been more than 
offset by the exploding demand for more capacity, leading to growing 
revenues. By the end of 2001, however, while price declines had 
continued to exceed forecasts and expectations, the demand for capacity 
had slowed.
    In addition to the slower-than-expected rollout of broadband 
applications, the broader economic crunch hit our industry, and hit it 
hard. The economy slowed down in the United States and worldwide, and 
our service revenues did not grow as rapidly as we had predicted. The 
capital markets, which had previously enabled, even encouraged, the 
existence of many emerging telecommunications and Internet companies 
who were large purchasers of bandwidth, closed down for these 
companies. Even the large incumbent telecommunications carriers, who 
were large customers of ours, had financial challenges of their own, 
whether from the economic slowdown, increased competition, the demands 
of improving their own networks or acquisitions of 3G wireless licenses 
at auction in Europe.
    We were not the only telecommunications company to get caught in 
this ``perfect storm'' of slowing growth in demand, declining prices, a 
perceived glut and an economic and financial downturn. We had incurred 
over $8 billion in debt in order to construct and operate our global 
network and, as the year progressed, we realized that it would be 
increasingly difficult to meet the requirements of that debt.
    Early in the fourth quarter of 2001, I was asked to serve as Global 
Crossing's CEO. My leadership team and I quickly undertook the further 
steps that were needed to streamline the company's operations. We 
eliminated layers of management, implemented dramatic cost reductions, 
including a reduction in force from nearly 14,000 to 5,000 employees, 
and redesigned the company's business and financial models. Despite 
these necessary and painful measures, it became apparent that our debt 
service, coupled with a realistic assessment of the market 
opportunities in the context of a continued slow-down in the economy, 
required Global Crossing to explore all its options.
    Towards the end of the year, we accelerated discussions with banks 
and potential investors. As the pressure of loan obligations increased, 
however, our advisors counseled us that the Company's situation called 
for measures more drastic than originally expected, and, with great 
regret, we filed for bankruptcy protection on January 28 of this year.
    We were neither the first nor the last telecommunications company 
to seek bankruptcy protection. As The Wall Street Journal reported in 
early 2001, telecommunications companies had borrowed more than $1.5 
trillion from banks since 1996 and issued over $600 billion in bonds in 
order to invest in their networks. Given these debt loads, many 
telecommunications enterprises were forced to cut back their operations 
and, in the case of some, file for bankruptcy. Inevitably and 
unfortunately, many people who were employed by them, and many others 
who invested in these companies, personally experienced the ensuing 
turmoil.

Government Inquiries
    The media continue quite naturally to highlight allegations of 
accounting irregularities and the role that they may have played in 
bringing about the current crisis. Each of us sitting at this table is 
reportedly the subject of government inquiries into various accounting 
practices. With respect to Global Crossing, the media have reported 
that the government is examining issues related to the accounting 
methods or procedures our company used for sales and purchases of 
capacity in the form of Indefeasible Rights of Use, or IRUs, in 
connection with concurrent transactions with our carrier customers.
    I do not believe that the way in which Global Crossing accounted 
for specific transactions played any role in our financial troubles. 
The sale and acquisition of capacity via contracts known as IRUs is an 
essential part of creating efficient networks. Transactions involving 
IRUs are legitimate and important to both buyers and sellers of 
capacity and have been used for many years in the industry. Accounting 
for the concurrent transactions raised several very complex issues; in 
fact, we spent a great deal of time working with our independent 
auditors to determine how to account for them appropriately.
    It is far too simplistic to assert that the widespread problems in 
the telecommunications industry were caused by particular methods of 
accounting. Whether other companies' difficulties are accounting-
related, we cannot say. At Global Crossing, however, we know that the 
transactions in question represented a relatively small portion of our 
business, and that our accounting for them does not explain why we 
found it necessary to seek bankruptcy protection.
    We are, of course, cooperating fully with the investigations by 
government bodies into our accounting practices. We have provided 
documents and testimony to the SEC regarding the subject transactions 
and precisely how we accounted for them. We have also made our 
employees available to be interviewed by the staff of the Energy & 
Commerce Committee of the House of Representatives, and in March I 
testified before the Subcommittee on Oversight and Investigations of 
the Financial Services Committee of the House of Representatives. For 
our own part, Global Crossing's Board of Directors has appointed a 
special committee of independent directors, which is conducting a 
review of the Company's accounting practices for the concurrent 
transactions.

Post-Bankruptcy Events at Global Crossing
    I believe there are important lessons to be learned from our 
experience at Global Crossing as we look forward. Our network is still 
fully operational. We have thousands of dedicated and loyal employees 
who have maintained uninterrupted service across our network since our 
bankruptcy filing. We have substantially cut our capital and operating 
expenditures, and we have met all of our operational goals.
    Delivering top quality service is still our highest goal. We 
continue to meet the national and worldwide needs of our tens of 
thousands of customers. The fact of our bankruptcy has not disrupted or 
affected a single customer. It is our hope that the steps we have taken 
will allow Global Crossing to continue to compete as an ongoing 
business. We are aggressively pursuing plans to emerge from Chapter 11 
with our network intact.
    Our financial performance since filing for Chapter 11 protection 
has met or exceeded our expectations. We are winning new customers and 
retaining our existing customers at rates higher than we had forecast. 
We continue to achieve an availability rate of 99.999 percent on our IP 
network, a level of performance that matches the best in the industry. 
Since we filed for Chapter 11 protection, our revenue, earnings, and 
cash have all exceeded the expectations that we established with our 
creditors. At the same time, our monthly operating expenses are now 40 
percent lower than they were at the end of last year. IP traffic across 
our network shows healthy growth in light of the current environment.
    What does the future hold for Global Crossing? It is hard to say, 
because we are in the middle of a complex restructuring process 
governed by the bankruptcy law. The future ownership of the company is 
being determined by the confidential auction that is now proceeding, 
and we expect to present the results of that auction to the Bankruptcy 
Court next week. Although our future is not entirely certain, we 
believe that we will emerge from this process with our network intact, 
and with new, more efficient ways of running our business.
    Before I conclude, let me add some thoughts on the role of 
government in restoring financial health to the telecommunications 
sector.
    Although some have argued that, in a time of turmoil, it may be 
appropriate for government to intervene in the market, to apply a 
heavier regulatory hand to the telecommunications industry, we believe 
that the FCC should stay on course in instituting measures that ensure 
fair competition and a level playing field between incumbents and new 
competitors. We believe the FCC, supported by the Congress, can 
continue to play an important role, working with industry and Wall 
Street, to assist the industry in transitioning out of our financial 
crisis.
    We urge the Committee, along with the rest of Congress, the 
Administration and the FCC, to do what they can to open up the 
remaining telecommunications bottleneck in the local market, including 
through enforcement and monitoring of the obligations of Section 271 of 
the Communications Act. With respect to the local market, it is 
essential to do what is needed to promote competition and, most 
importantly, to bring down the prices of local access so that the 
promise of broadband can be realized. In addition, Congress has an 
opportunity to legislate on the issue of the fees charged for public 
rights of ways and for access to buildings. Adopting nondiscriminatory 
policies and ensuring that fees are reasonable, to allow fairer access 
to public rights of way, will help stimulate demand, promote consumer 
choice and lay the foundation for a healthier industry.
    We believe that this industry will, one way or another, come 
through this difficult period. We cannot be sure how long the crisis 
will last. At Global Crossing, we started down the path of 
restructuring nearly a year ago. We have demonstrated that a turn-
around is possible where management implements a focused and pragmatic 
plan, including often painful, but necessary, cost-reductions. This 
week, we expect that the competitive bidders who have come forward with 
proposals to invest in Global Crossing will make their final offers. 
And, early next year, we expect to emerge from the Chapter 11 process. 
When we do, we fully intend to continue serving our customers, just as 
we remain confident in our founding vision, of a global, seamless 
fiber-based IP network.
    Mr. Chairman and Members of the Committee, the current financial 
turmoil need not have a permanent effect on our world-leading 
telecommunications industry. With the cooperation of our industry 
partners, the financial markets, the Congress, the Administration and 
the FCC, we can restore the confidence of the American people and the 
world. During the last decade, our country has undergone a 
communications revolution that has produced substantial social and 
economic benefits. We believe that the industry will recover from its 
current financial crisis and that it will continue as an integral part 
of the engine for economic growth. On behalf of the thousands of Global 
Crossing employees and our customers, let me reaffirm that we very much 
expect to be part of that recovery and resurgence.

    Thank you, once again, for inviting us to testify.

    The Chairman. Very good, sir.
    Mr. Sidgmore?

 STATEMENT OF JOHN W. SIDGMORE, PRESIDENT AND CHIEF EXECUTIVE 
                       OFFICER, WorldCom

    Mr. Sidgmore. Good morning, Mr. Chairman and Members of the 
Committee.
    My name is John Sidgmore, and I'm the president and CEO of 
WorldCom. There are three points that I would like to highlight 
as I begin. First, despite our Chapter 11 filing, WorldCom will 
continue to deliver world-class service to all of its 
customers--residential customers, business customers, and the 
government--without disruption. Second, on behalf of WorldCom, 
I want to apologize for the accounting irregularities that we 
discovered and disclosed last month.
    We share the outrage of the American public, and we are 
committed to cooperating with investigators of all kinds--and 
there are many--to identify the wrongdoers and to taking the 
appropriate steps to ensure that this can never happen again, 
and to move forward as a highly ethical company. And, finally, 
we strongly urge policymakers to reaffirm their commitment to 
pro-competitive policies.
    Let me return to the subject of serving our customers. 
There is a perception that when a company files for bankruptcy 
protection, its business operations cease. In our situation, 
this is just not the case, and service will not be disrupted. 
To be sure, WorldCom has been through a very difficult period 
recently. When I became WorldCom CEO at the end of April, the 
company was facing very serious, but not insurmountable 
financial problems. We undertook a plan to cut costs and to 
restructure our debt. But before we could complete those 
efforts, WorldCom on June 25th disclosed accounting 
irregularities that require the company to restate our earnings 
for 2001 and for the first quarter of 2002. These accounting 
irregularities led directly to our Chapter 11 bankruptcy filing 
on July 21st. Because of the need to restate earnings, we 
suddenly lacked audited financial statements, which in turn 
caused the public debt markets to close to our company. 
Critically required financing, which we had been very, very 
close to obtaining--I would say within hours--was no longer 
available, and some of our existing credit was withdrawn. The 
only door left open to us at that time was debtor and 
possession financing, which is only available in connection 
with a Chapter 11 filing.
    Entering Chapter 11 allowed us to arrange for up to $2 
billion in such financing, $750 million of which has been 
secured already. Ironically, it is because of our Chapter 11 
filing that we now have the financial wherewithal to continue 
serving all of our customers--again, without any disruption.
    I would like to further commend FCC Chairman Michael Powell 
for his efforts to reassure a nervous marketplace. It has been 
very, very helpful. And we will continue to work closely with 
this Committee and the FCC to ensure that customers continue to 
receive our highest-quality service.
    Second, WorldCom has been very proactive in responding to 
the accounting irregularities matter openly, expeditiously, and 
responsibly. And I want to make it clear that we reported 
ourselves. Our board of directors moved very swiftly and 
decisively to terminate our CFO and to report that matter to 
the SEC and to the public immediately. We have cooperated fully 
with the various official investigations by the SEC, the 
Justice Department, and those in Congress.
    William McLucas, the former chief of the enforcement 
division of the SEC, was retained to perform an independent 
investigation of the facts and circumstances that underlie 
these numbers that were problematic.
    Further, two new members have been elected to our board: 
Nicholas Katzenbach, a former U.S. attorney general, and Dennis 
Beresford, a former chairman of the Financial Accounting 
Standards Board. Both were appointed to a special investigative 
Committee of the board that will oversee the McLucas 
investigation.
    Just yesterday, I appointed a new CFO, John DeBell, and a 
chief restructuring officer, Greg Rayburn. They are two of the 
most highly qualified and experienced restructuring executives 
that are available. They will play very key roles in our 
efforts to emerge from bankruptcy as quickly as possible with a 
very healthy business.
    Third, I'd like to amplify on the need to preserve 
telecommunications competition. We think Congress got it right 
when it passed the pro-competition Telecommunications Act in 
1996. Hundreds of new competitors entered the marketplace at 
that time, and network investment boomed. New technologies were 
deployed. Customers enjoyed innovative services and lower 
prices.
    A couple of years ago, however, the sector began to 
experience significant problems, as were discussed before. 
Several factors, including a bad economy, excess capacity, 
pricing pressures, converged to create, to use Mr. Legere's 
words, a kind of perfect storm--and I guarantee you we did not 
rehearse this--that ripped through the telecommunications 
industry.
    But there is good news. The competitive telecommunications 
sector, while battered, is far from destroyed. Competition can 
survive, and the industry can prosper, but it can only do so if 
we remain committed to the pro-competition principles 
underlying the Telecommunications Act. The 1996 act set the 
right policy direction. We think it must be fully implemented 
and enforced.
    In conclusion, Mr. Chairman, I assure you that we will work 
hard to regain your trust and the trust of the American people. 
We plan on emerging from Chapter 11 as quickly as possible with 
our competitive spirit intact, and we think we can wind up a 
healthier and stronger entity.
    Finally, we will strive every day to provide the industry's 
best service to our customers and to operate WorldCom in accord 
with the highest ethical standards.
    Thank you, Mr. Chairman, for your time.
    [The prepared statement of Mr. Sidgmore follows:]

 Prepared Statement of John W. Sidgmore, President and Chief Executive 
                           Officer, WorldCom

    My name is John Sidgmore. I am the President and Chief Executive 
Officer of WorldCom, Inc. I am proud to be leading a team of 60,000 
people who are working hard to support our 20 million-plus customers.
    I am here this morning to discuss the state of the 
telecommunications industry, including the events that led up to 
WorldCom's recent filing under Chapter 11 of the Bankruptcy Code. 
WorldCom has obviously been through a difficult period recently, but we 
are determined to overcome our problems and to move forward. We are 
intensely focused on ensuring that all of our customers--consumer, 
business and government--continue to receive the highest quality 
service without disruption. At the same time, we are planning for the 
future. We are committed to emerging from this process a stronger 
company with its competitive spirit intact.
    Mr. Chairman, I've spent over twenty years in the information 
services and telecommunications industries. I've been honored to serve 
in several senior posts during that time, including a stint as Vice 
President at General Electric Information Services in the days before 
the Internet and as CEO of UUNET Technologies, which was the first 
commercial provider of Internet services.
    That 20-year span has marked a tumultuous time in the industry's 
history, with many ups and downs. What we're witnessing today, however, 
is unprecedented. Clearly, the entire industry is experiencing severe 
problems. While many competitive companies have experienced 
difficulties--many have gone out of business--it's important to 
emphasize that competition is alive. I strongly believe that those 
companies that survive this bleak period will, as the result of 
vigorous competition, continue to bring product innovation and consumer 
savings to the marketplace. That will be true, however, only if federal 
and state regulators complete their implementation of the 
Telecommunications Act of 1996 and fully enforce this historic law.

Introduction
    In April, when I agreed to take over as CEO of WorldCom, it was 
clear that both our industry and our company faced significant 
challenges. I knew then that, among other things, the company was 
struggling under the weight of $30 billion in debt. But I never 
imagined what else was in store for us. I could not have imagined that 
in June we would uncover and publicly disclose significant, past 
accounting irregularities. Nor could I have imagined that about one 
month later WorldCom would file for relief under Chapter 11. As I will 
explain, there was a direct link between these events.
    WorldCom announced on June 25, 2002 that the company misstated its 
earnings for 2001 and the first quarter of 2002. While the misdeeds we 
uncovered occurred before I became CEO, I want to apologize again on 
behalf of everyone at WorldCom. WorldCom's new management team and our 
employees share the public's outrage over these events. You have my 
commitment to continue to do everything possible to obtain the facts, 
to fully cooperate with investigators' efforts to bring wrongdoers to 
justice, to develop safeguards to prevent such an event from recurring 
in the future, and to operate this company according to the highest 
commercial and ethical standards. Every effort will be made to ensure 
the long-term viability of this great company.
    Saving this company is what led to the decision to file a voluntary 
petition under Chapter 11 on July 21. We fought hard to avoid doing so, 
but our need to restate earnings virtually eliminated other debt 
restructuring options previously available to us. Of all the options we 
examined, none could accomplish our goal of restoring corporate health 
as effectively. In the end, we believe that this process, while 
painful, is the best way to help the most people. Most importantly, it 
enables us to maintain quality customer service without disruption and 
it provides the best alternative for preserving the maximum number of 
jobs.
    We have every intention of overcoming the challenges now facing us. 
We will operate our business normally while focusing on our business 
plan and getting our finances in order. We intend to emerge from 
Chapter 11 as soon as possible as a strong and healthy competitor.

Telecommunications Industry: Competition Alive But at Risk
    Any analysis of the telecommunications industry today must begin 
with an acknowledgment of the significance of the 1996 Act, which 
created a sea change in the regulatory paradigm governing the 
telecommunications sector in this country. For the first time, the 
last-mile monopolies were opened to all forms of local competition--
facilities-based, elements-based, and resale-based--and the competitive 
industry responded in kind. Hundreds of new competitors entered the 
marketplace and the capital markets financed their entry.
    Investment in the telecommunications sector was driven by two 
fundamental factors: vibrant new competition and expectations of 
burgeoning customer demand. Competitive local exchange carriers (CLECs) 
poured tens of billions of dollars into the deployment of new 
telecommunications facilities and services. It's estimated that CLECs 
invested some $55 billion during the four years following the passage 
of the Act. While much of this money went into building thousands of 
miles of new fiber-based networks, CLECs also invested in network 
elements leased from the incumbents, or purchased retail services at 
wholesale rates. Moreover, the Bell companies and other incumbent local 
exchange carriers (ILECs) responded with significant new investment of 
their own--over $100 billion during that same time period. Thus, the 
Act helped spur investment by competitors and incumbents alike.
    As the 1990s wound down, however, the sector began to experience 
some significant problems. The market version of a ``perfect storm''--a 
slowing national economy, plummeting prices and excess network 
capacity--was brewing and became more real with each passing month. The 
bursting of the ``dot-com'' bubble made matters worse. Many of the 
``dot-com'' companies were among the largest users of high-capacity 
data services.
    In sum, an unprecedented number of competitors were fighting for a 
diminishing number of customers and available revenue. Customer demand 
never materialized to the extent expected. Dozens of providers began to 
curtail service or go out of business. It was a case of fundamental, 
supply-and-demand economics. The downward spiral created by the 
``storm'' remains an issue for the industry.
    Aside from pure economics, other factors also were at work. In 
particular, the incumbent Bell companies fought aggressively to thwart 
or retard implementation of the 1996 Act--a statute they had sought and 
supported. Whether filing court challenges to the very 
constitutionality of the Act, or slow-rolling the negotiation process 
for network interconnection, or refusing to pay CLECs for services 
rendered, the Bells did everything in their power to obstruct the 
development of competition.
    The economic ``storm,'' exacerbated by anticompetitive Bell 
activity, was further complicated by the incomplete or unsatisfactory 
implementation of the Act by some regulators. On the positive side, 
early Federal Communications Commission (FCC) decisions, such as the 
Local Competition Order and the first 271 decisions (regarding approval 
of Bell company entry into the long distance market), laid out a 
rational and well-crafted blueprint both for competitive entry into 
local markets, and for Bell company entry into long distance markets. 
Many states, such as New York, Texas, California, and Illinois, took 
the lead in implementing pro-competitive rules.
    Unfortunately, just as the ``storm'' began to hit, public policy 
progress began to slow, as the Bell companies fought back against these 
laudable reform efforts. Today, CLECs still lack some of the 
fundamental tools promised by the 1996 Act, and several proposals at 
the FCC--as well as legislation pending before this Committee--threaten 
to turn back the important progress achieved thus far.
    There is some good news: the competitive telecommunications sector, 
while wounded and bleeding, is far from dead. Amazingly enough, despite 
the unprecedented economic turmoil engulfing the industry:

    CLECs still managed to invest over $12 billion in 2001, 
        bringing total competitive industry-wide capital investment to 
        over $65 billion since passage of the Act.

    CLEC share of the local market continues to rise, slowly 
        but steadily. According to the FCC's latest figures--released 
        just a week ago and based on end-of-year 2001 numbers--while 
        the ILECs control some 173 million switched access lines 
        serving end user customers, CLECs now have almost 20 million 
        lines, or 10.2 percent of the total in service. This compares 
        favorably to just under 15 million access lines, and 7.7 
        percent market share, at the end of 2000.

    Of those CLEC lines, about 30 percent are provisioned over 
        the CLEC's own last-mile facilities, 47 percent by means of 
        unbundled network element (``UNE'') loops, including the UNE-
        Platform, leased from other carriers, and 22 percent by 
        reselling the services of other carriers. Thus, CLECs continue 
        to build out their networks, and sign up new customers, using 
        all three market entry methods stipulated by Congress.

    Another positive note: the FCC's critical statutory role in 
fostering local competition also has been confirmed by the Supreme 
Court. First in 1999 and again earlier this year, the Court firmly 
endorsed the FCC's pro-competitive authority under the Act. In 
particular, the May 2002 decision upholding the so-called ``TELRIC'' 
costing standard swept away much of the economic mythology being 
generated by the incumbents, and confirms that competition is best 
built on the framework of a forward-looking costing methodology.
    In addition, competitive companies continue to bring innovative 
products to market that benefit all customers. In April, WorldCom's MCI 
unit launched The Neighborhood, a suite of products that offers 
residential consumers a ``bundle'' of services--local and long distance 
calling, plus features such as voice mail, Caller ID and call waiting--
all for one flat monthly price: about $50 in most states. Consumer 
response to The Neighborhood has been amazing. It confirms the pent-up 
demand across the country for the same kinds of value and choices in 
the local market that they have enjoyed in the long distance and online 
spaces for many years. Now available in thirty-four states and the 
District of Columbia, The Neighborhood will be available in almost all 
states by the first quarter of next year.
    In WorldCom's view, there is a light at the end of this tunnel; 
there will be a return to prosperity in this industry. Our view assumes 
that Congress does not undermine the pro-competition policies of the 
Act by adopting legislation that would effectively repeal them. It 
further assumes that the FCC accepts the overwhelming consensus of both 
consumers and competitors regarding ILEC ``deregulation'' proposals now 
pending before the Commission. The 1996 Act sets the right policy 
direction. It is critical that the FCC finish the job of implementing 
the Act and enforce the Act aggressively. If it does, the industry will 
once again flourish and consumers will continue to benefit.

WorldCom: Overcoming Challenges and Moving Forward
    Again, Mr. Chairman, I am confident that if the visionary policies 
embodied in the Act are carried forward, the telecommunications 
marketplace of the future will be characterized by vigorous competition 
and even greater benefits for consumers. To fully appreciate the 
promise of the future, it's often helpful to consider the experience of 
the past. WorldCom's legacy--and that of its key operating units, MCI 
and UUNET--is unmatched.

WorldCom's Pro-Competition Legacy and Industry Leadership
    MCI and UUNET literally changed the face of an entire industry. MCI 
pioneered competition in the long distance industry, the first company 
to attack the old Bell System's monopoly. UUNET was the first 
commercial provider of Internet services. Indeed, both companies played 
leading roles in the development of the Internet. No other company in 
the world has the legacy that we do in promoting competition.
    Unlike virtually every other major telecom firm, WorldCom was never 
a monopoly. Our company had to compete for every customer we have and 
today we have the privilege of serving over 20 million customers. A 
company with $30 billion in annual revenues and 60,000-plus employees, 
WorldCom is:

    The second largest long distance company in the U.S.;

    The largest competitive provider of local telephone 
        services;

    The largest carrier of international voice traffic; and

    The world's largest Internet services provider.

    WorldCom clearly has been, and continues to be, an industry leader. 
We have been blessed with world-class employees whose great ideas and 
marketing savvy have produced innovative services and consumer savings. 
The Neighborhood is the latest innovation we've brought to the 
marketplace. Our competitors are scrambling to match us. And that 
really makes the point--when we innovate, all consumers benefit. 
Savings may be the ultimate measure of our success and our continuing 
value to the marketplace. Since MCI introduced competition to the old 
Bell System, residential, business and government users have saved many 
tens of billions of dollars.
    Millions of people have a real stake in WorldCom's survival--our 
customers, our employees, our suppliers and our creditors. It is worth 
noting that WorldCom is a provider of network services for critical 
applications for the United States government. These applications 
include the provision of customer service to 80 million Social Security 
beneficiaries, air traffic control applications for the Federal 
Aviation Administration, network management for the Department of 
Defense, and critical data network services for the U.S. Postal 
Service. In addition, WorldCom provides long distance voice and data 
communications services for the House, the Senate, and the General 
Accounting Office. Our company provides those same kinds of services 
for virtually every government agency under its FTS2001 contract. In 
addition, WorldCom provides support for law enforcement and homeland 
security agencies, as well as agencies concerned with national 
security.
    In other words, WorldCom is a key component of our nation's economy 
and communications infrastructure. Both commercial and national 
security interests rely upon WorldCom's operations continuing without 
disruption.
    In that regard, I would like to commend FCC Chairman Michael Powell 
for his efforts to reassure a nervous marketplace. The FCC has a 
critical role to play in ensuring the continuing integrity of the 
nation's communications network. WorldCom takes its own legal and 
regulatory responsibilities very seriously. I can assure this Committee 
that we will continue to work closely with the Commission to ensure 
that customers will not suffer adverse consequences as a result of our 
current financial status.

Financial Crisis at WorldCom
    Despite all the good things WorldCom had going for it, when I 
became CEO in April, WorldCom was a very troubled company. The sluggish 
economy and a variety of industry issues had caused a steep decline in 
the company's revenues, and the company was struggling to deal with its 
massive $30 billion debt load. The debt load alone required more than 
$2 billion a year in interest payments.
    Notwithstanding these financial challenges, I truly felt that 
WorldCom could get back on the right track through a series of 
aggressive moves designed to reshape the company and restructure our 
debt without the need for a Chapter 11 proceeding. On June 14, at the 
annual meeting of WorldCom's shareholders, I set forth my blueprint for 
the future.
    As part of that plan, WorldCom would sell or eliminate unprofitable 
lines of business. To that end, we began the sale of WorldCom's 
wireless resale service, largely by selling our customers to the 
underlying carrier providing the service.
    We also continued to bring expenses in line with revenue. For a 
number of years, WorldCom's workforce had been increasing in 
anticipation of continued growth and we had, frankly, gotten far too 
big for the revenues that we were generating. Thus, we embarked on a 
plan to eliminate 17,000 from our workforce, including through 
attrition, the sale of non-core assets, and the discontinuation of 
contract services that were no longer required.
    Together, shutting down our wireless resale unit and reducing our 
employee base will save WorldCom about $1.8 billion per year.
    Even with those savings, however, WorldCom still needed to 
restructure its debt. Although not easy, we were beginning to have some 
success in accomplishing this as well. We negotiated a $1.5 billion 
accounts receivable securitization program with several of our lenders 
to replace a similar facility that was expiring. We were also engaged 
in productive negotiations with a consortium of banks on providing us 
with a new $5 billion credit facility that would have enabled us to 
operate without concern of bankruptcy for at least several more years 
while we got the rest of our financial house in order.
    Unfortunately, WorldCom's world changed for the worse on June 25th.

Disclosure of Accounting Irregularities and the Need to Restate 
        Earnings
    When we disclosed the need to restate earnings for 2001 and the 
first quarter of 2002 on June 25, we committed to deal with this matter 
openly, expeditiously and responsibly. As I will outline below, we have 
done so.
    Let me remind you at the outset, however, that WorldCom uncovered 
this problem internally. Our external auditor at that time was Arthur 
Andersen. In effect, we audited our external auditor and we found what 
they missed.
    WorldCom is being proactive. Our actions are guided by our 
commitment to restore public confidence in this great company and to 
operate WorldCom according to the highest standards of ethics and 
integrity. To that end, we have taken several specific actions:

    When this matter was brought to its attention, our Board of 
        Directors moved swiftly and decisively. Its actions included 
        terminating our Chief Financial Officer and promptly reporting 
        the matter to the Securities and Exchange Commission (SEC) and 
        to the public.

    We are cooperating fully with the various official 
        investigations--by the SEC, the Department of Justice and the 
        Congress. For example, on July 1, 2002, we filed a written 
        statement with the SEC that included a summary of key events, 
        known to us at that time, that led to our June 25th 
        announcement. At the SEC's request, a revised statement was 
        filed on July 8. A copy of the revised statement is available 
        on two websites: the SEC's [ www.sec.gov/ ] and ours [ 
        www.worldcom.com/ ]. It details how the accounting 
        irregularities were discovered by our internal audit team, led 
        by Ms. Cynthia Cooper. The kind of initiative demonstrated by 
        our internal audit group is to be applauded and will continue 
        to be encouraged.

    William McLucas, a former Chief of the Enforcement Division 
        of the SEC, was retained to perform an independent 
        investigation of the facts and circumstances underlying the 
        transfers. He will investigate not only our past and current 
        management team, but also our Board regarding any individual 
        involvement. His report will identify the wrongdoers and, in 
        addition, will enable us to put into place new or modified 
        internal procedures to prevent any recurrence of this type of 
        event.

    Coincident with our Chapter 11 filing, WorldCom announced 
        the election of two new members to its Board of Directors: 
        Nicholas deB. Katzenbach and Dennis R. Beresford. Mr. 
        Katzenbach is a former Attorney General of the United States. 
        Mr. Beresford has served as Chairman of the Financial 
        Accounting Standards Board (FASB). Both were appointed to a 
        Special Investigative Committee of the Board to conduct an 
        independent review of the company's accounting practices and 
        preparation of financial statements. They will assume an 
        oversight role with respect to Mr. McLucas' investigation.

    If we are to be a model for corporate behavior going 
        forward, we must be transparent and above reproach. Therefore, 
        in our July 1 SEC statement, we clearly stated that we were 
        examining whether additional earnings restatements might be 
        required for periods going back to 1999 with respect to the 
        accounting for reserves established by the company. We are 
        committed to completing this analysis, with the assistance of 
        our new external auditors, KPMG, at the earliest possible date 
        and to announcing the results of that analysis promptly.

    Many questions still remain. We won't know the answers until the 
conclusion of the pending investigations. We will continue to cooperate 
fully with the various agencies and the Congress to answer those 
questions.

Filing for Protection Under Chapter 11 of the U.S. Bankruptcy Code
    As noted earlier, WorldCom had successfully negotiated a new 
accounts receivable securitization program and was nearing accord on a 
new $5 billion dollar credit facility when we announced the accounting 
irregularity and the need to restate earnings. Because of the need to 
restate, WorldCom no longer had valid, audited financial statements. 
Within a matter of days, the banks withdrew the receivables program and 
ended negotiations on the new credit facility. Without audited 
financial statements, the public debt markets were closed to WorldCom. 
Our hand was forced--we had no choice but to file a Chapter 11 petition 
and seek Debtor-In-Possession (DIP) financing.
    On July 21, WorldCom filed a voluntary petition for reorganization 
under Chapter 11 of the U.S. Bankruptcy Code in the United States 
Bankruptcy Court for the Southern District of New York. Chapter 11 
allows a company to continue operating in the ordinary course of 
business and to maximize recovery for the company's stakeholders. 
WorldCom's non-U.S. subsidiaries are not included in the filing and 
will also continue to operate normally.
    WorldCom also announced that we had obtained an agreement to 
arrange up to $2 billion in DIP financing. The company already has 
secured a commitment of $750 million of this amount from Citibank, 
N.A., JP Morgan Chase Bank and General Electric Capital Corporation to 
supplement the company's cash flow during the Chapter 11 proceeding.
    We struggled to avoid this outcome. Unfortunately, our need to 
restate earnings left us few options. In the end, we believe Chapter 11 
is the best way to help the most people. The principal reasons for 
pursuing this option were:

    It allows us to continue our company's high quality service 
        and customer programs. We will work closely with our lenders 
        and federal and state regulators to ensure that there will be 
        no disruption in service to any of our consumer, business or 
        government customers. We have already had significant feedback 
        from customers stating their support for our efforts to move 
        the company forward and their commitment to stay with us 
        through this process.

    It provides the best alternative for preserving jobs for 
        our employees.

    It allows us, post-filing, to pay all suppliers, vendors 
        and employees in the normal course of business. We are a very 
        large customer to most of our suppliers. This action allows 
        them to keep our business. The nation's economy will avoid a 
        negative ``ripple effect''. We will not, however, be allowed to 
        pay claims arising prior to filing without Bankruptcy Court 
        approval.

    It provides our company with a systematic, legal framework 
        to operate our business normally, while we focus our business 
        plan and get our finances in order. It allows us to reconfigure 
        our capital structure, reduce the unmanageable debt burden, 
        improve cash flows, and deal with legal and financial issues in 
        an organized manner--all of which are intended to make the 
        company leaner and stronger, and to put it in a position to 
        create future value for our stakeholders. Many companies having 
        nationwide operations--including Continental, Texaco, Federated 
        Department Stores, Southland Corporation--have emerged from 
        Chapter 11 as stronger, fiercer competitors.

WorldCom's Future
    Our intention is that WorldCom emerge from Chapter 11 as quickly as 
possible. I strongly believe that WorldCom is most valuable as an 
intact enterprise--clearly an example of the whole being greater than 
the sum of its parts. I believe that a large number of our creditors 
recognize this as well.
    Unlike many companies entering Chapter 11, WorldCom has significant 
assets that will help it successfully emerge from the process: a 
significant customer base that is balanced between large enterprise 
customers and smaller mass-market consumers, a first-class global 
network that provides us with a superb platform with which to compete 
in the marketplace, and talented and dedicated employees.
    When we do emerge from Chapter 11, we plan to be a competitive 
force to be reckoned with in the marketplace. We intend to eliminate a 
substantial amount of our debt, dispose of unprofitable lines of 
business, and significantly lower our costs. WorldCom's presence will 
continue to ensure competition in the rapidly consolidating telecom 
industry. No other company's legacy matches ours in terms of promoting 
competition and delivering its benefits to consumers and businesses in 
both pricing and product innovation. WorldCom is one of the last hopes 
for America to realize the intended benefits of the 1996 Act.

Conclusion
    In concluding, I urge this Committee and the Congress to stay the 
course in promoting competition. The telecom industry, as a whole, is 
struggling, but competition is alive. The Act provides the right policy 
direction; to ensure the future vitality of competition, the Act needs 
to be fully implemented and enforced. Reversing course via legislation 
or regulation would cause even more harm to the industry and to the 
economy.
    As for WorldCom specifically, our pro-competition legacy will 
continue. Mr. Chairman and Members of the Committee, we will work hard 
to regain your trust and that of the American people. We will work hard 
to rebuild the value of the company. We will continue to be straight 
about any problems we may discover and act aggressively to solve them. 
We will operate WorldCom according to the highest commercial and 
ethical standards. We will return your faith in us by continuing to 
make a significant difference in the marketplace--providing industry-
leading telecom services and unsurpassed value to all of our customers.

    The Chairman. Thank you, Mr. Sidgmore.
    Mr. Mohebbi?

       STATEMENT OF AFSHIN MOHEBBI, PRESIDENT AND CHIEF 
            OPERATING OFFICER, QWEST COMMUNICATIONS 
                      INTERNATIONAL, INC.

    Mr. Mohebbi. Mr. Chairman and Members of the Committee, my 
name is Afshin Mohebbi, and I am President and Chief Operating 
Officer of Qwest Communications International, Incorporated. I 
want to thank you for allowing me to appear today at your 
hearing on maintaining operations of communications facilities 
in the telecommunications industry.
    Permit me to tell you a bit about Qwest. Qwest is a local 
telephone company with 25 million customers. We provide local 
telephone service in a 14-state area throughout the West. We 
have 56,000 employees and annual revenues of more $19 billion. 
About 80 percent of our revenues and more than 90 percent of 
our profits come from our local phone services. We also provide 
data and long-distance services to businesses in major United 
States markets outside the 14-state local service area.
    In addition, Qwest has a state-of-the-art global fiber 
optic network that spans more than 175,000 miles. Qwest's 
optical network is among the most advanced in the world. Qwest 
does business with more than 60 percent of the Fortune 1000 
companies worldwide.
    I want to assure the Committee and Qwest's customers that 
Qwest expects to be around for a long time and that the 
critical telecommunications services Qwest provides are not in 
jeopardy. We have multiple sources of revenue and a solid 
customer base. We're the first company to blend the assets, 
products, and customers of a regional Bell operating company 
with that of a carrier of high-speed telecommunication 
services. As the industry changes and matures, we are in a 
position to be equipped to continue to grow.
    Because the Committee has inquired as to financial 
contingencies, I wish to assure the Committee that Qwest is 
fully prepared to ensure that customer service continues 
uninterrupted. In addition, Qwest has already dealt with the 
issue when telecommunications service providers have filed for 
bankruptcy, and we have successfully maintained the level of 
service and reliability that our customers expect from Qwest.
    In fact, over the past 2 years Qwest has invested billions 
of dollars that have resulted in significant improvements in 
customer service. A Qwest analysis of FCC service data shows 
Qwest is first in overall service quality among the 12 largest 
local service providers. Qwest recently announced that its 
first-quarter 2002 service performance was the best in 7 years 
in key areas of installation and maintenance.
    On Sunday, as the Committee is aware, Qwest announced that 
it expects to restate its financial statements for 2000 and 
2001 to reflect adjustments in, among other things, revenue 
recognized from the sale of optical capacity assets, which are 
sometimes referred to as IRUs. Earlier this year, the company 
began an analysis of accounting treatment for IRUs. We have 
tentatively concluded that our accounting policies at the time 
were incorrectly applied in connection with certain 
transactions.
    In terms of Qwest's preliminary conclusions, let me 
emphasize the following. First, in the accounting of these 
transactions, Qwest sought, in good faith, to comply with the 
Generally Accepted Accounting Principles (GAAP) and all 
applicable accounting guidelines in regular consultation with 
its outside auditors. Next, when it completes its analysis, 
Qwest expects to restate its financial statements for prior 
periods. The $591 million of revenue recognized with respect to 
the optical capacity asset sales identified in the Sunday press 
release represents 1.4 percent and 1.8 percent of total 
revenues in 2000 and 2001.
    We are proud of our company. As a company, we feel we are 
ready to address the continuing difficulties within our 
industry and to address the steps necessary to complete our 
analysis of the company's accounting policies and practices. 
Our new chairman and CEO, Dick Notebaert, has said that 
increasing Qwest's credibility with investors and the public in 
general is his top priority and that he is, quote, ``confident 
that Qwest is moving in the right direction and we have the 
ability to perform for our customers, our employees, and our 
shareholders,'' unquote. I could not agree more with Mr. 
Notebaert.
    Qwest's voluntary and public disclosures about our 
accounting is an important step in the process of turning the 
company around. We're also proud to have the support of our 
employees in this effort. We were gratified by the statement 
recently issued by the Communications Workers of America 
president, Morton Bahr, who said that Qwest has now the 
customer base, the highly skilled and dedicated workforce, and 
the leadership team to restore Qwest's reputation and business 
success. It will not be easy, but we are intent on working hard 
to win back the trust of our employees and our investors and 
move this company forward while continuing to provide the very 
best telephone service possible to our customers.
    I will be glad to try and answer any questions that you may 
have. Thank you.
    [The prepared statement of Mr. Mohebbi follows:]

  Prepared Statement of Afshin Mohebbi, President and Chief Operating 
           Officer, Qwest Communications International, Inc.

    My name is Afshin Mohebbi and I am President and Chief Operating 
Officer of Qwest Communications International Inc. I want to thank you 
for allowing me to appear today at your hearing on maintaining 
operations of communications facilities in the telecommunications 
industry.
    Permit me to tell you a little about Qwest. Qwest is a local 
telephone company with 25 million customers. We provide local telephone 
service in a 14-state area throughout the West. We have 56 thousand 
employees and annual revenues of more than $19 billion. About 80 
percent of our revenues and more than 90 percent of our profits come 
from our local phone service. We also provide data and long-distance 
services to businesses in major markets outside the 14-state local 
service area.
    In addition, Qwest has a state of the art global fiber optic 
network that spans more than 175,000 miles. Qwest's optical network is 
among the most advanced in the world. More than 4.2 billion megabits of 
traffic travel across the network at any given time, along with web 
hosting centers that safeguard the critical data of banks, 
corporations, health care providers and government agencies among 
others. Qwest does business with more than 60 percent of the Fortune 
1,000 companies.
    I want to assure the Committee, and Qwest's customers, that Qwest 
expects to be around for a long time and that the critical 
telecommunications services Qwest provides are not in jeopardy. We have 
multiple sources of revenue and a solid customer base. We're the first 
company to blend the assets, products, and customers of a regional bell 
operating company with that of a carrier of high-speed 
telecommunications services. As the industry changes and matures, we 
are in the position to be equipped to continue to grow.
    Because the Committee has inquired as to financial contingencies, I 
wish to assure the Committee that Qwest is fully prepared to ensure 
that service continues uninterrupted. In addition, Qwest has already 
dealt with the issue when telecommunications service providers have 
filed for bankruptcy, and we have successfully maintained the level of 
service and reliability that our customers expect from Qwest.
    In fact, over the past two years, Qwest has invested billions of 
dollars that have resulted in significant improvements in customer 
service. A Qwest analysis of FCC service data shows Qwest is first in 
overall service quality among the twelve largest local service 
providers. Qwest recently announced that its first quarter 2002 service 
performance was the best in seven years in key areas of installation 
and maintenance.
    On Sunday, as the Committee is aware, Qwest announced that it 
expects to restate its financial statements for 2000 and 2001 to 
reflect adjustments in, among other things, revenue recognized from the 
sale of optical capacity assets, which are sometimes referred to as 
IRUs. Earlier this year the company began an analysis of accounting 
treatment for IRUs (particularly sales to customers from which the 
company agreed to purchase optical capacity assets). We have 
tentatively concluded that our accounting policies at the time were 
incorrectly applied in connection with certain transactions.
    In terms of Qwest's preliminary conclusions, let me emphasize the 
following:
    First, in accounting for these transactions, Qwest sought in good 
faith to comply with generally accepted accounting principles (GAAP) 
and all applicable accounting guidance, in regular consultation with 
its outside auditors.
    Next, when it completes its analyses, Qwest expects to restate its 
financial statements for prior periods. The $591 million of revenue 
recognized with respect to the optical capacity asset sales identified 
in the Sunday press release represented 1.4 percent and 1.8 percent of 
total revenue in 2000 and 2001.
    We are proud of our company. As a company, we feel we are ready to 
address the continuing difficulties within our industry and to address 
the steps necessary to complete our analysis of the company's 
accounting policies and practices.
    Our new CEO, Dick Notebaert, has said that ``increasing Qwest's 
credibility'' with investors, and the public generally is his top 
priority--and that he is ``confident that Qwest is moving in the right 
direction, and we have the ability to perform for our customers, 
employees, and shareholders.'' I could not agree more. Qwest's 
voluntary and public disclosures about our accounting is an important 
step in the process of turning the company around.
    We are also proud to have the support of our employees in this 
effort: we were gratified by the statement recently issued by CWA 
President Morton Bahr, who said that Qwest now has the ``customer base, 
[a] highly skilled and dedicated workforce, and the leadership team . . 
. to restore Qwest's reputation and business success.'' It will not be 
easy, but we are intent on working hard to win back the trust of our 
employees and investors, and move this company forward while continuing 
to provide the very best telephone service possible to our customers.
    I will be glad to try and answer any questions you may have.

    The Chairman. Well, Mr. Mohebbi, you talk about the Sunday 
news release. Of course, if we just look at the morning New 
York Times release, and that's what's disturbing everybody, 
because we see everyone having to restate their financial 
statements or otherwise declare for bankruptcy, and you find, 
on page C4 of the New York Times, Phillip F. Anschutz, board 
member, former chairman between 1999 and 2000, and the 
company--1.453 billion--one and a half billion bucks to take 
out of a company.
    I'll ask each of you, What about stock options? I'm like 
Senator McCain. We haven't really legislated stock options. 
That's the big attraction to take the money and run rather than 
look out for the company, look out for the employees, look out 
for the customers, and everything else like that, when you can 
get away with one and a half billion in a 2-year period, you 
say, ``Well, ta-ta and goodbye. Forget about Qwest. Forget 
about WorldCom or any--or communications.''
    Mr. Sidgmore, what about stock options?
    Mr. Sidgmore. Well, my personal opinion is stock options 
are a very important part of the compensation program in many 
industries, telecommunications being one of them. But really 
all technology-based industries have used stock options as a 
central piece of their compensation programs for a long period 
of time. That----
    The Chairman. But you've got a double accounting for them--
you don't account them as an expense.
    Mr. Sidgmore. Right, I'm not saying that we shouldn't 
account for them as an expense. I'm just saying----
    The Chairman. Do you think they should be counted for as an 
expense?
    Mr. Sidgmore. I think there are arguments in both 
directions, but I----
    The Chairman. Yeah, but I know about the arguments. What do 
you think?
    Mr. Sidgmore. I think--I think they should be accounted for 
as an expense.
    The Chairman. The thing that puzzles--when did you come 
with WorldCom? I know MCI--I worked with Bill McGowan over the 
years. I remember when he got a farmer's loan, an agricultural 
loan, down in downtown Georgetown here in the District 30-some 
years ago to start MCI and to give competition to AT&T.
    Mr. Sidgmore. Right.
    The Chairman. Now, when did you join WorldCom/MCI?
    Mr. Sidgmore. I was running a company called UUNET 
Technologies, it was actually the first Internet service 
provider, over in Virginia. And that was a company that went 
public in 1995, and then we sold it to a company called MFS in 
1996. I became president of MFS. And then we sold that company 
to WorldCom in December 1996. So I joined WorldCom as chief 
operations officer in December of 1996.
    The Chairman. So you've been there 6 years and you couldn't 
tell you were 3.5 to 4 billions dollars shy?
    Mr. Sidgmore. No----
    The Chairman. You didn't know anything about this necessary 
restatement of----
    Mr. Sidgmore. In my own defense, I was the operations 
officer for 1997 and 1998, and I stepped down from that role in 
September of 1998. In 1999, I remained with the company, but my 
role basically was to do strategic acquisitions. For example, I 
was the one that worked on the Sprint acquisition, or the 
attempted Sprint acquisition. And for the last 3 years, really, 
I haven't had a role other than to work on some strategic 
development in technology, but I have not had any role in 
operations.
    The Chairman. So this was all news to you when----
    Mr. Sidgmore. Yes, it was.
    The Chairman. I was made to understand that the reason you 
gave--well, excuse me, the company--WorldCom/MCI gave a $400 
million loan to Mr. Bernie Ebbers was because he had that many 
in stock options, and if he had exercised all the options, it 
would have ruined the financing of the company or ruined the 
market for the stock itself. What's your comment? Is that the 
case?
    Mr. Sidgmore. Well, that was the theory at the time. The 
compensation committee at that time apparently was concerned 
that if Mr. Ebbers had sold his stock, which he had to do to 
pay off some loans, apparently, that the stock would be injured 
and the company would be injured. And the compensation 
committee granted that loan. The rest of the board, which 
included me, ratified that after the fact.
    The Chairman. But stock options should never put a company 
in jeopardy to the tune of 400 million without the approval of 
the stockholders.
    Mr. Sidgmore. I couldn't agree more. I couldn't agree more 
with that.
    The Chairman. But, unfortunately, we, at the congressional 
level, haven't been able to get that amendment up either. We'll 
keep trying.
    Let me yield to Senator Burns.
    Senator Burns. Thank you, Mr. Chairman.
    I'm going to be very parochial here in my questions, and 
that's to my good friend from Qwest. Being as I live out there 
and you were talking about investment in new technologies and 
things, well, Montana has been sort of about a half a step 
behind. Could you take a look at that up there and--we've got 
some old 56 switches that need replacing and some of those kind 
of things.
    I want to--a problem that we have in Montana, so this is 
very parochial, and I'd like to just get your response to is--
that I'm sure you're aware. TouchAmerica is an extremely 
important organization to Montana, given that it's 
headquartered in Butte, Montana, runs one of the largest fiber 
networks in the country.
    With this in mind, I've been following the recent suits and 
countersuits surrounding the billing dispute between Qwest and 
TouchAmerica very closely. This conflict has arisen from the 
sale of long-distance assets from Qwest to TouchAmerica as part 
of its FCC approval process to buy USWest in 1999. As I 
understand it, Qwest claims that TouchAmerica has not paid 
amounts Qwest says it's due for Qwest's billing and operational 
support services. TouchAmerica, on the other hand, alleges that 
Qwest has improperly billed TouchAmerica and failed to account 
for the revenues due TouchAmerica.
    So what else little argument we've got on the schoolyard, 
you might say. While I don't judge the merits of the dispute, 
which are currently in arbitration, I am very concerned that, 
as it continues to drag out, it is imperiling the Montana high 
tech company that provides numerous jobs in my state. Do you 
anticipate this dispute can be solved? Is there any way we can 
get the lawyers out of the way and bring this to a close?
    Mr. Mohebbi. Senator Burns, as you well stated, the dispute 
with TouchAmerica is a billing dispute. It is unfortunate that 
it has to drag this long. And there were a number of attempts 
made to try to settle it outside of the legal procedures. 
Certainly there has been continued willingness from Qwest, and 
the matter has gotten the utmost attention in our company. I 
have personally flown to Butte three times to try to deal with 
this situation, and we will continue to work in that area. 
TouchAmerica is a customer of ours, as well, and we are 
interested in its well-being and growth, and so we are hoping 
that we could work the issue.
    Senator Burns. Well, I'd like to see it taken care of as 
soon as possible because it's inhibiting some of the things 
that they want to do. And it's a fairly important question to 
TouchAmerica.
    In the announcement of Qwest, you have a new CEO----
    Mr. Mohebbi. Chairman and CEO, yes.
    Senator Burns.--and I'm very excited about that. I knew him 
when he was at Ameritech. He has taken some bold steps now that 
is going to--the courage to do that to get them back on the, 
let's say, bed rock, so to speak, and do what you do best, and 
that is local service and the services through the local 
switches. So I'm very happy about that.
    Can you comment specifically on the IRUs and the swaps? 
Give us an idea on how they work. And I know that's where, 
that's been discovered by Qwest now as being one of those 
practices now that's causing real problems. Could you give us 
an idea on how that worked?
    Mr. Mohebbi. Yes, Senator. As part of the Qwest's original 
company plan, we built a network for our own use, and we also 
built network assets to be sold to other communication 
companies who were interested in building a national and then 
international networks. The IRU, as a product or as an asset, 
is essentially the right of--the indefeasible rights of use 
that a particular company purchases along with its liabilities 
and opportunities and risks to be able to meet its 
requirements. So it is a sale of assets that involves assets 
that were created to be sold, and that's what we did as we 
built the original Qwest, the long-haul network throughout the 
United States during the years 1996 through 2000.
    Senator Burns. Well, now--ok, now, how can that be--how can 
that--you relate that to swapping?
    Mr. Mohebbi. In terms of what has been called ``swaps,'' 
one of the things that we did was, once Qwest was done with 
building out its U.S. network, we were interested in building a 
global network because the business customers, which were the 
focus of our global expansion, required that you, as a service 
provider, carry their services on your own network throughout 
the world. So we looked at building our global network, again 
through buying these assets from other companies that had built 
assets throughout the world. And in some cases, when we bought 
assets from some of these companies, those companies were also 
building plans on a global basis, needed assets in the United 
States, for example, and purchased those assets from us. The 
timing of some of these transactions were close, and that's 
what being looked at and called as ``swaps.''
    Senator Burns. I am--well, I thank you for coming today.
    And I thank the Chairman for not demanding this, the new 
head of Qwest, because he just got there, you know, Mr. 
Chairman, and I think we can see some changes there happening. 
So I appreciate that very much.
    The Chairman. Very good.
    Senator Burns. But as far as building the global networks, 
you'd better talk to the guy on the right-hand end of the 
table--your right--and he can probably tell you about that. But 
I appreciate that, and I appreciate the testimony of all three 
of you.
    Mr. Chairman, I----
    The Chairman. Senator Dorgan?
    Senator Dorgan. Mr. Chairman, thank you. Is it Mr. Legere?
    Mr. Legere. Legere.
    Senator Dorgan. Mr. Legere, I'm sorry. Mr. Legere, Global 
Crossing recently had to restate its earnings. There are 
questions about the way its accounting was handled. It's under 
FCC investigation. And apparently it concedes that documents 
were shredded in several of Global Crossing's offices. Is that 
the case?
    Mr. Legere. We have not restated earnings, because we do 
not have audited results for 2001, so we have not filed the 
10(k) for 2001 yet.
    We are under FCC investigation. We've been cooperating 
fully and looking forward to getting input and feedback from 
them, which will lead to us taking action.
    Senator Dorgan. Do you expect to be required to restate 
earnings?
    Mr. Legere. We don't--we don't know at this point in time. 
But, again, since we haven't closed 2001 numbers, the outcome 
of 2001's financials would be dictated by their input.
    Senator Dorgan. Mr. Legere, let me ask you about something 
else that's controversial about your company and some others. 
Global Crossing effectively renounced its U.S. citizenship by 
reincorporating in Bermuda. You were a U.S. company. You 
decided that you wanted to renounce your U.S. citizenship and 
become a Bermuda company. It's called an ``inversion.'' Can you 
tell me, are the members of the board of directors that were 
with the company and helped make that decision still 
predominantly the board of directors today?
    Mr. Legere. Senator, if I could just clarify.?
    Senator Dorgan. Yes.
    Mr. Legere. When Global Crossing was created, it was 
created as a global company. And at that time, it was 
incorporated, the holding company, in Bermuda. Second, though, 
we are a very complex global set of assets. And, for example, 
when we purchased the Frontier Corporation in the United 
States, that still is a U.S. company. It does pay taxes in the 
United States.
    So we have a holding company that was created in Bermuda, 
basically because of the fact that we were creating global 
assets, but we do have legal entities in most countries in the 
world, including many in the United States that are paying. So 
anything we bought in the U.S. stayed headquartered in the U.S. 
and does pay taxes here.
    Senator Dorgan. Yeah. Well, I won't go further, because 
there are other questions.
    Let me just say that I think inversions that are occurring 
for the purpose of saving taxes are shameful. To be able to 
decide you should renounce your citizenship--we're talking 
about a number of companies--Tyco, Stanley Tools and others--
you know, we're at war with terrorists, and we see a spectacle 
now of companies deciding that they want to become citizens of 
another country? I don't understand the thinking process. When 
they get in trouble, do they want to call out the Bermuda navy, 
the Bermuda army, Bermuda marines? I don't think so. They want 
all the benefits America has to offer them, except the 
responsibility to pay taxes.
    But I won't go further, except to say that I think we need 
to--this Congress needs to address inversions aggressively. The 
House of Representatives has begun to do that, and I hope we 
will do so in the Senate.
    Mr. Mohebbi, you heard my questions about Qwest. We have 24 
exchanges owned by Qwest in North Dakota. My preference is 
either they serve them or sell them. Qwest was engaged in 27 
different countries but couldn't put DSL on 20 exchanges in 
North Dakota, and I have a little heartburn about what 
happened. And I also--it's also interesting to note that they 
couldn't do it because it wasn't worth the investment. But the 
compensation committee of Qwest, last year, met 7 times--
compensation committee in the board of directors met 7 times at 
a--all during the period when the Qwest stock was falling 60-
some percent, and it was meeting to give the CEO cash and 
bonuses and incentives. And then when they pushed him out the 
door, they gave him a $10 million severance package. Do you 
think that's nuts? Sounds nuts to me.
    Mr. Mohebbi. Senator Dorgan, I'd like to address the issue 
in terms of service in North Dakota, because----
    Senator Dorgan. Please do.
    Mr. Mohebbi.--in my direct responsibility, I have 
responsibility for that. And if we look at the overall, the 
number of exchanges that you actually mentioned have DSL are 
absolutely correct. There are 4. And we'd like them to be 
higher than that. One of the things that I think we need to 
work with our customers as well as the chambers of commerce and 
others in North Dakota is to try to encourage people to try to 
actually buy more DSL. I can tell you the take rate that we 
have in the four exchanges that we have installed DSL is about 
7 percent----
    Senator Dorgan. But, Mr. Mohebbi----
    Mr. Mohebbi.--which is low.
    Senator Dorgan.--excuse me for interrupting, but let me 
tell you this. Other representatives of the Bell systems have 
sat at that table and described their build-out of DSL at 50, 
60, and 70 percent of their exchanges and their customers in 
their areas. Qwest decided not to do that, and the executives 
at Qwest were off busy working in China and Europe and not so 
interested in our exchanges, and they were also running off 
with a substantial amount of money as they got canned. And I 
was asking you the question whether you think it's nuts to see 
the record of what has happened.
    Having said that, let me also say that the new CEO gives me 
some heart. I think he's an extraordinarily well-qualified 
person. I feel good that he's where he is.
    But do you not agree that what happened here with Qwest is 
just Byzantine and wrong?
    Mr. Mohebbi. Senator, I'm not an expert, in terms of what's 
the right compensation for the right individuals and how that 
compensation was derived. What I can tell you is, on the issues 
of service, we're interested in making sure that all our 
customers in the 14 States receive the rights of the services.
    Senator Dorgan. Well, without sounding arrogant, I'm just a 
flat-out expert in these matters. I think when somebody runs a 
company into the ground, the last thing you do is give them a 
$10 million bonus. When somebody cooks the books, the last 
thing you do is give them incentive payments.
    And so, you know, I come from a really small town of 400 
people. And it's very simple. If pay is based on performance, 
when somebody's cooking the books and running a company into 
the ground, you don't give them big bonuses. That--I mean, that 
doesn't--that's not rocket science.
    But, look, I want Qwest to succeed. They do business in 
Montana, North Dakota, and our part of the country. I want them 
to succeed. But I have great heartache about what went on, and 
great anger about what went on, as a matter of fact, with 
Qwest.
    One question, if I might, for Mr. Sidgmore. Mr. Sidgmore, I 
know that you have a substantial background in this industry, 
and I want you to succeed, but what you're telling the Chairman 
is that, although you were affiliated with WorldCom, that you--
and I suspect you would say many others at the top level--had 
no knowledge of what was happening with respect to the 
development of costs and revenues. And the evidence suggests, 
of course, that a substantial--in fact, announced by you--a 
substantial amount of costs and revenues were inappropriately 
applied and the earnings had to be restated as a result of it.
    So how does it work that that happens inside a corporation 
to the extent of billions of dollars, and yet you and others 
really don't know anything about it?
    Mr. Sidgmore. Well, first of all, let me just say it was 
the equivalent of a corporate disaster that we had to restate 
earnings and that others, you know, did not see that. But let 
me just explain to you how it possibly happens.
    A board of directors protects itself in a number of ways. 
You have an audit committee, which we had a very significant 
audit committee with very highly qualified people. We have an 
internal audit department that is independent of the financial 
organization that goes out and does checks frequently. And then 
on top of that, you hire a professional audit firm--in this 
case, Arthur Andersen.
    And in every one of those cases, the audit reports came 
back totally clean. And, in fact, even as recently as February, 
we had a major audit committee meeting with Arthur Andersen, 
and they specifically responded to questions about the exact 
transfers that occurred and said that the books were totally 
clean. So, you know, there possibly is no total defense for 
this, but that's just an explanation. I mean, every step along 
the way, we had audits done, and the audits came back clean. 
Unfortunately, you really can't very easily defend against a 
deliberate change to the books. And that's really what 
happened.
    I could give you a much more lengthy explanation of the 
mechanics of how it happened, or how we think it happened, but 
that will come out in great detail after our investigation is 
over.
    Senator Dorgan. But normally in a corporation or other 
organizations, there's a culture. If you're skating way up to 
the line, everybody understands, ``Boy, we're aggressive. We're 
finding ways--we're finding the route through the keyhole 
here,'' and people have a sense of that, even though they may 
not know the details. You're saying that there was no sense of 
that in the company?
    Mr. Sidgmore. I don't think there was, and I'll--the only 
other thing I can tell you is our books are extraordinarily 
complex because of the number of acquisitions that have been 
made over the last 4 years, about 78.
    And so, I mean, I understand your point. I'm just saying 
that this is a very, very complex and difficult situation. I 
don't think anyone thought that we were steering that close to 
the edge.
    The Chairman. Senator Allen?
    Senator Allen. Thank you, Mr. Chairman.
    I'd like to address my comments and questions to Mr. 
Sidgmore, who, first of all, I want to thank you for coming to 
this Committee hearing, and I also thank you for your efforts 
to bring WorldCom out of Chapter 11 bankruptcy as soon as 
possible. I encourage you, Mr. Sidgmore, to work with the FCC 
and the SEC and other Federal authorities--and I think you have 
been doing it, but I want to encourage you to do so. I will say 
that WorldCom has been a very good corporate citizen in the 
Commonwealth of Virginia, and I do encourage your efforts to 
try to restore that credibility.
    When you took over as CEO in April, WorldCom was carrying 
$30 billion in debt, you had a blueprint to come out to handle 
that. I note, on page 17 of your statement, where you mention 
that WorldCom has significant assets that will help it 
successfully emerge from the process, which is Chapter 11, a 
significant customer base--which I might add includes the U.S. 
Government--and you have large-enterprise customers, small-
market consumers, first class global network, which provides 
you all, with WorldCom with a superb platform with which to 
compete in the marketplace, and talented and dedicated 
employees.
    The employees mean a lot of me, and there was the--in my 
understanding, part of the plan was to eliminate 17,000 from 
your work force, about 1,300 of whom were in Virginia. 
Subsequent to the--or due to the restatement, and subsequent to 
the filing of Chapter 11, do you envision any additional 
layoffs in the future that you can share with us?
    Mr. Sidgmore. Well, let me just say that there are none of 
any kind of significance. There are always people that changed 
in and out during the year, but there are none of any 
significance that are planned now.
    I might also add that that 17,000--by the way, this doesn't 
change your point, but it just modifies it slightly--that 
17,000 includes about--about half of those 17,000 were actually 
associated with a division which we have sold, so they weren't 
really employees that got removed from the payroll. They were 
sold.
    Senator Allen. But you do not envision any, at this moment, 
reduction in positions.
    Mr. Sidgmore. We have no plans at this time for that.
    Senator Allen. Now, as you know from your history, starting 
off with UUNET, and when I was Governor and we were working on 
the WorldCom deal, it was WorldCom UUNET before you merged with 
MCI right in late 1997, early 1998, the UUNET was the largest--
not only was the first, but it's the largest commercial 
Internet service provider in our country. With regards to the 
Internet backbone facility that WorldCom maintains in Northern 
Virginia, I understand that it is one of only three major 
Internet hubs that WorldCom operates throughout the world.
    Now, I'd like to hear from you what precautions, what 
procedures have been taking place to ensure its sustainability 
and its service. And as WorldCom goes through this 
reorganization and restructuring, what plans do you have for 
that segment of the corporation, which is very, very important?
    Mr. Sidgmore. OK. Well, this is probably not surprising to 
anyone that knows me, but, from my standpoint, the Internet 
backbone network that we run that is called UUNET is probably 
as central to our asset base as you possibly have. It's as 
central to our future success as it could possibly be. People 
ask me all the time what segments of the business have we 
considered selling? And I can tell you that, you know, from my 
standpoint, the Internet backbone, which is the world's 
largest, the long-distance business, both here in the United 
States and in Europe, those are the central core pieces of 
WorldCom and MCI. And I consider, in the long-distance network, 
by the way, both the consumer business and the long-distance 
business.
    We have no plans to change the structure, the concept, the 
technology or anything about the UUNET network. That is 
probably our No. 1 most valuable asset in most people's minds 
today.
    Senator Allen. Do you see business or economic activity 
increasing? That is a good indicator. It's almost like a 
railroad, to some extent, to see the usage----
    Mr. Sidgmore. Well, I mean----
    Senator Allen.--of it. Is that increasing? Is it stable?
    Mr. Sidgmore. The Internet business, I would say, is 
stable, and, in some cases, in some segments is growing 
slightly. It is still the fastest-growing piece of the 
telecommunications industry. It doesn't grow quite like it used 
to, but it's still the fastest-growing piece.
    Senator Allen. Can you share with us or tell us a little 
about some of the services that you do provide to the U.S. 
Government, currently?
    Mr. Sidgmore. We provide a great many services to the U.S. 
Government, including the use of our Internet network. We 
provide long-distance services to many, many agencies, 
including the FAA and many others. We provide lots of different 
kinds of service to the Defense Department in various places, 
including places outside the United States. The Government 
business is significant to us. It's over 8 percent of our 
business. And we plan--you know, we plan on being very 
aggressive about holding onto that business.
    I know there have been some rumors about some agencies 
being nervous about, you know, service disruption. And I want 
to reiterate again, we are not going to have any service 
disruptions as a result of this bankruptcy--to the Government 
or anyone.
    Senator Allen. That's why I asked the question.
    Mr. Sidgmore. Right.
    Senator Allen. Thank you, Mr. Sidgmore. I'm about out of 
time.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Brownback?
    Senator Brownback. Thank you very much, Mr. Chairman, and 
thank you, gentlemen, for being here.
    Mr. Sidgmore, and the whole panel, obviously, there are a 
lot of people very mad, disappointed across the country, and 
they want to know how these things could possibly happen. And I 
want to focus in on those and then talk a little bit about a 
way that maybe we can get more market income taking place.
    Mr. Sidgmore, you're primarily here because of a $3.8 
billion accounting restatement, I guess you would say, where 
you took line access costs and capitalized them instead of 
expensing them. It seems to me, and just to a layman looking at 
this, that this is a big decision that a company would make--
$3.8 billion, how are you going to treat that on the ledger? 
And that that's not just something that mechanically gets 
caught in the grind at a fourth or fifth level down in a 
company, but somebody pretty high up in the system has to 
decide we're going to go left or right with this $3.8 billion. 
This is a pretty clear decision. Where was that decision made, 
that $3.8 billion, whether it would be expensed or capitalized?
    Mr. Sidgmore. Well, let me just say that, you know, this is 
the subject of a great many investigations, including our own 
independent investigation, which is not concluded, so I can't 
give you a specific--you know, a specific set of names. But let 
me just say that that would have been a decision made at, you 
know, the highest levels of the company.
    I can tell you further that the way it happened is a very 
interesting scenario. We had line costs and a line cost budget 
that were very much in line with prior years as a percentage of 
our revenue. We also had capital expenditures that were very 
much in line with the plan. So it looked to the world, 
including the board and apparently to others, like Arthur 
Andersen, that there were no irregularities happening. What we 
didn't know is that we weren't actually spending the money on 
capital--you know, we weren't spending the capital budget on 
hardware and communications equipment. We were actually 
capitalizing the line costs. And that's really how, at the end 
of the day, the mechanics worked.
    But that decision would clearly have been made very 
specifically. This was not a mistake. This was a decision that 
was clearly made by people close to the top. No question about 
that.
    Senator Brownback. And it would have had to bounce up 
through several layers of people asking this same question, 
``How do we treat this?'' So there had to have been a number of 
people in that company that knew that this decision was going 
to be made. And how it would be made would have a significant 
impact on the financial disclosures at the bottom of the sheet.
    Mr. Sidgmore. No question about the significant impact. 
You're right about that. But it's not necessarily true that 
there were multiple layers involved. It could have been one 
person very, very close to the top that had the direct access 
to making changes in the journal.
    Senator Brownback. And he would be able, he or she would be 
able to say this is going to be treated as a capital----
    Mr. Sidgmore. That's why I said it would have to be 
somebody very high up in the organization.
    Senator Brownback. And then that would have gone and would 
have been cleared by Arthur Andersen and the audit committee of 
the board?
    Mr. Sidgmore. Well, frankly----
    Senator Brownback. I mean, they would have seen, then, this 
decision was made and it was treated that way, at least those 
two groups, wouldn't they? The audit committee and Arthur 
Andersen?
    Mr. Sidgmore. You would think so. And, frankly, Arthur 
Andersen told us that they never caught it. In the check in the 
entire audit that we paid them $4 million for, they claim that 
they never saw it. And, frankly, it's an outrage to our company 
that that happened. I mean, that should have been caught in an 
audit, in my judgment, and it wasn't.
    Senator Brownback. Well, it just strikes me as beyond 
belief it wouldn't be caught. What about at the audit 
committee?
    Mr. Sidgmore. Well, the audit committee apparently went 
through the same checks as Arthur Andersen, but obviously in 
much less detail. And I guess my only point to you is that if 
the auditor that you're paying $4 or $5 million for exactly 
this purpose could not catch it, it was a little bit more 
difficult to catch than you might think on the surface. I mean, 
that's the only thing I can say. But that doesn't mean, I mean, 
we are quite upset that that was not caught by our audit.
    Senator Brownback. It's just astounding to me. Even when I 
read that in the paper--and then that's not only impacted 
WorldCom. That impacts the entire marketplace, because 
everybody wants to know, well, what else has been misstated?
    Mr. Sidgmore. Right.
    Senator Brownback. Or what else have people been playing 
close to the line with? I hope companies now are setting the 
atmosphere that says we don't play close to these accounting 
lines. We're going to play very--we're going to be very 
judicious on this, and we're going to be very careful on these 
particular issues.
    You stated that you just hired a CFO. The issue of stock 
options is something that a number of people are very concerned 
about and questioning what we should be doing on this issue. 
Are you providing stock options to the new CFO that you've 
hired?
    Mr. Sidgmore. We actually hired a new CFO and a chief 
restructuring officer at the same time, and we actually hired 
them from an agency, so they're actually in those roles for a 
long period of time. But they will be provided by that 
consulting firm on a consulting basis. So they're not 
technically employees of WorldCom, and they don't have stock 
options.
    Senator Brownback. Are you going to offer stock options in 
the future at WorldCom, to the people you bring in?
    Mr. Sidgmore. Well, right now we don't have stock options 
that people would be interested in, but----
    [Laughter.]
    Mr. Sidgmore.--in fact, we can provide those very 
inexpensively now.
    But hopefully, when we emerge from bankruptcy--and I 
believe we will emerge as a stronger entity--we will again wind 
up with a stock that people are interested in having, and we 
will probably use stock options as an incentive, as we always 
have.
    Senator Brownback. Will you expense those?
    Mr. Sidgmore. We believe that we will probably expense 
those.
    Senator Brownback. Will you expense stock options at Global 
Crossing?
    Mr. Legere. The only question that I'm trying to deal with 
in this issue is questions of valuation and matching principles 
associated with the cost. But those being overcome, as long as 
it's consistently applied, you know, we'll abide by it.
    Senator Brownback. Will Qwest?
    Mr. Mohebbi. Senator, our board of directors has not made a 
decision on that particular issue.
    Senator Brownback. I still want to make one other point, 
and it's just on an issue that Chairman Powell had talked 
about, about the build-out to the last mile. We need to get 
broadband competition out there. The expense of doing that, 
Corning has estimated, would cost about $200 billion to rewire 
all access line with fiber optics. That last mile--$200 
billion. I think we're going to need to look at serious policy 
options if we're going to try to incentivize the deployment of 
real broadband service out to the community, and particularly 
companies that are capitally challenged as much as the telecom 
industry is now. I think we're going to have to really provide 
some incentive here to be able to do that.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Fitzgerald?

            STATEMENT OF HON. PETER G. FITZGERALD, 
                   U.S. SENATOR FROM ILLINOIS

    Senator Fitzgerald. Thank you, Mr. Chairman. I've just been 
going back and forth between an Enron hearing over in the 
Governmental Affairs, and I'm back over here. And I--we're 
getting--over in the Governmental Affairs, we're getting 
involved in the minute details of how Enron was engaged in 
fictitious transactions to artificially inflate their earnings. 
My suspicion all along has been that the motivation for Enron 
executives to do what they did was because they were getting 
very rich on their stock options. The top managers at Enron, 
the top 29 cashed in $1.1 billion worth of stock options. Most 
of them left the company and aren't anywhere to be found right 
now. And everybody else was left holding the bag--the long-term 
shareholders, the employees who had their 401(k) life savings 
invested in Enron stock--was left holding the bag.
    Now, I sit here and I see the three of you. Mr. Legere, 
from Global Crossing, the insiders at your company topped the 
insiders at Enron in cashing in stock in the last 3 years 
before the company was put in bankruptcy. Is it correct that 
insiders cashed in $1.3 billion worth of stock options--well, 
stock; I won't say it was all in options--in the 3-years before 
Global Crossing filed for bankruptcy?
    Ms. Legere. Well, that--I mean, I don't know the exact 
number, but it sounds in the right range.
    Senator Fitzgerald. Now, Mr. Winnick, as I understand it, 
the former chairman of the company, alone, realized $735 
million in profits either from selling the stock that he had or 
from earnings realized by buying collars in April of 2001 to 
protect himself from a downfall in Global Crossing's stock, and 
he now lives in a $95 million home in Bel Air called Casa 
Encantada or some--``enchanted house'', or something like that.
    Are you doing anything--now that it's come out that the 
company was artificially inflating their revenues to keep the 
stock price high, are you doing anything to go after the former 
executives who did that? They have a big pot of money out 
there, $1.3 billion in profits recognized. Are you pursuing Mr. 
Winnick for any of those potentially ill-gotten gains?
    Mr. Legere. First of all, at this point there has been no 
findings yet to the allegations against our company. And once 
the SEC finishes its work, you know, we'll know the answer as 
to some of the accounting questions. They're not--there are 
very complex accounting questions yet to be answered.
    We are in bankruptcy process, so the court, the creditors, 
and the banks have total jurisdiction to look over all the----
    Senator Fitzgerald. Is the trustee in bankruptcy pursuing 
any ill-gotten gains by your----
    Mr. Legere. All of----
    Senator Fitzgerald.--previous executives?
    Mr. Legere.--all of the information associated with every 
financial transaction to insiders for the company is provided 
to the court. It's my understanding they're still reviewing the 
information.
    I would make one point, if I could, which is, at this point 
in time, my entire senior leadership team at Global Crossing, 
except for one individual, has never sold a single share of 
stock in the company, or an option, and the one individual has 
sold a very minor amount. So the team that's focused on 
bringing this company forward has very clearly not been 
participating in this situation.
    Senator Fitzgerald. Are you aware of a Mr.--I think his 
name--is it Roy Olafson?
    Mr. Legere. Yes, I am.
    Senator Fitzgerald. He made allegations about a year ago. 
He was a senior vice president or a vice president of the 
company. He made allegations that the company was capitalizing 
recurring expenses, as happened at WorldCom, about a year ago. 
Now, I have articles here where Global Crossing was fighting 
Mr. Olafson in court and saying his allegations were without 
merit. Is that still your opinion, that Mr. Olafson's 
allegation were without merit?
    Mr. Legere. Mr. Olafson's allegations are taken very 
seriously. They happened to be, you know, the substance of the 
investigations by our special committee of our board, and 
they're being taken very seriously. So we're looking at 
everything he outlined.
    Senator Fitzgerald. Is there litigation between you and Mr. 
Olafson right now?
    Mr. Legere. I believe Mr. Olafson has filed a wrongful 
termination suit against Global Crossing, and it is pending.
    Senator Fitzgerald. And are you still fighting that? You 
are, then.
    Mr. Legere. Well, it's a wrongful termination suit that's 
not settled, so----
    Senator Fitzgerald. Well, he's saying he was fired because 
he was blowing the whistle on the improper accounting, and 
you're still trying to uphold his termination and say it wasn't 
wrongful.
    Mr. Legere. The case is pending.
    Senator Fitzgerald. Well, it's pending because you're 
fighting it, is that correct?
    Mr. Legere. We--at this point in time, there's no closure. 
We don't believe he was wrongfully terminated, so we are 
defending ourselves.
    Senator Fitzgerald. Mr. Mohebbi, from Qwest, I gather you 
aren't on this list that appeared in the New York Times where 
insiders at Qwest in the last 3 years, they cashed out $500 
million worth of their stock options, and now they're gone. Are 
you going to go after any of these people? You just came out 
Sunday and said that you're restating the earnings of the last 
few years, that they were overstating revenues, perhaps 
understating expenses, apparently to goose their earnings to 
keep--in my judgment, probably to keep the stock price high to 
keep getting rich. And they did get rich. Your former chairman, 
Mr. Nacchio, cashed in $226 million worth stock options. But he 
has that $226 million. The long-term investors have got 
nothing. They've gotten the shaft. They've been betrayed here. 
Are you going to do anything about it, or are you going to let 
it slide?
    Mr. Mohebbi. Senator, on Sunday, what we said publicly was 
that we have an ongoing investigation, and there are a number 
of other agencies, government agencies, that are looking, 
obviously, at different pieces of the ongoings in Qwest. What I 
can tell you is that the new company, the management of the 
company, if there are any improprieties or if there are any--
there is found any rules--laws to be broken, obviously we will 
be very proactive on that, and I'm sure the government agencies 
will be proactive on that.
    Senator Fitzgerald. Will you try to recover, for the 
company, any ill-gotten gains if you find that there are any?
    Mr. Mohebbi. To the extent that the wrongdoing is 
identified and proven, we have no choice, Senator.
    Senator Fitzgerald. OK. Well, I'm glad--I'm glad to hear 
that.
    Now, Mr. Sidgmore, WorldCom. Ebbers got a loan from the 
company. How much was the loan?
    Mr. Sidgmore. Well, it's now about $400 million.
    Senator Fitzgerald. Are you trying to collect the loan?
    Mr. Sidgmore. We are in the process of supporting all the 
investigations that are going on. And, as I mentioned before--
--
    Senator Fitzgerald. Have you filed suit to collect the 
loan?
    Mr. Sidgmore. No.
    Senator Fitzgerald. Is it being paid back?
    Mr. Sidgmore. No. But let me just--let me just say that 
we're waiting for the results of the investigation. And our 
position on all these matters is if----
    Senator Fitzgerald. Is the loan in default? I'm not asking 
about----
    Mr. Sidgmore. It's not in default.
    Senator Fitzgerald. It's not in default, so he's making 
payments on the loan.
    Mr. Sidgmore. He starts making payments in January.
    Senator Fitzgerald. Oh, no payments are due until January.
    Mr. Sidgmore. That's right. It was a term note.
    Senator Fitzgerald. And there are no defaults now. Even a 
material deterioration in Mr. Ebbers' financial condition 
doesn't trigger a default in the----
    Mr. Sidgmore. Right now we do not believe he's in default. 
OK? Let me just----
    Senator Fitzgerald. Who is responsible for----
    Mr. Sidgmore. If I could just make one point on that, OK? 
We are of the opinion that we will cooperate with all the 
investigations, including our own. And if there are any 
improprieties found, we will go after them, to the full extent 
we can, not only directly, but we will support the Government 
in going after them.
    Senator Fitzgerald. If the loan is not timely paid by Mr. 
Ebbers----
    Mr. Sidgmore. We'll go after it.
    Senator Fitzgerald.--will you sue him to collect the note?
    Mr. Sidgmore. We'll go after it. Yes, we will.
    Senator Fitzgerald. And you'll exercise the full powers to 
get----
    Mr. Sidgmore. Yes, we will.
    Senator Fitzgerald.--a judgment against him, file the 
judgment against his house, take everything he has to get that 
money back for WorldCom.
    Mr. Sidgmore. I guess at this point, I just want to, I 
don't want to go through the details of it, but we will go 
after it, to the full extent we can.
    Senator Fitzgerald. Was there collateral for the note? Just 
the shares of WorldCom within----
    Mr. Sidgmore. No, there's real estate, there are boat 
yards, there are all kinds of----
    Senator Fitzgerald. You have mortgages on----
    Mr. Sidgmore. Yes, we do.
    Senator Fitzgerald.--real estate?
    Mr. Sidgmore. Yes, we do.
    Senator Fitzgerald. So you can foreclose that real estate, 
then.
    Mr. Sidgmore. Yeah.
    Senator Fitzgerald. And you won't shy away from that if he 
is in default.
    Mr. Sidgmore. No, we won't.
    Senator Fitzgerald. I'd urge you to look to see whether he 
isn't already in default just based on a material 
determination----
    Mr. Sidgmore. There are about 400 lawyers looking at that 
right now.
    [Laughter.]
    Senator Fitzgerald.--Thank you, Mr. Sidgmore.
    Mr. Sidgmore. Thank you.
    The Chairman. Senator McCain.
    Senator McCain. Thank you, Mr. Chairman.
    For all three of the witnesses, Mr. Winnick got $735 
million in stock options; Mr. Nacchio, $300 million since the 
1990s; Chairman Roberts, $22 million, at WorldCom. Aren't these 
stock options, these huge compensations, aren't they supposed 
to be based on performance of the corporation? Starting with 
you, Mr. Legere.
    Mr. Legere. Obviously stock options are inherently based on 
performance of the company, because they don't become 
exercisable unless the company's stock price at that point in 
time is greater than the option----
    Senator McCain. Do the other witnesses agree? Do you agree 
that----
    Mr. Sidgmore. Yes.
    Senator McCain.--it's supposed to be based on the 
performance of the----
    Mr. Sidgmore. Yes, absolutely.
    Senator McCain. Then why wouldn't you immediately ask for 
that money back?
    Mr. Sidgmore. Well, I----
    Senator McCain. Because all three corporations are either 
in bankruptcy or, in the case of Qwest, having to restate 
earnings to a tremendous degree, and the stocks have tanked. 
Shouldn't you ask for that money back and distribute it maybe 
to the stockholders or to the employees that have been laid off 
or the retirees whose pensions have been wiped out?
    Mr. Legere. I mean----
    Senator McCain. Did that ever cross your mind?
    Mr. Sidgmore. Well, part of it depends on when the stock 
was sold. I mean, it is possible that you have--predecessor 
companies, for example, did extremely well. People had stock 
options based on this companies. They cashed in those stock 
options and moved on.
    Senator McCain. I'm talking about your companies. I'm 
talking about your companies. Mr. Legere, shouldn't Mr. Winnick 
be asked to give some of that $735 million back that he cashed 
in?
    Mr. Legere. Senator, I believe legally, at this point in 
time, the company has no rights to the money that Mr. Winnick 
took, unless he is seen to do something inappropriate.
    Your broader question really is one associated with the 
pain that's been caused to so many people, which, you know, is 
the hardest part of everything that we've gone through. I don't 
think that's a----
    Senator McCain. A lot of----
    Mr. Legere.--legal question. I think it's a broader 
personal question that I can't answer.
    Senator McCain. A lot of Americans are saying, you know, 
maybe it's legal. And if it's legal, there's something terribly 
wrong.
    Mr. Legere, do you think, can you explain why--I'm sure you 
probably can, but just out of curiosity, do you know why Mr. 
Winnick refused an invitation to testify here today?
    Mr. Legere. I don't know why he wasn't available, Senator, 
but I also, as we looked at the topic of the hearing today, 
with the over 22 years of experience I have in telecom and the 
fact that I'm running the company full force right now, I think 
we believed that I'd be a good witness to come here and 
represent the business.
    Senator McCain. Well, I would have asked him about, he and 
three other members of Global Crossing's board starting a 
company called PCG Telecom that was a subsidiary of Mr. 
Winnick's holding company, Pacific Capital Group. PCG Telecom 
signed a 25-year contract with Global Crossing to provide, 
quote, ``advice on the development and marketing of the 
network.''
    In 1997, Mr. Winnick and three other executives split $7.2 
million for arranging the financing of a portion of Global 
Crossing's network. In March 1998, they split $2 million 
advance against future revenues. In June 1998, Global Crossing 
cancelled the contract and paid Mr. Winnick and the three other 
executives $135 million in stock as a, quote, ``contract 
termination fee.'' Were you aware of that?
    Mr. Legere. All of the intercompany arrangements of the 
company are part of the things that are being investigated by 
our special committee. My focus, since I came here in October, 
was getting this company turned around and saving what we have. 
And a lot of issues of the past are being looked at. Action 
needs to be taken. And right now we have no outcome to those 
investigations.
    Senator McCain. But you didn't know anything about that 
deal.
    Mr. Legere. I was not with the company at that point in 
time. I do know the details, because I have seen the filings 
and I've seen the questions.
    Senator McCain. According to the L.A. Times, a company 
controlled by Gary Winnick is demanding $500,000 in overdue 
rent from Global Crossing. Is he still demanding that from you?
    Mr. Legere. I don't know the status of it, but, as part of 
my turning around the company, I've very aggressively closed 
227 real estate sites, including the ones owned by Mr. Winnick, 
and I used the bankruptcy court proceedings to do some of 
those. If he has filed some suit against those, it's a, you 
know, business transaction, and I don't know the status of it.
    Senator McCain. Did Global Crossing rent office space from 
a company called North Crescent? Do you know anything about 
that?
    Mr. Legere. I believe North Crescent Holdings would be the 
holding company in the Beverly Hills office that I recently 
closed.
    Senator McCain. But as far as you know, Mr. Winnick is 
still asking for $500,000 in overdue rent.
    Mr. Legere. If he's asking, he'll be asking the bankruptcy 
procedure. And if it's his legal right to do so, he can push it 
forward.
    Senator McCain. According to an article appearing in the 
Los Angeles Times, ``Stacks of documents were destroyed at 
Global Crossing in the days before and as well as after the 
company filed for bankruptcy. A Global Crossing receptionist 
said she saw a secretary and a relative of Global Crossing's 
vice president of finance leave a storage room containing a 
shredder at the company's Madison, New Jersey, offices.''
    What's your response to those allegations?
    Mr. Legere. Well, on the--on the whole information 
preservation question, in February of this year, when the SEC 
sent us requests for documents, we immediately, under my watch, 
executed a policy company-wide for full document retention. The 
item that you're speaking of was part of a filing by a 
plaintiff's attorney in our bankruptcy procedure several weeks 
ago. We interviewed the people. We found no merit to the 
allegations.
    But just to be clear, we did a full worldwide review of the 
processes, and we did come forward to all constituents and say 
we found one or two locations in the world where there were 
some documents being destroyed. They were non-critical 
information that was backed up, but yet there was some 
information being destroyed. We disclosed that. It had no 
relevance to the proceedings that had taken place.
    Senator McCain. Mr. Sidgmore, it's been reported that 
former WorldCom CEO Bernie Ebbers will receive $1.5 million per 
year for the rest of his life and the use of WorldCom's 
corporate jets. Is that still an existing arrangement?
    Mr. Sidgmore. That is--that is correct, as of now, and that 
will be looked at in the context of these investigations, as 
well.
    Senator McCain. Mr. Mohebbi, press reports indicate that 
former Qwest CEO Joseph Nacchio sold over $300 million of Qwest 
stock since 1997. This is after the fact that, under his watch, 
Qwest shares tumbled from $65 a share to under $2 today.
    In addition, Mr. Nacchio will reportedly receive a $10 
million severance package. Do you believe that Mr. Nacchio was 
aware of the reported accounting discrepancies at the time he 
was selling millions of dollars of Qwest stock?
    Mr. Mohebbi. Senator McCain, obviously we have ongoing 
investigations in the company. I have no knowledge to tell you 
whether he did or did not know, at this time.
    Senator McCain. You don't--you don't have any idea.
    Mr. Mohebbi. I do not.
    Senator McCain. Yesterday, Qwest announced it would restate 
its results for 2000 and 2001. According to your CFO, Qwest 
uncovered misstatements that led it to book approximately $874 
million in revenue for 2000 and 2001 in lump sums up front, 
instead of over a period of time.
    In your testimony, you acknowledge that certain accounting 
practices were related to the sale of capacity. Can you explain 
why these practices weren't discovered earlier?
    Mr. Mohebbi. Senator, at the time that Qwest accounted for 
these transactions, we did so in good faith and in conjunction 
with our former auditor, in terms of the policies that were set 
for those particular transactions. Earlier this year, what we 
did was we started an internal analysis as a result of the 
increased attention that obviously was put around this area of 
these particular transactions, to review them, each and every 
one, in detail and make sure that we can see whether every part 
of our Qwest policies were followed for each of these 
transactions.
    What we announced on Sunday was that, at this point, we 
have found some of these transactions where our internal 
policies have not been followed. And we went public. We wanted 
to make sure that there was full disclosure on that. And what 
we have stated is that we are going to, throughout this 
process, make sure that everyone knows how we are making 
progress.
    Since the investigation and the process--the analysis is 
not completed, Senator, I can't tell you what were the specific 
reasons for the process and policies not being followed in the 
case of a number of transactions. But we will find that out, 
and we will share that information widely.
    Senator McCain. Is the board contemplating any action 
concerning Mr. Nacchio's retirement package?
    Mr. Mohebbi. Senator, as I was stating, if, during the 
analysis and the work that's being done independently by the 
board-appointed Committee, as well as other agencies that are 
looking at it, if evidence of impropriety has been found, 
obviously then the company and I'm sure as well as other 
agencies will act on that.
    Senator McCain. Wouldn't you act on it, just on the basis 
of stock for the performance of the corporation itself?
    Mr. Mohebbi. Senator, I believe we need to have specific 
evidence of wrongdoing for an action to be taken against 
companies or individuals. And the board of the company and the 
new management----
    Senator McCain. I thought a compensation package was given 
on the basis of performance of the CEO, not whether it's 
illegal or not.
    Mr. Mohebbi. Senator, to the best of my understanding, if a 
legal contract is signed with an individual, then there should 
be legal evidence if you want to----
    Senator McCain. I thank you.
    I thank you, Mr. Chairman. I thank the witnesses for being 
here today.
    The Chairman. The Committee thanks the witnesses for their 
appearance. The record will stay open for further questions.
    The Committee will be at ease, subject to the call.
    [Whereupon, at 1:15 p.m., the hearing was adjourned.]

                            A P P E N D I X

   Prepared Statement of John Rose, President, Organization for the 
    Promotion and Advancement of Small Telecommunications Companies 
                               (OPASTCO)

    Mr. Chairman, I commend you for acting quickly to convene this 
morning's hearing to examine the impact of recent financial failures in 
the telecommunications marketplace. It is not surprising that the focus 
of this hearing is to gather information from three of the largest 
telecommunications providers, WorldCom, Inc., Global Crossing Ltd., and 
Qwest Communications International, each of whom has faced significant 
financial difficulties in recent months. However, it is important for 
Members of this Committee to understand that ``financial turmoil in the 
telecom marketplace'' has far-reaching consequences for hundreds of 
small, rural Local Exchange Carriers (LECs) across the nation and the 
customers they serve in each of your states.
    In contrast to the average Regional Bell Operating Company (RBOC) 
that serves approximately 40 million access lines, the typical rural 
telephone company represented by OPASTCO serves approximately 6,500 
access lines. Nationally, the population density in areas served by 
rural carriers is only about 13 persons per square mile. This compares 
to a national average population density of 105 persons per square mile 
in areas served by non-rural carriers. The ability of rural telephone 
companies to provide affordable and quality telephone service to 
communities such as Reynolds, Georgia; Circle, Montana; Walterboro, 
South Carolina; Burkes Garden, Virginia, and New Florence, Missouri 
relies in large part on revenue streams provided by toll providers such 
as WorldCom to support their high fixed network costs.
    As you know, the recent bankruptcy filing by WorldCom, Inc. has 
resulted in heightened uncertainty throughout the already challenged 
telecommunications industry. OPASTCO members believe that it is 
essential for federal policymakers to take steps to ensure that the 
business failure of WorldCom does not spread to other companies. More 
specifically, OPASTCO members are quite concerned with WorldCom's 
ability to continue fulfilling its obligation to pay inter-and 
intrastate access charges to LECs for their initialization and 
completion of toll calls on the local network. We are also concerned 
with WorldCom's continued ability to contribute their required share to 
the federally-mandated universal service fund (USF). OPASTCO members, 
who already face the operational challenges highlighted above, would 
find it increasingly difficult to make added investments in advanced 
services, such as broadband, were these portions of their revenues 
negatively impacted.
    Mr. Chairman, small, rural carriers rely much more heavily than 
other LECs on access charge and universal service payments. In fact, on 
average, access and USF payments collectively account for over two 
thirds of all revenue received by rural LECs.

                                  The table shown below illustrates this point.
----------------------------------------------------------------------------------------------------------------
                                                                                     Amount Received By Rate of
              Revenue Source               Amount Received By Price-Cap  Regulated    Return  Regulated (Small)
                                                       (Large) Carriers                       Carriers
----------------------------------------------------------------------------------------------------------------
Direct from Customers                      $6.00/Month (residential)                $6.00/Month (residential)
(Subscriber Line Charges)                  $6.80/Month (multi-line business)......  $9.20/Month (multi-line
                                                                                     business)
Interstate Access Charge                   0.55 cents per Minute (for RBOCs)......  2.1 cents per Minute
Payments from                              0.95 cents per Minute (for rural.......
Interexchange Carriers                     Price-Cap Carriers)
Universal Service Fund
(USF) Payments                             0.50 cents per Line/Month                $13.50 per Line/Month
----------------------------------------------------------------------------------------------------------------

    As these statistics demonstrate, were small, rural LECs to 
lose a significant portion of either or both of these revenue 
streams, access charges and/or local rates would need to be 
increased in order to continue to provide quality service. In 
turn, such increases could force many rural residents to drop 
off the network. Therefore it is crucial that these payments 
continue to be met, in order to avoid a broader catastrophe 
that would threaten the ability of rural Americans to remain 
connected.
    First, OPASTCO members believe that WorldCom should be 
required to reasonably guarantee that it will continue to meet 
both its access charge and universal service contribution 
commitments. With regards to its access charge payments, 
WorldCom has asked the U.S. Bankruptcy Court for the Southern 
District of New York (the Court) to classify its access 
obligations as ``Utility Services Payments'' with 
``administrative expense status.'' It is our understanding that 
``administrative expense status'' payments are assigned a lower 
repayment priority than the category of ``Critical Vendor 
Payments.'' Access charge payments are not just another cost of 
doing business for WorldCom. Access is a critical input in the 
provision of toll service; without it toll calls could not be 
initiated or completed. Therefore, any disruption of access 
payments would jeopardize both WorldCom's efforts to continue 
its operations, as well as the reliability of our national 
telecommunications network.
    Second, OPASTCO members feel that it is essential that the 
Court and federal regulators demand that WorldCom specifically 
guarantee that it will continue to make its ongoing 
contributions to the USF. We note that within its bankruptcy 
petitions WorldCom pledges to make payment for all of the 
required ``regulatory fees,'' it incurred up to the July 21st 
filing of its bankruptcy petition. Although WorldCom's 
bankruptcy petitions tangentially reference universal service 
contributions as one of these ``pre-petition regulatory fees,'' 
more direct guarantees from WorldCom would provide the 
marketplace with a greater degree of certainty with regards to 
this issue. Furthermore, it is still unclear as to whether 
additional provisions have been made for those regulatory fees 
incurred in the time since WorldCom's petition was filed.
    Mr. Chairman, WorldCom's payment of its universal service 
contribution simply cannot be treated in the same manner as 
other governmental fees that it may incur. Universal service 
programs ensure that Americans living in rural and high-cost 
areas receive affordable and comparable access to the same 
high-quality telecommunications services enjoyed by citizens 
living in more urban locations. Were WorldCom's ongoing USF 
contributions reduced or disrupted in any way, the obligation 
on other contributing carriers would necessarily increase. 
Consequently, the universal service line-item charge placed on 
other carriers' end-user bills would have to increase 
dramatically to make up the shortfall.
    The Commerce Committee has demonstrated its commitment to 
the ongoing stability of the federal universal service program, 
as was noted during the Committee's June 19th hearing examining 
the future of the universal service program. Clearly, now is 
not the time to introduce any added stresses into the system. 
In our view, it is essential that Congress and the Federal 
Communications Commission ensure that the WorldCom crisis does 
not lead to a broader universal service crisis. Concrete 
assurances must be required of WorldCom vis-a-vis its current 
and future universal service contribution obligations.
    The current financial failures within the 
telecommunications industry are of great concern to many 
Americans. At this time, it is absolutely essential that 
Congress work collaboratively with the courts, key regulators, 
and other stakeholders within the telecommunications 
marketplace to contain the damage that industry financial 
breakdowns, such as the WorldCom bankruptcy, may have. Only by 
doing this can the stability and continued reliability of our 
nation's telecommunications network be guaranteed for all 
American consumers.

Thank you.

                                  
