[Senate Hearing 108-961]
[From the U.S. Government Publishing Office]
S. Hrg. 108-961
TELECOMMUNICATIONS POLICY REVIEW:
LESSONS LEARNED FROM THE TELECOMMUNICATIONS ACT OF 1996
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
APRIL 27, 2004
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
U.S. GOVERNMENT PRINTING OFFICE
82-206 WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South
CONRAD BURNS, Montana Carolina, Ranking
TRENT LOTT, Mississippi DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas JOHN D. ROCKEFELLER IV, West
OLYMPIA J. SNOWE, Maine Virginia
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada RON WYDEN, Oregon
GEORGE ALLEN, Virginia BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
MARIA CANTWELL, Washington
FRANK R. LAUTENBERG, New Jersey
Jeanne Bumpus, Republican Staff Director and General Counsel
Robert W. Chamberlin, Republican Chief Counsel
Kevin D. Kayes, Democratic Staff Director and Chief Counsel
Gregg Elias, Democratic General Counsel
C O N T E N T S
----------
Page
Hearing held on April 27, 2004................................... 1
Statement of Senator Brownback................................... 8
Statement of Senator Burns....................................... 6
Statement of Senator Cantwell.................................... 48
Statement of Senator Dorgan...................................... 45
Statement of Senator Hollings.................................... 2
Prepared statement........................................... 3
Statement of Senator Lautenberg.................................. 6
Statement of Senator Lott........................................ 8
Prepared statement........................................... 9
Statement of Senator McCain...................................... 1
Statement of Senator Smith....................................... 7
Statement of Senator Stevens..................................... 4
Statement of Senator Sununu...................................... 41
Statement of Senator Wyden....................................... 5
Witnesses
Dorman, David, Chairman and CEO, AT&T Corporation................ 10
Prepared statement........................................... 13
Geiger, James, Chairman, Association for Local Telecommunications
Services and CEO, Cbeyond Communications, LLC.................. 22
Prepared statement........................................... 25
Notebaert, Richard C., Chairman and Chief Executive Officer,
Qwest Communications........................................... 20
Prepared statement........................................... 21
Appendix
Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared
statement...................................................... 53
TELECOMMUNICATIONS POLICY REVIEW:
LESSONS LEARNED FROM THE
TELECOMMUNICATIONS ACT OF 1996
----------
TUESDAY, APRIL 27, 2004
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. John McCain,
Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
The Chairman. Good morning. At the Committee's hearing on
Voice-Over-Internet Protocol, or VoIP held earlier this year, I
announced that the Committee was undertaking a series of
hearings this spring on telecommunications policy.
Today's uncertain telecommunications policy landscape,
brought largely by rapidly developing technology, outdated
statutory framework that's not keeping pace, and Federal
regulations mired in litigation requires us to reexamine the
assumptions under which the Telecommunications Act of 1996 was
put into law. The VoIP hearing in February was the first
hearing in this series, and gave Members an opportunity to look
at the catalytic role of technology in our increasingly
outmoded telecommunications policies.
Today, we look at the Act and the lessons we can learn from
it. I look forward to hearing testimony from some of the
telecom industry's finest leaders as they take a look back at
the last 8 years since passage of the Act to identify its
successes and failures.
Tomorrow, we'll take a look ahead and hear testimony from
industry analysts and former Federal and state regulators about
their suggested revisions of telecommunications law, including
alternative regulatory frameworks that we might consider in any
future reform of telecommunications policy. We'll also hold at
least one more hearing in the coming weeks to give industry
executives opportunities to comment on these proposals and
provide their own suggestions for the future.
As I've said many times before and will continue to remind
my colleagues as we proceed down the path of the reform, the
Telecommunications Act was a piece of legislation to a large
degree written by lobbyists that freezes telecommunications
policy in a bygone era already rendered obsolete by technology
advances.
I look forward to working with my colleagues on the issue
of tremendous national importance so that our legal framework
for the next decade is not in fundamental conflict with the
goals upon which our telecom policy is originally based, as
stated in the Act's preamble, ``to promote competition and
reduce regulation in order to secure lower prices and higher-
quality services for American telecommunications consumers, and
encourage the rapid deployment of new telecommunications
technologies.''
I just also want to emphasize, much of the technologies
that have been developed have blurred many of the distinctions
between different types of telecommunications services. I don't
think anybody doubts that. The VoIP illustrates that as much as
any other, but there have been numerous technological changes
in the way that all of our telecommunications is conducted
throughout this nation and the world. So I think it's
appropriate for us to be looking at the legislation that was
passed in 1996 and see what we need to do in the future to
conform with the new realities of telecommunications in America
today.
Senator Hollings?
STATEMENT OF HON. ERNEST F. HOLLINGS,
U.S. SENATOR FROM SOUTH CAROLINA
Senator Hollings. Thank you very much, Mr. Chairman.
Let me, at the outset, hail the success, generally, in
large measure, the competition that has ensued and the
reduction in prices. And since we've got one of the
distinguished witnesses with us still, Mr. Dick Notebaert, and
I'm going to have to leave a little bit early, I ought to try
to use this for a question and try to catch him off base.
[Laughter.]
Senator Hollings. But instead of catching him off base, let
me quote Mr. Notebaert, in February 1996, ``Mr. Chairman, the
real and open competition this bill promotes will bring
customers more choices, competitive prices, better-quality
services. In one day, this industry has gone from 1934 to the
year 2000 and beyond. We believe this bill will rank as one of
the most important and far reaching pieces of Federal
legislation passed this decade. It offers a comprehensive
communications policy solidly grounded on the principles of a
competitive marketplace. It's truly a framework for the
Information Age . . .'' and on and on. It's magnificent.
Well, I agree with Mr. Notebaert. In fact, Mr. Clendennon
said that same thing to me. The very evening that I told him we
had gotten together a conference report, he said, ``That's
outstanding,'' and that he would be in long distance within a
year. They're not yet, 8 years later, to any real extent.
Now, what happens is that they started in, Mr. Chairman--
because I'm very familiar with this thing--instead of going in,
and everything else of that kind, they immediately petitioned
the FCC to get into long distance in their region. We allowed
them into long distance anywhere they wanted to go except where
they had a monopoly. Those monopolistic prices and procedures
were all designed by us, and it worked. America had, at the
time, and still has, the best communications in the world, so
nobody's fussing about that. But they wanted to get into their
region; when they couldn't get into it, they immediately said
that the Act was unconstitutional.
After they went all the way to the U.S. Supreme Court with
that nonsense, they then said, ``Oh, it didn't refer to data,''
they wanted to get into data. Well, we showed where it was 428
times mentioned in the records and in the bill itself, data. So
we had considered data.
Then they wanted to say, ``Ooh''--they had a bunch of rural
fellows on the Commerce Committee, so if we could just extend
it to the rural new Chairman of the Committee--Committee's
subcommittee, Communications Subcommittee--and the whole time,
they came up saying, ``We're just trying to get into rural. Got
to serve rural.'' They were selling off their rural entities
and holdings at the very time that they were saying that they
wanted to get into rural. They have tried every trick in the
book, and, as a result, they have been fined, Mr. Chairman, for
anti-competitive conduct, to the tune of $2.6 billion--$2.6
billion--in fines in the last 8 years. Now, that's been our
problem.
They just absolutely--the Bell companies have just put
their feet down and locked themselves in, and, in essence, they
have gotten into long distance, forbidding anybody to get into
the local. Now, they can get into long distance, in the long-
distance market. If a Bell wishes to lease or purchase long-
distance lines all they need to do, if AT&T's price--they can
negotiate with a host of providers--if AT&T's price is too
high, the Bells can call MCI, Sprint, Level 3, or any other
long-distance provider. So they can get in, the Bell companies,
into long distance. But if a long-distance provider wishes to
bundle local services with customer offerings, there's only one
party he can negotiate with, and that's the local Bell. And if
the wholesale price is too high, that's too bad.
And what is the Chairman of the bloomin' FCC tell them?
``Go ahead and negotiate and work it out.'' Instead of the
public, in the open, setting rates, we've got a Chairman at the
FCC, says, ``Y'all get together on the rates.'' And 57 million
Americans' rates are on the way up under that procedure, I can
tell you that right now. That's our problem.
I'll ask, Mr. Chairman, that my complete statement be
included in the record, and I thank you for holding the
hearing.
[The prepared statement of Senator Hollings follows:]
Prepared statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
Today, the Committee once again reviews the telecommunications
marketplace and, more specifically, what effect the market-opening
provisions of the 1996 Telecommunications Act has had on consumers. As
one who helped to author this law, I believe that it has played an
important role in lowering consumer phone bills and in spurring the
development of innovative communications services.
For the better part of two decades now, our nation has struggled to
promote competition in the telecommunications marketplace. With Judge
Greene's assistance in 1984, we took an important first step by
breaking up Ma Bell into AT&T and the 7 regional Bell companies. At
that time, fearing that the Bell companies might use their significant
market power in local markets to subsidize their entry into new
markets, Judge Greene restricted the bells from entering the long
distance and manufacturing markets.
Seen in its proper context then, the 1996 Act was merely the next
logical step in our nation's effort to free telecommunications markets
from the stranglehold of monopoly power. Specifically, the idea was to
allow the Bell companies to compete in long distance markets, but to
prevent them from providing ``in region'' long distance until after
they had opened their local markets to competition.
We all had high hopes, particularly given that all the major
companies were at the table and signed onto the Act. If everyone played
by the rules and kept their promises, the goal would be accomplished.
But unfortunately, the ink on the 1996 Act was hardly dry before the
Bells sought to renege on the very bargain that they had struck.
First, they challenged the constitutionality of the law they helped
draft. Second, instead of competing, the seven Bells combined into four
monopolists that today control the overwhelming share of local access
lines. Third, they used every trick in the book to avoid meeting their
obligations to competitors, and have been fined for their anti-
competitive conduct to the tune of $2.6 billion over the past 8 years.
The effect of this foot-dragging is pronounced--particularly now,
since the Bells have been cleared to provide long distance services in
all states. Indeed, eight years after passage of the 1996 Act, CLECs
have acquired less than 15 percent of last mile lines. In contrast,
since December 1999, when the FCC granted its first approval for Bell
provision of ``in region'' long distance services, the Bells have been
able to capture over 30 percent market share in long distance
services--with Verizon now ranking as the third largest long distance
provider. This disparity does not happen by accident. It happens
because of continuing Bell resistance to FCC rules designed to open
their local markets to competition.
The FCC's current ``laissez faire'' attitude toward ensuring
competitive access is only making a bad problem worse. Reliance on
``marketplace'' negotiations to ensure competitive access to local
loops won't work in the absence of a ``market'' to begin with. Consider
the difference. In the long distance market, if a Bell wishes to lease
or purchase long-distance lines to enable its offering of a local/long
distance service ``bundle'' to its customer, it can negotiate with a
host of providers. If AT&T's price is too high, the Bell can call MCI,
Sprint, Level 3, or any other long haul provider.
In contrast, if a long distance provider wishes to bundle local
services with its customer offerings, there is only one party that it
can ``negotiate'' with--the local Bell. If the wholesale price offered
by the Bell is too high, too bad.
Ultimately, this disparity highlights the problem with the FCC's
current stance toward local competition and its recent call for
additional marketplace negotiations over the price of access to local
networks. In the abstract, there is nothing wrong with more
negotiations. Indeed, parties may value the certainty of a negotiated
price over the uncertainty of one set by regulation. But in the absence
of alternative providers, we, as policymakers, should not allow the
Bell Companies to unilaterally dictate the terms of local competition.
To protect the public interest, the FCC must take a firmer hand to
ensure that the negotiation process is open and above board, and that
all interconnection agreements reached by the parties are filed with
the appropriate state regulators as required by law.
Eight years ago, Congress emphatically stated that it believed in
competition. We should not abandon that belief. I Thank the witnesses
for joining us today and look forward to their testimony on this vital
issue.
The Chairman. Thank you very much, Senator Hollings.
Mr. Notebaert, a quote from your press release reminds me
of my beloved friend, Morris Udall's politician's prayer, ``May
the words I utter today be tender and sweet, because tomorrow I
may have to eat them.''
[Laughter.]
The Chairman. Senator Stevens?
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Mr. Chairman, I welcome this hearing, and
Mr. Dorman, Mr. Notebaert, and Mr. Geiger. And I do think we
have to look back at the 1996 Act, but we have to look forward
to see where we're going. And I do hope we have series of
hearings that deals with the subject. As a matter of fact, I'd
like to have some consensus meetings where we sit around the
table and try to get the Members to understand the technology
we're trying to deal with before we rush in to find new ways
to, you know, legislate regarding it.
But, Mr. Chairman, this morning is the memorial service for
my late good friend, Daniel Boorstin, who was the former
Librarian of Congress. As the Joint Committee Chairman, I must
leave, and I do thank you for holding the hearings and look
forward to the other hearings.
Thank you very much.
The Chairman. Thank you, Senator Stevens. And please extend
our sympathies to his family. Thank you.
Senator Wyden?
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman. And I, too,
appreciate your holding these hearings.
It is extraordinary when you think, for example, that the
1996 Act barely mentions the concept of the Internet. We had
all of these staggering changes in the last 8 years. It took 60
years to do the first rewrite. And now, all of a sudden, the
last 8 years, as a result of technology, we've got to look
again. And these are three areas that I have a special interest
in and I would hope we take a look at.
The first stems from our hearing on voice-over. It's pretty
clear that under the current Act, the rules focus on a
particular type of service, but in the IP world, in the
Internet Protocol world, different services are all just
indistinguishable bits of data traveling over the same network.
So my sense is, as we look to the future, what we really ought
to be doing is trying to frame policy around the concept of a
network, and try to really be agnostic with respect to
services. So I hope that we'll pursue that idea.
The second area that I'd like to see us look at, Mr.
Chairman and colleagues, is on the issue of universal service.
It doesn't seem to me to make sense to keep pouring 100 percent
of the subsidies into old-fashioned phone-only networks. And if
the future phone service is over broadband, I want to make sure
that my constituents have access to those kinds of services.
And I would hope that we would look at making broadband the
focus of universal service in the future.
Finally, the current Act makes lots of distinctions between
interstate services and intrastate services, or between local
and long distance, but these distinctions are also breaking
down. A lot of phone companies now offer buckets of minutes
that don't distinguish between local and long distance, so I
would hope that we would look at this issue, as well.
The title of this hearing, Mr. Chairman, ``Lessons Learned
from the 1996 Act,'' it's pretty clear that one lesson is that
monopolies do not get toppled overnight. So there is work to be
done here, and I look forward, as you do, to working, as we've
done in the past, in a bipartisan way.
The Chairman. Thank you.
Senator Burns?
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Thank you, Mr. Chairman, and thank you for
starting these hearings of hearings.
We've looked at the 1996 Act, and I welcome our guests this
morning. I'm struck by Mr. Wyden's words that the Internet
wasn't mentioned, and how can we distinguish signals? My gosh,
we talked nothing but digital then. We knew we had emerging
technology that you're not going to distinguish whether it's
voice or data or whatever it is because it is a movement of
numbers, ones and zeros. And that's going to--and we talked
about that a lot.
In fact, there was a section put in that Act for buildout
and the promotion of broadband throughout. I mean, you don't
have to sit there and say ``that's the Internet,'' as such. But
we talked a lot about broadband services and digital technology
in order to move--and fiber optics and all of these
technologies that were coming. And so I think maybe we didn't
hear the message when we were doing it because there was a lot
of things flying around here at that time.
We've got two guests today, Mr. Dorman and Mr. Notebaert,
and they do a lot of business in my state of Montana, and I
would imagine--Mr. Dorman has run an Internet startup group, a
joint venture between British Telecom and AT&T, and now AT&T.
Mr. Notebaert now heads a company that was formed when a long-
distance provider created in the wake of the 1996 Act through
U.S. West. I suspect both of them did not perceive where they
would be today in 1996 because of the evolution of the Act and
the actions of people in the industry.
And I would say there is tremendous change in the
communications, and most of it has been--in fact, the greatest
majority of it has been--the consumer has been pretty well
treated in this. Because we can look at prices of services now
compared to 1996.
So the ongoing challenges faced by our witnesses here today
in their own careers, in a sense, is indicative of what
industry has been through over the past 8 years, massive and
ongoing changes.
But it is time we looked at the Act and take a look in the
rearview mirror just a little bit. But we'd better not take our
eyes off of the future, because there's going to be some more
changes out here before this is all over, and it is an
evolution that we welcome. I think it's good for the consumers,
I think it's good for the investors, and the possibilities are
still unlimited in the IT and telecommunications industry.
And I thank the Chairman.
The Chairman. Thank you, sir.
Senator Lautenberg?
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Thanks, Mr. Chairman. It's certainly
appropriate to have this review.
I think so much that was said in those days, regardless of
the understanding of the then-current technology, had aims
that, it seems to me, are still unmet. We've got to take a look
and see whether the 1996 Act is promoting or, in some manner--
competition between providers that are necessary to produce the
lower prices and better service to the public. And, again, I
think that that answer is still being debated, challenges all
over the place. And I hope that we can make sense, ultimately,
for the public interest, and that is to give them the services
at the lowest prices possible. The 1996 Act opened local
telephone markets to competition, thereby, we thought, doing
away with the historical monopoly in the telephone business.
Now, my home state of New Jersey, the most densely
populated state in the country, consumers have benefited from
competition in local phone service. They can choose between
Verizon, AT&T, MCI, Sprint, and other smaller independent
carriers. As a result of this competition, over 800,000 New
Jersey consumers have chosen carriers other than the Baby Bell
carrier which had operated in a regulated monopoly environment
for so many years. And I think this is a positive change.
Since the breakup of the Bell system in 1984, there have
been substantial reductions in long-distance telephone rates,
with charges plunging from nearly $3 a minute to less than 10
cents a minute. Similarly, as a result of the 1996 Act,
American consumers now can choose from a host of unlimited
local and long-distance bundled offerings and features for a
flat rate of roughly $50 or $60 a month, which is not a modest
sum by any standard. For instance, consumers can buy a plan
that provides unlimited local and domestic long-distance calls,
unlimited calls to Canada, and a choice of features, including
caller ID, call waiting, repeat dialing, call forwarding,
three-way calling, et cetera.
However, even with some competition, local telephone rates
are still too high. Local telephone rates for New Jersey, which
are regulated by the State Board of Public Utilities, have been
frozen since 1985, but the subscriber line charge, which is set
by the Federal Communications Commission, has more than
tripled, from $2 in the late 1980s to anywhere from $6 to 9.50
a month in some states.
And even though the Act has been mired in legal challenges
since its enactment, I think there is a consensus that Congress
did the right thing by opening both local and long-distance
telephone markets to competition. The disagreement is whether
or not the 1996 Act has been properly implemented. And I hope
that today's witnesses, especially Mr. Dorman, the Chairman and
CEO of AT&T--headquartered in New Jersey, I might add--will
clarify for us some of the implementation issues that we should
consider addressing when it comes to the 1996 Act and
telecommunications generally.
I thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Smith?
STATEMENT OF HON. GORDON H. SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Thank you, Mr. Chairman.
It's clear, from comments of all my colleagues, that we've
learned much from the 1996 Act, and many revisions are
appropriate. I believe one of those is to fix a very serious
inequity in the current funding mechanism for the Federal
Universal Service Program. It's currently unsustainable.
Universal service is based on the percentage of long-
distance charges. But as our witnesses can attest, long-
distance rates have fallen to almost nothing, and the
distinction between long distance and local is vanishing. If we
do not act soon, universal-service funding will soon fall short
of its needs, and we cannot allow this to happen.
To cite another serious program in the Universal Service
Program, it is supposed to help ensure affordable telecom
services to the majority of rural Americans. It is grossly
unfair, and needs to be reformed. The USF program for rural
areas, served by larger carriers, excludes 40 states from
eligibility, including Oregon, Arizona, South Carolina, Texas,
Maine, Kansas, Illinois, Nevada, Louisiana, North Dakota,
California, Florida, Washington, and many others; in fact, most
of the states represented in this Committee.
I've introduced legislation to fix this program, and my
bill has been endorsed by a broad bipartisan coalition of more
than 50 independent groups and leaders. I appreciate your
support on this issue, Mr. Chairman, and I'm also committed to
seeing this inequity fixed sooner rather than later.
In sum, we've got a lot of work before us, and I applaud
you for getting started, and look forward to our witnesses
today.
Thank you, sir.
The Chairman. Senator Sununu?
Senator Sununu. I have no opening statement.
The Chairman. Senator Brownback?
STATEMENT OF HON. SAM BROWNBACK,
U.S. SENATOR FROM KANSAS
Senator Brownback. I'm going to have to leave, Mr.
Chairman, for a hearing on the appointment of Ambassador
Negroponte to Iraq, so I apologize to the witnesses and to the
Chairman. I'm going to have to leave for that shortly. But I
think this is an important set of hearings that we need to
engage.
Thank you.
The Chairman. Thank you.
Senator Lott?
STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Senator Lott. Thank you, Mr. Chairman, I ask consent that
my statement be made a part of the record.
The Chairman. Without objection.
Senator Lott. I want to thank you for having these
hearings. I think, certainly, we need to be taking a broad look
at this 1996 Act and begin thinking now about what we need to
do to upgrade and modernize that Act to reflect what's
happened. So much has changed since 1996, it's breathtaking,
and so we have a responsibility to think about where the future
is going to take us.
Thank you, Mr. Chairman.
[The prepared statement of Senator Lott follows:]
Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
Mr. Chairman, thank you for holding these important hearings this
week in order for the Committee to begin the process of reviewing our
nation's telecommunications policy. A consensus is developing to begin
a comprehensive reassessment of telecommunications policy in our
country, and as we move into the 109th Congress, this review seems
likely to be one of our top priorities in this committee and in the
Congress.
It is important to examine both the positive aspects of the 1996
Telecom Act, and any of its provisions which may not have been as
productive as we had hoped, as we look ahead to new telecommunications
legislation in the future. As one of the principal Senators involved in
the passage of the 1996 Telecom Act, I have followed the implementation
of this legislation closely and plan to be involved in the intricacies
of this comprehensive review.
While only eight years have passed since the passage of the 1996
Act, significant changes have taken place in the telecom sector. Some
of these changes were encouraged by the text of the 1996 Act, such as
the opening of local telecom markets to competition and the reciprocal
entry of the incumbent carriers into the interstate long distance
business. I am pleased that Section 271 approval has been granted in
every state. This development indicates that the various state public
service commissions and the FCC have found that the requirements of the
fourteen point checklist, which I helped to craft, are being met. As a
result of the completion of the Section 271 approval process, consumers
in every state now have more competitive options for both local and
long distance service. Congress will need to carefully continue to
assess the status of telecom competition as future decisions are made
regarding the rules under which future competition will proceed.
Other changes that have taken place in the telecom sector during
the past eight years have been driven by technological developments.
Since the passage of the 1996 Act, the Internet has become a pervasive
and indispensable piece of our communications network, with the rapid
evolution from early dial-up service to broadband access today. As a
result, now ``Voice over Internet Protocol'' promises to revolutionize
the way calls are made in this country and throughout the world.
State-of-the-art upgrades have been made to the traditional
wireline infrastructure in the country, including the cable industry's
push to upgrade their systems to enable digital transmission.
Furthermore, the wireless communications industry has grown and matured
dramatically. These technological developments have blurred the
historical lines between different types of telecommunications
services, and Congress will need to carefully review the way regulatory
policies are applied when the same or similar services are being
offered over the various different distribution platforms in the
telecom marketplace.
Additionally, there are other challenges which we will need to face
as we consider new comprehensive telecom policy legislation. It is
critical that telecommunication services remain universally available
to all Americans. My home state of Mississippi is a rural state, and
meeting the unique challenges and expenses in the provision of
telecommunications services in my state has been made feasible because
of the Universal Service Fund. Congress will need to thoroughly study
the Universal Service Fund to insure that it is funded through a fair
and stable framework, and to make certain that disbursements are made
according to carefully defined priorities.
Mr. Chairman, there are many other aspects of telecom policy--in
addition to those I have touched on today--that we will need to examine
as we move forward on legislative action in the coming Congress. We
should learn as much as possible from the past and the present as we
seek to establish the best guidelines for the future in this important
area of our economy. I am glad that we are beginning this important
review, and I will look forward to hearing the testimony of the
witnesses.
The Chairman. Thank you.
I want to welcome our witnesses today, Mr. David Dorman,
the Chairman and Chief Executive Office of the AT&T
Corporation; Mr. Richard Notebaert, Chairman and Chief
Executive Officer of Qwest Communications; and Mr. James
Geiger, Chief Executive Officer, Cbeyond Communications.
I want to welcome the witnesses today. I thank you for
taking the time from your schedules to be with us.
And we'll begin with you, Mr. Dorman, and thanks for coming
back.
STATEMENT OF DAVID DORMAN, CHAIRMAN AND CEO,
AT&T CORPORATION
Mr. Dorman. My pleasure.
Mr. Chairman, Senator Hollings, and Members of the
Committee, thank you very much for inviting me to speak with
you today.
At AT&T, we do see a bright future for the telecom
industry, as long as competition remains the guiding principle
and pro-competition rules are enforced in a stable and
predictable manner.
My message to you today is that, whatever one thinks about
the 1996 Act, it has begun the very challenging process of
opening the telephone exchange market to competition.
Competition, thus far, has brought consumers billions of
dollars in savings that would not otherwise have been possible.
The D.C. Circuit's recent decision invalidating the FCC's
pro-competitive framework poses a mortal threat to this
progress. Left in place, that decision could harm millions of
consumers and businesses, eliminate thousands of jobs, and
hamper investment in new technologies.
The goals of the 1996 Act have proven more difficult to
attain than many of us had hoped; but they should be
reinforced, not abandoned. Any changes to the Act must preserve
the consumer benefits already realized today, and assure that
competitors have sufficient customer base to allow investment
in and widespread deployment of innovative new technologies,
especially Voice-over-Internet Protocol, or Voice-over-IP.
Voice-over-IP holds great promise, but ensuring the
appropriate regulatory framework for VoIP is critical. VoIP
must be allowed to develop free of burdensome regulation. The
intercarrier compensation and universal-service systems must be
reformed to ensure that universal service is preserved and that
all providers contribute on a fair, nondiscriminatory, and
technologically neutral basis without requiring innovative
competitors to contribute disproportionately or otherwise
subsidize old technologies or incumbent carriers. Let me
provide more detail on each of these points.
The Telecom Act of 1996 had the extraordinary and
unprecedented goal of eliminating monopoly in the local
exchange. Congress did not, however, predict and protect
against factors that have complicated competitive entry. The
Bells consolidated into four much larger companies, and
resisted attempts to implement the pro-competitive provisions
of the Act. Access to capital became seriously constrained
after the burst of the dot-com bubble, and fraud crippled the
industry.
We've done our best to surmount these barriers and become a
viable player in the market for local telephone service. Today,
AT&T provides local service to more than 4.3 million
residential lines and 4.5 million business lines, including one
million small-business lines. We do so through a combination of
facilities-based entry and the lease of Bell network elements,
which are two of the three competitive pathways established by
the 1996 Act.
We've invested over $26 billion in our own local facilities
since 1996, and we've invested tens of billions more in our
long distance, network, cable, and wireless facilities.
Facilities-based service, however, requires a significant
customer base to be economic and to reduce the risk of network
deployment. Until we can develop that local customer base, a
strategy that relies solely on facilities-based competition is
simply not feasible. UNE-P provides a stepping stone to
facilities-based competition by enabling competitors to build
scale needed to deploy facilities wherever possible.
Competition has meant more choices, better service, and
lower prices for tens of millions of consumers. In response to
competition, the Bells have had to lower their prices, often
for the first time, and sometimes by as much as one third.
Consumers and small businesses are savings billions of dollars
annually because of competition. Competition has also resulted
in bundled services. Bear Stearns recently estimated that over
52 million consumers in competitive markets have switched to
one-stop shopping bundles of service, at a savings in the range
of $7 billion per year.
Despite their rhetorical support of facilities-based
competition, the Bells have repeatedly tried to eliminate UNE-
P. As a result of a lawsuit initiated by the Bells, the Court
of Appeals for the D.C. Circuit in March in validated the FCC's
rules, ensuring that competitive carriers can lease unbundled
network elements, when they otherwise would be unable to
compete effectively in the local markets. The decision sets a
nearly insurmountable presumption against competitors seeking
to use these unbundled elements.
The Bells were also successful in their efforts to uphold
the FCC rule eliminating competitors' access to broadband
facilities, a ruling that will impair broadband competition and
inhibit competitors' ability to invest in facilities for voice
competition.
We do not like being dependent on a reluctant supplier for
our critical service inputs. Until we're able to move to
alternatives, however, we remain dependent on the Bells for
leased use of their network. We have tried for years to
negotiate access to these facilities commercially, and we
continue that effort today, particularly given the FCC
Commissioner's recent request that we engage in intensive
efforts during a 45-day timeout in the legal proceedings. Given
the Bells' persistent market power, these negotiations will be
challenging, but AT&T is committed to pursuing the hope of
preserving competition in the local market. We are negotiating
in good faith to secure economically reasonable rates that
allow us to continue providing competitive local service
alternatives to customers.
While Mr. Notebaert and Qwest, commendably, have stepped
forward to agree to the presence of an arbitrator, the
remaining Bell companies have not, which could make a
satisfactory outcome more difficult. Indeed, I'm afraid that
there is a misconception among some about the purpose of these
negotiations. These negotiations must not be about ending mass-
market telephone competition, and AT&T will not accept
wholesale rate increases that achieve that end. Rather, we
believe that current negotiations are intended to find mutually
acceptable commercial wholesaling arrangements that permit
competition to continue, and facilitate a transition to
facilities-based competition, wherever feasible. That is our
focus in the negotiations, and that is what would best serve
our nation.
It is critical that the government retain the option of
Supreme Court stay and review of the D.C. Circuit decision. The
decision is wrong as a matter of law, and it's bad policy for
this Nation. The prospect of Supreme Court review of that
decision is the most significant reason for the Bell companies
to negotiate right now. The stakes for consumers, small
business, and my company, AT&T, are too high to risk a court
vacatur of the FCC rules in hopes that the Bell companies,
after 8 years of opposition, will negotiate commercially
reasonable access arrangements. Given this Committee's long
history of promoting competition, your support at this time to
ensure that this decision can go to the Supreme Court if
negotiations fail is absolutely critical.
Failing to reach a commercially reasonable agreement, and
failing to appeal, would return consumers to the monopoly
environment that existed before the 1996 Act, and would carry a
heavy price. It would mean disconnecting millions of homes and
businesses from their chosen carrier, taking away lower prices
and more responsive services those customers gained from their
choice, and the loss of a significant driver for our economy--
competitive incentives to deploy and promote the use of
broadband.
The importance of pro-competitive policies also go beyond
today's greater choices and lower prices. Carrier's incentives
to invest in new technology and services are substantially
diminished by regulatory instability or market dominance by a
given provider. Creating an environment in which companies feel
confident to invest and deploy new service is particularly
critical now, when existing new technologies, or exciting new
technologies like Voice-over-IP, are emerging.
VoIP holds the promise of choices and capabilities far
beyond today's offerings. It may very well be that a killer
application could drive widespread broadband adoption for which
we've all waited. And an important step to our nation's
economic revival. A recent study concluded that Voice-over-IP
could save the government alone three- to ten-billion dollars
annually, up to 60 percent of their current phone bills.
I must add that we should not think of Voice-over-IP as
simply cheaper phone service. It will deliver lower cost, but
with a host of new user features and options that go well
beyond the notion of ``plain-old telephone service,'' or POTS.
If competitors cannot remain in the market today, they will
not be able to maintain the scale to make this service a broad
reality in the near future. And without the threat of losing
customers to a VoIP rival, the Bells will have no incentive to
invest in and deploy this new technology themselves.
AT&T fully intends to lead the Voice-over-IP revolution. We
have invested heavily to make the necessary changes to our
network, some three billion in 2003 alone. We already provide
Voice-over-IP service to hundreds of businesses, and we have
become commercial deployment to consumers. We have announced
that we will provide VoIP service in the top 100 markets in the
country this year. But without UNE-P, we cannot retain and grow
our customer base; and without a stable customer base, Voice-
over-IP deployment would become riskier and most costly.
AT&T welcomes the fact that Members of this Committee and
Congress, such as Senator John Sununu and Congressman Chip
Pickering, support a hands-off approach to VoIP. We recognize
that providers of VoIP services must meet important social
policies. Access for the disabled, enabling public safety, 911
response, and the need for law enforcement to trap and trace
calls when necessary are technical and operational issues that
the industry can resolve, and AT&T is taking the lead in
resolving them.
Let me also assure the Members of this Committee that
nothing about VoIP threatens universal service. The problem
with the Universal Service Fund is, it is supported by a
shrinking base of interstate revenues, as Senator Smith
suggested, for traditional telecom services. A growing fund
with a shrinking base cannot be sustained. We think Voice-over-
IP providers should contribute to universal service in a
sustainable, fair, and nondiscriminatory manner.
There are no fewer than six access-charge methods in place
for the use of the Bells' local networks. These differences
create a range of unintended consequences, including favoring
classes of technologies and competitors over others. The
largest threat to VoIP is the application of 20th century
access charge regulations to a 21st century technology. The
access-charge scheme was developed decades ago, and just
doesn't work today. The FCC has promised for years to overhaul
its intercarrier compensation regime, but it continues to
address these issues on a piecemeal and discriminatory basis.
The far-better course would be a comprehensive reform of
intercarrier compensation and universal-service regimes to
eliminate market distortions and opportunities for regulatory
arbitrage while protecting and advancing this nation and my
company's proud heritage of universal service.
In conclusion, Mr. Chairman, this Committee has a long
commitment to promoting competition. You and your colleagues
have provided the leadership necessary to move the
telecommunications industry from the notion of natural monopoly
to real competition. Today, we must call upon your leadership
again. The competitive vision of the Telecom Act is being
fulfilled, but it needs the continued support of lawmakers and
regulators if all of its ambitious goals are to be met. If
local markets remain open to competition, consumers,
businesses, and the American economy can all win.
Thank you, again, for inviting me here today, and I look
forward to your questions.
[The prepared statement of Mr. Dorman follows:]
Prepared Statement of David Dorman, Chairman and CEO,
AT&T Corporation
Mr. Chairman, Senator Hollings, and Members of the Committee, thank
you very much for inviting me to speak with you today regarding AT&T's
view of the state of competition eight years after enactment of the
1996 Telecommunications Act. At AT&T, we see a bright future for the
competitive telecommunications industry as long as competition remains
our guiding principle and pro-competition rules are enforced in a
stable and predictable manner.
I speak to you today from a unique perspective. When the Act was
passed, I headed Pacific Bell, one of the incumbent Bell companies that
today is part of SBC. In the post-1996 Act environment, I spent almost
two years at PacBell and SBC, and have been with AT&T since December
2000. So I have seen how the Act's passage has affected the Bells, and
how its implementation has affected the competitors.
My message to you today is that whatever one thinks of the 1996
Act, it has begun the very valuable process of opening the telephone
exchange market to competition. It is indisputable that competition has
brought residential and small business customers savings and choices
that would not have been possible without the Act. Studies have shown
that the competition produced by the Act has resulted in savings to
consumers and businesses of billions of dollars per year. The D.C.
Circuit's recent decision invalidating the FCC's pro-competitive
framework poses a mortal threat to this progress, however. Left in
place, that decision could harm millions of consumers and businesses,
eliminate thousands of jobs, and hamper investment in new technologies.
The goals of the 1996 Act have proven more difficult to attain than
many of us--and many of you--may have hoped, but that means they should
be reinforced, not abandoned. Any changes to the Act must maintain a
strong, pro-competitive framework to preserve and extend the consumer
benefits realized today, and to ensure that competitive national
carriers have a sufficient and growing customer base to allow and
justify our investment in and widespread deployment of innovative new
technologies and services, especially Voice over Internet Protocol
(``VoIP'').
Firm resolve in enforcing the pro-competitive policies of the 1996
Act is a necessary first step on the path to VoIP, but ensuring the
appropriate regulatory framework for VoIP itself is equally critical.
VoIP must be allowed to develop free of burdensome regulation. In
particular, the FCC should be encouraged to resist the insistence of
the Bell companies--by far the largest telephone companies in the
country--that they need subsidies in the form of inflated access
charges from nascent VoIP providers. The intercarrier compensation and
universal service systems must be reformed to ensure that universal
service is preserved while at the same time not requiring new and
innovative competitors to contribute disproportionately to universal
service or otherwise subsidize incumbent carriers.
Let me provide more detail on each of these points.
Attaining the Ambitious Goals of the 1996 Telecommunications Act Has
Proven Difficult
At its core, the Telecommunications Act of 1996 had an
extraordinary goal. It sought to eliminate monopoly in the local
telephone exchange, the last mile facilities that connect virtually
every home and business to the public switched telephone network.
To achieve the goal of local competition, the Act offered the
incumbent local telephone monopolies a remarkable trade. In exchange
for opening their local monopolies to competition in accordance with a
``competitive checklist,'' the Bell telephone operating companies would
be permitted to enter into markets from which they had previously been
excluded. It was widely believed that granting the Bells a clear path
to provide wireline long distance services would give them the
incentive to open their local markets to competition. The
demonopolizing of local service and Bell entry into long distance was
the mutual quid pro quo.
Creating a competitive local market, however, proved more difficult
than first imagined. Building a local telephone network with no
subscribers to fund that construction is incredibly risky and
technically challenging. Entering a business in competition with an
established provider whose network has ubiquitous capacity and was
built with ratepayer funds at a guaranteed profit is even riskier.
Indeed, even in 1996 many believed that local telephone service was a
natural monopoly.
Recognizing the difficulty new entrants would face, Congress
established several pathways for competitive entry. The Act allowed
providers to interconnect their networks with those of the incumbents,
to lease unbundled network elements (``UNEs'') from the incumbents, and
to resell the services of the incumbents.
Congress did not, however, predict and protect against factors that
have complicated competitive entry. The Bells have resisted and
challenged nearly every attempt to implement the pro-competitive
provisions of the Act. They have spent years playing their two hole
cards--price and process. And with them, they've largely managed to
keep competitors out of their monopoly. Their strategy of resistance,
delay, and litigation has enabled them to maintain their dominance of
the local telephone market, while dozens of their competitors have been
forced out of business.
Further, Congress could not have predicted that the Bells would
become even more formidable opponents in the few years after the Act
was passed. Rather than enter each other's territories to compete, as
Congress anticipated, the seven Bell companies have consolidated into
four, much larger companies wielding even more market power.
Nevertheless, the FCC has granted the Bells the enormous competitive
benefit of long distance entry in every state. To obtain that
authority, the Bells relied upon the ability of competitors to use
leased network elements--the very competition they now seek cynically
to eliminate--as evidence of the competition that was a predicate of
their first being allowed to enter the long distance market.
Other events, too, have made competitive entry more difficult.
Access to capital has become seriously constrained. The enactment of
the 1996 Act spurred investment in new telecommunications facilities
and services far exceeding the historical norm. From 1980 to 1995, the
industry average investment was $38.8 billion annually and there was an
average annual investment growth rate of 2.8 percent. Investment after
the Act passed soared--growth averaged 22.3 percent annually and the
industry invested on average $95.3 billion per year. In the year 2000,
competitive carriers' capital expenditures totaled nearly 64 percent of
their revenues. The burst of the dotcom bubble essentially eliminated
access to needed capital, however. Numerous competitors declared
bankruptcy or shut down operations. For many of those that continued,
stock prices plunged. While telecommunications companies captured an
average of two billion dollars per month in initial public offerings in
1999 and 2000, they virtually ceased to be able to raise money in IPOs
in 2001. As competitors scaled back their plans, consumers were left
with fewer choices.
In addition, fraud has crippled the telecommunications industry.
Competitors were significantly harmed at an already difficult time for
the telecommunications industry by fraudulent practices that overstated
both profitability and demand for long-haul telecommunications
facilities and services. This led to crippling overcapacity, cost
investors tens of billions of dollars, and imposed incalculable costs
on the industry and the economy. At bottom, the confluence of events
caused a severe misallocation of resources and investment throughout
the telecommunications industry that has forever changed the complexion
of the marketplace.
AT&T's Experience
At AT&T, we have done our best to surmount these barriers and
become a viable player in the market for local telephone service. I am
pleased to say that today we provide local service to more than 4.3
million residential lines and 4.5 million business lines, including 1
million small business lines. We have done so through a combination of
facilities-based entry and the lease of Bell network elements, both
means established by Congress in 1996 and rules crafted by the FCC as
instructed by the Act.
First, we have invested billions of dollars in our own local
facilities since 1996. In 1998, we purchased Teleport, a facilities-
based competitive local service and access provider, for $11 billion to
provide local and long distance service to enterprise customers. Since
then, we have spent an additional $15 billion dollars on local
facilities. As of September 30, 2003, we had invested in 158 local
voice switches, 20,600 route miles of metropolitan fiber, and 8,400
fiber rings in 67 metropolitan statistical areas covering 91 cities in
49 states. All these investments have made AT&T the largest facilities-
based competitive local exchange carrier in the country in terms of
revenue. Further, all these sums are in addition to the tens of
billions we invested in our long distance network, cable and wireless
facilities.
In both the business and residential markets, however, facilities-
based service requires a significant concentration of demand to be
economic. To the extent multiple networks can ever economically
compete, a significant customer base is needed to justify network
deployment and reduce the risk of such deployment. Until we can develop
that local customer base, a strategy that relies solely on facilities-
based competition is simply not economically feasible. MCI and Sprint
recognized this 25 years ago when they entered the long distance
business by reselling AT&T's service. For the same reason, the Bell
companies today are using the networks of AT&T and the other
established interexchange carriers to offer long distance service
rather than waiting to build their own long haul facilities.
There are other substantial challenges to facilities-based
competition. Eight years after passage of the Act, the Bells still have
substantial unique advantages over competitors in providing facilities-
based service. For instance, only the Bells enjoy unfettered use of the
public rights-of-way in most places, while a competitive carrier must
negotiate--often over many months or even longer--a rights-of-way
agreement with the municipality in which it seeks to provide service
before it may even begin building its network. The Bells also have
exclusive access to many multi-tenant buildings and have access to
capital at much lower interest rates than new entrants. All these
disparities between the incumbents and their competitors give the
incumbents a substantial cost advantage over new entrants.
In the face of these economic challenges and the incumbents' legacy
advantages, the only viable means of competitive local market entry in
the mass market has proven to be the lease of capacity on the incumbent
carriers' networks. Leasing unbundled network elements from the Bell
companies and using them to create and assemble our own innovative
service packages has allowed AT&T to remain in the market even as many
others have failed.
The same has proven true for the rest of the competitive industry.
The majority of competitors that have survived in the mass market are
using UNE-P. UNE-P also provides the stepping stone to facilities-based
competition by enabling competitors to build a customer base that
justifies investment in facilities. Despite their rhetorical support
for facilities-based competition, the Bells' repeated efforts to
eliminate UNE-P will eliminate this essential first step and with it
the most meaningful prospect of facilities-based competition in the
future.
As a result of a lawsuit initiated by the Bells, the Court of
Appeals for the D.C. Circuit in March invalidated the FCC's rules
ensuring that competitive local telephone companies can lease UNEs when
they otherwise would be impaired in their ability to compete in local
markets. In fact, the D.C. Circuit appears to have set a nearly
insurmountable presumption against competitors seeking to use UNEs,
driven by its view that--notwithstanding the mandate of Congress in the
Telecommunications Act--local competition based on unbundled access
rather than ownership of local facilities is ``synthetic'' and deters
investment in telecommunications facilities. The D.C. Circuit decision
is wrong. It blatantly contradicts two Supreme Court decisions that
explicitly rejected arguments that the Act elevates facilities-based
competition over other entry methods and that leased use of the network
deters investment by competitors or the Bells as ``fundamentally
false.'' The Solicitor General and the Antitrust Division of the
Department of Justice also have already rejected the D.C. Circuit's
interpretation of the Act, arguing that it failed to ``accord
appropriate deference to the FCC's reasonable interpretation of a
complex statute'' and substituted a standard that creates an
``unwarranted restriction on the FCC's implementation of the Act's
network element provisions'' that is ``in tension with other provisions
of the Act'' and ``not compelled by statutory text.'' The Solicitor
General also has noted that the ``job of judges'' is ``to ask whether
the Commission made choices reasonably within the pale of statutory
possibility in deciding what and how items must be leased,'' not to
substitute its own policy views for those of Congress.
Likewise, the Bells were successful in their efforts to uphold the
FCC rule eliminating competitors' access to broadband facilities--a
ruling that will not only impair broadband competition but also
significantly inhibit competitors' ability to invest in facilities for
voice competition.
In fact, while the Bells claim that they welcome competition from
facilities-based competitors, they regularly stifle attempts to
construct such facilities. Just this month, Qwest engaged in a
tremendous lobbying effort to halt Salt Lake City and other Utah
municipalities from joining the Utah Telecommunication Open
Infrastructure Agency (``UTOPIA''). UTOPIA is a government agency
formed by 18 Utah cities to build a fiber-optic network that would
provide Internet, telephone and TV access directly to households in
member cities. AT&T and other competitors could lease space on the
UTOPIA network rather than the Bell network, freeing Qwest of the need
to allow AT&T access to its local facilities. Qwest, however, has done
everything it can to secure opposition to the project, including
promising to accelerate its DSL deployment in the area to 90 percent of
homes. The Bells do not want facilities-based competition; they want to
keep their monopoly.
Until we or others are able to build more of our own facilities,
however, we remain dependent on the Bells for leased use of their
network. For more than eight years, we have tried to obtain access to
these facilities through commercially negotiated arrangements pursuant
to sections 251 and 252 of the Act, and we continue that effort today,
particularly given the recent request of the FCC Commissioners to
engage in intensive negotiation efforts during a 45 day ``time out'' in
legal proceedings. Given the Bells' persistent market power, these
negotiations will be challenging. While the sale of wholesaling
capacity is today a major revenue contributor to long distance and
wireless companies where vibrant competitive markets exist, the Bells
with retail market shares of 90 percent are most reluctant wholesale
providers. Even as the largest customer of each of the Bells, we rarely
see any effort by them to ensure that we are a loyal wholesale
customer.
Nevertheless, AT&T is committed to pursuing any process that offers
the hope of preserving competition in the local telecom market. I have
designated our two most senior operating executives to handle the Bell
negotiations, and I am reviewing their progress daily. Despite the
challenges, we are negotiating in good faith to secure economically
reasonable rates that allow us to continue providing competitive local
service alternatives to customers.
AT&T has always preferred the business commitment of a fair
commercial agreement over regulatory uncertainty. In fact, I called for
such an approach in a speech before the American Enterprise Institute
only last September. We're hopeful that the Bells will recognize, as we
did in the long distance market, that a robust wholesale business is
good for them. We hope that the FCC's call for genuine, good-faith
negotiations will provide all parties with the proper incentives to
create commercial arrangements that preserve competition and benefit
consumers. At the same time, the government must retain the option of
Supreme Court stay and review of the D.C. Circuit decision. The D.C.
Circuit decision is wrong as a matter of law and bad policy for this
nation. It is inconsistent with the Telecommunications Act and the
Supreme Court's interpretation of the Act. Moreover, I believe that the
prospect of Supreme Court review of that decision is the most
significant reason for the Bell companies to negotiate right now. The
stakes--for consumers, small businesses, and AT&T--are simply much too
high to risk a court vacatur of the FCC's rules in the hopes that the
Bell companies, after eight years of opposition, will negotiate
commercially reasonable access arrangements.
Consumers Benefit From Competition
While certainly not perfect, the 1996 Act represented an important
shift in telecommunications policy that began the long process of
opening the local monopoly to competitive entry. Competition has meant
more choices, better service and lower prices for tens of millions of
consumers. There are now more than 19 million UNE lines serving
consumers and small businesses. Consumers and small businesses save
close to $11 billion dollars annually. While the benefits to date have
not met your expectations or ours, they would not have been realized
without the Act. In response to competition, the Bells have had to
lower their prices, often for the first time, and sometimes by as much
as one-third.
Competition has also led providers to offer bundled services. In
response to bundled offers from competitors, the Bells now offer
bundled local and long distance service in all of their states, to
about 85 percent of all American households. They offer bundled local
and high-speed Internet (DSL) service to nearly three-quarters of all
U.S. households. Bear Stearns recently estimated that the number of
consumers in competitive markets that have switched to one-stop-
shopping ``bundles'' of services is over 52 million.
Bundled services--both local and long distance--are often available
for a flat ``all you can eat'' fee per month, rather than traditional
per-minute charges. Estimates point to 30 percent savings where bundled
offers are in the market, and suggest that consumers of bundles save in
the range of $7 billion per year. So while the Act might not be
perfect, there is no doubt it is delivering real and otherwise
unachievable benefits to consumers and small businesses today.
Encouraging Investment Will Bring Emerging Services to the Marketplace
To preserve these benefits for consumers, it is imperative that
Congress and the FCC renew their commitment to the pro-competitive
policies that have given millions of residential and small business
customers choice and billions of dollars in savings.
Staying the course on competition means resisting the incumbent
providers' calls to repeal the market-opening reforms of the 1996 Act.
It also means rolling back the FCC's decision to eliminate our ability
to use UNEs to provide the broadband services that customers
increasingly demand. Lack of access to broadband facilities will impede
our ability to offer bundled voice and data services, putting us at a
disadvantage vis-a-vis the incumbent Bell companies, at least in the
short term during the incubation period of nascent technologies like
Wi-Fi, WiMAX and broadband over power lines.
Clearly, there are those who would return consumers to the monopoly
environment that existed before the 1996 Act. A move backwards--whether
through regulation, legislation, or judicial order--would carry a heavy
price. It would mean:
disconnecting millions of homes and businesses from the
carriers those customers chose to provide them with competitive
phone services;
taking away the lower prices and more responsive services
those customers gained from their choice;
taking away the benefits of lower prices and more responsive
service from Bell customers once the threat of competition is
removed;
permitting the remonopolization of consumer and small
business telecommunications (unless policymakers are willing to
expel the Bells from the long distance market and restore an
antitrust standard that keeps them out until they face market-
disciplining facilities-based competition); and
the loss of a significant driver for our economy--
competitive incentives to deploy and promote the use of
broadband--at a time when our Nation can least accommodate it.
The far better choice is to encourage existing competition. The
importance of pro-competitive policies goes beyond today's greater
choices and lower prices. The incentives of companies like AT&T--or
even the Bells--to invest in new services and technology are
substantially diminished by marketplace instability. Creating an
environment in which U.S. companies feel confident to invest and deploy
new services is particularly critical now, when exciting new
technologies are emerging. Let me stress that we do not regard UNE-P as
a panacea. We do not like being dependent on a reluctant supplier for
our critical service inputs, and we are highly motivated to escape our
dependence on the Bells.
VoIP Holds the Promise of New Choices and Capabilities
While UNE-P and circuit-switched facilities are the ``now'' for
competitors serving mass market consumers, VoIP is the future. VoIP
holds the promise of choices and capabilities far beyond today's
offerings. It will enable consumers to tailor their communications
services to their needs and lifestyles at competitive prices and with
important enhanced security benefits. It very well could be the
``killer app'' to drive widespread broadband adoption for which we have
all waited. It could also be an important step to our Nation's economic
revival. With VoIP, voice service is just another ``hosted
application,'' like e-mail, so customers can take their phone numbers
wherever they go and access connections over any device, such as a
standard home telephone, wireless phone, or computer. The Alexis de
Tocqueville Institution recently concluded that government at all
levels could save $3-10 billion annually--up to 60 percent of their
current phone bills--by replacing circuit-switched service with VoIP.
VoIP has potential applications in all segments of the
communications industry--in the enterprise market; on customers'
premises, replacing old and costly PBX systems; in international
service, where the FCC has recognized VoIP's value in bypassing high
foreign settlement rates; and in private IP-and Internet-based
networks, where AT&T and others are deploying VoIP technology. As the
service develops, these deployments will continue to expand, enabling
America's businesses and consumers to enjoy the benefits of voice,
video and data services over one secure network. I must add that you
should not think of VoIP as ``cheap phone service.'' It promises to be
lower-cost, yes, but with a host of new user features and options that
go well beyond today's ``POTS.''
But if national carriers cannot remain in the market today, they
will not be able to generate the revenues they need to make the
investments necessary to make this service a reality in the near
future. VoIP will be yet another technology controlled by the Bells--
who held back DSL from consumers for some ten years so customers would
have to take their other, higher priced services. It was only when
cable operators deployed cable modem service that the Bells responded
with a mass-market, high-speed Internet access service of their own.
Similarly, without the threat of losing customers to a VoIP rival, the
Bells will have no incentive to invest in and deploy this new
technology, preferring to milk the legacy assets as long as possible.
Competitors will spur investment by the Bells, not deter it.
AT&T fully intends to lead the VoIP revolution for businesses and
our customers. We have invested heavily to make the necessary changes
to our network--some $3 billion in 2003 alone. We are already providing
VoIP service to hundreds of business customers, and we have begun
commercial deployment of a broadband consumer VoIP offering. We have
announced that we will be providing VoIP service in the top 100 markets
in the country this year. But without UNE-P, we cannot retain and grow
our customer base--and without a stable, mass market customer base,
VoIP deployment would become riskier and more costly. Clearly, it will
take much longer to reach wide penetration.
VoIP Must Be Appropriately Regulated
Ensuring the continued availability of UNE-P and facilities-based
competition will promote the widespread availability of VoIP. Equally
important are the decisions that Congress and the FCC make about the
regulation of VoIP itself.
AT&T believes that VoIP should be allowed to develop in the
marketplace. We welcome the fact that many Members of this Committee
and Congress, such as Senator John Sununu and Congressman Chip
Pickering, support a ``hands off'' approach to VoIP and have introduced
legislation that would bring the benefits of competition and innovation
to the telecommunications marketplace. Senator Sununu and Congressman
Pickering's deregulatory approach to VoIP both acknowledges the need to
reform the current subsidy system and allows this nascent service to
flourish.
AT&T strongly supports this approach. Allowing emerging services to
develop free of unwarranted, legacy regulation allows carriers to
design the service to respond to customer needs and interests, and to
remain flexible in their business plans as customer preferences emerge,
rather than be bound by a government-dictated vision of what the
service should include and what is a benefit to consumers.
We recognize, however, that providers of VoIP services must also
meet important social policies. Access for the disabled, enabling
public safety (911) response, and the needs of law enforcement to trap
and trace calls when necessary are technical and operational issues
that the industry can resolve, and AT&T is taking the lead to resolve
them. And government has a legitimate role in ensuring this gets done.
Indeed, the enormous flexibility and power of VoIP promises to address
these issues in ways superior to current circuit-switched technology.
Let me assure the members of this Committee that nothing about VoIP
threatens universal service. The problem with the universal service
fund (USF) is that it is still supported by a shrinking base of
interstate revenues for traditional telecommunications services. A
growing fund with a shrinking base cannot be sustained. It's long past
time for the universal service systems in this country to be reformed,
and we support VoIP being part of the broader reform of the USF system.
We think VoIP providers should contribute to universal service--in a
sustainable, fair, and nondiscriminatory manner. For example, basing
contributions on telephone numbers or connections would broaden the
base of contribution and assess it on voice communications regardless
of underlying technology.
The largest threat to VoIP, however, comes from an effort to apply
20th century access charge regulations to 21st century technology. The
access charge scheme was developed decades ago to ensure that whenever
a long distance company used the local network, it would subsidize
local service by paying grossly inflated rates to the local carrier.
While there was much in this framework to which one could object, it
remained workable as long as local carriers and long distance carriers
operated in separate markets. Its infirmities became apparent and
unsustainable when those carriers entered each others' markets, and
even more so when the principle outside users were no longer long
distance companies, but wireless companies and ISPs.
For that reason, eight years ago, Congress ordered that implicit
subsidies, including those in access charges, must be eliminated.
Unfortunately, they still remain in place eight years later. And while
the FCC has promised for years to overhaul its intercarrier
compensation regime--and FCC Chairman Powell has called the regulations
``a mess''--it continues to address these issues on a piecemeal and
discriminatory basis. The far better course would be comprehensive
reform of the intercarrier compensation and universal service regimes
in ways that eliminate market distortions and opportunities for
regulatory arbitrage while also protecting and advancing this nation's
proud heritage of Universal Service.
The Bells, realizing that VoIP could replace the switched long
distance calls that bring them these inflated revenues, have seized on
this inaction and are calling for VoIP providers to subsidize them as
well, even though VoIP providers already pay the local companies
directly for use of their networks. It is ridiculous to ask emerging
providers of this nascent technology to subsidize monopolists many
times their size operating in the same market. If we require the new
grocer in town to subsidize the supermarket, we are not going to see
many new grocers. Internet access flourished in this country in part
because Internet service providers were not saddled with payment of
access charges. The incredible growth of wireless services was helped
substantially by the fact that wireless carriers pay far less in access
charges than wireline competitors. The same approach will promote the
widespread availability of VoIP.
AT&T agrees that affordable service needs to be maintained in high-
cost areas of the country. Applying the legacy access charge regime to
VoIP, however, is not the way to achieve this result and would prove
counterproductive and market-distorting. It simply slows the deployment
of new and desirable technologies while driving users away.
* * *
Mr. Chairman, this Committee has a long commitment to promoting
competition and securing for consumers the benefits of choice and lower
prices that competition can bring. You and your colleagues have
provided the leadership necessary to liberate the telecommunications
industry from the shackles of the monopoly era. Today we are at a
crossroads where we must call upon your leadership again. The
competitive vision of the Telecom Act is being fulfilled, but it needs
the continued support of lawmakers and regulators if all its ambitious
goals are to be met. If local markets remain open to competition,
consumers, businesses and the American economy can all win.
Thank you again for inviting me here today, and I look forward to
your questions.
The Chairman. Thank you very much.
Mr. Notebaert, welcome.
STATEMENT OF RICHARD C. NOTEBAERT, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, QWEST COMMUNICATIONS
Mr. Notebaert. Thank you, Mr. Chairman and Members of the
Committee. I appreciate this opportunity----
The Chairman. Would you like to respond to Senator
Hollings' quotation from your press release before you----
[Laughter.]
Mr. Notebaert. Senator, it didn't sound like a question.
[Laughter.]
Mr. Notebaert. I appreciate this opportunity to offer a
brief overview of the Telecommunications Act of 1996. I'll do
that from the perspective of my experience at Ameritech, which
I led when this legislation was passed; at Tellabs, a Chicago-
based telecom equipment manufacturer; and now at Qwest, the
incumbent local-exchange provider in 14 western states that
also offer services, including long distance and enterprise
systems, throughout the United States.
In 1996, we had high hopes for this legislation; not that
the Act was everything we hoped, but that it would finally
provide progressive, consistent national telecom policy, rather
than the antiquated 1934 legislation then in place. We welcomed
competition and the chance to enter new markets, and we were
eager for reform. We thought this bill offered real promise,
beginning with its very first line, and I quote, ``The purpose
of the Act is to promote competition and reduce regulation.''
I'm here today to suggest some reasons why, in my view, of
that opening line failed, but I'll do so very briefly, mindful
of the words of the great philosopher, Tommy Lasorda, who said,
and I quote, ``I've found it's not good to talk about my
problems. Eighty percent of the people who hear them don't
care, and the other twenty percent are glad I'm having
trouble.''
[Laughter.]
Mr. Notebaert. Mr. Chairman, if I boiled down where we
think the Act went wrong, it would be in three areas. First, it
was far too complicated. The bill, which was just over 100
pages, morphed into thousands of pages of decisions and rules.
And those rules include complex and sometimes inconsistent
procedures for achieving simple things. That creates
significant ambiguity, and, thus, contributes to the dissension
within the industry, just as you accurately envisioned, Mr.
Chairman, when you predicted the legislation had, and I quote
you, ``the hallmarks of becoming a real regulatory nightmare.''
Second, the regulatory process takes too long, especially
in view of today's market realities. For instance, when Qwest
responded to consumer demand and filed for permission to
provide stand-alone DSL, that process cost us $130,000 and took
45 days. The cable company, which has twice as many broadband
customers as we do, could have achieved the same thing in less
than 24 hours.
And, third, it has created complete uncertainty. Three
times since this Act was passed, the courts have rejected the
rules that require us to sell network elements at below cost
prices, but nothing has been resolved. And this ongoing limbo
makes it difficult to raise capital, to build a business plan,
or to justify infrastructure investment.
We agree with the final words of the recent court decision
that reflects its exasperation due to, and I quote, ``the
Commission's failure after 8 years to develop a--lawful
unbundling rules, and its apparent unwillingness to adhere to
prior judicial rulings,'' end quote. Mr. Chairman, I am
convinced there is a direct and dramatic connection between
this uncertainty and the fact that nearly one million
telecommunications employees have lost their jobs.
So what is the remedy? I believe it lies in the same vision
that has been the foundation of Qwest's turnaround, looking at
the market through the eyes of the customers. I would offer
that any legislation or regulation you support should be based
on two principles.
The first of those principles is, the customers view
telecommunications, at least voice services, as a commodity.
Multiple providers offer it via wireless or cable or landline
or, increasingly, the Internet. We have accepted that at Qwest,
and regulators should do the same by eliminating the regulation
of a single provider when others offer the same capability
regulation free.
The second principle is, the customers are embracing new
technology now. If they decide wireless works better for them
than wireline, they could care less that regulators say it's
not a substitutable service. When their preference is for a
technology that makes distance irrelevant, it doesn't matter
that the government still considers distance important. If
Voice-over-IP best suits their needs, it's irrelevant that the
1996 Telecom Act never considered the Internet as a real
competitive factor.
The fact is that we will make real progress only when
regulation becomes more in sync with the advances in
technology, which is, by the way, advocated by Senator Sununu's
approach to Voice-over-IP.
There are many initiatives, Mr. Chairman, that you and this
distinguished Committee can take toward fulfilling the promise
of legislation that had the stated purpose, and I quote again,
``to promote competition and reduce regulation.''
And I'll look forward to whatever questions you may wish to
raise on our mutual journey toward that end.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Notebaert follows:]
Prepared Statement of Richard C. Notebaert, Chairman and Chief
Executive Officer, Qwest Communications
Thank you, Mr. Chairman and Members of the Committee. I appreciate
this opportunity to offer a brief overview of the Telecommunications
Act of 1996. I'll do that from the perspective of my experience at
Ameritech--which I led when this legislation passed; at Tellabs, a
Chicago-based telecom equipment manufacturer; and now at Qwest, the
incumbent local service provider in 14 western states that also offers
services including long-distance and enterprise systems throughout
America.
In 1996, we had high hopes for this legislation--not that the Act
was everything we had hoped--but that it would finally provide a
progressive, consistent national telecom policy rather than the
antiquated 1934 legislation then in place. We welcomed competition and
the chance to enter new markets, and we were eager for reform.
We thought this bill offered real promise, beginning with its very
first line, and I quote, ``The purpose of the Act is to promote
competition and reduce regulation.''
I am here today to suggest some reasons why, in my view, that
opening line failed. Mr. Chairman, if I boil down where we think the
Act went wrong, it would be in three areas.
First, it was far too complicated. The bill, which was just over
100 pages, morphed into thousands of pages of decisions and rules. And
those rules include complex--and sometimes inconsistent--procedures for
achieving simple things. That creates significant ambiguity and thus
contributes to nonproductive dissension throughout the industry. Just
as you so accurately envisioned, Mr. Chairman, when you predicted the
legislation had the ``hallmarks of becoming a real regulatory
nightmare.''
Second, the regulatory process takes too long, especially in view
of today's market realities. For instance, when Qwest responded to
consumer demand and filed for permission to provide stand-alone DSL,
that process cost us $130,000 and took 45 days. The cable company,
which has twice as many broadband customers as we do, could have
achieved the same thing in less than 24 hours.
And third, it has created complete uncertainty. Three times since
the Act was passed, the courts have rejected the rules that require us
to sell network elements at below-cost prices. But nothing has been
resolved. And this ongoing limbo makes it impossible to raise capital,
to build a business plan, or to justify infrastructure investment. We
agree with the final words of the recent court decision that reflects
its exasperation due to, and I quote, ``. . . the Commission's failure,
after eight years, to develop lawful unbundling rules, and its apparent
unwillingness to adhere to prior judicial rulings.''
In addition, Mr. Chairman, I am convinced there is a direct and
dramatic connection between this uncertainty and the fact that nearly
one million telecommunications employees have lost their jobs, and that
the manufacturing side of this industry has lost some 90 percent of its
market capitalization.
What is the remedy? I believe it lies in the same vision that has
been at the foundation of Qwest's turn-around: looking at the market
through the eyes of consumers. Because if we view this as consumers
would, the path to success gets much, much clearer.
I would offer that any legislation or regulation you support should
be based on two principles:
The first of those principles is that customers view
telecommunications--at least voice services--as a commodity.
Multiple providers offer it via wireless or cable or landline
or, increasingly, the Internet. We have accepted that, and
regulators should do the same--by eliminating the regulation of
a single provider when others offer the same capability
regulation free. By the way, no provider in its right mind
raises prices above those of its competitors in a commodity
marketplace. At Qwest, in fact, we are responding to this new
reality by lowering the amounts customers pay.
The second principle is that customers are embracing new
technology now. If they decide wireless works better for them
than wireline, they could care less that regulators say it's
not a substitutable service. When their preference is for a
technology that makes distance irrelevant, it doesn't matter
that the government still considers distance important. If VoIP
best suits their needs, it's irrelevant that the 1996 Telecom
Act never even considered the Internet as a competitive factor.
The fact is that we will make progress only when regulation
becomes more in sync with the advances in technology, which is,
by the way, advocated by the Sununu approach to VoIP.
There are many initiatives, Mr. Chairman, that you and this
distinguished committee can take toward fulfilling the promise of
legislation that had the stated purpose ``to promote competition and
reduce regulation.'' And I'll look forward to whatever questions you
may wish to raise on our mutual journey toward that end.
Thank you.
The Chairman. Thank you very much, Mr. Notebaert. That's a
very succinct and, I think, courageous statement, in light of
views of some of the Members of this Committee, and I thank
you.
Mr. Geiger?
STATEMENT OF JAMES GEIGER, CHAIRMAN, ASSOCIATION FOR LOCAL
TELECOMMUNICATIONS SERVICES AND CEO, Cbeyond COMMUNICATIONS,
LLC
Mr. Geiger. Chairman McCain, Senator Hollings, and Members
of the Committee, I'm Jim Geiger, Chairman of the Association
for Local Telecommunications Services, usually referred to as
ALTS. And I'm also the CEO of Cbeyond Communications. I thank
the Committee for its continuing oversight of the
Telecommunications Act of 1996.
ALTS is the leading trade association for facilities-based
local-exchange carriers, or CLECs. ALTS' mission is to open
local telecommunications markets so that our members can
provide more service options at lower prices to consumers.
ALTS' members provide service in nearly every state, both
in metropolitan and outlying areas. We are facilities-based,
meaning the companies own and invest in their own switches,
fiber optic cables, wireless antennas, and other new
infrastructure. ALTS' members do not focus on the so-called
UNE-P platform.
Mr. Chairman, while the Act is not perfect, it is working.
The 1996 Act was never intended to assure success for every
competitor, nor to protect incumbents. But, at this point, 8
years after passage of the Act, a number of facilities-based
CLECs are emerging as strong, healthy businesses that are
bringing value to both investors and consumers.
To note, CLEC market share has increased each year since
1996, reaching 15 percent at the end of 2003. The CLEC industry
has invested $75 billion since 1996. Facilities-based CLECs
provide service to over 25 million phone and Internet users,
including more than 10 million access lines. CLECs employ
nearly 60,000 people in the U.S., mostly in high tech, skilled
positions. And if you ranked all providers of local phone
service by access lines, facilities-based CLECs would occupy
nine of the top 25 slots.
This investment in the competitive sector has, in turn,
stimulated investment by incumbents, creating downward pressure
on prices, and contributing to making American workers the most
productive in the world.
Now, allow me to briefly use Cbeyond as an example of the
success of the Act. I could equally use other ALTS members.
Cbeyond uses a state-of-the-art IP network to provide an
affordable bundle of voice communications, high-speed Internet
access, voice mail, e-mail, web hosting, and other related
services. Our exclusive focus is on businesses with between
four and 100 employees. And typical customers include
physicians' offices, real estate offices, attorneys,
landscapers, and architects. Because of efficiencies involved
in IP technology, Cbeyond is able to provide small-business
customers affordable packages of services that the Bell
Operating Companies, or BOCs, traditionally offered to big
business at higher prices. Unlike the VoIP providers that have
been getting a lot of press lately, Cbeyond is a full peer to
the BOCs. We comply fully with all regulatory requirements, we
pay access charges on our long distance voice traffic, and we
make all requisite universal service contributions. We comply
also with E911 and CALEA requirements.
Mr. Chairman and Members of the Committee, the promotion of
intramodal competition through unbundling is at the very heart
of the 1996 Act. Congress recognized that competition requires
access to incumbent bottleneck facilities, such as the local
loop or the last mile. Facilities-based CLECs build their own
networks where it is economically feasible to do so, but
require access to the facilities that we are just simply not
able to duplicate. Without facilities-based CLECs, like us,
providing intramodal competition, we would most likely see a
cozy duopoly develop between cable and the incumbent telephone
companies.
Congress chose wisely, because intramodal competitors have
been the source of key innovations over the last few decades.
Digital subscriber lines, IP-based communications, and even the
Internet, as we know it today, itself were initially developed
by competitors.
Cbeyond jointly developed, with Cisco, over the past 4
years, an advanced local IP telecommunications network
technology. It is the same technology that is currently being
deployed by Cisco in China. These advanced IP applications in
China are virtually leapfrogging legacy networks in that
country. It would be a grim irony if regulation failed to
preserve, in the United States, the rollout by intramodal
competitors of advanced IP applications that were developed
here, while China uses that technology to jump ahead of this
country.
In my experience, incumbents, as rational businesses, will
not introduce new, more efficient services that devalue their
legacy investment and cannibalize existing higher-priced
services.
ALTS members are working diligently to meet national
broadband goals. Cbeyond exclusively uses high-capacity loops
to deliver our service. Well over 90 percent of Cbeyond
customers did not previously receive high-capacity DS-1 level
broadband access, although the dormant capacity to do so
existed. Likewise, upward of 90 percent of American homes have
broadband access available to them, but the ``take rate'' is
only 20 percent. Now, we believe that's because of the price
and the lack of compelling applications.
Mr. Chairman and Members of the Committee, the problem I
think we need to focus on is not broadband deployment; it is
broadband acceptance and adoption. And that can only be
achieved through continued CLEC innovation and continued
competition to increase the utility of, and downward price
pressure on, broadband access.
We are concerned that the FCC and Congress are moving
toward scaling back key pro-competitive provisions of the Act.
Intramodal competition must be preserved in any rewrite of the
Act, or we risk losing the benefits that competition has
produced so far. Unfortunately, based on its Triennial Review
Order, the FCC is apparently headed down a path of fostering a
closed, proprietary bottleneck immune from the disciplining
impact of intramodal competition.
I would suggest that since BOC long-distance entry was
premised on the provision of unbundled access, any elimination
of that access would necessitate revisiting the quid pro quo
embodied in the 1996 Act--that is, long-distance entry only
after markets are opened to competition.
Finally, ALTS members share the goal of universal,
affordable broadband access, and ALTS will work with Congress
and the FCC to assure adequate funding mechanisms which ensure
that broadband is available and affordable to all Americans.
That concludes my statement.
[The prepared statement of Mr. Geiger follows:]
Prepared Statement of James Geiger, Chairman, Association for Local
Telecommunications Services and CEO, Cbeyond Communications, LLC
Introduction
Good Morning, Mr. Chairman and Members of the Committee. I am Jim
Geiger, Chairman of the Association for Local Telecommunications
Services, usually referred to as ``ALTS,'' and CEO, of Cbeyond
Communications, LLC. I thank the Committee for its continuing oversight
of the Telecommunications Act of 1996 (``96 Act'').
ALTS, now halfway into its second decade, is the leading trade
association for facilities-based competitive local exchange carriers
(``CLECs''). ALTS' mission is to open local telecommunications markets
so that business and residential customers can obtain the benefits of
competition including more service options and lower prices. As found
by the Small Business Administration, ALTS' companies save its
customers on average 30 percent per telephone line compared to the
rates charged by the incumbent local exchange carriers (``ILECs'').\1\
Although ALTS members also serve residential and large business
customers, we are the leaders in bringing local telecommunications
value to the small and medium sized business market. Our members do not
include major long distance companies or the BOCs. We are focused
exclusively on promoting competitive local services. ALTS' thirty-three
CLEC members provide service in nearly every state in both metropolitan
and outlying areas. Our companies are facilities-based, meaning the
company owns and is investing in switches, fiber optic cables, wireless
antennas, and other broadband telecommunications networks. ALTS members
are not focused on the unbundled network element platform, commonly
known as UNE-P, because most ALTS companies install and use their own
switching capability. Instead, ALTS companies purchase loops and
transport from the ILECs, the transmission facilities that connect our
customers to switching facilities. Because our companies deploy our own
networks as much as possible, we are the leaders in deploying new
communications technology, including IP and softswitching. ALTS
supports the goal of universal affordable broadband access for all
Americans. Our members are working zealously to meet that goal.
---------------------------------------------------------------------------
\1\ A Survey of Small Businesses' Telecommunications Use and
Spending, Stephen P. Pociask, SBA, March 2004, Tables 12, 13.
---------------------------------------------------------------------------
Although I am testifying this morning on behalf of ALTS, I would
also like to briefly introduce Cbeyond. Cbeyond, headquartered in
Atlanta, uses a state-of-the-art IP network to provide affordable voice
telecommunications and Internet access service to small and medium-
sized business customers in Atlanta, Denver, Dallas, and Houston.
Cbeyond is a showcase for Cisco's innovative IP products. At Cisco's
invitation, we are frequently visited by other companies because we are
viewed as a model provider of IP communications. Because of the
efficiencies involved in IP technology, Cbeyond is able to provide to
small business customers affordable packages of services that BOCs
traditionally offered to big business at higher prices. Well over
ninety percent of Cbeyond's customers did not previously have DS-1
level access, which we use exclusively to deliver our services. Our
company is fully funded and financially healthy. We fully comply with
all regulatory requirements; we pay access charges on our voice
traffic; we make all requisite universal service contributions; and
reciprocal compensation is not part of our business plan. Cbeyond
operates as a full peer to the BOCs offering E911 access, local number
portability, and CALEA compliance.
Competition Is Working
As I will discuss below, the 96 Act is not perfect. Nonetheless it
is a success story in very significant respects. The 96 Act was never
intended to assure success for every competitor or every business plan.
Nor was it intended to protect incumbents from the disciplinary impact
of competition. But at this point, eight years after passage of the 96
Act, a number of facilities-based CLECs are emerging as strong, healthy
businesses that are bringing value to both investors and consumers.
Congress got it right in choosing competition in local
telecommunications markets as the best way to innovate and bring new
services to consumers. The market-opening provisions of the 96 Act
initiated, and made possible, substantial investment in new facilities
and new technology that, in turn, has created a large competitive
industry that is benefiting consumers.
Facilities-based CLECs invested nearly $75 Billion from 1996
through 2003.
The CLEC sector of the telecommunications industry
represents $46 Billion in annual revenue, which is close to
that of the cable industry.\2\
---------------------------------------------------------------------------
\2\ New Paradigm Research Group.
CLECs employ nearly 60,000 persons in the U.S., mostly in
---------------------------------------------------------------------------
high-tech, skilled positions.
According to the FCC's 2003 Local Competition Report,
facilities-based CLECs serve over 10 million access lines.
(This is in addition to the 19 million lines served by the UNE-
P carriers.) \3\
---------------------------------------------------------------------------
\3\ We estimate that 10 million access lines serve approximately 25
million end users because some reported access lines are trunks serving
on average about 5 customers per trunk.
Facilities-based CLECs comprise nine of the top 25 largest
---------------------------------------------------------------------------
telephone companies in the U.S. measured by access lines.
Because of this enormous investment, CLECs have increased their
market share every year since 1996. Of course, CLECs winning voice
customers from incumbents through better service options and prices is
not a public policy problem, but evidence of the success of the 1996
Act and the benefits it is intended to bring consumers. CLECs have
experienced this growth because they compete and offer innovative new
services and features typically to underserved markets. CLECs have
created new markets and pioneered new ways of offering service, such as
bundled offerings, and online customer care including online billing
and online self-provisioning. Nevertheless, local telecom competition
has grown more slowly than most of us thought when the 96 Act was
passed. After eight years, the CLEC industry has won about 15 percent
of the local market nationwide. Obtaining the cooperation of the
Regional Bell Operating Companies (RBOCs), enforcing the 96 Act,
convincing municipalities and building owners to allow competitors into
their markets, have all been extremely difficult.
The slower-than-expected pace of competition can also be seen in
the evidence of the RBOCs enormous profitability. Even as they complain
to regulators about the local competition rules, the RBOCs' latest
reports demonstrate that they are experiencing huge margins and
profits. SBC, for example, recently reported for the 1st quarter of
2004 an EBITDA margin of 31 percent, and pretax income of $1.35
Billion.\4\ SBC's DSL lines and long distance lines have increased 60
percent and 12 percent, respectively, in the last year.\5\ BellSouth
reported that its 1st quarter 2004 profit increased 30 percent to $1.6
Billion. BellSouth reports that growth in long distance and DSL offset
access line declines.\6\ For 2003, Verizon reported net income of
$3.077 Billion.\7\
---------------------------------------------------------------------------
\4\ Schwab Soundview Capital Markets, April 22, 2004. EBITDA is
Earnings Before Interest, Taxes, Depreciation and Amortization.
\5\ Communications Daily, April 22, 2004, p. 9.
\6\ Communications Daily, September 23, 2004, p. 5.
\7\ Verizon Communications, Inc.10-K 2003.
---------------------------------------------------------------------------
Intramodal, Facilities-Based Competitors Are the Innovators
Innovation and broadband deployment are the key success stories of
the 96 Act. By requiring the RBOCs to open their networks to
competitors, the 96 Act embraced intramodal competition. The Act's
unbundling provisions and the explicit trade-off between BOC long
distance entry and opening markets to local competition were designed
to encourage CLECs to develop innovative and, in many cases,
``intelligent'' devices that can bring consumers more sophisticated
broadband services using the relatively passive transmission pipes
leased from the RBOCs. Intramodal competition is thus not simply
reselling and re-branding the RBOC service; intra-modal competition has
encouraged extensive deployment of new hardware and software that can
turn the RBOCs' plain old copper loops into high-speed broadband
transmission facilities.
Congress chose wisely because intramodal competitors have been the
source of key telecommunications sector innovations over the last few
decades. DSL, IP-based communications, even the Internet itself were
initially developed by competitors.
To use an analogy, RBOC telecommunications facilities can be
likened to train tracks, or the roads leading to every customer
premises. If competitors are permitted to put their own trains and
engines on these tracks, those same tracks formerly used to carry
freight trains can be used to carry high-speed maglev trains, carrying
infinitely more capacity, than when they were solely under the control
of the monopolist. If, however, competitors must build tracks and roads
to every customer, they will never be able to acquire the enormous
amount of capital necessary to duplicate the existing telephone
network.
We believe that Congress should be quite disturbed, to put it
mildly, to see how the RBOCs are seeking to dismantle the unbundling
regime and eliminate the competitors' ability to obtain access to their
networks, the train tracks. The RBOCs' principal argument is that they
face competition from the cable companies, but this argument simply
does not hold up under scrutiny. To give one reason, many ALTS members
focus on the small and medium-sized business market, a market that is
not served by the cable companies. Eliminating the ability of CLECs to
serve the small and medium-sized business market would essentially
leave these small and medium-sized business customers with a monopoly--
their local RBOC. Even in those areas served by the cable companies,
insufficient intramodal competition would leave a duopoly between cable
and incumbent telephone companies. As a business person with over 20
years experience in a variety of companies, it is my opinion that a
marketplace dominated by two providers would not stimulate innovation
and competition. It is more likely that a cozy duopoly would develop,
characterized by a division of the market perhaps along service lines.
As a result, a return to the slower pace of innovation characteristic
of the 70s and 80s would be likely.
Incumbents Are not the Best Innovators
VoIP is the latest example of the fact that BOCs are not the most
efficient or innovative users of their own networks. Not because BOCs
may not have some of the smartest business persons and technical
experts and highly skilled craft persons. Rather, they delay innovation
for very rational reasons. In part, BOCs are reluctant rapidly to
embrace new technologies because they must move cautiously given the
size and scope of their monopoly networks. Perhaps more importantly,
however, they are reluctant to introduce new services that cannibalize
their own higher-priced legacy services. VoIP providers, for example,
offer voice service to consumers at considerable savings in comparison
to traditional incumbent services and with more features, such as
management of long distance calls from a website. BOCs are announcing
plans to offer consumers these benefits that undercut their traditional
voice offerings only because of competitive pressure. They would have
no incentive to do so otherwise, and without competitors in the market,
would only do so at much higher prices than those charged by new
entrants.
Integrated IP-based services such as those offered by Cbeyond are
another example. BOCs did not deploy this technology that undercuts
their own more expensive DS-1 data services until competitive pressure
from CLECs required them to do so. Similarly, CLECs were the first to
offer DSL services. BOCs did not want to undercut their own inferior
second line services used for dial-up Internet access. As stated in its
1999 Economic Report of the President's Council of Economic Advisors:
``[t]he incumbents' decision finally to offer DSL service
followed closely the emergence of competitive pressure from
cable television networks delivering similar high-speed
services, and the entry of new direct competitors attempting to
use the local competition provisions of the Telecommunications
Act of 1996 to provide DSL over the incumbents' facilities.''
Similarly, in the 80s and before, incumbents were slow to introduce
Telex, PBXs, and key systems, and only after the FCC took steps to
assure a competitive market by competitive providers.
These examples show that BOCs will not innovate to rapidly bring
consumers new services if this undercuts a legacy higher priced
service. Instead, BOCs carefully evaluate competitive inroads and only
when they have more to lose to competition by standing still will they
move to introduce new services.
Unbundling Promotes Broadband Investment
A key initial success of the 96 Act is promotion of broadband
investment by both CLECs and incumbents. The unbundling provisions of
the 96 Act have provided a framework for robust investment in
broadband. As noted, competitors have made very large investments in
new telecommunications facilities, and this investment fueled the
growth of the Internet. As recently as 2001, over half the Internet
traffic in the country flowed over networks built by CLECs. The network
investment by CLECs incented the RBOCs to increase their capital
expenditures as well. For instance, the RBOCs have been engaged over
the last decade or so in a gradual build-out of fiber networks. It
began using fiber for all new feeder placements beginning in 1996. In
2000, when the unbundling rules applied to fiber as well as copper
plant, BellSouth described itself as the ``market leader'' in deploying
fiber to multi-premise developments.\8\ Already 50 percent of its loops
can support 5 Mbps service.\9\ BellSouth already has 1 million homes
passed with fiber, and an additional 14 million with fiber to a nearby
distribution point.\10\ Similarly, in 1999, SBC announced its $6
Billion fiber-in-the-loop ``Project Pronto.'' All the BOCs have
invested heavily in DSL capability. These broadband investments by BOCs
refute their argument that unbundling obligations inhibit investment.
---------------------------------------------------------------------------
\8\ BellSouth Now Wiring New Homes for the Future, BellSouth Press
Release (June 15, 2000).
\9\ Id.
\10\ Vince Vittore, Bill Smith, BellSouth, Telephony (June 2,
2003).
---------------------------------------------------------------------------
In fact, incumbents are modernizing the loop because costs savings
and efficiencies alone justify the investment. They do not need relief
from unbundling to incent them to install fiber. As recently reported
in an article in the Los Angeles Times concerning SBC's fiber project
in Mission Bay, CA, quoting an SBC official:
Fiber is expensive to deploy in existing communities because of
the costs to install it. But after that, it's a cakewalk. Once
I've got it in, my operational costs are much lower. There's
less failure, fewer trucks rolling out and fewer workers needed
to test and fix the system.\11\
---------------------------------------------------------------------------
\11\ James S. Granelli, Dialing in Competition, L.A. Times, April
19, 2004.
---------------------------------------------------------------------------
ALTS Shares the Goal of Advanced Affordable Broadband Networks
ALTS believes that broadband access should be universal and
affordable. ALTS members have helped expand the deployment of broadband
services to almost all Americans. In 1996, fewer than 5 percent of
Americans had access to broadband; today, almost 90 percent of American
homes can purchase broadband services today from at least one provider
of broadband services. This is an enormous accomplishment, and one for
which Congress deserves a substantial amount of credit. However, that
is not the end of the broadband story. Approximately 10 percent of
American households can not yet purchase broadband services, and many
of these households are in rural areas. ALTS supports efforts by
Congress and the FCC to take steps to ensure that 100 percent of
Americans have broadband available to them, and our companies are
willing to pay our fair share to achieve this goal of universal
broadband. Furthermore, it is also a concern that only 20 percent of
American households actually subscribe to broadband services, even when
it is available to them. Some Americans simply do not see the value of
purchasing a broadband connection; other Americans would like to
purchase broadband but simply cannot afford it. For many Americans, the
price is simply still too high. Greater competition for broadband
services would put downward pressure on rates and help to make
broadband services more affordable. ALTS members are very willing to
work with Congress to achieve the goal of universal and affordable
broadband.
Let me give you an example of how the unbundling regime and
intramodal competition has helped to promote broadband deployment.
Without unbundling, the intramodal competition that served as the test
bed and originator of broadband IP applications would not have been
possible. Cbeyond jointly developed with Cisco advanced local IP
telecommunications network technology and applications because the 96
Act gave Cbeyond the right to purchase high-capacity loops from the
ILECs. These are the same technology and applications that are
currently being deployed in China. These advanced IP applications in
China are virtually leapfrogging legacy networks in that country. It
would be a grim irony if regulation fails to preserve in the United
States the roll-out by intramodal competitors of advanced IP
applications that were developed here while China uses that technology
to leapfrog ahead of this country.
We strongly disagree with the current views of the FCC as to how to
achieve broadband goals. The FCC recently decided to exempt fiber-fed
loops from the unbundling provisions of the 1996 Telecom Act. In other
words, the FCC decided to grant the RBOCs a monopoly over customers
served by fiber. Further, the FCC is considering whether to redefine
incumbent bottlenecks as ``Title I'' networks so that incumbents would
not even be required to provide nondiscriminatory access to competitive
providers.
ALTS could not disagree more strongly with the FCC's cramped vision
of closed, non-common carrier incumbent broadband networks. American
consumers will be best served by an advanced broadband network that is
open to competitive access on reasonable terms and conditions. As with
DSL and VoIP, CLECs will rapidly introduce new broadband services at
better prices than would ILECs. Insulating BOCs from the competition
CLECs can provide will simply limit incentives for them to innovate.
This will guarantee a slow roll-out of new and affordable broadband
services.
The Committee should discourage requests by BOCs for further
broadband unbundling relief. In particular, extending the FCC's fiber-
to-the-home (``FTTH'') policy to multiunit buildings and new housing
development would permit BOCs to thwart provision of competitive
services in these environments. Many building owners, shopping centers,
real estate management companies, and apartment developers support the
pro-competitive unbundling provisions of the Act because this promotes
the availability of innovative services and lower prices.
As a businessman with considerable telecom experience, I believe
that there is essentially no empirical evidence that eliminating
unbundling would incent BOCs to deploy fiber. Quite the contrary, BOCs
have been gradually installing fiber in the ``last mile''
notwithstanding unbundling obligations. The FCC in its Triennial Review
Order took it on faith that BOCs would deploy more fiber if they are
given a monopoly over these customers. I am concerned that BOCs have
made similar promises and broken them before. For years, BOCs promised
that they would build advanced ``video dial tone'' networks--
essentially the same networks that they are now again promising to
build--if they were permitted to provide video programming. Congress
granted that permission in the open video provisions of the 96 Act, but
BOCs never built those networks. Cbeyond and other ALTS members have
been the first to offer new broadband services over the current network
and if granted access to new fiber investment will do the same there.
Of course, to the extent that BOCs are claiming that they have an
insufficient return on fiber investment, this is better addressed
through pricing of unbundled broadband access rather than denying such
access altogether as the FCC has apparently chosen to do.
In this connection, however, it is noteworthy that the Supreme
Court affirmed the FCC's TELRIC pricing methodology for UNEs and noted
the substantial basis in past policy for rejecting BOCs' request that
they be permitted to recover their historic costs. TELRIC pricing
duplicates the prices that incumbents would be able to charge in a
competitive market. TELRIC pricing includes a reasonable profit. BOC
efforts to derail TELRIC are no more than an attempt to impose the
costs of outmoded technology on customers. Regulators will best promote
the introduction of new technology if they continue to require
incumbents to base prices on competitive, not legacy, costs.
Regulatory Uncertainty
Unfortunately, however, I would have to count as a major deficiency
of the 96 Act that it was not sufficiently clear in expressing
Congress's view that broadband goals should be achieved by competition,
not protecting incumbents from competition. Incumbents have been able
to persuade regulators and the courts that they should be protected
from competition that could be enabled by unbundled access to their
bottleneck loops. If this approach stands, consumers will have at best
a broadband duopoly of BOCs and cable companies with limited choices
and ultimately rising prices. I would also count as a major deficiency
of the 96 Act that it has invited such extensive litigation over the
last eight years.
If CLECs can no Longer Interconnect with the ILEC Network at Cost-based
Rates, a New Section 271 Rebalancing Would Be Necessary
If the RBOCs are successful in eliminating the unbundling rules and
intramodal competition, Congress should establish a new trade-off
between BOC long distance entry and opening markets to competition.
Leading up to the 96 Act, BOCs strongly opposed a market share test for
long distance entry, arguing that competitors could slow their entry
into the market to delay the RBOC entry into long distance. In response
to that concern, Congress chose instead to permit the RBOCs to provide
long distance service after they opened and unbundled their networks to
competitors, and the RBOCs agreed to this balance. The Department of
Justice established the standard that the RBOCs should only be
permitted to enter the long distance market after it was proved that
the local market was ``irreversibly opened'' to competition. If
unbundling is undermined, it will be clear that the market is not, in
fact, irreversibly open. Indeed, since gaining long distance entry BOCs
have worked diligently to eliminate the provision of unbundled network
elements (UNEs) that formed the basis for long distance approval. If
CLECs' access to the BOC networks is eliminated, either Congress or the
FCC should revoke long distance authority and the FCC should
immediately prohibit BOCs from taking on new customers.
The Adverse Impact of USTA II
The substantial facilities-based CLEC industry built its business
on the foundation of access to bottleneck loop and transport
facilities. It is unfortunate, just as many of those CLECs have
surmounted the difficult financial environment of the last few years,
that the D.C. Circuit issued its recent decision which at least
temporarily casts doubt on the legal basis for CLEC unbundled access to
bottleneck facilities on reasonable terms and conditions. The D.C.
Circuit decision appears to be inconsistent in many respects with prior
Supreme Court rulings on the 1996 Act. Furthermore, the Court erred in
speculating that the availability of special access could eliminate the
need for UNE transport. Special access has been available for many
years, predating the 96 Act. If Congress believed that special access
could substitute for UNEs, it would not have provided for unbundled
access to transport and other network elements.
Nonetheless, the BOCs have already indicated that they intend to
take advantage of this court case to impose huge rate increases on the
CLECs. In particular, BOCs are already seeking to impose unacceptable
price increases for high-cap loops and transport by transitioning them
to their special access rates. For example, BellSouth's special access
price for a Zone 1 DS-1 loop in Georgia is triple the UNE price. For
Verizon in Pennsylvania the price would be double. SBC's price in Texas
for Zone 1 DS-1 transport would increase by more than 50 percent. For
Qwest in Colorado the price for such transport would more than double.
DS-1 loop and transport prices are particularly important to CLECs
because they are components of the loop-transport combinations that
they use to serve customers. Any BOC assumption, such as BellSouth's
view, that CLECs should simply pay higher special access prices is
completely unacceptable from a business perspective and from a policy
perspective as well since this fails to recognize the bottleneck
character of loops and most transport. In this connection, most BOC
special access services have been deregulated on the theory that they
are competitive. But BOCs have not been reducing special access prices
as would be expected in a competitive environment. BellSouth has been
raising some special access prices.\12\ Consequently, I am very
concerned that BOCs' conduct in the wake of USTA II could lead to
substantial service disruptions for tens of millions of telephone
users. For these reasons, it will be important to obtain a stay and a
new decision from the Supreme Court.
---------------------------------------------------------------------------
\12\ In addition to appealing the D.C. Circuit decision, the FCC
should initiate a comprehensive review and investigation of special
access pricing. BOCs are also not subject to any performance metrics
for provision of interstate special access. The FCC has failed to act
in special access metrics rulemaking.
---------------------------------------------------------------------------
Industry UNE Negotiations-What Happens on June 16, 2004?
ALTS supports the FCC's recent call for negotiations between CLECs
and incumbent telephone companies concerning access to unbundled
network elements. While we strongly disagree with some aspects of the
opinion of the D.C. Circuit in USTA II, ALTS supports good faith
efforts to resolve key issues through negotiation rather than
litigation. To that end, ALTS, on behalf of its members, on April 9,
2004 sent letters to each of the BOCs proposing negotiations on loop
and transport issues. Individual ALTS members are pursuing separate
company-to-company or group negotiations with BOCs, and one, Covad, has
reached an agreement with Qwest concerning line sharing.
We hope that these negotiations result in long term agreements for
access to incumbent bottleneck facilities that will permit facilities-
based CLECs to provide competitive local services. We are disappointed
that BOC negotiating efforts so far have apparently been almost
exclusively focused on the so called UNE-Platform (``UNE-P''). We are
also very disappointed that BellSouth has recently posted a notice on
its website that unilaterally directs CLECs to transition from UNE to
special access and much higher prices.
BellSouth has informed Cbeyond that after June 15 it will only
provision new loops and transport as special access and that
negotiations will be limited to the status of facilities that CLECs
currently obtain as UNE. Qwest has also proposed special access pricing
for apparently both existing and newly ordered facilities. As noted,
price increases of the magnitude suggested by BOCs are completely
unacceptable for DS-1 and other UNE that are the lifeblood of
facilities-based CLECs. CLECs would not be able provide value
propositions to their small and medium-sized business and other
customers and competition would be stalled. Consequently, we do not
view these BOC approaches to the post-USTA II environment as
constructive or reflective of an intent to engage in good faith
negotiations as requested by the FCC.
ALTS urges Members of the Committee to direct incumbents to
negotiate in good faith with facilities based CLECs. We would be
pleased to provide to the Committee any progress reports concerning
negotiations that it would find useful.
Negotiations may not be successful. If that proves to be the case,
ALTS and facilities-based CLECs will have no alternative but to appeal
USTA II to the Supreme Court. We will encourage the government to do so
as well. If we are unsuccessful in obtaining permission for appeal from
the Supreme Court or a stay pending appeal, facilities-based CLECs and
the customers they serve could be harmed unless the FCC promptly
clarifies among other things that USTA II did not vacate the FCC's loop
rules.
Need for Enforcement
Since the 1996 Act, BOCs engaged in unprecedented violations of the
Act. They have paid more than $2.1 Billion in fines including for
failure to comply with UNE rules, Section 271 obligations, and merger
conditions. While I am pleased that the FCC took the enforcement
actions that it did, I question whether fines, and the delays in
imposing them, are sufficient to deter incumbent incentives to deny
access to bottleneck facilities. For example, Verizon is essentially
declining to comply with the FCC's new rules concerning denial of
access to loops based on ``no facilities'' and yet the FCC has done
nothing. The FCC should be given additional resources and new tools,
such as the ability to impose forfeitures as part of self enforcing
performance measures, so that it may take a more pro-active and
effective approach to enforcement. Furthermore, any penalties on the
BOCs for failing to provision UNEs should be awarded directly to the
CLEC in the form of liquidated damages, rather than as fines paid to
the U.S. Government. Paying the penalty directly to its competitor
should give the BOC even more incentive to comply with the law.
Universal Service
ALTS recognizes the potential challenge to universal service
programs that could be occasioned by increasing demands on outflow to
eligible telecommunications carriers and changes in underlying network
technology that may make current contribution requirements insufficient
to support current programs. ALTS looks forward to working with
Congress and the FCC to assure adequate funding mechanisms as VoIP and
broadband technologies become more widely deployed in carrier networks.
Conclusion
My experience under the 96 Act has shown that competitors such as
my own company and other ALTS members are the first to innovate and
introduce new technology. The 1996 Act as initially implemented has
successfully provided a framework for the development of substantial
facilities-based competition that is providing significant benefits to
consumers. A shortcoming of the 96 Act is that it did not sufficiently
make clear that broadband goals should be achieved through
implementation of the unbundling obligations of the Act. ALTS and its
member companies will endeavor to reach a negotiated solution to access
to UNEs rather than litigation while preserving a right to further
appeal of USTA II if necessary.
I want to thank the Committee for recognizing the importance of
facilities-based competition and for consistently reiterating that
support.
The Chairman. Thank you, Mr. Geiger.
Mr. Notebaert, how many jobs did you say have been lost
since the passage of the 1996 Act?
Mr. Notebaert. Close to a million, sir.
The Chairman. Close to a million. I was intrigued by your--
in your statement, you said, ``Qwest responded to consumer
demand, and filed for permission to provide standalone DSL. The
process cost $130,000, took 45 days. A cable company, which has
twice as many broadband customers, could have achieved the same
thing.'' Why is that? Why could the cable companies have
achieved it in 24 hours--in less than 24 hours?
Mr. Notebaert. The cable companies, which have about over
half of the market share right in cable data modems, are not
regulated at all. Another example would be where we have to
post where we are going to deploy DSL 60 days in advance of
making it available to customers; thereby, giving the
competition--the cable company--an opportunity, Mr. Chairman to
canvas, door to door, that very neighborhood that we're
deploying in.
And one last comment. Where we support competition
completely, they block us from even advertising on their
systems--in other words, advertising a competitive service.
The Chairman. Well, that's pretty remarkable.
Mr. Notebaert. Uh-huh.
The Chairman. And probably because when the Act was
written--that it was not envisioned that the cable companies
would have this kind of technological capability, right?
Mr. Notebaert. No, Mr. Chairman. I believe that, at the
time the Act was written, Senator Hollings and Senator
Pressler, at the time, as well as the other side, the House,
had talked to the cable companies about the deployment of cable
telephony, and, in fact, talked to Time Warner at the time. So
I believe that facilities-based competition was a strong part,
and that the arbitrage that was created by the Act was only an
interim process. And it's 8 years later; that's a long interim.
[Laughter.]
The Chairman. Let me just ask the witnesses a series of
short questions, and I know they're tough questions, but I'd
like to try to get them in, in the time that I have.
Michael Powell, the chairman of the FCC, has said the
Telecommunications Act of 1996 is, quote, ``walking dead.'' Do
you agree? And if not, why?
Beginning with you, Mr. Dorman.
Mr. Dorman. I don't agree, because I think it was a very
complex undertaking. I think that the judicial challenges in
litigation has slowed down progress, but I do believe now the
benefit----
The Chairman. Nobody anticipated that, with a thousands
pages of law, that there would be a lot of litigation, and----
Mr. Dorman: I did not mean--excuse me----
The Chairman.--many parts of this Act were written by
lobbyists. Were you surprised, Mr. Dorman, that there was as
much litigation as there was?
Mr. Dorman. I think that the tone and tenor has been
different than we would have expected. Challenges, yes. But the
same issues being, you know, sort of, brought up over and over
again----
The Chairman. I'm not gifted with clairvoyance, but I sure
as hell predicted it.
Mr. Notebaert?
Mr. Notebaert. I agree with Chairman Powell. And I wish, if
we could go back and redo it, Senator, Packwood's suggestion
that at 5 years the Act would terminate, would be--end. That
would have been a good thing to do, because it has been a very
expensive process.
The Chairman. Mr. Geiger?
Mr. Geiger. Well, I approach these things by asking myself,
``what problem are we trying to solve?'' If, indeed, you
believe the analytical reports that there is broadband within
reach of 80 percent of homes from cable, 80 percent of homes
and businesses from the Bell Operating Companies, I think that
this piece of legislation----
The Chairman. How about the jobs lost?
Mr. Geiger. I'm sorry, I can't speak to the jobs lost.
We've lost a lot on our side of the industry, as well.
But it's also, I think, interesting to look at the
financial health. Eight years of a regime that has supposedly
been so terrible has produced a tremendous amount of investment
by both sides, the CLECs and the ILECs. And if you look at any
relative measure of financial health, the ILECs, as a group,
are roughly twice as profitable on a net-operating basis as the
average S&P company; and on a free-cash-flow basis, they are
also twice as profitable. So----
The Chairman. Thank you.
Is continued regulation of wireline competition necessary
in light of the intermodal competition that both incumbents and
competitive carriers increasingly face from wireless, cable,
Voice-over-IP, and other providers of voice services?
Mr. Dorman?
Mr. Dorman. I think that the real issue in regulation is
the fact that you've got to de-monopolize before you
deregulate. And the fact is that the Bell companies' market
powers are still significant. Take the do-not-call legislation,
the fact that in Qwest territory it does business with a
significant percentage of customers--I would suspect in the
high 80s--they had the ability to call those customers and ask
them if they'd like to get long-distance service from them, for
example. Wherein, AT&T, even at our size, does business with
perhaps only 30 percent of the customers.
So until you can reduce the market power--like AT&T was
regulated after 1984 under a basis that was established by the
FCC called ``dominant carrier status''--until AT&T's market
share dropped below 55 percent, it was regulated as a dominant
carrier. Well, I'm not proposing 55 percent. I certainly think
that we've got to focus on de-monopolizing before we
deregulate, in the case of the Bells.
The Chairman. Mr. Notebaert?
Mr. Notebaert. It's unnecessary. If we look at the Act, and
read the Act carefully, it says there will be no market-share
tests. That was very specifically put in the Act.
Second, if you look at the intermodal competition that
takes place between wireless, the cable companies, Voice-over-
IP, and you look at the market share for voice communications
for consumers, there is less than half that use the wireline,
the traditional incumbent local-exchange carrier. There are
more cell phones out there. Every one of us uses them. We're
all used to it. And cable telephony is there to stay. If you
take Omaha, Nebraska, we have about half the market share in
Omaha.
The Chairman. Mr. Geiger?
Mr. Geiger. I would say that there are a lot of promising
new technologies--broadband over power, certainly cable--but if
you look at market segments, we focus on small business, and
there is less than a 5 percent overlap of any other network
touching those businesses in this country, which would imply
that if there were an abolishment of our access to that last
mile, 95 percent of businesses would have no choice for their
communications services.
The Chairman. I want to thank the witnesses.
Senator Hollings?
Senator Hollings. Thank you, Mr. Chairman.
Let's don't run a touchdown in the wrong direction when we
just, rat-a-tat-tat, a thousand pages and a million jobs.
The textile industry has lost a million jobs since 1996.
Had nothing whatsoever to do with communications. The bill
itself was a hundred pages, not a thousand pages. And it was
written, not by lobbyists, but by the chief executives and the
best of lawyers of the communications companies.
Mr. Notebaert was head of Ameritech, and I've got the
greatest respect for him. He's an outstanding individual, and I
hailed when he took over Qwest, and he's running it right. I
like it. Dorman, he was down with Bell South. Jim Cullen, of
Bell Atlantic, just stood there as a referee. I know--Dick
Notebaert starts smiling, because----
Look, it took me 4 years. I started writing this with a
jaundiced eye there about deregulation. I had been on this
Committee, I had gone along with the deregulation of natural
gas, and the price had gone through the ceiling.
[Laughter.]
I had gone along with the deregulation of the airlines, and
I still--costs a thousand dollars for a roundtrip to
Washington. I've gone along with the deregulation of trucking,
and we had 67 cross-country truckers, and they're down to 11
now. So I said wait a minute, let's make sure we do this one
right.
And we had a problem, because we were trying to bring
monopolies into competition. As of April 27, 2004, we still
have monopolies not in the competition. They still have 85
percent of the last line, right, Mr. Geiger?
Mr. Geiger. I think at least 85 percent.
Senator Hollings. Yes, sure, they've got--so they've got a
monopoly. And I'd love to run one of those Bell companies,
because all you have to do is get some people to know a little
bit about communications and go around and honey-up all the
state legislators and the Congressmen and Senators, and give
them dinners and parties, and play golf with everybody and be a
nice fellow, because you cannot lose money. It's still a
monopoly. They've got the cap--if it exceeds the cap, then, by
gosh, they can make the profits--I mean, if it's less than the
cap price setting at the local level, then they get that
profit. If it exceeds it, the local commission takes care of
them.
So they've got a monopoly, and the mistake--you list three;
I list one--and that was, we trusted them. We trusted them. It
was all enacted after 4 years. We had 2 years on this
Committee. We lost out. George Mitchell was trying to bring the
bill up, and we lost the Senate, the Democrats in the Senate.
And then we turned around and--I'm sorry Senator Lott is gone,
but he gave me his staffer.
Now Congressman Pickering, who's cosponsoring the bill that
you attest for. And we--it was Chip Pickering representing the
Republican side--and myself, and we worked with Tom Bliley over
there, and we got this bill going, with Mr. Notebaert, Mr.
Cullen, Mr. Clendennon--I can go right on down the list and
call the roll--with the best of lawyers, communications
lawyers. And, as a result, we had long-distance and Bell
companies, both, all endorsed the bill. We passed it 95 to 5.
Everybody agreed it was a good bill.
Now, there was the misplaced trust, Senator. What happened
was, they used every gimmick in the book to frustrate it, which
gives the thousand pages. When you say it doesn't have data,
and it's got data mentioned 428 times--and, you know,
communications lawyers down here, they'll bollix up everything,
and particularly when you've got a chairman who now says ``the
walking dead.'' He's made the regulatory commission a walking-
dead commission, because the Bell companies have used that as a
political instrumentality to frustrate and continue to take
over the, by gosh, long distance. And now they're--the third-
largest long-distance carrier is Verizon. I mean, they've
gotten in there. But the long-distance companies can't get into
that local; they've still got 85 percent.
So let's get right to the point. What has really happened,
and what we should have done was, should have ordered the
unbundling by a certain time, and everything else like that,
and then we would have gotten open competition, and everything
else like that, just like we wanted. And we thought--everybody
said--I'd listen to them all during the 80s, with Judge Green's
order and everything, ``Oh, we're going to get--we've got to
get into long distance.'' That's all they wanted to do. And
they--by gosh, they're using every lawyer in town to resist
doing it, and distorting the Federal Communications Commission
in the entire process, and that's what's happened.
I mean, it isn't a complicated bill, Mr. Notebaert. You
wrote it. He smiled. Let the cameras and the record show the
gentleman is smiling.
[Laughter.]
Senator Hollings. Thank you, Mr. Chairman.
The Chairman. Would any of the witnesses like to respond to
that question?
[Laughter.]
Mr. Notebaert. I guess I will.
Senator Hollings, when we worked on that bill, all of us,
we felt that the bill, as it was written, had the opportunity
to be a success. Those 1200 pages, or just over 1,000 pages,
that were written by the FCC were written before any attempt
was made to file for long distance. I know Ameritech was the
first company. We filed in Michigan. And before those thousands
pages, the ink was dry, we were already told that the
Commission would ignore the market- share tests, which had been
prohibited, with your good work, in the bill. And Henry Hyde
worked on that, too.
So if I go back and think about what occurred, being as
close to you as I was at the time, I don't think the bill was
necessarily the issue. I think the interpretation of the bill--
and when you have contradictory rules, we have a problem, no
matter which side of regulation you come out on. So----
Senator Hollings. We agree on that.
Mr. Notebaert. Yes, sir.
The Chairman. Mr. Dorman or Mr. Geiger, would you like to
make a comment?
Mr. Geiger. No, thank you.
The Chairman. Senator Burns?
Senator Burns. We keep coming back to this thing--thank
you, Mr. Chairman--and coming back to this end of it, as Mr.
Hollings has put it, and then the actions that were taken after
the bill was passed.
There's another element in this that should be made part of
the conversation, and I would ask all of you to respond to
this, historically. Telecommunications regulation has been
shared responsibly--or a shared responsibility with both the
FCC and the states. The states have always had a major role in
the regulations and the enforcement of those regulations. As we
think about the future of the industry and the possibility of
revisiting this Act as of right now, what role should the
states play? And should we go back into this idea? Because it
was a big part of the conversation during the writing of the
bill. What role do the states play? What role was--the FCC
plays? Would you like to comment on that?
Mr. Dorman. I think that the sharing of responsibility
between the states and the FCC remains important. I think the
FCC's ability to be familiar with every local market in the
U.S. and the amount of communications business that gets done
is difficult. And I think the recent FCC response to the last
remand of the District Court suggested that taking into
consideration local competitive requirements, local competitive
conditions, was important. That's what the remand before this
last remand asked for. And when the FCC majority put forth this
set of rules in response to that, it suggested it needed the
states' help in determining impairment of competition at the
local level.
As technology evolves and we think about Voice-over-IP, the
notion of locality and communications services is certainly
blurred. The cell phone has done that, to a certain degree. So
I would suggest that intrastate, interstate, interLATA,
intraLATA, some of those mechanisms do not apply in the way
they did in a wireline environment, and so we've got to update
our thinking about it. But I do think there's still an
important role for state authority.
Senator Burns. Mr. Notebaert?
Mr. Notebaert. Senator, I think if we're going to have a
national communications policy, it needs to be a national
policy. We see this problem in broadband today.
I brought along a chart, and I would just point out to you
this was from April 5 in the New York Times, and it shows the
policy that we have in various states as to taxing broadband
access for the consumer. You'll look at this, and you'll note
that there are three colors. In the yellow area, there is no
tax on either DSL or on cable data modem. In the case of green,
both are taxed. In the case of blue, only DSL is taxed; cable
data modems are not taxed. How can we have a policy, a national
policy, to get broadband in to every consumer--high-density
markets or low-density markets--if we're going to have this
type of difference between the regulations that states apply to
a Federal issue?
So I believe that if we're going to have the policy, if
we're going to catch up and move from number 11 in the world to
where we should be as America, that we need a Federal approach
to this.
Senator Burns. Mr. Geiger?
Mr. Geiger. The interaction of Federal oversight and state
review of rate cases is a fairly mature process that I would
say has worked well in the past. I think that states are very
well suited to understanding their own constituents, and that
many times there are very long and rich relationships between
state commissions and the telecommunications companies in those
states. So I think it should be preserved.
Senator Burns. I've got to go get my glasses. I broke my
glasses last night, and so I'll ask this question and then I'll
leave.
If you were going to revisit the Act, and there's no doubt
in my mind that somewhere along the line we're going to revisit
this Act, give us one or two things that we should absolutely
do, and give me a couple that we do not do.
The Chairman. That's a good question.
Senator Burns. Mr. Dorman?
Mr. Dorman. Well, I think in the case of how the Bell
companies are regulated as a monopoly, we cannot lose sight of
the aspect of what I said before in the Act, that de-
monopolizing before deregulation--there should be a clear
carrot for the Bell companies in that regard, that--you know,
and sending someone to lose market share is a difficult thing
to do, but I think anyone who looked at this at the time the
Act was passed recognized that market-share loss would be
inevitable, you know, going from monopoly to other things.
I would concur with Mr. Notebaert that in new markets, in
markets where there is emerging capabilities, like cable modem
and DSL, as long as the incumbent does not use this market
power in the other area in any cross-subsidy mechanism, they
should have deregulatory benefits in these new markets.
I think, on the other hand, new technologies, like Voice-
over-IP, we need to have a policy of incenting them to be
deployed. We need be moving faster than we are today, whether
we're eleventh in broadband deployment or wherever we are. I
would agree with Mr. Notebaert, we should be first.
The Chairman. How do you incentivize, Mr. Dorman?
Mr. Dorman. I think in the case of new technologies, not
applying legacy regulation, you know, things like the access-
charge regime causing, you know, some groups of competitors to
have to jump through hoops that others don't.
Take a look at what we did with the dial-up Internet
service. In 1984, the ESP waiver was established, saying that
information-service providers who use the local network don't
have to pay access charges. What happened? The entire Internet
early days was based on companies like AOL rapidly bringing
service to customers, because they did not pay access charges
the same way that the phone companies had historically paid
them. Today, on Voice-over-IP, if we applied that same logic,
not paying legacy access charges, the rate of adoption, I
think, would near what we saw on dial-up Internet services. We
created the entire Internet miracle largely because of the lack
of regulation, or a different kind of a regulation, on those
nascent services.
Senator Burns. Mr. Notebaert?
Mr. Notebaert. Senator, I go back to the 1996 Act and the
opening line that I quoted in my earlier comments. I think we
need to reduce regulation and recognize that technologies
substitute for one another. And the whole regime was built on
regulating copper wires, not applications. This is not about
technology; this is about the customer. And the customer feels
no difference in using a wireless device, whether it's for
their computer, 802-11, or 802-16, which will be coming, or
whether it's a copper wire or coaxial cable. I think we need to
look at this from the eyes of the customer and recognize that
the current regulatory format is sadly dated.
The second thing that I would do is, I would look very
carefully at what universal service really means today compared
to where we started. What is universal service, and what do we
really want it to be?
Those are the two issues that I think need to be dealt
with.
Senator Burns. I would ask Mr. Geiger, but I'm going to
stop right there--you know, we had two sessions--and I want to
thank all of you at this table today--that were kind of closed-
door stakeholders, and everybody was at the table for universal
service. And we're almost to the point now where we're writing
that bill. However, we're going to write it on the--probably
the first end of it will deal with the revenues, and then I
think it's very important that we should take a look at
expenditures and how the money is spent and where it's spent.
That will be more difficult, I think, than finding the revenue
base to sustain the fund.
But we're almost there, and I just want to thank all of
you. You were participants--Senator Dorgan--we hosted those
closed meetings, and they were very good meetings. And so we
can now move ahead on that.
Mr. Geiger, you want to respond? What's the first thing we
should do and the first thing in your mind that we should not
do?
Mr. Geiger. Well, I think the first thing that we should do
is preserve intramodal competitors' access into these pipes
into the house. And in our business, we look at the pipe as a
railroad track. It has capability that we can use differently.
We can use the service equivalent, if you will, of putting a
Mag Lev train on that railroad track. But without access to
that last mile track in to the customer, we just simply don't
have a business.
And it is irrelevant of what technology is involved.
Technology has changed over time. Whether it's DSL, whether
it's fiber, whether it's IP, we need access to those tracks to
have a business and to compete with the incumbent. And I think
any policy should preserve that right.
Senator Burns. What shouldn't we do, then?
Mr. Geiger. What we shouldn't do, in my opinion, is deny
access on the basis of what technology is deployed.
The Chairman. Senator Wyden?
Senator Wyden. Gentlemen, I know you've negotiated, and
these negotiations are going on after the court decision with
respect to new wholesale prices for competitors to access the
incumbent's networks. Can you give us an update on what's going
on? I mean, in some ways it's sort of hard to see, for example,
how this is going to be of benefit to some of the incumbents,
and I'm concerned about that. I'm also concerned that
apparently some incumbents are taking the position that they
don't need to disclose the deals they strike. So then you've
got real problems for the little guy.
And so why don't the three of you just kind of give us a
sense of where these negotiations are going, because I think
that would be helpful.
Mr. Geiger. Would you like me to start, sir?
Senator Wyden. Go ahead.
Mr. Geiger. Well, first of all, it's a little daunting to
try and accomplish in 8 weeks what the FCC has not been able to
accomplish in 8 years. We are negotiating with a very, very
powerful supplier that has many of the characteristics of a
monopoly.
So it is difficult, and we don't have a lot of market power
because there is truly no alternative for us to access upwards
of 95 percent of our customers. Those railroad tracks, as I
referred to, are only supplied by the local phone company, so
we have very little leverage. And we have engaged in initial
conversations, and really what we've gotten back is significant
price increases, and price increases that would not allow us to
sustain our business. And the assumption of the incumbent is
that unbundling elements are gone.
Senator Wyden. Mr. Notebaert?
Mr. Notebaert. Senator, we view the negotiations as an
opportunity to strike commercial contracts. These are
distributors. I think it's a misnomer to call them Competitive
Local Exchange Carriers, because, for us, it is a commodity,
and we are a commodity business. We want every distribution
channel we can get. So what we have done, we have struck an
agreement already with Covad. We have, with MCI, gone out and
hired--or, pardon me, retained--a mediator, Cheryl Perino, who
is the head of the Wisconsin Commission. We have high hopes for
that. We have a meeting tomorrow, in Colorado, where we've
invited all of our distributors to come in, and we will try and
reach an arrangement. And that is being worked by the mediator.
I think we can get there if people are willing to accept
that the status quo has changed. And that'll be the difference.
Senator Wyden. Sir?
Mr. Dorman. I wish I could be as specific as I'd like to,
but we are bound by nondisclosure in our negotiations
specifically with the Bells. But I can say this, that there are
different approaches being taken by the Bell companies. Mr.
Notebaert's company has put a complete sunshine opportunity in
place with a respected former commissioner, and I have high
hopes for those discussions. They invited not only their direct
negotiator, which is MCI, but all of the CLECs to be present in
this hearing that will go on.
I think in the context of reality here, we have a reluctant
supplier, who would prefer not to sell these items the way they
are being sold today. That is reality. I would take this, and
contrast it to AT&T's recent experience with the Cingular
proposed acquisition of AT&T Wireless, our former wireless
subsidiary. AT&T will get the use of the AT&T Wireless brand
back, and we have announced our intention to reenter the
wireless business. To do that, we will undoubtedly buy minutes
from other wireless suppliers. And, as Mr. Notebaert knows, he
himself has been able to go to the marketplace, to the six
national wireless suppliers, and buy minutes and become a
wireless distributor himself without owning his own networks
facilities to do that. We' seeking to do the same thing.
I would simply contrast, in going to the six national
wireless suppliers and saying, ``Hey, I'd like to buy billions
of minutes,'' the experience is very different than saying,
``I'd like to spend nine-and-a-half-billion dollars with the
Bell companies,'' as we do today as AT&T, and be treated like a
customer.
Senator Wyden. I appreciate that. And because the
negotiations are ongoing, I understand there's limitation on
what you can say, but I just hope we'll have as much
transparency as we can, because I think I'm particularly
concerned about whether this can be a forum where essentially
big guys can go after little guys and compound some of the
problems. And I'm not accusing anybody of that, I'm just
concerned that with lack of information it's certainly a
possibility.
Let me ask you a policy question for the future with
respect to the need to access to the last mile. And everybody
constantly comes back to this issue. And I wonder if the three
of you that last mile facilities are bottleneck. In some places
they're a monopoly, maybe in other places they're a duopoly.
But I'm curious whether you would say that mandatory access to
the local loop now makes sense. And I'd just be interested in
the three of you being on record on that.
Would you like to start, Dick?
Mr. Notebaert. Yes. I think we would look at this, again--
because people that buy this are our distributors--and I would
rather get some return on an asset than no return on an asset.
It's just good business.
I also believe, though, that there are multiple
technologies. And, as I showed on the map that I held up, I
continue to be amazed that we talk about copper wires, and we
fail to talk about a cable company, again, that won't even let
us advertise on their system. And we don't talk about wireless.
And each day, we compete with wireless because customers have
made a shift, in a lot of cases, and no longer have a wireline.
So we seem to be hung up on one type of technology, versus
regulating an application.
But let me go back and finish with--we would--I'm very
comfortable with UNE now. I'm very comfortable selling those
assets to our distributors.
Senator Wyden. Mr. Dorman?
Mr. Dorman. In 1984, AT&T had a high-90s-percent market
share of the long distance business, and mandatory resale, in
the form of selling WATS to Sprint and MCI, was a very key part
of developing competition in long distance until some 20 years
passed, and during the 1990s Sprint and MCI developed their own
long-haul fiber networks, and their dependence on AT&T
diminished. I was at Sprint for 14 years during that time, and
I can say without access to AT&T's network we could not have
built the ability to ubiquitously complete long-distance calls.
That diminished over time.
I think in a case of access to the local exchange, we
expect it to diminish over time as viable--economically viable
technologies come to market that will allow us to accomplish
for ourselves what we get from the Bells.
I've said this many times, and not to be funny about this,
but it's certainly a perverse situation, where you're spending
nine-and-a-half-billion dollars with four suppliers to have
your eyes gouged out. And I wished all of them thought of us as
distributors. So it does tend to make you highly motivated to
develop your own facilities. But, being practical, for the 110
million American households and tens of millions of business
locations, it will be a long time before there are viable means
to reach all of them more economically than the use of the Bell
network.
Mr. Geiger. I would echo that. I think that the last mile
is a bottleneck, especially if you try and segment the
marketplace. Now, you could argue that there is another wire
into a consumer, but wireless technologies are not available
today that would displace broadband to businesses. And as they
emerge, I think that the economics may become viable. They are
not today.
Senator Wyden. Thank you, Mr. Chairman.
The Chairman. Senator Sununu?
STATEMENT OF HON. JOHN E. SUNUNU,
U.S. SENATOR FROM NEW HAMPSHIRE
Senator Sununu. Thank you, Mr. Chairman.
As I listen to the supporters and the opponents of the 1996
Act talk about its shortcomings, I find it interesting that
they all seem to be disappointed in the bill, whether they
supported it or not, and their disappointment seems to flow
from two particular areas, and I think they were mentioned in a
number of the opening statements. One is a lack of clarity in
the legislation itself, lack of clarity in the legislative
language, and that's something that Congress obviously bears
responsibility for.
In my discussions with interested parties and other
legislators, it seems to me that that lack of clarity was
created because we either attempted to predict where technology
was headed, or we didn't foresee where technology was headed,
and in the crafting of the language, therefore, we didn't deal
with the kind of technical environment that we see today. But a
lack of clarity is something that we should take away as being
problematic, whether we're trying to write Voice-over-IP
legislation or reopen the 1996 Act.
The second area are those circumstances where we delegated
too much authority to regulators. A hundred pages of
legislation, a thousand pages of regulation. I think that's
just not quite the right ratio. I don't know what the right
ratio is, but that's very, very problematic.
So, again, if you have a lack of clarity in the legislative
language or you delegate too much to regulators, you get what
we have, which is a lot of court cases and a lot of legal work,
a lot of money being made by a lot of good lawyers, but we
don't have an environment where people will step up to the
plate and commit risk capital in the way they that would want
to see to succeed in the deployment.
Those, for me, are the two important lessons as we either
look at revising the 1996 Act or we begin to take up
legislation like VoIP, which I appreciate.
I think at the last hearing the Chairman made a very polite
gratuitous reference to my legislation, and I was very grateful
for it. And now the witnesses have done it, and that's very
flattering. But all that really is, is an attempt to make sure,
going forward, we have as much clarity as possible in the
legislative framework and that we're careful about what we
delegate from a regulatory perspective. Some people have
referred to it as a ``lite regulatory touch.'' I don't mind
that phrase. But the key is clarity.
As we talk about these issues--again, whether it's the
broad context of the 1996 Act or Voice-over-IP legislation--I
see two big potential areas where there might be, to use a
technical term, a ``food fight.'' And that is on the issue of
intercarrier compensation, one; and universal service, number
two.
And what I would like to have each of the witnesses talk to
is, In revising our intercarrier compensation system, what
should be the principles for an equitable system? And what
would be your principal concerns if we don't get an
intercarrier compensation reform process right?
Mr. Dorman?
Mr. Dorman. Well, I think that the discriminatory aspects
of access today are what concerns us the most about
intercarrier compensation. As I said before, ISPs pay one rate
for the use of the local network, and they make heavy use of
it, long call-holding times associated with sessions on AOL or
whatever service provider you might use. Cellphone providers
pay a different rate. CLECs pay a different rate. One class of
Voice-over-IP call, based on last week's ruling by the FCC, pay
interstate rates or intrastate rates, depending on the
origination of the call, which in an Internet environment is
difficult, if not impossible, of determining. And then,
finally, intrastate access rates and interstate rates are
vastly different. You know, a half a cent, roughly, for
interstate rates, and state rates that range up to several
cents--and in independent territories, as much as nine to ten
cents.
We need to create a situation where technology deployment
follows its own economics, not the access-charge regime's
steering of it. And we remove from the system, encouraging
arbitrage, at the nicest end of the spectrum, to outright
deceit on the other end, by masking what a certain call may be
to get a lower rate.
Senator Sununu. I'm sorry, you're talking about routing
calls to specific regions in order to----
Mr. Dorman. One form.
Senator Sununu.--avoid----
Mr. Dorman. One form. You know, changing the jurisdiction
of a call to interstate, for example, from intrastate, would
allow someone to pay a much lower rate.
So we think that having completely technology and supplier-
neutral access charges for the use of the local network is
absolutely essential. We don't find it offensive to pay for use
of the local network; we simply want all players to pay the
same amount.
In doing so, the pool for universal service could be much
more significant, and I think that we could find a compromise
in this with the local exchange carriers, certainly the large
ones.
Senator Sununu. Mr. Notebaert, do you agree with Mr.
Dorman?
Mr. Notebaert. I would start out by asking--and we support
universal service, obviously, and would comply with whatever
the policy that is established--but we should decide first what
we're going to do, and then decide how to fund it.
Access charges, I think, can be put away, and we can do
bill-and-keep. The question is, How do you want to subsidize?
How do you want to tax? But to decide that, you have to decide
what you want to do with it. And, as I said earlier, I think we
need to determine what USF is in the future, and then we can go
back and say, ``How do we tax? How do we fund?''--versus
creating huge funds, and then finding an issue for them.
Senator Sununu. So instead of deciding how much we want to
spend, then decide what we want to spend it on, set some goals
first----
Mr. Notebaert. That's the thought, Senator.
Senator Sununu.--for accomplishment.
Mr. Geiger, do you agree with what's been said?
Mr. Geiger. I agree with Mr. Dorman. I think that a call is
a call. The use of the public switched network should be
compensated, and an interLATA versus an interstate versus an
international terminating call should not create an opportunity
for arbitrage. And Cbeyond is, if not the only CLEC in the
country, one of a few that is a bill-and-keep carrier for
exchange of local traffic. We do not arbitrage on access
charges.
Senator Sununu. And does that go for the larger
organization, ALTS' support for a bill-and-keep system?
Mr. Geiger. I'm sorry, I was speaking for Cbeyond.
[Laughter.]
Mr. Geiger. I think you would find the flexibility with the
ALTS organization in a transition mode from the current regime
to a regime of a sort of ``all users pay comparable charges.''
Senator Sununu. But speaking as a forward-looking provider
for Cbeyond, you would support a nondiscriminatory uniform
system.
Mr. Geiger. We would. Cbeyond would, right.
Senator Sununu. Thank you.
Thank you very much, Mr. Chairman.
The Chairman. Senator Lautenberg, I know you have a
pressing appointment.
Senator Lautenberg. Yes.
The Chairman. I apologize.
Senator Lautenberg. There are not many of us here, but
there's a World War II Memorial being dedicated out there, and
half of this Committee on that case left--Senator Hollings, and
I don't want to miss any words that Senator Hollings gives,
I'll tell you.
I'd ask you this. Mr. Notebaert, you had--you're experts in
local service, and technically you could go beyond your region
if you wanted to get into the business--more of the local
business and more of the opportunity that's presented. Why
haven't you, for instance, among others of the old Bell
systems, gone beyond the territories that were originally
consigned to them, to try to compete in those areas?
Mr. Notebaert. Senator, we do. We do billions of dollars
outside of the 14 states where we are an incumbent local
exchange carrier. We do business in Philadelphia, Atlanta, New
York, San Francisco, Los Angeles----
Senator Lautenberg. Local----
Mr. Notebaert. Yes, we do. Yes, we do. We compete head to
head with the larger companies, the--what used to be called
IXCs--and we've been very successful. In fact, the Yankee Group
just put out a report talking about the fact that we had taken
share from the top three providers, and we've been doing this
for a number of years.
Senator Lautenberg. Do you offer, in those areas, the full
range of services that Qwest might be offering in their local
areas?
Mr. Notebaert. Yes, we have. We have pulled back in two
areas. We were offering DSL. We disposed of that business to
Covad. We were doing pay phones outside of where we were the
local incumbent exchange carrier, and we have disposed of that
group of assets. But, other than that, we do consumer long
distance, we do package switching, ATM frame, all the different
types of services to everyone from the government to Crate and
Barrel to Delta Airlines and others.
Senator Lautenberg. Mr. Dorman, are you able to move a
facility into these markets? I assume Mr. Notebaert's company
is not compelled by access charges that prevent them from
moving ahead rapidly in these marketplaces that they go to. Do
you have the same access?
Mr. Dorman. We have--AT&T today provides local service in
46 states. That's a fairly recent occurrence. In fact, we did
not provide service in any of the 14 Qwest states a year ago.
We went into Arizona, as our first state in the 14 Qwest state
regions, principally because of the prices that were charged
for the unbundled elements in those states. The prices
determine how broadly we can compete, or not. And I think in
the case of AT&T, at least, we've found ways to enter some of
the markets recently, because we have a bigger base now, we're
amortizing our fixed investment over a larger number of
customers. But I would say that we are dependent upon access to
the Bell networks as certainly our entry strategy until we can
build sufficient customer base to deploy our own facilities.
And just as a matter of clarification, Qwest is a
combination of the old Qwest and the old U.S. West, so, in Mr.
Notebaert's case, he actually has--well, you know, U.S. West
was acquired by Qwest, and Qwest was operating nationally as an
IXC, so it's the one example of a Bell company that is a
hybrid, versus the other three, who are largely as they were
before, local exchange companies.
Senator Lautenberg. What would happen with AT&T if access
rates were increased to 50 percent, as has been petitioned, in
that many instances?
Mr. Dorman. Well, I can give you a specific example.
Recently, the Indiana Commission raised prices that we paid SBC
for access, and we've stopped marketing two of our most popular
plans that consumers had selected because they are no longer
economical for us to offer. While we've stopped short of
completely exiting the market, we've made it clear if some of
the requested rate increases were approved--in New Jersey
recently, Verizon requested a 50 percent rate increase. The
state commission granted a 14 percent increase. We weren't
happy about that, but we can still continue to compete, albeit
at what I'd consider to be a razor-thin margin.
If prices went up as proposed from some of the public
statements the Bells have made about, sort of, their public
offers during the negotiation period, it undoubtedly would lead
to us having to exit, almost completely, the local market.
Senator Lautenberg. Interesting. Well, then part of your
advertising campaign, which is fairly robust, is, you ought to
say, ``Well, we would charge a lot less even than we do--even
than the low price that we do if your local company would
permit us to come in and offer you these services.'' And
there's no charge for that advice, I promise.
[Laughter.]
Senator Lautenberg. In New Jersey, Mr. Chairman, what
happened is, the BPU granted Verizon a 14 percent increase, and
they got so angry that they threatened to call off a $240
million investment in capital equipment to let New Jersey know
how they responded to that. Not satisfied with a 14 percent
increase. And this is not a company that's starving for
earnings or revenues.
Thanks, Mr. Chairman, appreciate it.
Thank you very much.
The Chairman. Thank you.
I'm not sure if Senator Cantwell or Senator Dorgan is next.
Senator Dorgan, do you----
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you.
First of all, let me thank the witnesses for the testimony
today. I think that this hearing, which is the first of a
couple of hearings, is important and kind of sets the stage for
a broader discussion about some of these issues.
Let me also point out that I think--while we're talking
about different devices by which people communicate, I think
the interests of the 1996 Act was about a set of principles,
not devices. Doesn't matter to me much whether somebody is
talking over a telephone that's connected to a wire that goes
to a wall someplace, someone is speaking on a cell phone, or
someone else is on VoIP using a computer. The issue is the set
of principles. And one of the principles was to promote
competition.
Now, even when we wrote the 1996 Act, we understand there
was robust aggressive competition with respect to long
distance. We knew that, because all of us got calls at home
every day, relentlessly, asking whether we would be willing to
change our long distance carrier. There were some 500
competitors, and at least when we wrote the 1996 Act the cost
of long distance had diminished substantially as a result of
that robust competition. The same was not true with respect to
local service and local exchange.
So the design of the Act was an attempt to promote
competition in the local exchanges, number one. Number two, the
Act did talk about reducing regulation. And, number three,
about preserving the principle of universality. And the reason
that that's important is, we, long ago, decided that
communications ought to be universally available at an
affordable price. So we did anticipate--although we didn't know
exactly what advanced services would be, we did anticipate
advanced services, because we wrote the provision in law
talking about advanced services, and we provided in law also
that the Universal Service fund, which shall be continued under
the 1996 Act, would promote comparable service at comparable
prices.
Now, why is that important? Because in some parts of the
country it had traditionally been much more expensive to
provide these communications services than in other parts of
the country. And so the Universal Service Fund was to drive
down those high-cost areas so that Donald Trump could call a
telephone in Grenora, North Dakota if he wanted to. Not that he
would. But the fact is, everyone would have access to a
telephone at an affordable price.
So those were the principles in the Act. And, frankly,
while I think a lot has changed since 1996, those principles
haven't changed, and the need to pursue those principles have
not changed, in my judgment.
I think that, Mr. Chairman, a number of bad decisions have
been made by, first of all, an FCC that's made wrong decisions,
and, second, an FCC that has been content to observe. So you've
got two different problems over a period of about 8 years; one,
making bad judgments, and then, in other circumstances,
deciding to make no judgments and simply be an observer,
despite the fact that we pay them are regulators.
So, you know, we come to this point, in the year 2004, and
we have what I think is an interesting discussion, because I
think perhaps these three witnesses represent a pretty healthy
slice of most of the competitive circumstances, in terms of
what changes are necessary and how we proceed.
I understand that if I were in Mr. Notebaert's chair or Mr.
Dorman's chair or Mr. Geiger's chair, my responsibility is to
my business, the stockholders, and advancing the interests of
that business, period, end of story. That's the responsibility.
And so if I have Mr. Notebaert's customers, I don't want
anybody coming to get them. If I have a dominant position in
the local exchange, I don't want anybody coming to get them. To
the extent that I can prevent that and protect my base, that's
what I'm going to do. If I'm in Mr. Dorman's position, I want
to--what I want to do is maximize my capability of going to get
the customer somebody else has, and then trying to anticipate
with what technology we're going to compete in the future, and
how do I best accomplish that. These are difficult, vexing
decisions that we have to make, both in the private sector and
in the public sector.
Let me make just one or two other points.
Mr. Notebaert, first of all, I think you're a breath of
fresh air for Qwest. When I say ``fresh air,'' I don't mean
that you're a kid and you haven't been there very long; I mean
that----
Mr. Notebaert. I can take that, that's OK.
Senator Dorgan.--I mean that Qwest was a company that's
very important to my state and was being run in a way that was
devastating, in my judgment. And I regret that those who ran it
that way did that, but that's change. I respect the work you're
doing, I'm glad you're there and that you've changed the
orientation of that important company.
And, Mr. Dorman, you and I have talked before, I have no
idea how you make decisions in this environment in a business
of the type that you're in.
But these are very interesting, difficult, in some ways,
very challenging times. And let me just ask one question, if I
might, because I think there are many other questions. And what
I would perhaps like to do is send you some questions, because
we're going to have some other hearings, and I do want to get
some of this on the record.
It deals with this issue of competition. Facilities-based
competition is not something that happens like that, and we
understood that in 1996. You're not going to stand up--and we
didn't in long distance--you're not going to stand up a
separate industry that says, ``All right, today we've got
facilities, we're going to compete.'' So the result is, we kind
of develop an approach, like UNE-P and requiring unbundling and
so on, or bundling, and try to create this competition.
Mr. Notebaert, you indicated that you're in Philadelphia, I
believe, for local exchange service. Is that facilities-based
competition or--how do you compete in----
Mr. Notebaert. We have facilities throughout the United
States. We also purchase----
Senator Dorgan. For local----
Mr. Notebaert.--local loops or private lines from
companies. We do not use UNE-P.
Senator Dorgan. All right.
Let me just say that I hope in this period, post-action by
the courts, that when we have these negotiations that are going
on for the 45-day period--I hope that to the extent that we can
make them available to the public and let some sunshine in, as
I think you have done, Mr. Notebaert, in your area, I hope that
occurs.
And let me just ask the question, What happens if we don't
succeed in making any progress in the 45-day period and things
collapse and we don't have the capability under UNE-P any
longer to access other facilities? I assume that the answer to
that is, it dramatically, dramatically diminishes the
opportunity to promote local competition in the local
exchanges. Is that correct?
Mr. Dorman. Well, based on our reading of the decision and
what it asks the FCC to do, it would be our belief that,
without further appeal to the Supreme Court, that UNE-P as a
mechanism disappears because the Bells don't want to provide it
at the current price levels that are regulated. And my view is
that all 50 states didn't get it wrong with respect to setting
cost-based prices. I think it's been pretty clear from the
price-increase request across the Bell companies, that we are
seeing price increases, you know, that would average nine to
ten dollars per loop, which would translate into 50 to 100
percent price increases in some cases. That would take our
already very thin margins as the largest UNE-P reseller, down
to the point where we could not continue. So AT&T, from its
part, would have to exit those local markets, because we
wouldn't choose to keep doing something we lose money at.
Mr. Geiger. While it wasn't our interpretation, we've been
informed by a couple of the phone companies, the incumbent
phone companies, that it is their interpretation that access to
unbundled network-element loops--not the platforms, not the
switching--we don't buy that--but the loops themselves were
vacated. And we have been told that, as of June 16th, we would
not be able to order them anymore and that the price
increases--they would revert to the interstate special-access
tariffs, which are between three- and four-hundred percent
increases over our UNE-loop pricing.
So my quick answer is that it would be Armageddon in the
industry, nationally I can speak for all of our members on
that.
Senator Dorgan. Mr. Notebaert?
Mr. Notebaert. Yes, I think that commercial negotiations
are always better. And from our point of view, since we face
severe competition from wireless and cable television--maybe
more than others, I don't know; I mentioned the Omaha
statistics--it's very important for us to find common ground so
that our distributors are pushing our product. I think UNE-L
and access to the loop is a good thing. Where I have a problem
is with UNE-P, because the whole concept is total--totally
economically foreign. I mean, arbitrage is a bad thing, not
sustainable, especially the arbitrage built upon taking a cost
structure of a future incremental cost, and not the actual cost
of the asset that you put in. And so I have a lot of problems
with that.
We've put forth a plan at the FCC. We made it public. We've
also entered into mediation. I think--maybe I'm optimistic--I
think reasonable people negotiate all the time. And we've done
it with satellite providers so that we have competition. Those
negotiations aren't simple, but one has to be willing to
compromise. And when one's not willing to compromise, one
shouldn't have a guarantee of their business success. There's
risk in everything we do.
Senator Dorgan. Mr. Notebaert, just one final point. The
question the Chairman asked in response to your testimony about
the 24 hours for the cable, is--the approval--is that not
because the cable was defined as an information service?
Mr. Notebaert. No. It's because we don't regulate--we
chose, in the Telecom Act, to regulate copper wires and not
regulate the application or telephony. We don't regulate
telephony. We regulate copper wires. And as the court said, you
know, we probably shouldn't treat these companies as pinatas.
There's more to this than that. And if we're going to regulate,
we should regulate applications. And our only plea, as I showed
in the chart from the New York Times, is that it be consistent,
that it be balanced, and that there is a chance for success for
those of us who invest billions of dollars every year.
Senator Dorgan. And my final point is that whatever the
application is by which someone communicates, the principles,
in my judgment, that persuaded us to proceed with an act in
1996 remain the same principles today.
The Chairman. Senator Cantwell?
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman.
And, gentlemen, I've heard most of your testimonies and
read parts of it, and we've had this discussion now for the
last hour or so. But I want to ask you a question. And if you
could, I'm requesting--if you could, just answer in a yes-or-no
fashion to this first question. And the reason I'm asking it is
because I think it really does boil down to how we view Voice-
over-IP in the next year or two, and whether we should regulate
it or not. Because I hear various things coming out of the
panel. So just a yes-or-no answer from each of you on whether
you think Voice-over-IP, just, say, for the next 2 years,
should be regulated.
Mr. Dorman. No.
Mr. Notebaert. No. I want to add one thing. Yesterday, we
announced that we wouldn't charge access fees on VoIP.
Mr. Geiger. Yes.
Senator Cantwell. Thank you. Thank you for that brevity.
I'll give you a chance to explain in a second.
My second question, Isn't this dilemma really--now that we
know that technology is evolving and that we all want to be in
the Voice-over-IP business, and we all want to have is a level
playing field--isn't the real issue that the definition under
the Telecom Act of ``information service'' is not really
sustaining us, not really allowing the FCC to make decisions
that will create a level playing field, and actually creating a
lot of havoc and legal fees and an unpredictable environment,
instead of predictability?
Mr. Dorman. Well, I think the notion of information
service--again, going back 20 years, to nascent suppliers at
the time that we were hoping to promote their evolution--is a
far cry from where we are today. Yahoo, as an information
service provider, uses the Internet network, doesn't pay access
charges to use the Internet network, but provides a range of
services--you know, not necessarily voice today, but perhaps
voice tomorrow--and their market capitalization is over twice
what AT&T's market capitalization is, not that that--I'm just
making the point that when you think about----
Senator Cantwell. So you think, yes, information services
is limiting? Because I have a question that I do want you to
spend a lot of----
Mr. Dorman. Yes.
Senator Cantwell.--time on.
Mr. Dorman. Information services needs to--be reformed.
Mr. Notebaert. I don't think that's the issue. We didn't
regulate wireless the same way we did wireline, and look at how
it's blossomed, and look how well it's done. We didn't regulate
many different features that we have out there, and they
blossom, and technology and investment is made. We could blame
it on the definition of ``information service,'' but it's
really a question of, do you want to regulate an application or
a technology?
Senator Cantwell. So you think the definition suits us well
and we should keep it?
Mr. Notebaert. I'm fine with it.
Senator Cantwell. Interesting. Thank you.
Mr. Geiger?
Mr. Geiger. I don't have anything to add to that comment,
but did you want me to explain my----
Senator Cantwell. Let me ask one more question----
Mr. Geiger. Sure.
Senator Cantwell.--and then anybody can explain anything
that they want.
Mr. Geiger. OK.
Senator Cantwell. My question is--there is a lot of
dialogue floating around there by MCI and others. I have a
feeling that Vince Cerf, as I--as most people think of him, the
Father of the Internet--probably had a hand in promulgating
this notion. And this notion is that our current infrastructure
on telecom is this siloed approach, if you will, having the
various titles of voice and wireless and audio broadcasts and
radio and everything else. And shouldn't we move more to a
physical layer, with the applications on top of it?
And I--this is very interesting, because Mr. Notebaert is
actually advocating that we do something to regulate the
application, but I would propose--I think I agree with this
proposal. I think it's the other way around. I think you should
look at the transport layer, and then have net neutrality on
top of that, and have everybody--because you're all going to be
in the same business in 10 years, I guarantee it--or the ones
that can navigate their way through this. We'll all be in the
same business. Everybody's going to offer video, everybody's
going to offer Voice-over-IP, all of that. So why not look at
the transport layer, regulating the transport layer, and then
having the applications on top of that be the things that we
leave alone? So that's what I'd like your comments on.
Mr. Dorman. I think the way I see it is that we tend to
debate the voice application a lot, and the fact is, it's the
one application--if you look across all the services that can
flow through an IP network--streaming video and audio, you
know, finding out what the weather is in Seattle tomorrow,
moving your photos to oPhoto, you know, meeting someone over
the Internet, whatever the application may be--voice is
consistently singled out for different treatment.
Our notion is, Services-over-IP, or SoIP, as we call for
it, is very similar to your view, which is, once you have a
broadband network in place of sufficient speed and the software
tools of quality of service that exists in the IP network realm
today, the notion that you're going to take one application and
treat it differently from everything else that we know about
today or ultimately will see developed just doesn't make good
sense.
Senator Cantwell. They're all bits.
Mr. Dorman. It's all bits at some level. So our notion is
that we certainly see voice requiring special things because of
the interactivity of the human conversation. You know, latency
in a network matters, so you've got to be able to have the bits
leave one person's mouth and arrive at the other person's ear
in a coherent fashion. So there will be voice application
service providers. That's what AT&T seeks to be. Some of them
will own networks and deploy them because it fits their
requirements, and some won't.
Senator Cantwell. Mr. Notebaert, if I could--I hope Qwest--
being in the West, I hope Qwest is the broadband video service
delivery. I would get my video on demand from Qwest in the
future.
Mr. Notebaert. I'd be happy to take your order today.
[Laughter.]
Mr. Notebaert. Right after--I'll get the information.
I would be OK with net neutrality, except we don't have it.
Take a look at your bill for your telephone service, look at
the fees that the government applies. Take a look at your
wireless bill, look at the fees that are applied. Take a look
at your cable bill and look at the fees that are applied. If
you mean by ``net neutrality'' that we're going to regulate
them all the same, I'm with you. But we have been incapable of
seeing the world through the eyes of the customer. We haven't
done this.
Senator Cantwell. So, in the future, if everybody was
pushing bits, and all the bits were basically the same--I mean,
obviously, there are more bits in streaming video than there is
in IP telephony--but you believe if you were in that business
and Mr. Dorman was in that business, all the bits would be net
neutral, that everybody would be pushing everybody's bits at
the same speed, and that you wouldn't tax somebody or regulate
some--one of those applications--I'm concerned about your
comments about regulating the applications.
Mr. Notebaert. I'm just trying to get us to move from the
status quo of regulating a pair of copper wires to move toward
regulating cable telephony, or cable, the same way, or
regulating wireless the same way, so that we do have
neutrality. The only way I know to get people there is to use
the discussion of the application that's run over the networks,
and that starts to bring people back to what's really
important, and that's customers. We spend a lot of time talking
about things, but most of the time the discussions don't come
down to what's important, and that's the customer, who's the
center of our universe.
Senator Cantwell. And I think that is the concept of the
transport layer, is that everybody coaxial--everybody would
be----
Mr. Notebaert. Then I would be very supportive.
Mr. Geiger. This is very rich discussion. I think it speaks
to the Senator Dorgan's notion about principles. And a
principle I think that we need to keep in sight is intramodal.
And if you were here for my analogy about a train track--it
might not be very articulate, but we don't have a business
without access to that train track, which I would call the
transport layer. Today, we happen to use a technology that is a
next-generation technology--allows us to deliver a richer--more
rich cargo within our train cars than our competitors do. And
so we get customers because of that. And, you know, that's an
opportunity to induce others to buy and deploy new broadband
technologies, new service technologies.
So I would agree with you in your analogy that the
transport layer, broadband, and the access to those train
tracks and the last mile, are essential for competition, and we
think that competition is best served by intramodal.
And I would tell you that my opinion on VoIP--first of all,
voice bits fetch more money than other bits, and that's why
there's this much discussion around it.
Senator Cantwell. Today.
Mr. Geiger. Today.
Senator Cantwell. Today, they do.
Mr. Geiger. That's right. Today. But I think VoIP needs to
be held accountable for other public service issues, like E911,
like CALEA. And I don't think VoIP should get a hall pass on
access charges.
Senator Cantwell. Well, Mr. Chairman, I know my time is
expired, but, under the transport layer of the future, you
would change your opinion and then say VoIP----
Mr. Geiger. That's correct.
Senator Cantwell. You would not change your--OK.
Thank you, Mr. Chairman. And if I could just add--I know
the Chairman entered into the record a statement for the
Consumers Union and the Consumer Federation of America, but I
would just request, if--I know we're going to have more
hearings--but if they could testify sometime in the future, I
think that this set of hearings are important hearings, and I
know it seems like many of them get down to the battlefield of
current business, when I think we need to keep in mind the
ultimate effect we're trying to strive for, as the 1996 Act
tried to, is, How do we protect consumers in the future to more
economical--in this case, delivery of bits?
Thank you.
The Chairman. I'll certainly do that. And I--as you know,
they have testified before this Committee on many occasions on
a variety of issues, and their opinions are highly valued.
I thank the witnesses for their time today. We've been more
than 2 hours. We thank you for being here, and you've
contributed a great deal to our efforts that I think are
necessary to get underway. And whether we do anything this year
or not, or next year, it's certainly important, I think, to
review the Act and to see what areas we need to change and
improve on. And I thank the witnesses.
And this hearing is adjourned.
[Whereupon, at 11:30 a.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
Thank you. Mr. Chairman. Today's hearing is an opportunity for the
Committee to revisit progress made since passage of the
Telecommunications Act of 1996, in promoting greater competition in the
communications marketplace. Lest we forget, we should remember that our
efforts to rewrite the 1996 Act were taken only after many hearings and
much debate. I trust that our consideration of potential future changes
in telecommunications policy will be taken with similar care.
In my view, the 1996 Act was an important piece of legislation
designed, first and foremost, to bring the benefits of competition to
local markets. Since that time, competitors have provided millions of
Americans with a choice of local telephone service and lower phone
rates. The benefits of this competition also extend to customers of the
incumbent phone companies, as competitive pressures have forced them to
become more efficient and to respond with competitive bundles of
telecommunications services.
Yet, despite measurable benefits, the growth of competition in
local markets it is still only in its early stages. In most areas of
the country, the Bell operating companies and other incumbent providers
still retain the lion's share of local telephone lines. Indeed,
according to recent FCC data, incumbent phone companies today--eight
years after the 1996 Act--still retain over 85 percent of all local
access lines across the nation.
Mr. Chairman, it is abundantly clear to anyone regularly reading
the business section of their daily newspaper that the
telecommunications industry in the midst of some fundamental
technological changes. In many cases, these advancements have the
potential to provide consumers with new features and services that may
enhance productivity and promote economic growth. But, in addition,
these new technologies raise some important policy questions that need
to be carefully examined and answered. For example, should providers of
similar services be subject to similar regulation, or are their
legitimate reasons for different regulatory obligations? How will new
communications technologies affect our commitment to universal service
in rural and insular areas? And, what action may be necessary, if any,
to ensure that network providers do not discriminate against
competitive service offerings? These are only a few of the many
questions that we will have to wrestle with in the coming months.
As such, I appreciate the Committee's efforts to begin this
discussion and look forward to the testimony from today's witnesses.