[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





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       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.

                                  
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