TESTIMONY OF JAMES CULLEN COMMUNICATIONS REFORM ACT OF 1993 HOUSE COMMITTEE ON THE JUDICIARY ECONOMIC AND COMMERCIAL LAW SUBCOMMITTEE TUESDAY, FEBRUARY 2, 1994 MR. JAMES CULLEN: Good morning, Mr. Chairman and members of the Subcommittee. My name is James G. Cullen, and I am President of Bell Atlantic Corporation. I want to thank you for giving me the opportunity to testify on this important bill. We support H.R. 3626, and we appreciate the work of this Subcommittee and the delicate balance that has been struck. I would like to focus my testimony on the "incidental" long distance services that H.R. 3626 says must be considered on an expedited basis by the Justice Department and the FCC. The Administration, in its testimony last week, proposed building upon this concept by allowing immediate Bell company entry into incidental long distance services without additional rulemakings or other procedural hurdles. The Administration urged that incidental relief include long distance services to facilitate the provision of wireless, cable, and other services (such as information services) that were not subjects of the AT&T lawsuit. Bell Atlantic strongly supports the Administration's suggestion for technical improvements in the incidental provision. Immediate "incidental" relief creates no danger to competition in the long distance business and will to a long way toward opening up immediate competition between the Bell companies for local telephone services. For ten years, the Bell companies and GTE have not gone outside their regions to compete in landline telephone services. That is now changing. Bell Atlantic and several of the other Bell companies now see more opportunities in providing local telephone services outside their regions than simply defending their turf in-region. Bell Atlantic's out-of-region business will be built upon the existing cable facilities of TCI and Liberty Media. As soon as our merger with TCI and Liberty closes, we will begin upgrading the out- of-region TCI and Liberty cable systems to provide telephone services in direct competition with the incumbent telephone companies. Within approximately two and a half years after we close the merger, we plan to be providing local telephone services in approximately 30 cities outside our region. By the end of the 1990's, we expect to be providing competing local telephone services in geographical areas totalling more than 40 million people outside Bell Atlantic's current telephone service area. Incidental relief, as defined by the Administration, will facilitate our out-of-region competition in several ways. First, it will allow us to use the existing TCI and Liberty cable systems to build competing local telephone networks even where the cable systems do not conform to LATA boundaries. Second, it will allow us to continue delivering and receiving cable programming by means of satellites. Finally, it will allow us to add telephone capability to TCI and Liberty's cable systems by means of wireless services. The FCC will soon be auctioning new wireless spectrum for PCS. This additional spectrum will be offered in geographic areas defined by Rand McNally that do not correspond to the out-of-region LATAs where Bell Atlantic would be competing. The incidental long distance relief provision contained in H.R. 3626, as amplified and supported by the Administration, would cure these issues that impede our full scale attack on the other telephone companies. As the Administration suggested to the Subcommittee last week, however, it is critical that the incidental relief be immediate, rather than subject to additional rulemakings and procedures. The current processing of decree waivers results in extraordinary delays even though the rules for that process are well-established and only one agency is required to review relief proposals. In view of this history, we urge the Subcommittee to adopt the Administration's proposal and just say "yes" to incidental relief without further delays. There is no antitrust rationale for delaying the competitive benefits that incidental relief would create. The competitive benefits are real. In the United Kingdom, several of the Bell companies have partnered with cable companies to provide combined telephone and cable services in direct competition with British Telecom. Consumers in the U.K. have benefitted as British Telecom dramatically lowered its rates as a direct result of this competition. On the other hand, any anticompetitive concerns are fanciful. For example, GTE is a U.S. local telephone company with as many telephone lines and more revenues than Bell Atlantic and TCI combined. GTE is providing long distance service incidental to its wireless operations without impeding competition. Sprint and Centel, another local telephone company, are also providing long distance service incidental to wireless services, again without impeding competition. If there were a genuine danger to competition, you would expect to see it manifested in the actions of telephone companies that are already providing hese services. I'd like to close by noting that while we are discussing how quickly to allow the Bell companies to compete, foreign telephone companies are already seizing business opportunities in the United States. Through its purchase of a minority equity stake in MCI, British Telecom is financing MCI's entry into the U.S. local telephone business. Similarly, Bell Canada is entering the U.S. local telephone business by purchasing a stake in Jones Intercable. British Telecom and Bell Canada are not subject to any decree prohibition against offering customers long distance services incidental to their cable and wireless services. Incidental relief, granted immediately, would allow the Bell companies to compete on an equal basis with these foreign telephone powers. END From mech Mon Mar 14 19:31:09 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA28821 for mech; Mon, 14 Mar 1994 19:31:08 -0500 Date: Mon, 14 Mar 1994 19:31:08 -0500 From: Stanton McCandlish Message-Id: <199403150031.TAA28821@eff.org> To: mech Subject: Anne K. Bingaman - Asst. Attorney General Status: RO STATEMENT OF ANNE K. BINGAMAN ASSISTANT ATTORNEY GENERAL ANTITRUST DIVISION BEFORE THE SUBCOMMITTEE ON ECONOMIC AND COMMERCIAL LAW COMMITTEE ON THE JUDICIARY U.S. HOUSE OF REPRESENTATIVES CONCERNING THE ANTITRUST REFORM ACT H.R. 3626 PRESENTED ON JANUARY 26, 1994 Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to testify on behalf of the Administwation on H..R. 3626, authored by Chairman Jack Brooks and John Dingell. This Administration is grateful to both Chairmen for their hard work in crafting legislation that will help acceIerate the telecommunications revolution and the completion of the National lnformation Infrastructure (NII). The Administration looks forward to working with this Subcommittee and the entire Congress to move a comprehensive telecommunications reform package, including this legislation, quickly through the Houee and Senate. The job of building the NII - or more specifically, infrastructure that will permit broadband, interactive communication between all members of our society -- has been aptly compared to the building of the nation's interstate highway systern. Like the construction of the highway system, the construction of the NII will create hundreds of thousands of jobs. And just as roads have enhanced this nation's productivity and living standards, the completion of the NII will make firms and individuals more productive. The NII will also enhance the quality of our lives by creating new ways to educate adults and their children, improve our health care, give us better and cheaper ways of buying products and services, and entertain us at home. There is a key diffcrence, however, between the nation's roads and its information infrastructure. Our roads have been built by government Our NIL is being built by private enterprise. But that does not mean that government has no role in promoting the development of the NIL to the contrary, just as in any other sector of the economy, government is needed to set and enforce rules of fair play. In a word, government is needed to ensure compeition where technologically and economically feasible. For it is only through vigorous competition in all phases of the telecommications business -- in the construction of the various information highways and their access roads, wired or wireless; in the operation of those highways; and in the provision of content over the highways - that the nation can be assured of hsving the highest quality telecommunications service at the lowest cost. Thus, it is appropriate that this Subcommittee which oversees the enforcement of the nation's antitrust laws -- is where we begin consideration of legislation that will finally set the ground rules for the completion and operation of the NII. I will concentrate in my remarks today on the role of competition in key parts of the NII effort: the provision of telephone services (both voice and data) and the infrastructure of telecommunications equipment. H.R. 3626, which builds upon H.R. 5096 authored by the Chairman Brooks and reported by the Judiciary Committee in the last Congress, represents an important step toward ensuring the prominence of competition in the telecommunications industry. The new bill generally would enable the Regional Bell Operating Companies (RBOCs) that are now barred from competing in long-distance telephone services to enter that market, but only if the telephone companies satisfy both the Federall Communications Commission (FCC) and the Justice Department that their entry will not harm competition in other markets. In addition, the proposal would permit the RBOCs to March, develop, and manufacture telecommunications equipment unless the Justice Department challenges such activity as posing undue threats to competition. The Administration endorses these objectives and applauds the authors of H.R 3626 for identifying a constructive mechanism for achieving them. In particular, the Administration believes the time has come to move telecommunications policy out of the courts and into the statute books so that Congress, representing the public, can establish the far-reaching and comprehensive framework for governing the telecommunications world of the future that the nation deserves. In the balance of my testimony, I would like to do the following: -To put the discussion we are having today in a usefull framework, by explaining how we got here and, in particular, how the nation has benefitted from the competition in telephone markets that has occurred thus far; -To identify why providing even greater competition in both local and long-distance telephone markets is critically important for American consumers and industry; -To identify the fundamental challenges policymakers face in bringing about this result; and -To discuss the valuable foundation constructed by H.L 3626 to address these changes. The Origins Of The Current Telecommunications Revolution This Subcommittee is now considering legislation to taake die nation's telephone markets more competitive in significant part because two decades ago, the Department of Justice decided to sue AT&T for impeding competition in the telephone service and equipment business. Assistant Attorneys General in both Democratic and Republican Administrations vigorously prosecuted this case. My antitrust professor in law school William Baxter, then resolved the matter in 1982 by obtaing a consent decree that effectively broke up AT&T - splitting the local telephone companies from AT&T's long-distance and manufacturing businesses. That decree, or the Modification of Final Judgment (MFJ),has now been in effect for ten years. The Motion owes a huge debt of gratitude to Judge Harold Greene, who has devoted his enormous energies and legal talents to administering the MFJ. It is no understatement that tbe MFJ was one of the most important and beneficial developments affecting the telecommunications industry in this century. It was the MFJ that enabled the United States to become the first nation in the world to introduce competition as the main principle for governing the development of telecommunications services. Before AT&T was split up, it was assumed that the telephone business was a natural monopoly in need of regulation. But developments in technology proved this assumption wrong. Upstarts like MCI proved that competition could survive in long-distance, if only government could prevent AT&T from refusing to interconnect other long-distance providers to its local telephone networks. Similarly, other manufacturers of telephone equipment wanted to sell equally, if not more, innovative products but were frustrated by AT&T from doing so because of the telephone company's incentives and ability, due to its control of the local telephone monopoly, to buy such equipment only from its wholly owned subsidiary, Western Electric. By unleashing competition in various segments of the telephone industry, the MFJ has delivered the benefits that competition everywhere else guarantees: innovation, better products and services, greater efficiency, and lower prices. Consider that since the MPJ: interrstate long distance prices for the average residential customer in real terms (adjusted for inflation) have fallen by more than 30% without compromising universal service; there has been a virtual explosion in the types of telephone and services that consumers can choose from; competition has stimulated the development of hundreds of innovative voice and data services (such as call waiting and voice mail); spurred by MCI and Sprint, all the major long-distance providers (including AT&T) now have laid fiber optic cable throughout much of the country and thus have already built much of the backbone for the NII; and competition in the telephone equipment market has opened whole new markets and spawned the development and sale of new products. In short, the MFJ has enabled the United States to maintain its technological leadership in telecommunications. Nations that have stuck to the old monopoly model of telephone services have fallen behind. That is why many are now trying to emulate us, rather than the other way around. The Need For And Benefits Of Even Greater Competition While the MFJ has unleashed powerful competitive changes that have benefitted American consumers and business, its job - and our job - is not yet complete. There is still room and need for even more competition in all three markets affected by the MFJ: local telephone service, long distance telephone service, and equipment research and development and manufacturing. Local telephone markets are in greatest need of added competition for they are still monopolized by local companies in the old Bell System, the RBOCs. Although divestiture end "equal access" rules have brought a measure of competition to long distance and to the provision of information services, the Bell Operating Companies (BOCs) in most areas of the country still have a lack on local telephone traffic, carrying more than 99% of all local calls in their service areas. In time, the there is hope that technological innovation will erode this monopoly, as longs as the government facilitates rather than obstructs such progress. While still expensive, cellular and specialized mobile radio services - which can transmit calls through the air rather than by wire-- are growing rapidly throughout the country. Shortly, the FCC will auction off additional spectrum for Personal Communications Services (PCS), yet another form of wireless communication. And hopefully, cable television systems will be successfull soon in adding the transmission of telephonic communications to their networks, providing perhaps the most powerful source of competition to existing providers of local telephone services. But these alternatives are largely prospective; they are not yet widely available and affordable today, and it is not yet clear when they will be. Second, while several competitors certainly have made significant inroads in long-distance telephone markets, there is room for more competition. AT&T still has a lion's share of the long-distance market, about 60%. Third, while telephone equipment is now probably the most competitive of the markets affected by the MFJ, even this market could use additional competition. Here, too, AT&T continues to have a leading share of the market, although it faces stiff competition from numerous other providers, domestic and foreign. Given their expertise in the industry, some or all of the RBOCs may be natural entrants into developing and manufacturing telecommunications equipment, especially for network switching, but are precluded from entry by the MFJ. Under the right terms and conditions, entry by the RBOCs into these activities could help spur innovation and bring down prices for telecommunications equipment. In the process, the RBOCs could help make American firms even more competitive in the international telecommunications equipment market. Policy Challenges Ahead A key challenge now for all telecommunications policymakers - in Congress, in the Executive branch, and the states - there- could not be more clear: To encourage greater competition in all facets of the telecommunicatiom industry in a way that does not distort the marketplace or pose dangers to consumers. In particular, the important task is to subject the RBOCs, which still have monopoly power in local telephone service, to real competition, while at the same time specifying conditions that would permit the RBOCs to engage in the other activities from which they are now precluded by the MFJ, notably long-distance service and developing and manufacturing telecommunications equipment. Several straightforward steps would open up local telephone markets. Existing local and state restrictions against entry must be superseded, while RBOCs must be required to "unbundle" and fairly price each element of their local monopoly services and provide interconnection to other firms that want to use the "local loop" to provide local and other telephone services. Structural safeguards should also be considered in order to protect against cross-subsidization and discriminaiton. In addition, cable television and telephone companies' should be permitted to engage in both businesses in the same service territory (although to preserve competition, each type of firm should be prohibited from acquiring the other in the same service area for a minimum of five years. Fortunately, there appears to be a consensus supporting such measures. In the House, Reprsentatives Markey and Fields have authored legislation (H.R. 3636) that would broadly authorize these steps. In the Senate, Senators Danforth and Inouye have introduced similar legislation (S. 1086). The Administration strongly supports the basic thrust of these legislative initiatives, but urges that they be strengthened, as I have already suggested. In the meantime, we applaud the announcements by MCI that it will enter the local telephone business and by various RBOCs and cable companies that they will upgrade their telephone and cable networks to enhance competition in their video and local telephone markets, respectively. The more controversial, but equally important, issue is to is to specify the conditions under which the RBOCs may be allowed to offer long-distance service and engage in manufacturing and R&D. A key condition is to open up and fairly price each element of the local loop to competition in order to reduce and eventually eliminate, the ability of the RBOCs to cross-subsidize and discriminate in adjacent competitive markets. Indeed, it is critical that any legislation authorizing RBOC entry into any other line of business not be enacted in isolation. It must be paired with legislation which truly sweeps away existing restrictions against entry into local telephone markets and requires the RBOCs to take all necessary steps to open their local monopolies to effective competition. Neverless, even if the law facilitates competition in the local loop, RBOC entry into other lines of business remains an important issue. As long as they have a monopoLy over local phone service, the RBOCs -- as did AT&T will continue to have incentives, and the ability, to cross-subsidize and to discrimiate. Ultimately, effective competition in local telephone markets will provide the best protection against cross-subsidization and discrimination by the RBOCs, since without market power RBOCs will be unable to leverage their local telephone monopolies into other markets. However, until local telephone markets are competitive, entry tests and/or structural safeguards that allow for objective analyses by regulators of pricing, cross-subsidization, and discrimination are important means available to ensure that local telephone customers are not charged with-the costs of long-distance service and manufacturing and that markets are not distorted by unfair and cross-subsidized pricing. The Important Contributions of H.R. 3626 H.R. 3626 represents a major step forward in constructing an environment that will enhacce competition in the long-distance and telephone equipment market in a way that will prevent the RBOCs from leveraging their local telephone monopolies into distorting competition in these other markets. In particular, H.R. 3626 retains entry tests, administered by DOJ and the FCC, for RBOCs to enter long-distance (should they pass the tests) after minimumu waiting periods (18 months for reselling and five years for facilities-based service out of region). H.R. 3626 would also permit the RBOCs to develop and manufacture equipment no earlier than one year after enactment unless DOJ objects and prevails in court. The Administration supports the thrust of these provisions of H.R. 3626: While the nation owes deep gratitude to Judge Greene for enormous efforts in admnistering the MFJ, the rapid pace of technological change suggest that the time has come to do what H.R. 3626 would accomplish: move telecommunications policy out of the courtroom and into the hands of the two expert agencies chareged with protecting the broad public interest in telecommunications (FCC) and competition in particular (DOJ, which helped launch the telecommunications revolution with its suit against AT&T); The Administration endorses competition based entry tests that require approval of the DOJ and FCC before the RBOCs may provide long-distance as a key safeguard, since without market power, the RBOCs cannot effectively cross-subsidize or discriminate. The Administration suggests building on the concept in H.R. 3626 of allowing RBOC entry into certain limited portions of long-distance service that are "incidental" to the provision of other services. Specifically, the Administration would permit the RBOCs to offer long-distance to facilitate the provision of wireless, cable and certain other services that were not subjects of the AT&T lawsuit. The Administration supports RBOC entry into manufacturing, safeguarded by the requirement that such activities be carried out in a separate affiliate, in H.R. 3626 would mandate. We also support the provisions in H.R. 3626 providing for a notification-and-waiting period procedure, prior to entry, which would preserve the right of the DOJ to investigate, and if necessary, sue and thus prevent the proposed entry. Conclusion In the end, the Administration shares the objective of sponsors of both H.R. 3626 and H.R. 3636 that the legal framework governing the telecommunications industry should promote as broad a degree of competition in all phases of the business as possible, with many viable competitors providing products and services, on a level playing field for all. While removing existing legal barriers to entry in various markets is essential and may bear to promote competition, truly effective competition requires a truly level playing field, where no competitor is able use its monopoly or market power in one market, such as local telephone services, to disadvantage competition in other markets. Ultimately, it is competition, not regulation, that will provide the best guarantee of promoting new products, lower prices, employment, expanded export opportunities, and innovation in the telecommunications industry. The Administration looks forward to working with the Congress to provide the fair and competitive environment for the telecommunications industry that its participants and consumers deserve. Both H.R. 3626 and H.R. 3636 will be essential compnents of the telecommunications reform package that will enure this result. From mech Mon Mar 14 19:31:49 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA28858 for mech; Mon, 14 Mar 1994 19:31:48 -0500 Date: Mon, 14 Mar 1994 19:31:48 -0500 From: Stanton McCandlish Message-Id: <199403150031.TAA28858@eff.org> To: mech Subject: Larry Irving - Asst. Secretary for Communications & Information Status: RO TESTIMONY OF LARRY IRVING ASSISTANT SECRETARY FOR COMMUNICATIONS AND INFORMATION U.S. DEPARTMENT OF COMMERCE ON TELECOMMUNICATIONS REFORM LEGISLATION BEFORE THE SUBCOMMITTEE ON ECONOMIC AND COMMERCIAL LAW COMMITTEE ON THE JUDICIARY HOUSE OF REPRESENTATIVES JANUARY 26, 1994 Mr. Chairman and Members of the Subcommittee: INTRODUCTION Good morning. Thank you for this opportunity to testify before you today on issues related to the development of a national telecommunications and information infrastructure -- and, specifically, on Administration legislative proposals to promote the advancement of this infrastructure in a procompetitive manner that benefits all Americans. I am pleased to join Assistant Attorney General Bingaman, who will focus on the Administration's reform proposals bearing on the AT&T Consent Decree. I will discuss more generally the changes in the competitive landscape that make the passage of telecommunications legislation this year a top Administration priority, and, in the context of that discussion, highlight elements of the Administration's proposals not covered by Assistant Attorney General Bingaman. Vice President Gore and Secretary Brown unveiled the Administration's National Information Infrastructure (NII) initiative in September of last year, setting forth an agenda for a public-private partnership to help bring about this revolution. This includes support for innovative applications that will use the NII, improving access to government information, protecting individual privacy and intellectual property rights, and the passage of telecommunications legislation -- the subject of today's hearing. Before proceeding further, let me underscore, Mr. Chairman, the profound debt of gratitude the Administration owes you and Chairman Dingell for seizing the initiative in developing H.R. 3626. Our proposals for reform of the AT&T Consent Decree substantially build upon your efforts. The Administration also wishes to salute the creative bipartisan legislative initiatives undertaken by Representatives Markey and Fields, and by Senators Hollings, Inouye, and Danforth, among others. We have closely studied their proposals. Aspects of our set of legislative proposals, which I will touch on today, also build in large part upon the foundation they have established. The Administration looks forward to working closely with Congress to arrive at a final telecommunications legislative product that will stand the test of time. THE NEED FOR LEGISLATION There is a national consensus that an advanced information infrastructure will transform life for every person in the United States in the near future. We have all heard of countless examples of how broadband, interactive communications will connect and empower all people in this country. Vice President Al Gore recently said that the word "revolution" by no means overstates the changes ahead. The newspapers bring us daily examples of the ways in which the development of the NII will revolutionize American life. The January 19 Washington Post reported how interactive dial-up computer network services allowed individuals to communicate with friends and relatives in the Los Angeles area immediately after last week's disastrous earthquake, and to spread vital news to other interested subscribers within a matter of minutes. On January 19 Secretary of Health and Human Resources Shalala announced a contract that will provide by the end of this decade for the electronic payment of nearly all of the $1 billion annual Medicare bills. The Mountain Doctor Television Project (MDTV) in West Virginia brings high quality care to rural residents by allowing rural physicians to link to medical specialists at the University of West Virginia. Likewise, the Texas Telemedicine Project offers interactive video consultation to primary care physicians in rural hospitals as a way of alleviating the shortage of specialists in rural areas. Also, the Texas Education Network serves over 25,000 educators and is making the resources of the Internet available to classrooms, so that students in small school districts can access NASA and leave messages for the astronauts, browse around in libraries larger than they will ever be able to visit, and discuss world ecology with students in countries around the world, among other things. These and countless other examples attest to the rapid rate at which the American public is entering the information age. It would be a mistake, however, simply to "let nature take its course" and allow change to proceed under the existing legal regime, whose underlying structure was established 60 years ago. This is true for three essential reasons. First, in an increasingly competitive world trade environment -- which will become even more open with the implementation of NAFTA and the GATT Uruguay Round -- we simply must ensure that our telecommunications capabilities remain the best in the world. Because information transmission increasingly is the life's blood of all our industries, archaic rules that inappropriately retard innovation by telecommunications firms have a negative impact on the international competitiveness of the private sector in general by inhibiting industrial productivity and job creation. Legislation that lifts these outdated structures will enhance competitiveness and spur the creation of good new jobs. Second, the existing regulatory structure has been altered on an ad hoc basis over six decades to meet perceived problems of the moment. This has created an uneven playing field that artificially favors some competitors over others, and that in some instances unnecessarily discourages investment and risk-taking. These effects, in turn, inappropriately skew the growth of industry sectors and retard the development of the NII itself. Accordingly, legislation is needed to eliminate these unwarranted regulatory disparities. Third, we need to be sure that our telecommunications policies are fully responsive to the needs of the American people as a whole, and, in particular, poorer and disadvantaged Americans. As Secretary Brown stated in a January 5 address, we cannot "become a nation in which the new information age acts as a barrier, rather than a pathway, between Americans" -- a nation divided between the information rich and the information poor. Yet, while the universal provision of "plain old telephone service" has long been a national goal, the existing regulatory structure may not be sufficient to ensure that all Americans benefit from the broader range of information services that will become available under the NII. Accordingly, legislative reform is urgently needed to address this shortcoming. As Secretary Brown stated on January 5, "the Administration will propose a renewal and re-invention of the concept of universal service." I will have more to say about the Administration's views on universal service below. THE ADMINISTRATION'S PROPOSAL The Administration, as promised last fall, has developed a comprehensive set of legislative proposals setting forth the principles under which we believe the advanced infrastructure should operate. As I have already indicated, the Administration's proposals further the visions set forth in House and Senate legislative initiatives. We build upon innovative regulatory reforms and other dramatic steps taken by various states, and we will work closely with the states in promoting an advanced telecommunications and information infrastructure. Together we can encourage competition, infrastructure modernization, and advanced NII applications in health care, education, and government services. Underlying the Administration's proposals are five fundamental principles that Vice President Gore and Secretary Brown have outlined. These principles are: ú Encouraging private investment in the NII; ú Promoting and protecting competition; ú Providing open access to the NII by consumers and service providers; ú Preserving and advancing universal service to avoid creating a society of information "haves" and "have nots"; ú Ensuring flexibility so that the newly-adopted regulatory framework can keep pace with the rapid technological and market changes that pervade the telecommunications and information industries. ENCOURAGING PRIVATE INVESTMENT AND PROMOTING COMPETITION The Administration believes it is time to act decisively to lift the artificial regulatory boundaries that separate telecommunications and information industries and markets. Those clear, stable boundaries served us well in the past. They enabled regulators to establish separate regulatory regimes for firms in different industries. They also prompted regulators to address the threat of anticompetitive conduct on the part of some telecommunications firms by barring them from certain industries and markets. Technological and market changes are now blurring these boundaries beyond recognition, if not erasing them entirely. As Vice President Gore emphasized on January 11, we are moving away from a world where technologically valid regulatory distinctions may be made among local telephone, long distance telephone, cable, and other purveyors of information transmission. Digital technology enables virtually all types of information, including voice, video, and data, to be represented and transmitted as "bits" -- the ones and zeros of computer code. Thus, rules which artificially distinguish among different types of "bit transmitters" based on old historical understandings will no longer serve a socially useful purpose. Accordingly, regulatory change is necessary to fully realize the benefits of private investment and greater competition in the information infrastructure. Regulatory policies predicated on the old boundaries can harm consumers by impeding competition and discouraging private investment in networks and services. The Administration is therefore committed to removing unnecessary and artificial barriers to participation by private firms in all communications markets, while making sure that consumers remain protected and interconnected. These reforms are necessary in order for people in the United States to "win" the information revolution as soon as possible. To this end, the Administration supports the initiation by the Federal Communications Commission (FCC) of a review of current broadcast policies. Broadcasters remain the principal source of free, universally available electronic information in the United States, and it is important to ensure full participation by that industry in the NII. LOCAL TELECOMMUNICATIONS SERVICES The Administration supports removal of those barriers preventing competition in the provision of local telecommunications services. Competition already has generated substantial benefits for consumers in a host of communications and information service markets. For example, the varieties of customer premises equipment have expanded dramatically since deregulation. In addition, the price of interstate long distance telephone services for the average residential user has declined more than fifty percent in real dollars since 1984, due to competition and regulatory reform. At the same time, the infrastructure used to provide long distance service has been substantially upgraded. There are now four digital, fiber-based national networks serving this market, and many more interconnected regional networks. Consumers will realize similar benefits in service innovation, declining prices, and infrastructure enhancement from the expansion of competition in the local telephone market. Such competition will reduce the ability of any telephone company to harm competition and consumers through monopoly control and will encourage investment and innovation in the "on and off ramps" of the NII. Current policies regarding interconnection and service bundling, as well as specific barriers erected by individual states, inhibit competition -- and the low prices, service choices, and other benefits such competition brings to consumers. The Administration proposes to ensure that competing providers have the opportunity to interconnect their networks to local telephone company facilities on reasonable, nondiscriminatory terms. Local telephone companies will also be required to unbundle their service offerings so that alternative providers can offer similar services using a combination of, for example, telephone company-provided switching and their own transmission facilities. Finally, in order to ensure a consistent, procompetitive environment for telecommunications services, the Administration proposes to preempt state entry barriers and rate regulation of new entrants and other providers found by the FCC to lack market power. Competition in local telecommunications markets should generally lower prices and increase innovation in the services offered users. Nevertheless, we are aware of concerns that repricing of some local services may result in rate increases in some cases in an increasingly competitive environment. Accordingly, in order to guard against any possible "rate shock" for users, the FCC and state regulators will be directed, in implementing network interconnection and unbundling, to prevent undue rate increases for any class or group of ratepayers. MODIFIED FINAL JUDGMENT (MFJ) RESTRICTIONS The Modified Final Judgment (MFJ) in the AT&T Consent Decree helped unleash an era of competition and innovation that brought low prices and new service choices for consumers. In short, it has been a tremendous success. The Administration acknowledges the great public service the judiciary has performed in overseeing the breakup of that monopoly. But twelve years have passed since the basic framework of the MFJ was established, and it has been ten years since the breakup took place. Technologies and markets are changing rapidly. A judicial decree may at some point become a barrier to a more comprehensive, far-reaching approach to an advanced information infrastructure. Reform of the MFJ goes hand-in-glove with opening up local competition, which I described above. The development of full-fledged competition in the local provision of telecommunications services will alleviate the competitive concerns that prompted the strictures placed by the MFJ on the activities of the Regional Bell Operating Companies (RBOCs). Thus, comprehensive legislative procedures for loosening the MFJ restrictions as competition develops are appropriate. Implementation of these procedures in the wake of enhanced local competition will allow the RBOCs to compete in markets for goods and services now closed to them. This will further enhance innovation in the American economy and benefit consumers. Assistant Attorney General Bingaman will address the MFJ reform provisions. I wish to note, however, that while Assistant Attorney General Bingaman will describe the Administration's MFJ position, the Departments of Commerce and Justice have worked together closely in developing our position in this area. This position represents not only the joint efforts of our two Departments, but also the work of others in the Administration who have joined in this policy initiative. CABLE TELEVISION-TELEPHONE COMPANY CROSS-OWNERSHIP The Administration supports repeal of the current cable television-telephone company cross-ownership restriction in the 1984 Cable Act. We believe that telephone companies should be allowed to provide video services in their local exchange areas, subject to effective safeguards to protect consumers and competition. OPEN ACCESS AND PROGRAMMING DIVERSITY The public benefits of the information revolution would be severely diminished without a wide range of diverse programming. An advanced information infrastructure, to be truly useful, must offer a potpourri of educational material, health information, home and business services, entertainment, and other programming matter, both passive and interactive. Barriers to open access and widespread availability of programming serve only to harm users. The Administration's legislative proposals are designed to further the goals of promoting a diversity of programming and open access to distribution of this programming. ENSURING REGULATORY FLEXIBILITY AND FAIRNESS As barriers to an advanced information infrastructure fall, the regulatory regime must adapt to the changing environment. In the rapidly changing telecommunications and information industries, the only certainty is uncertainty. A new regulatory framework is required that will stand the test of time, without the need for continual upheaval in the nation's overall approach to telecommunications and information policy. At the same time, in the interest of fairness, similarly situated services should be subject to the same regulatory requirements. The Administration proposes to address these concerns by granting the FCC flexibility to reduce regulation for telecommunications carriers that lack market power. The Administration also proposes a new Title VII to the Communications Act, that will encourage firms to provide broadband, interactive, switched, digital transmission services. The Administration's Title VII proposal will provide the FCC with broad regulatory flexibility while maintaining key public policy goals, including open access, interconnection, and interoperability requirements, and obligations to support universal service. UNIVERSAL SERVICE The Administration is committed to developing a new concept of universal service that will serve the information needs of the American people in the 21st century. Indeed, the full potential of the NII will not be realized unless all Americans who desire it have easy, affordable access to advanced communications and information services, regardless of income, disability, or location. In his January 5 speech, Secretary Brown challenged the private sector "to expand universal service to the National Information Infrastructure." He pointed out that promotion of universal service advances American competitiveness, stating: "Just as progressive businesses have increasingly recognized that their fate is tied to education and good schools, so the businesses that will take advantage of the new information marketplace must realize that our national fortune is dependent on our national competitiveness -- on ensuring that no talent goes to waste." CONCLUSION In conclusion, enactment of telecommunications reform legislation will promote the development of the NII in a flexible, procompetitive fashion that creates incentives for desirable investment, economic growth, and the widescale availability to all Americans of new, highly valued information services. The Administration looks forward to close collaboration with Congress to enact a set of legislative proposals that achieves these desired ends. This concludes my testimony. I would be pleased to respond to any questions you may have.  From mech Mon Mar 14 19:32:24 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA28891 for mech; Mon, 14 Mar 1994 19:32:23 -0500 Date: Mon, 14 Mar 1994 19:32:23 -0500 From: Stanton McCandlish Message-Id: <199403150032.TAA28891@eff.org> To: mech Subject: Peter W. Huber Status: RO House Committee on the Judiciary Economic and Commercial Law Subcommittee Testimony of Peter W. Huber on H.R. 3626: Antitrust and Communications Reform Act of 1993 January 26, 1994 Thank you Mr. Chairman for inviting me to testify on this very important bill. My name is Peter W. Huber. I am a Senior Fellow of the Manhattan Institute for Policy Research. I am also counsel to the Washington, D.C. law firm of Kellogg, Huber & Hansen. I have been working on telecommunications law and policy since 1985, when I was invited by the Department of Justice to prepare a report on competition in the telephone industry, in connection with the first triennial review of the Bell breakup. Since then, I have done consulting work for a number of different telecommunications companies. The views I express this morning, however, are strictly my own. Competition is Developing Rapidly in the Local Exchange In 1982, it was confidently assumed that the local exchange monopoly reflected immutable economic imperatives that even antitrust law could not challenge. Now competitors are designing and building full-fledged alternative networks, using new architectures, new media, and radically new technologies. The local exchange faces rising competition from five different sources: from the providers of "inside wiring" and "private exchanges," which are replacing LEC facilities on customer premises; from radio providers, which are replacing copper in the last mile; from competitive access providers (CAPs), which are reaching up to permit their customers to connect directly to long distance carriers; from cable carriers, which are beginning to offer interactive services to the home, both on their own and in alliances with radio and competitive access providers; and from long distance carriers, which are leveraging their interexchange market power down into the local exchange. The first layer of "local exchange" telecommunications is situated on private premises. "Inside wiring" carries traffic from desks and computers in an office building or university campus to the basement or to the curb, where it is handed off to other carriers. In 1982, Judge Greene declared that inside wiring "is as much a 'bottle-neck' as are the subscriber access lines."2 Two years after divestiture, the FCC declared just the opposite,3 and inside wiring is now provided competitively by countless telcos, equipment vendors, electricians, and contractors. Private branch exchanges (PBXs) represent a related layer of direct competition with the "local exchange monopoly." The PBX may operate as a stand-alone switching hub, or as a remote switching node on a private network made up of numerous private switches and lines. Typically, one half of a large business's "local" telephone traffic never enters the public exchange at all. The installed base of PBX systems is now in excess of 25 million lines. In 1982, cellular telephone and other radio services were treated as part of the integrated "local exchange monopoly," but the FCC was committed to a competitive market. Since 1982, two licenses have been issued in virtually every cellular market, and numerous other licenses have been issued for paging services. In June 1993, the number of cellular subscribers stood at more than 13 million. Cellular subscribership increased by 45 percent in 1992. In 1991, an estimated 2.5 million new cellular phones were put into service, substantially more than the 1.9 million loops added to the landline network. With the arrival of next-generation Personal Communication Services (PCS), radio will offer a direct, competitive alternative to landline for last-mile transport. The FCC has estimated that there will be over 60 million PCS users in the United States within 10 years. In the readily foreseeable future, all current owners of cordless telephones (50 million units are already in service) and all households able to receive cable TV (already over 95 percent of households) could become users of PCS. In addition, digital compression technology will soon expand the capacity of all wireless telephony from 5 to 20 times present levels. By every available indication, then, wireless services are going to end up competing directly with landline local telephony in the near future. As George Calhoun declares in his Wireless Access and the Local Telephone Network, "Make no mistake about it, we are witnessing the beginning of the end of the natural monopoly."4 Competition within LATAs has also extended to the delivery of interLATA traffic to interexchange carriers. New competitive access providers (CAPs) bypass the LECs altogether by running independent, usually fiber-optic, networks, through major urban centers, connecting businesses to each other and to interexchange carriers. CAPs did not exist at all in 1982, and the possibility of this kind of competition did not figure in the decree's "natural monopoly" assumptions. The industry has since expanded feverishly. In 1992, CAPs installed 80 percent more fiber miles than in 1990, and over eight as many as in 1988. A 1991 count found approximately 30 separately managed CAPs serving over 40 cities. Overall, interexchange carriers account for 60 percent or more of CAPs' demand, and cable interests now control over 50 percent of CAP revenues. At the same time, the cable industry is moving fast toward two-way capabilities and a head-on challenge to the telephone's hegemony in two-way communications. Cable companies are replacing their "tree and branch" networks with "star" configurations that use the more efficient fiber-optic lines to connect the cable head-end to a neighborhood node, and coaxial cable to serve the homes themselves. The FCC has consistently backed cable's right to provide telephone service.5 Cable companies are rapidly building alliances with CAPs, which offer two way fiber-optic capabilities. Spurred by the promise of their new alliances, cable-CAP companies are deploying fiber-optic cable at record rates. The cable-CAP consortia are in turn allying themselves with providers of cellular and PCS radio services. Fully 20 percent of the applications the FCC has received over the last two years to test PCS systems have come from cable TV companies. Cable companies now account for more of the experimental licenses issued by the FCC than all seven Regional Bell companies combined. Bell Operating Companies have recognized the competitive potential of cable companies, and five of the seven Regional Bell Companies are merging or forming joint ventures with U.S. cable companies. See Map 1. Bell Atlantic plans to merge with TCI. Southwestern Bell purchased the Hauser cable systems in Virginia and Maryland and recently announced a joint venture with Cox Cable. US West has purchased a 25 percent interest in Time Warner. NYNEX has an interest in Viacom. BellSouth has a 22.5 interest in Prime Cable. The "Regional Bells" of the North and East are forging alliances with U.S. cable companies as well. Bell Canada Enterprise (BCE), which serves 17.7 million local phone lines in Canada, recently announced its acquisition of a 30 percent interest in Jones Intercable and an option to purchase outright control. British Telecom recently acquired 20 percent of MCI. MCI, in turn, has organized a consortium of more than 250 U.S. cable companies, CAPs, and independent local phone companies, which collectively have local transport facilities (including both cellular and cable plant) potentially capable of reaching 75 percent of the U.S. population. The consortium plans to develop a national wireless telephone network. Cable telephony is a reality in the United Kingdom. The emergence of cable telephony in Britain has resulted in better service for customers and has greatly increased competition in the market for local telephone service. Cable inroads into UK telephone service have been made possible in large part by investments of American Regional Bells. Interexchange carriers are leveraging their position in long-distance down into the local-exchange. On August 16, 1993, AT&T announced plans to purchase McCaw for $17.5 billion. The merger will combine AT&T _ the overwhelmingly dominant long-distance carrier and manufacturer of mobile switches _ with McCaw, the foremost provider of cellular service in the United States. AT&T, by far the largest telecommunications company in the world, already occupies a commanding market position in three of the four areas essential to providing nationwide, integrated, wireless/landline service: long-distance service, switch manufacturing, and terminal equipment manufacturing. It also has interests in numerous other closely related markets, such as cellular modems, small computers, and software. McCaw is the dominant provider of wireless service. McCaw presently serves roughly 2.3 million cellular subscribers. Besides cellular, both companies are aggressively moving into PCS. AT&T has formed a new operating unit called AT&T Personal Communications Systems, with the declared goal of providing an "affordable, nationwide," wireless personal communications service, with "[f]eatures and quality comparable with the wireline network."6 For its part, McCaw is already developing a PCS system in Orlando, Florida, and has been licensed to conduct additional PCS trials in Seattle, West Palm Beach, Miami, Colorado Springs, New York City, Los Angeles, San Francisco, Dallas, and Houston. As the AT&T/McCaw merger demonstrates, the new entrants into wireless local telephony are not limited to providing "local" service. As cellular and PCS systems proliferate, costs drop, and as wireless local transport becomes fully competitive with landline, there is every reason to expect that local transport will be rebundled with long-distance carriage. In fact, the expanded "free" calling areas established by cellular carriers are already price-competitive with 0- intraLATA toll from a pay phone. MCI is likewise rapidly entering the local market. In addition to organizing a national PCS consortium, MCI has recently unveiled a $2 billion plan to develop MCI Metro, an alternative local transport network architecture, aimed first at large business customers in major metropolitan areas, and possibly later at residential customers. MCI's plan to develop CAP urban fiber-optic loops and switches builds on its 1990 acquisition of Western Union ATS (Advanced Transmission Systems), which has conduits or rights-of-way in 200 cities, accessing over 2,000 buildings. MCI Metro will eventually serve 20 U.S. cities. The Associated Press reported that MCI's "foray into the local marketplace goes beyond anything AT&T or Sprint has attempted." Long-Distance Services are not as Competitive as they Should Be In the decade since divestiture AT&T has remained, by every measure, the dominant long-distance carrier. Revenue figures illustrate the differences in size between AT&T and its two major rivals _ MCI and Sprint. As of 1992, AT&T's annual revenues were $65 billion, MCI's $11 billion, and Sprint's $9 billion. AT&T's network, with 1.2 million fiber miles deployed, has almost double the route miles, double the fiber-optic miles, and double the fiber-optic investment than its nearest competitor. The capacities of the long-distance fiber-optic networks already in place vastly exceed demand, and carrying capacities are being increased year by year at very little cost. A 1989 FCC study found carriers other than AT&T (which collectively serve less than one-third of the market) are capable of supplying 146 percent of the market. AT&T has maintained a 60-65 percent share of the long-distance market since 1990, and this share may now in fact be rising slightly. AT&T's market share today remains over three times that of it nearest competitor. Most analysts agree that the long-distance market today is a stable oligopoly characterized by pricing cooperation rather than competition. A recent Standard & Poor's industry analysis plainly states that"[p]rice competition [has] cool[ed] down" in the long-distance market. The gap in prices between AT&T and its competitors has steadily narrowed, from 10-20 percent in mid-1984 to about 5 percent in 1987, to still smaller margins today. Setting the prices for interexchange services continues to be a game of follow-the-leader _ with AT&T leading the way. Despite steadily decreasing access charges, the long-distance carriers have raised prices no fewer than four times in the past three years. On each occasion, AT&T led the way, and MCI and Sprint followed.7 See Figure 1. Figure 1. Trends in Long Distance Rates and Exchange Access Charges.8 Barring the Bell Companies from providing interLATA services incidental to information and wireless services is particularly inappropriate. Information service markets are characterized by dispersed demand and high-fixed-costs, which can be served economically only through centralized facilities that serve regional or national markets. Unlike all other information service providers, the Bell Companies are currently permitted to provide information services only within LATAs, except to the extent that waivers have been granted. As a result, when a Bell Company provides an information service, it cannot do what all other information service providers do. It cannot provide seamless service by making long-distance transport inconspicuous to the end user. It cannot exploit basic economies of scale achieved through the provider's selection of a single long-distance carrier for the service. Indeed, a BOC must require the end user to make his or her own arrangements for transport. As a result, transport is less convenient and more expensive. The current restriction serves no purpose in protecting competition; its sole effect is to prevent the Bell Companies from participating as efficient competitors in a market they have otherwise been permitted to enter. Bell Companies are likewise barred from providing full and effective competition in wireless services. The Bells alone are forbidden to knit together their wireless service areas into seamless, wide-area networks. But landline LATAs are often too small for efficient operation of wireless networks. There is no wireless bottleneck. Both Bell and non-Bell mobile customers are losers under the current regime. Bell customers are forced to pay retail long-distance rates. Non-Bell customers are forced to pay whatever mark-up over bulk long-distance rates that the non-BOC mobile providers, in the absence of any direct competitive restraint, decide they can get away with. It has been estimated that if the decree restrictions were removed, BOC cellular customers alone would potentially realize annual savings of $200 million. The Decree Waiver Process is not Working The divestiture decree expressly provides that the Bells may seek waivers to enter markets in which they pose no serious threat to competition. The waiver process, however, has become paralyzed. Since entry of the decree, the backlog of waivers pending before the Department of Justice has grown inexorably, to a high of 49 at year end 1990. The delays in processing those waivers have also grown to intolerable lengths. In 1984 the Department disposed of 23 waivers, and the average age of waivers still pending at the Department at the end of the year was only 59 days, a little under two months; by 1993, when the Department disposed of only 7 waivers, the average age of pending waivers at year end had increased to 1,080 days, or 36 months. Review by Judge Greene has been slower still. In 1986, Judge Greene acted on 49 waivers, and the average age of waivers still pending at the court at the end of the year was only 164 days, a little over 5 months. In 1993, he acted on only 9 waivers, and the average age of pending waivers at year end had increased to 1,446 days, which is over 4 years. Delays of five or more years are not uncommon. Some matters have all but disappeared into his docket. In more than a few instances, the delays have become unconscionable. One BOC, for example, sought a waiver to provide an interexchange cellular radio service on the Amtrak line between Washington, D.C., and Philadelphia. After this request had been pending two-and-a-half years at the Department with no action, the BOC sought direct action from Judge Greene. Judge Greene refused, on the ground the Department had promised action within a few months. The Department then recommended approval of the waiver. Another two years elapsed. Judge Greene then called for further briefing. The waiver was finally granted _ five years and two months after it was first sought. The delays are caused, in large part, by the deluge of paper that has been filed with Judge Greene. In addition to substantive waivers, Judge Greene has issued 223 non-substantive, service related orders (ranging from the 105 orders to change the association of an exchange within a LATA to four orders involving the assignment of standby power equipment), and 248 administrative orders related to the decree for matters as trivial as requests to exceed page limits. Indeed, private interests seeking to protect their turf have learned that a deluge of paper filed with the Department and Judge Greene can substitute for providing quality services in the marketplace. The restriction on BOC provision of information services, for example, was removed in late 1991, but only after two trips to the Court of Appeals. Today, the Bell Companies provide over a million Americans with voice mail services. These services were technically feasible at the time of divestiture. Almost a decade of service to consumers, employment for U.S. workers, and revenues for shareholders have simply been lost in administrative proceedings. Because of the delays, many consumers have probably turned to stand-alone answering machines manufactured in Asia. As the advance of technology accelerates, competitive opportunities increase, and the windows for those opportunities decrease, exponentially. However, the decree inherently assures that as the time available for competitive action decreases, the time for the requisite court approval increases. There can be no serious doubt that delays caused by the decree have had significant anticompetitive consequences. New Legislation is Needed H.R. 3626 is an important initiative, and a major step forward in bringing telecommunications law into harmony with market realities. InterLATA relief for out-of-region activities should be granted immediately. There is no bottleneck out-of-region. Freeing the Bell Companies to compete without restriction outside their home territories would do more than any other form of relief to promote competition in the local exchange. Bell Companies should be freed immediately to provide incidental long-distance services provided in connection with wireless, information services, international services and satellite delivery of video programming. These services were never part of the Government's case against AT&T and maintaining the interLATA restriction in these specific areas serves no conceivable purpose. These are national markets, not subject to any local bottleneck. Information service providers affiliated with the Bell Companies have been competing in the information services market in varying degrees since they received permission to begin doing so in 1988.9 Their ability to compete effectively has been substantially limited, however, by geographic constraints on where they may deliver those services over the telephone network. It is time for more general long-distance relief. Much more competition is possible in long-distance markets, and it will benefit consumers. The Committee should recognize that with or without deadlines for action in the bill, the process of reviewing changes at the Department of Justice and the FCC is bound to be a lengthy one. The Committee should resist adding unnecessary layers of procedural complexity to this process. The timing for general relief should be based on the review process before the Department of Justice and the FCC. Arbitrary delays of eighteen months or five years serve no purpose. Competition should be permitted as soon as competent experts in Justice and at the FCC conclude that it is in the public interest, following a review process that From mech Mon Mar 14 19:32:59 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA28905 for mech; Mon, 14 Mar 1994 19:32:58 -0500 Date: Mon, 14 Mar 1994 19:32:58 -0500 From: Stanton McCandlish Message-Id: <199403150032.TAA28905@eff.org> To: mech Subject: Philip L. Verneer - Willkie, Farr & Gallagher Status: RO PREPARED TESTIMONY OF PHILIP L. VERVEER BEFORE THE SUBCOMMITTEE ON ECONOMIC AND COMMERCIAL LAW, COMMITTEE ON THE JUDICIARY, HOUSE OF REPRESENTATIVES TOPIC: H.R. 3626 WEDNESDAY, JANUARY 26, 1994 MR. VERVEER: Good morning, Mr. Chairman and Members of the Subcommittee. I am grateful for the invitation to testify on H.R. 3262. The communications sector today is as dynamic as any part of our economy. The combination of favorable technology, increasingly sophisticated consumer demand, and generally beneficial government policy has enabled our communications companies to deliver more, better, and cheaper transmission services and an ever expanding set of applications. These applications cover an enormous spectrum _ from inexpensive long distance voice services to voice mail to e-mail to more, and more specialized, video programming and database services. Moore's Law and the ingenuity and energy of our computer and related companies and the influence of increasing computer literacy (aided by the increasing transparency of computer processing and ease of use of computer-related applications) seem to assure that the technological progressiveness and the consumer acceptance of recent years will continue. that brings us to government policy, the only aspect of the communications revolution as to which I would claim any significant background. An indispensable aspect of our country's surpassing success in communications has been government policy that has relied principally upon competition. It has helped to achieve superior industry performance and increasing producer and consumer surplus. That policy has taken its inspiration, and has been reinforced, by our antitrust laws. The Justice Department and the courts have had an extremely important role in the implementation of that policy, but so has the Federal Communications Commission. Beginning nearly fifty years ago with mobile communications applications, the Federal Communications Commission authorized competitive entry into businesses previously conducted solely by the incumbent telephone utilities. The FCC's comfort with competitive approaches grew as it authorized and saw the favorable results of competitive entry into long distance, customer premises equipment, video programming, and enhanced services. The agency's commitment to competition has grown to the point that it has authorized, to the extent that the Communications Act permits, competitive entry into local electronic distribution services. There are many reasons to favor the passage of legislation along the lines of H.R. 3226 and of H.R. 3636, but the most important is to permit the completion of the evolution of our communications industry from monopoly to competition by eliminating the legal and regulatory barriers to entry to local transmission service. The judgments about the appropriate distribution of authority between federal and state government when the Communications Act was passed in 1934 are not viable in 1994. There simply is no rational basis for permitting the Balkanization of our communications business among more than fifty federal, state, commonwealth, and territorial governments at a time when our economy is not merely national, but global. This is not a negative judgment on the goodwill or the good judgment of the individuals involved in the enunciation and enforcement of government policy in these various jurisdictions. It simply is the recognition that in today's world on policy, even if it is not always the best imaginable, will serve us better than dozens of policies. The clearing away of the barriers to entry that would be accomplished by the passage of legislation patterned upon H.R. 3626 and H.R. 3636 would enable us to extract, for the first time, full value from our overall investment in communications facilities. As this suggests, I believe that H.R. 3626 must be considered inconjunction with H.R. 3636. Taken together they advance our most important social goals for telecommunications: 1. Open entry into local distribution; 2. Vertical integration of local telephone companies into long distance, manufacturing, and cable at the proper times and under proper circumstances; 3. Achievement, maintenance, and when and as appropriate, extension of universal service; 4. Authorization of flexible approaches to regulation to enable and require regulatory changes as marketplace circumstances evolve. While H.R. 3626 is only one component of the comprehensive set of changes that has been advanced by Chairmen Brooks and Dingell, by Representatives Markey and Fields, by Senators Inouye and Danforth, and by Vice President Gore, it is a very important one. And, while I feel very strongly that certain facets of H.R. 3626 should be adjusted prior to passage, in broad outline it presents an excellent procedural approach to what has been one of the most difficult problems confronting communications policy: the timing and circumstances under which the divested Bell Companies are allowed to integrate into long distance and manufacturing and all local exchange companies are allowed to integrate into the provision of video programming directly to subscribers. This set of questions has been, and remains, a matter of tremendous contention. It is difficult to address because the underlying considerations are a trifle arcane and because our present public policy presents the apparent paradox of promoting competition by prohibiting some from competing. Notwithstanding that, I believe that our present policy is right. And I believe that Title I of H.R. 3626 is fundamentally right in recognizing that we are dealing with an issue of sequencing. If there is open entry into the local exchange telephone business, and if it is successful, then the restrictions on local telephone company integration should be removed. The model advanced by H.R. 3626 _ of requiring the two most expert government agencies to make qualitative judgments subject to judicial review _ is by far the best approach that has been proposed over the several decades that these restrictions have been in place. It provides the relevant industries and the public at-large with an assurance that the local exchange companies will be foreclosed from entering new businesses under improper circumstances, but they will not be precluded from doing so any longer than necessary. The absence of that assurance has caused the principal objection to the transfer of this question from judicial to regulatory authorities. For a variety of reasons, it would be desirable to effect this change,but only if there is adequate assurance that the decisions to eliminate the line-of-business restrictions are made on the basis of relevant considerations supported by sufficient evidence. At present, there is no basis for removing the line-of-business restrictions. The circumstances that required their adoption remain. The restrictions were made necessary by the unusual incentives and abilities created by the combination of market dominance and traditional rate of return regulation. I can best explain this if the Subcommittee will indulge an excursion into some personal history. Twenty years ago, as a staff attorney at the Antitrust Division, I was engaged in reading the Bell Companies' internal documents. Those documents disclosed a set of competitive problems so substantial as to warrant the filing of the Sherman Act case that led, some ten years later, long after I had left the Justice Department, to the Modification of Final Judgment _ the largest forced corporate reorganization in our country's history. But more than just evidences of anti-competitive conduct emerged from those documents. They also corroborated the theoretical predictions of the government economists who had studied the issue. Something more important to today's debate emerged: an explanation for the Bell Companies' anti-competitive activities that was independent of personality and of historical circumstance. What happened then was the result of the poisonous synergy created by cost- based regulation and monopoly power combined with the provision of competitive services. The outcome was discrimination and cross- subsidization extremely damaging to the competitive process and, ultimately, to consumers. And, because those same condition exist today notwithstanding the divestiture, similar anti-competitive activities will happen again, if we let them. The explanation for the protracted history of competitive problems in the telephone industry is entirely independent of personality or of specific technological circumstance. It simply recognizes that the combination of the type of regulations to which the Bell Companies are subject and their continuing monopoly over the means of local electronic distribution presents them with both an ineluctable economic incentive and the ability to disadvantage competitors. The companies have an incentive to misallocate costs and discriminate in the provision of service to others. It is very important to understand how this works. Regulation prevents the Bell companies from exploiting the full economic value of their monopolies. The very nature of traditional public utility regulation prevents them from recognizing their monopoly profits in the market _ local distribution _ where they have power. As a result, their rational economic incentive to evade these constraints, to fully recognize the value of their monopolies, leads to efforts to exploit them in other markets. Regulatory evasion creates a constant and systematic bias toward diversification into adjacent markets and a constant danger of unfair competition in these markets. The evidence in the AT&T trial corroborated this theory. It confirmed that cost-of-service regulation induces the regulation induces the regulated monopolist to maximize its profits in an unusual way. The monopoly local exchange provider has an increased incentive to integrate into unregulated markets through which it can launder otherwise impermissible profits. The monopolist can maximize its overall profits by misallocating joint costs to the regulated services and thus increasing the rate base, by manipulating intra-corporate transfer prices, and by discriminating against its competitors, thereby raising their costs or foreclosing them altogether. No one seriously disputes the continuing validity of the theory. The Bell Companies' advocacy depends instead on evading its force by claiming that it is of ancient vintage, that the competitive environment has changed, or that public utility regulation has latterly become much more effective. The claim that the theory is of ancient vintage is, of course, irrelevant. Age alone (I trust) is not disqualifying. The claim that major changes have occurred since divestiture is without substantial basis. The regulatory environment, the applicable laws, and the institutions administering them have not changed materially since either divestiture or the events scrutinized in the AT&T litigation. The only factual change of consequence is the existence of seven companies _ still with market dominance, still subject to cost-based regulation and still subject to the some incentives _ where previously there was one. The Bell Companies' historic monopoly over local transmission service has remained unabated. There is no evidence that the Bell Companies' control over these "essential facilities" has diminished more than an infinitesimal amount since divestiture was agreed to, ordered, and implemented. Dr. Huber's 1987 study concluded that only one-tenth of one percent of inter-LATA traffic volume, generated by one customer out of a million, is carried through non-regional company facilities to an inter-exchange carrier. We have seen the beginnings of local competitions since then, but only the beginnings. The principal basis for the claim of change is the adoption by the Federal Communications Commission of price cap regulation and by many state public service commissions of various types of incentive regulation. In its pure, theoretical form, price cap regulation severs the connection between prices and underlying costs. Were this to occur, the local exchange companies' incentives to misallocate costs and integrate into adjacent businesses to evade regulatory constraint would be eliminated. While the opportunity and the incentive to discriminate against competing firms that need access to telephone company services or facilities as essential factors of production would remain, the poisonous synergy would be eliminated. The problem, however, is that price cap regulation has not been implemented as a kind of overlay to traditional rate-or-return regulation. The FCC, for perfectly understandable reasons, has not been prepared to proclaim complete indifference to the extent of local exchange company earnings. Its approach to price cap regulation continues to keep close track of the local companies' regulated earnings, and that in turn means that the incentive to assign costs to unregulated or less regulated activities remains as real today as it did in 1956, 1970, and 1984, when the line-of-business restrictions were imposed. This is not to say that price cap regulation is without advantages. It aims to provide proper incentives for efficient production of telephone company services. That is a worthy goal, enough so that it may well be worth assuming the risks of excessive prices and diminished quality inherent in the price cap approach. But conceding that price caps and other regulatory initiatives constitute improvements emphatically does not mean that they are sufficient to overcome the poisonous synergy. AS the Justice Department explained during the MFJ Tunney Act proceedings: "At the heart of the government's case in United States v. AT&T was the failure of regulation to safeguard competition in the face of the powerful incentives and abilities fo a firm engaged in the provision of both regulated monopoly and competitive services. . . . Neither of these problems (of discrimination and cross-subsidization) has thus far proven amenable to successful regulatory solution . . . . Thus, permitting BOC entry into competitive markets would undermine the rationale of divestiture . . . ." In sum, there have been no changes to the competitive or regulatory environment that would warrant removal of the line-of- business restrictions. Only if and when the BEll Companies lose their monopoly in local distribution or effective regulation is implemented to control the consequences of the poisonous synergy, will it be appropriate to modify the Decree. In the meantime, the MFJ provides the only way of promoting and projecting the growth of competitive long distance, and telecommunications equipment, markets in the United States. And the video programming restriction found in Section 613 of the Communications Act remains the only _ and a very inexpensive_ way of promoting and protecting the growth of competitive video distribution markets in the United States. As I have indicated, I believe that passage of H.R. 3626 and H.R. 3636, with certain amendments, would be very desirable. I say that despite a strong conviction that the line-of-business restrictions have worked exceptionally well and continue to be as well warranted as when they first were imposed. And I say it despite my great admiration for Judge Harold Greene and the truly extraordinary public service he has performed over more than fifteen years presiding over U.S. v. AT&T and U.S. v. Western Electronic Co. Why? First, the transfer from the courts to government agencies in the case of the MFJ issues and from the Congress to government agencies in the case of the cable-telco cross-ownership prohibition appears to be part of the price of securing urgently needed reforms to our communications policies. We need to open entry to the local exchange business, to redistribute fundamental policymaking authority to the FCC, and to afford both the FCC and state public service commissions with the authority and the obligation to adjust regulatory requirements as markets change. The courts in recent years have increasingly limited the Commission's flexibility to interpret the Communications Act in light of changing market conditions. This trend must be reversed. The opening of entry into the telephone companies' core business has the potential _ which I believe will be realized _ to change their economic circumstances significantly. That change could _ and I believe will _ come relatively quickly. Establishment of a process to alleviate the line-of-business restrictions as changing circumstances warrant adds an appropriate balance to the overall legislative endeavor. Should something along the lines of H.R. 366's open entry provisions be enacted, and should the efforts at entry prove successful, the line-of-business restrictions should be lifted. H.R. 3626 provides a substantive and procedural approach that assures all parties in interest that the critical determinations will be undertaken fairly and carefully and with a full measure of public participation. Second, the MFJ line-of-business restrictions themselves have become a source of unnecessary confusion and, perhaps, unnecessary cost as the communications revolution proceeds. There is an interesting irony here. Opponents of the line-of-business restrictions more than occasionally have argued that it is institutionally inappropriate for a federal judge to exercise the degree of authority Judge Greene does over the telephone business. The history of antitrust law and antitrust decrees suggests that Judge Greens's role is not as wholly unprecedented as the MFJ's opponents would have it. But I would concede that the Bell Companies have gone a long way toward making their point about the institutional arrangements. The problem has relatively little to do with Judge Greene's rulings. The rulings themselves reflect the reality that he is an exceptional jurist, that he has had the benefit of fifteen years of intensive exposure to the telecommunications business, and that he very probably knows as much about the telecommunications business and the legal and regulatory requirements governing it as any senior government official. The problem manifests itself in the Court of Appeals' rulings in the Western Electric case. These reviews have taken on an entirely unpredictable pattern. The reason can be traced to two sources. First, the appellate judges have no special background in any aspect of the AT&T case, the Modification of Final judgment in Western Electric, or the telecommunications industry. This lack of expertise is unfortunately reflected in the D.C. Circuit's rulings. But, second and more seriously, the court of Appeals has introduced a major substantive error into the administration of the decree. This occurred in the decision reviewing the results of the Triennial Review. There, the court construed the target of the line-of-business restrictions to be the avoidance of monopoly power _ in the traditional antitrust sense _ in the markets the Bell Companies are seeking to enter. The court found that the line-of-business restrictions depended upon the existence of the Grinnell requirements for monopoly _ power over price or power to exclude _ in the market to be entered. This is a fundamental misunderstanding of both the AT&T case and of the poisonous synergy that made the divestiture and the line-of-business restrictions necessary. In the special circumstances of a rate-of-return regulated monopolist, the anti-competitive effects are not confined to one market, but are spread over two. The object of the regulated monopolist is not classic predation, it is evasion of regulatory constraint. The anti-competitive effects are felt in the marketplace for local telecommunications services, where prices are too high and therefore consumption too low, and in the adjacent market to be entered, where prices are too low with the result that efficiently produced output may be displaced. This outcome is more elaborate and subtle, but it produces the same damage to allocative efficiency, industry dynamism, and consumer welfare as the straightforward Grinnell type of monopoly. By mischaracterizing the precise from of the evil to be avoided, the Court of Appeals at once diminished ruling attempted to mitigate the damage, but with only partial success. Even beyond the unfortunate consequences of the Triennial Review order, the Court of Appeals has created substantial uncertainty in the administration of the MFJ, such as in the area of "affiliated" interests that was the subject of last month's D.C. Circuit's Order. The degree of consistency that is highly desirable, if not absolutely necessary, to attract the optimal level of investment is missing. The appellate decisions lurch much too widely for comfort. The ultimate safeguard, of course, is competition. It also is the mechanism that Congress and the Administration seek to rely upon to produce major improvements in our national information infrastructure. Open entry proposals along the lines of those in H.R. 3636 and S. 1086 and in Vice President Gore's's recommendations are the most substantial improvement our country could make in its communications policy. But for present purposes it is important that they will not work automatically or immediately. In fact, although I am extremely optimistic that open entry policies will produce great benefits, whether they will work at all _ whether local distribution is competitive or a natural monopoly _ ultimately is an empirical question. And, of course, the answer to the question could change with changing technology. This is one of the reasons that H.R. 3626's basic approach is so useful. It permits a qualitative judgment by experts, once present marketplace )or, much less likely, regulatory) circumstances have changed sufficiently to remove the danger to competition and to telephone ratepayers that today is inherent in local exchange company expansion into adjacent markets. Since divestiture, we have seen major strides in the direction of a workably competitive long distance marketplace and have seen the accomplishment, remarkably quickly, of a competitive telecommunications equipment marketplace. We also appear to be at the threshold of cable industry-provided two-way, broadband competition _ facilitated by recently announced out-of-region ventures between cable companies and telephone companies. This competitive development was one of the principal goals of the cable-telephone cross-ownership restriction from its inception in 1970. It would be reckless to jeopardize this progress. As I noted, I would recommend certain changes to H.R. 3626 prior to enactment. I will mention only some of the most significant. Title I affords the Bell Companies opportunities to enter certain aspects of the interLATA business without using the parallel Antitrust Division-FCC application and approval process. These alternatives threaten to sabotage the basic arrangement. In the extreme case, the procedure authorized by Section 102(b) (2) and (3) could result in Bell Company entry into the long distance business through a combination of intrastate facilities and interstate resale without any significant change in relevant circumstance. It could permit the Bell Companies, through the offering of least cost routing service, effectively to commoditize the long distance business. There is nothing inherently wrong with letting the Bell Companies offer least cost routing services. But they should be permitted into these and other facets of the interLATA business only when the local bottleneck is sufficiently widened to allow the long distance companies, either directly or in conjunction with allied firms, to offer their own comprehensive local and long distance services. The issue of sequencing is absolutely critical. I also would recommend a procedurally unified approach to relaxing the line-of-business restrictions. The same application and approval process ought to obtain with respect to the manufacturing and video programming businesses. The underlying conceptual concerns for competition by and large are the same. Title II of H.R. 3626 addresses the regulatory safeguard attendant upon Bell Company provision of manufacturing, alarm services and electronic publishing. There is some ambiguity surrounding the coverage of the electronic publishing safeguards, occasioned by the definition of electronic publishing found in Section 231(p)(6)(A),(B), and (C). While it appears to me that it intends to cover virtually all forms of electronic publishing, arguments that it only reaches newspapers and newspaper-like features are foreseeable. Appropriate clarification of this point would be useful. One other aspect of H.R. 3626 deserves mention. The preservation of important parts of the MFJ in Section 107(a) and the inclusion of an antitrust savings clause in Section 107(b) and in Section 231(o) are very important. The history of the AT&T case shows just how important these provisions are. Without the antitrust savings clauses, there would be arguments that the specific provisions of H.R. 3626 impliedly repeal the more general proscriptions of the Sherman Act. Such an argument was made in the AT&T case when the defendants asserted that the specific provisions of the Communications Act impliedly repealed the antitrust laws. Judge Greene, and Judge Waddy before him, rejected the argument, holding that even though the Communications Act, unlike H.R. 3626, contained no express antitrust savings clause, the Sherman Act continued to apply. Failure to include an antitrust savings clause here could lead to the type of delay and seemingly interminable litigation of the immunity issue that occurred in the AT&T case. It took 35 months and two certiorari denials to get the initial ruling of no immunity in the AT&T case. It took 12 months more to reestablish the point when the case was assigned to Judge Greene. It was not until seven years after the filing of the complaint in AT&T that the antitrust immunity issue and its counterpart _ exclusive FCC jurisdiction _ were finally put to rest. In the meantime, there were numerous motions, briefs, arguments, opinions, appeals and petitions for certiorari on the issue. They consumed an inordinate amount of judicial and legal resources. Each time regulatory statutes are amended, defendants invariably grasp the opportunity to argue that the regulatory scheme is now so pervasive and specific that the general provisions of the Sherman Act are no longer applicable. While I do not believe that such an argument would prevail even after enactment of H.R. 3626, defendants will perforce make the argument, with resulting costs and delays. All this can be minimized by the simple expedient of including, as H.R. 3626 does, an express antitrust savings clause in the regulatory legislation. We occasionally hear the argument that the antitrust laws are obsolete or even counterproductive in today's high-technology, global economy and especially in rapidly developing industries such as telecommunications. For more than 100 years, each time a major innovation has appeared on the economic scene, the antitrust laws have provided the framework for maximizing the potential consumer welfare inherent in that innovation. Indeed, the general nature of the antitrust laws has provided the flexibility necessary to adapt our rules of competition to both the changing technology and changing evidence of what economic structure and conduct best promote consumer welfare. Assistant Attorney General Bingaman made this point in a recent speech on Antitrust and Innovation in a High Technology Society. In response to those who questioned the continued relevance of the antitrust laws in such a society, she said: "I don't view that as a tough question, for antitrust enforcement is designed to promote innovation. Innovation, whether in the form of improved product quality and variety or of production efficiency that allows lower prices, is a powerful engine for enhanced consumer welfare. By prohibiting private restraints the impede entry or mute rivalry, antitrust has worked to create an econoic environment in which the entrepreneurial initiative that is the hallmark of the U.S. economy can flourish; it creates and maintains opportunities for bringing innovations to market." Vice President Gore identified the same point earlier this month, in recognizing that "the pressure of competition" will "drive continuing advancements in technology, quality and cost." He cautioned, however, that competition must be protected against "both suffocating regulation on the one hand and unfettered monopolies on the other." The most effective means to accomplish these twin goals is to retain the antitrust laws as a governmental sanction against anticompetitive conduct in the telecommunications industry. From mech Mon Mar 14 19:30:39 1994 Received: from localhost (mech@localhost) by eff.org (8.6.4/8.6.4) id TAA28780 for mech; Mon, 14 Mar 1994 19:30:38 -0500 Date: Mon, 14 Mar 1994 19:30:38 -0500 From: Stanton McCandlish Message-Id: <199403150030.TAA28780@eff.org> To: mech Subject: Richard Odgers - Pacific Telesis Group Status: RO PREPARED TESTIMONY OF RICHARD W. ODGERS BEFORE THE COMMITTEE ON THE JUDICIARY ECONOMIC AND COMMERCIAL LAW SUBCOMMITTEE H.R. 3626: ANTITRUST AND COMMUNICATIONS REFORM ACT OF 1994 FEBRUARY 2, 1994 MR. RICHARD W. ODGERS: Mr. Chairman, Members of the Subcommittee: Thank you for inviting me to testify. I am Richard W. Odgers, Executive Vice-President for External Affairs and General Counsel of Pacific Telesis Group. I am here today on behalf of Pacific Telesis Group and other Bell Companies. I want to discuss the long distance provisions in H.R. 3626, and in particular the treatment of long distance services wholly within a state. Such services are technically called interstate interexchange or intrastate interLATA services. The Bell companies are not permitted to provide interexchange service, whether the call is wholly within one state, or between different states. This restriction on our companies is based on a concern about a lack of competition in the local telephone exchange and access market, and later in this testimony I will describe how that concern is rooted in the past _ for the most part AT&T's past _ and also describe the highly competitive nature of today's local exchange and access market. The Brooks/Dingell bill deals with several types of telecommunications activities: provision of long distance services manufacturing, alarm monitoring, and electronic publishing. The bill's treatment of long distance service has several components. I will focus on two critical long distance provisions (1) the provision allowing a state to approve Bell company intrastate interexchange service; and (2) the provision allowing Bell company resale of interexchange services that originate in a state where customers have the ability to presubscribe to their choice of interexchange (intraLATA) toll service providers. Let me say at the outset that there are many things the Bell companies dislike about H.R. 3626. The waiting periods before we can apply for authority to provide certain types of services are an example. The restrictions on our provision of electronic publishing and alarm monitoring represent especially difficult compromises for us. The Bell companies were successful in obtaining authority to provide information services such as these after several years of legal proceedings. We support this legislation even though it imposed restrictions on our ability to provide these services. We support this legislation because of the business relief provisions in the rest of the bill, primarily the provisions on long distance. As others have testified, H.R. 3626 represents a delicate balance, and we support the bill only as a package. We oppose any major amendments. The provision giving the states authority over intrastate interexcahnge services is particularly important to the bell companies. My company provides telephone service in California and Nevada. Pacific Bell, our California operating company, recently announced a $16 billion investment plan to upgrade its core network infrastructure over the next seven years. More than 1.5 million California homes will be hooked up to the communications superhighway by the end of 1996, and more than 5 million homes will be connected by the end of the decade. In addition to providing our own advanced services, the new broadband network will also serve as a platform for a host of other information and video programming providers. It will offer telephone customers an alternative to existing cable television systems. An integrated network will spur the development of new interactive consumer services in education, entertainment, government, and health care. These are services our customers want and need. The particular details vary, but the other Bell companies are also moving to upgrade their networks, with the common goal of providing more and better services to customers. The increasingly critical role played by telecommunications in our lives justifies these huge investments. The new advanced networks will bring new jobs and economic growth. Telecommunications also brings and keeps a community together, especially in times of hardship or crisis. The Bell companies supports the Brooks/Dingell bill because it holds the promise of allowing us to serve our customers better, by building the information superhighway faster, more cheaply, and more efficiently. The long distance and manufacturing restrictions in the MFJ have tied our hands for more than ten years. We are not able to serve our customers in the most efficient manner, and they often have difficulty understanding why we are permitted to provide some services but not others. H.R. 3626 would put in place a more rational and balanced procedure for determining if these restrictions have outlined their purpose. AT&T and the Department of Justice (DOJ) agreed in the 1982 AT&T Consent Decree that the seven Bell companies would not be allowed to provide interexchange services. To implement the restriction it was necessary to divide the territory served by a Bell company into geographical areas known as Local Access and Transport Areas, or LATAs. There are 164 Bell company LATAs across the country. (Exhibit A shows the twelve LATAs in California and Nevada.) Since the Bell companies were divested by AT&T on January 1, 1984, they have been banned from providing services that originate and terminate in different LATAs. The MFJ contains guidelines for drawing LATAs, but the boundaries are arbitrary in many respects. For example, Pacific Bell is permitted to carry a call from San Jose to Eureka, California, a distance of about 250 miles, because those cities are in the same LATA, but not between San Jose and Stockston, a distance of about 50 miles, because Stockton is in a different LATA. The interexchange restriction keeps us from providing our customers any service that crosses a LATA boundary, not just a voice call. The LATA lines block data, video, wireless, and even satellite services. As we serve our customers and build the network of the future we constantly run into problems caused by this restriction. Untold hours of employee and lawyer time are consumed in first deciding if a proposed service might run afoul of a LATA boundary, and then in resolving the problem in such a way that the MFJ is not violated. This is unproductive time, but time that cannot be avoided. MFJ violations are punishable by civil and criminal penalties. MORE Let me give several specific examples of how the long distance ban affects our business. The Bell companies are each planning and investing to provide the video services of the future. Video programming is frequently transmitted to different parts of the country by satellite. The Department of Justice has taken the position that we cannot own satellite earth stations, unless we obtain a waiver. The Department views the receipt or transmission of a satellite signal across LATA boundaries as the provision of a prohibited interexchange service. The restriction affects video services in other ways. One method of providing video on demand involves storing programming in multi- million dollar computers known as file servers. We are not permitted to use a file server in one LATA to provide video services to customers located in another LATA. A long distance carrier has to provide the portion of the service that crosses a LATA boundary, or we must apply to the DOJ and District Court here in Washington for a waiver. Not only are we prohibited from carrying the signal across a LATA boundary, we cannot pick a long distance carrier for this purpose. As a result we cannot take advantage of the efficiency of the file server. This sort of micromanagement by federal authorities is not limited to emerging technologies, nor to services that serve large numbers of customers. It can be and is applied to no-frills telephone service provided to a single customer. Mrs. Mary Campbell, of Plymouth, California needed to be served by pacific Bell's central office switching equipment located in Placerville, California. Plymouth and Placerville are in different LATAs, so we had to apply to the Department of Justice for a waiver. Even though this was a non- controversial matter and no one objected, we had to apply to DOJ, which then recommended to the D.C. District Court that the waiver be granted. Judge Green himself had to act before we could reroute Mrs. Campbell's calls. The District Court granted the Bell Companies authority to provide voice mail services in 1988; we received full information services authority in 1991. Voice mail services and many other existing and potential information services are provided from large computer storage's devices, equipment which is very expensive. Voice mail has become a popular service. Pacific Bell has two voice mail centers, each of which cost about $25 million. One is located in Pleasant Hill in northern California, and the other is in Alhambra in southern California. Together, these centers house computers that have the capacity to serve customers in much of the state. However, because of the long distance restriction Pacific Bell cannot efficiently provide voice mail service from these computers outside the LATAs in which the computers are located. The problem is that the long distance restriction prevents Pacific Bell from transmitting a stored voice message across a LATA boundary. The restriction also prevents us from selecting one of the long distance carriers and using its services to provide access to the voice mail computer from outside the LATA. Pacific Bell applied to DOJ over four years ago for a waiver that would allow us to select a long distance carrier for this purpose. We did not even ask for permission to provide the long distance transport ourselves. Even so, that waiver request is still pending. Voice mail services for large business customers are very competitive; companies not subject to the MFJ have a competitive advantage because they can provide these services without the restrictions of the long distance ban. Cellular and wireless services are another area where the long distance restriction puts Bell companies at a disadvantage. Bell companies are not allowed to carry a wireless call across a LATA boundary, without a waiver from the D.C. District Court. McCaw cellular, the largest Cellular provider and soon to be AT&T Cellular, has no such restriction. McCaw and the other non-Bell cellular providers are permitted to by long distance services in bulk at discounted rates and package long distance with local cellular service. This makes a very attractive package available to customers and obviously puts us at a competitive disadvantage. Unless things change, the Bell companies, and our customers, will be handicapped the same way when new PCS services arrive on the scene. These are a few of the ways in which the long distance ban makes us conduct our business and serve our customers in indirect and contrived ways. There are many others. The emphasis today as never before must be on building an information infrastructure and providing services to customers in the most direct and efficient manner as possible. To be able to do so, we must at a minimum have a better way of working under the long distance restriction. As I describe later, customers in the local market today have a choice of service providers and will have more choices tomorrow. The equal access provisions of the MFJ have been implemented. The long distance carriers have full and fair access to customers for the marketing and provision of their services. We believe these changed circumstances warrant a complete removal of the long distance ban. Until relief from the long distance ban is available, there must be changes in how the ban is available, there must be changes in how the ban is administered. I won't go into details about the quagmire of the present waiver process. Members of the Subcommittee already know of the delays and legal regulatory gamesmanship the MFJ waiver process has come to represent. H.R. 3626 responds to the waiver delay problem and presents a reasoned and balanced alternative to the current procedures. It does this in two main ways. First, the bill puts a six-month time limit on FCC and Attorney General determinations, and provides that appeals go directly to the Court of Appeals. Second, H.R. 3626 divides jurisdiction over Bell company applications for relief between federal and state jurisdictions. This allocation of jurisdiction recognizes that state authorities are in the best position to analyze local conditions and are well-qualified to make the determinations the bill assigns to the states. This division of jurisdiction also recognizes that the resources of the FCC and DOJ are not unlimited. The Brooks/Dingell bill gives the states the right to administer the long distance restriction in two provisions. First, Bell company applications for relief with respect to intrastate service, i.e., services wholly within the state, would be determined by the state. This is appropriate from both a practical and legal perspective. State personnel are in the best position to determine and evaluate the applicable facts, including assessment of local competitive conditions. In addition, empowerment of the states with respect to certain long distance services would reduce the load on the FCC and DOJ and would minimize the risk that these agencies would be overburdened by applications for relief. This provision giving the states authority over intrastate long distance service restores the jurisdictional balance that existed prior to the 1984 breakup of the old Bell System. Section 2 (b) of the Communications Act of 1934 gives to the states general authority with respect to intrastate communication service [47 U.S.C. 152 (b)]. Communications services between states are subject to FCC jurisdiction. The MFJ disturbed this balance by giving the federal District Court for the District of Columbia control of whether and when the Bell companies could provide intrastate interexchange service. Rather than representing a radical change, H.R. 3626 simply returns to the states the authority they lost when AT&T agreed to settle the DOJ antitrust case. State control over Bell company provision intrastate interexchange services is appropriate for a variety of other reasons. The states already have authority over such services under the above- mentioned section 2 of the Communications Act. The MFJ took away the states' right to control entry of the Bell companies into such services, but it left intact the states' authority over the rates charged by AT&T and the other long distance companies. Furthermore, most of the states already have allowed AT&T and the other long distance companies to come into the LATAs and provide intraLATA service in competition with the Bell company. Pacific Bell expects at any time an order from the California PUC allowing AT&T and the other long distance companies to provide such services. In addition to showing that the LATA boundaries in states allowing intraLATA competition operate like a one-way turnstile _ they allow the long distance companies in but don't let the Bell companies out _ this also demonstrates that the states have experience in regulating competitive services. Any suggestion that the states do not have the expertise to be trusted with the authority U.S. 3626 gives to then is hardly deserving of comment. The states have been regulating telephone and other utilities throughout this century. Some state utility commissions are recognized as leading the way in innovative regulatory practices. For example, California instituted price cap or incentive regulation for Pacific Bell a year and a half earlier than the FCC. New York and Illinois are at the forefront of "unbundling" or opening up the local telephone network to all service providers. States also have the primary responsibility for maintaining universal service, i.e., telephone service available to all at reasonable prices. The states have traditionally required telephone companies to price local service below costs, with the difference made up from above-cost pricing on other services, including intraLATA long distances services. Changes occurring throughout telecommunications are threatening the present support system for universal service. By giving the states the authority over Bell Company intrastate service, H.R. 3626 adds to the states' ability to react to such changes. H.R. 3626 also gives the states additional authority with respect to Bell company resale of long distance services provided by other companies. Resale of such services is a common business practice for non-Bell companies. MORE A large majority of today's long distance providers do not own long distance facilities; they instead buy bulk services, generally from AT&T, foreign, since all the Bell companies were owned by AT&T. The changes that have taken place in the local market in the past twelve years have more than historical significance; they demonstrate that the facts on which the MFJ restriction were based no longer prevail. FCC Chairman Hundt testified last week before the House Telecommunications and Finance Subcommittee that we are in a "communications revolution." That revolution is occurring throughout telecommunications, including in the local exchange telephone market. A fundamental change we see in the local market is the growing presence of competitors. That competition is taking several forms. Local telephone service includes more than the "exchange" call between two homes in the same community. Residential local exchange service is provided at a low monthly rate, and we have not seen much competition for that business yet, although we expect to see it in the near future. A more lucrative type of local service is access service; the "access" is to a long distance carrier such as AT&T, Spring, or MCI. Access service provides the link between the customer premise and the switching equipment of a long distance company. There are now approximately thirty companies, known as competitive access providers or "CAPs," that compete against the Bell companies in the provision of access services. The best known CAPs are Metropolitan Fiber Systems (MFS) and Teleport Communications Group (Teleport). These companies target access services because regulators have required us to price such services well above costs. CAPs allow customers, usually high volume business customers, to gain access to the long distance networks without going through the facilities of the local Bell company. By their own accounts, the CAPs compete directly against the Bell companies. Teleport claims to be "strengthening the weak link in America's telecommunications system ... the local telecommunications infrastructure," and insists that its "contribution to the local telecommunications industry ... is only beginning." The company promises to "liberate[]" "all telecommunications consumers" from the "tyranny" of the local exchange companies. Electric Lightwave's sales brochure declares that "Local Access just got competitive!!!!" MFS's marketing literature directly compares local exchange telephone company services with its own, and claims to "out-perform[] all BOCs in every region on virtually all important measures" of service. According to Donaldson, Lufkin & Jenrette, CAPs "consider themselves 'alternative local transport' companies - a euphemism for local telephone companies." Recent surveys confirm that a large proportion - between 62 percent and 77 percent - of larger business customers rely on CAPs for at least part of their access services. CAPs currently focus on access services, but CAPs need only legal authorization to expand into local exchange (i.e., switched) service as well. The "New York Times" of October 13, 1993 reported that MFS had received a favorable ruling from the New York Public Service Commission, under which the local Bell company, New York Telephone, will be required to give MFS greater access to telephone numbers. MFS will be granted co-carrier status equal to other local exchange telephone companies. Teleport is to receive the same status. In California, Teleport has installed central office switching equipment in San Francisco and plans to install switches in Los Angeles and San Diego. MFS has said that California is on the "short list" for central office switching equipment. These switches complete the fiber networks the CAPs have installed in our densest traffic corridors. Thirty percent of Pacific Bell's business revenues comes from .5 percent of our serving territory. CAPS have very successfully targeted these areas. We estimate they enjoy a 25-33 percent share of the high capacity market in the Los Angeles and San Francisco areas they serve. We also believe that MFS and Teleport alone have enough fiber installed in the Los Angeles and San Francisco downtown areas to handle all of Pacific Bell's switched traffic for these areas. MCI announced last month that it would enter the local telephone market. MCI expects to invest $2 billion in fiber rings and local switching equipment in 20 large metropolitan markets. MCI's press release also stated that these new facilities will "strongly position" MCI in the emerging wireless PCS market. The growth of the cellular industry has been phenomenal by any measurement. There are now 13.5 million cellular subscribers in this country. As early as 1991 the number of new cellular subscribers added in a calendar year was greater than the number of wireline loops added in the same year. The two largest cellular providers are non- Bell companies, McCaw and GTE/Contel. AT&T's strenuous efforts to avoid competition from the Bell companies in long distance and manufacturing did not distract it from taking note of what was taking place in cellular. AT&T's acquisition of McCaw, the largest cellular provider, will put AT&T back into local telephone service in a major way. The higher prices for cellular calling have caused users to limit their calling to times when they are away from home or office. However, new personal communications services (PCS) are just around the corner, and the FCC has provided for as many as seven new PCS providers in the same geographical area. This does not include Nextel, formerly Fleet Call, and other specialized wireless providers. The advent of PCS is widely expected to bring down rates for wireless calling, including cellular. The installation of optic fiber in cable television systems makes two-way transmission over cable TV very feasible. It is now possible to deliver two-way voice, video, and data services simultaneously to homes and businesses over a single fiber-optic, coaxial or fiber/coaxial hybrid wire. AT&T recently introduced a new Cable Loop Carrier technology that allows both video and telephone conversation to be carried over coaxial cable at the same time. Numerous tests are underway to assess two-way services over cable. In Orlando, Time-Warner is testing technology for delivering interactive services over cable networks. Viacom is conducting as technology and market test with AT&T in Castro Valley, California. Telecommunications, Inc. (TCI), the largest cable provider, AT&T and US WEST are conducting a test in Littleton, Colorado. MCI just announced a test of telephone service over cable in Alexandria, Virginia. Three cable systems in California are already interactive; another fifty are now being upgraded to interactive. Time-Warner plans to build a 60 mile fiber loop in San Diego. Teleport and TCI are building fiber loops throughout downtown San Diego. TCI has announced plans to build a fiber optic backbone in the San Francisco Bay Area by 1995. TCI and three other cable companies are planning to use fiber cable to interconnect their "headends," forming a regional hub network. This network will ring the San Francisco Bay Area with two separate fiber routes in each direction. The opening of the industry and the proliferation of alternative service arrangements are attracting non-traditional players into the telecommunications business. The Bay Area Rapid Transit (BART), the metrorail system in the San Francisco Bay Area, recently released a Request for Proposal seeking a partner to build a "synergistic, fully utilized Telecommunications Highway." The proposal envisions a full fiber-based network that allows telephone, cellular, paging, and cable TV delivery. Pacific Gas and Electric (PG&E) is the largest publicly-owned energy utility in the United States. PG&E has an extensive power transmission backbone network in northern California, and we believe it is fully fibered. PG&E recently received approval from the California PUC for joint use with MCI of both the fiber network and PG&E right-of-ways. This is consistent with recent proposals from utility industry groups and others for an expanded role for energy utilities in advanced telecommunications. Observe chart 'B' which is a depiction of the facilities of actual and potential competitors in the San Francisco Bay Area. Bell Atlantic's planned merger with TCI should convince any skeptic that cable TV systems are an enormous new competitive force. The resulting company will have access to 25 million homes. TCI is the largest cable provider in California, and Bell Atlantic Chairman Ray Smith recently told the "San Francisco Chronicle" that Bell Atlantic will come into "immediate competition" with Pacific Bell as soon as the merger with TCI is completed. US WEST, Southwestern Bell, BellSouth, and NYNEX have also announced major investments in cable companies. US WEST's cable investment is in Time Warner Entertainment. Time Warner applied to the California Public Utilities Commission in May of last year for authority to provide private line telecommunications service and to resell intrastate interexchange service in California. MORE Cable TV providers pass 8.4 million homes in California. Approximately 40 percent of these homes are passed by the cable providers that have recently announced affiliations with Bell companies. Each of these cable/Bell affiliations will be able to offer interactive multimedia services and telephone, including access and dial tone services to residential and business customers. Chart 'C' shows the areas of California and Nevada served by cable companies that have announced alliances with other Bell companies. Alliances of CAPs and cable companies are at the forefront of PCS deployment. Their high-capacity trunk networks are well suited to serve as backbone networks; they can knit together cell sites and switches, and link their switches into local and regional networks, and connect them to long distance carriers. Cable companies are actively testing PCS services; cable companies have more PCS experimental licenses issued by the FCC than the several Bell companies combined. Opponents of Bell company long distance repeatedly talk about the "bottleneck." They state that Bell company long distance relief is premature as long as there is a bottleneck. Prior to 1984, when there was no equal access and no presubscription, there was a bottleneck. In those simpler times a person moving to a new community and ordering telephone service wasn't even asked about their choice of long distance provider. Their long distance calls were automatically routed to AT&T. The breakup of AT&T, and more importantly the implementation of equal access and presubscription, have radically changed the facts. As described above, Bell companies are facing the most competition in the provision of access services. The reason for this is obvious. A competitive access provider can enter the business with a few high capacity facilities. The first customers targeted are high volume businesses. It is in access services where the "bottleneck" concept arose. The "bottleneck" theory holds that if a Bell company were allowed into long distance services in competition with AT&T and the other long distance carriers, the Bell company would have the "incentive and ability" to unjustly benefit its own long distance services. Popular as the metaphor is with opponents of Bell company long distance relief, there is no class of customer today where the "bottleneck" remains relevant. The horribles predicted by opponents of long distance relief are the creation of lobbyists and lawyers. If a Bell company that had been allowed to enter the long distance business decided to risk antitrust liability by discriminating against long distance carriers, it would be embarking on a dangerous journey. For the strategy to be effective customers must conclude that Bell company long distance service is more attractive than the service of AT&T and the others, presumably either because of better service quality or better price. The purpose of competition is to promote better quality and lower prices, so the mere fact that Bell company long distance service turns out to be better and cheaper does not mean that the Bell company is acting improperly. The question is whether the Bell company is improperly achieving the quality or price advantage. If quality of service is the focus, the question is whether the Bell company is somehow discriminating against the other long distance companies, possibly by poor connections or perhaps by delays in processing service orders. If that were the case, not only would the customer recognize it, so would the other long distance carriers. Customers would tell them that their service is not as good as the Bell company's. Such an easily discoverable anticompetitive tactic would seem doomed to failure. No company would or could conduct its business this way. If on the other hand it is price where the Bell company has somehow improperly obtained the advantage, the claim must be that the Bell company is pricing below cost. Pricing below cost does not make business sense unless the Bell company can drive AT&T, MCI, and Sprint out of business and then raise rates well above costs, or the Bell company can collect its below cost shortfall from monopoly ratepayers. The first possibility, so-called predatory pricing, speaks for itself. The big three long distance players have the resources and staying power to outlast any such tactic. No company would even consider this course of action. Regarding the second possibility, the FCC and most state commissions, including California's, have instituted price cap or incentive regulation for the Bell companies as a safeguard against improper cost shifting to monopoly services. Price cap regulation breaks the connection between price and costs, thereby effectively removing the incentive to shift costs between different services. The "bottleneck" is a vestige of the past, a past when AT&T dominated all aspects of telephone service. Policymakers must recognize that our opponents are repeating the same old arguments. totally ignoring the very different factual and regulatory circumstances now applicable. The telephone industry and the regulatory environment bear little resemblance to what they were ten years ago. The bottleneck theory no longer works. It is not surprising that AT&T, the company that invented the bottleneck, is unwilling to accept its demise. AT&T has repeatedly trumpeted its claim that 99 percent of the local access charges it pays go to local exchange carriers. The 99 percent figure is both misleading and irrelevant. One reason it is misleading is that more and more large business customers obtain their long distance access directly from competitive access providers, not from the long distance carriers. What AT&T pays to the local exchange carriers cannot give an accurate picture of how much bypass of local exchange carriers is taking place. In fact, no one knows the extent of access bypass in part because CAPs are not required to report their volumes. But, more importantly, the 99 percent claim is irrelevant. As chart 'B' graphically depicts, there are multiple competitive high capacity facilities already in the most lucrative markets. In downtown San Francisco, large business customers simply do not have to deal with Pacific Bell - or use our facilities - to get long distance service. The CAPs have fiber rings that provide alternative access - and the long distance carriers and cable companies will soon be able to do the same thing if they can't already. The presence of alternative access helps make the "bottleneck" metaphor - and the 99 percent claim that goes with it - irrelevant. In fact, the long distance carriers, CAPs and cable companies can now build facilities anywhere they believe they will find a profitable market. There is no bottleneck through which customers must pass to reach long distance carriers. If there is a profit to be made, the facilities are either already built or are being planned. Of course, the majority of customers in California are still served only by Pacific Bell's access facilities. But theses are the customers the CAPs have not yet elected to serve - and AT&T, MCI and Sprint are willing to use our facilities to reach them. This is not a bottleneck, it is rather a concession that it is not worth the long distance carrier's time to look for alternative access - generally because we are providing the service at or below cost. No one has chosen to bypass Bell company facilities on the high cost routes - but the long distance industry points to these customers to try to persuade policymakers that the Bell companies retain "monopoly" power. In conclusion, although the Bell companies do not agree with all of H.R. 3626, the Subcommittee should approve the entire bill as a package. Of particular importance are the provisions that give the states more authority to affect LATA boundaries, either by modifying intrastate LATAs or by mandating intraLATA presubscription, which would trigger long distance resale authority. The bill correctly reasserts the traditional federal and state jurisdictional split. The AT&T Consent Decree intruded into state jurisdiction by creating LATA boundaries within the states. LATAs divide up the state artificially and make it difficult for a Bell company to best serve its customers and build the information superhighway as quickly and efficiently as possible. The Consent Decree long distance restriction has outlived its usefulness, and the metaphor on which the restriction was built - the "bottleneck" - has outlived any real meaning. There is no longer a bottleneck. Equal access has been implemented. Competitive access providers, long distance companies and cable companies can provide connections between customers and long distance providers wherever they wish. Their progress in building fiber to large businesses - the most profitable customers by far - has been amazingly rapid. In the large metropolitan areas in our state, high volume customers now have a choice of access providers. In the small towns and cities, it is true that we are not yet challenged as local service providers. Where the costs of reaching customers are higher and the rewards lower, competitors are content to let us provide the connections. This allows long distance carriers access to customers at low cost while still criticizing "monopoly" local exchange companies. There is no danger in giving the states authority to remove or change the LATAs. The antitrust laws are not repealed by this bill. Further, the bill gives all parties a chance to be heard regarding any state action that results in business relief for a Bell company, and mandates a waiting period to permit challenges to any state action. The states are in the best position to determine what is needed to improve services in the states; they should be empowered to make the necessary changes.