Hearing of the Subcommittee on Telecommunications and the Internet of the House Committee on Energy and Commerce - Digital Future of the United States

Statement

Hearing of the Subcommittee on Telecommunications and the Internet of the House Committee on Energy and Commerce - Digital Future of the United States, Part VI: The Future of Telecommunications Competition

REP. MARKEY: Good morning.

Today's hearing is about the future of telecommunications competition in the United States. But I also feel a certain sense of deja vu. In April the subcommittee held a hearing on broadband deployment competition and consumer adoption in other nations, including Japan, New Zealand, the United Kingdom and Rwanda. That hearing took place the day after the United States dropped from 12th to 15th out of the 30 countries in the OECD broadband rankings.

In my view, there is no excuse for the fact that America is falling behind. This is because the United States started out on the right path by implementing provisions in the 1996 Telecommunications Act, designed to jump-start competition both between and among technology platforms.

Gradually, however, we lost our way as regulators became convinced that competition within a platform actually hindered overall broadband deployment and took market-opening rules off the books. It's as if the FCC several years ago picked up a loose football on the field after a collision and started running with the ball, full speed, towards the wrong end zone.

Our international competitors look on at what we're doing and must be stunned. And that's because we started this Internet game ranked number one in the world because we invented it, and now we're number 15. People quibble with the methodology of the OECD rankings, but regardless of how you slice it -- price, speed, percentage of subscribers -- the U.S. is no longer in the top tier, and we continue to drop.

Many other nations took one look at our broadband situation, learned from our experience and took the opposite approach. Japan and the United Kingdom implemented the very policies that the FCC had gradually eliminated in recent years, such as local loop unbundling and broadband resale, which facilitate competition using the incumbent's plan regardless of technology. These foreign competitors are now enjoying broadband success stories.

The United States, however, continues taking the opposite approach. We're digging ourselves a hole and now we're in violation of the first law of holes, which is if you're in one, stop digging.

Take the issue of forbearance. Some incumbent phone companies have asked the FCC to eliminate their essential network sharing arrangements under Section 10 of the act. One of today's witnesses, Cavalier Telephone, leases copper phone lines for the last mile and provides residential consumers with the "triple play" bundle of voice, 150 channels of cable TV and high-speed broadband for approximately $80 a month. But if the forbearance petitions are granted, Cavalier, Time Warner Telecom and other broadband competitors will lose access to the critical bottleneck facilities that they need.

A related issue is special access. Special access circuits are the life-blood connections for wireless carriers such as Sprint Wireless, and as a result, wireless carriers depend on special access which will grow as they deploy broadband networks that deliver greater bandwidth but correspondingly require more capacity.

The GAO found that the FCC's deregulatory pricing regime or special access has resulted in higher prices and little competitive choice for special access circuits. Because prices today are higher than what a truly competitive market would support, current and future wireless providers will expend funds on special access that would be better spent reducing prices to consumers or deploying more and better broadband facilities.

Unless this market failure is corrected, special access could have a negative impact on all wireless broadband deployment, including deployment that facilitates interoperability between public safety organizations.

But the most outrageous issue is copper retirement. In this sense, interpret the work "retirement" the way Luca Brasi used to "retire" competitors to the Corleone family. (Laughter.)

Some incumbent telephone companies are disabling perfectly functioning copper loops that could be used by competitive broadband providers such as Cavalier, after the incumbent deploys its own fiber facilities. Like Sherman's march to the sea, these incumbents leave scorched Earth in their wake, cementing the broadband duopoly between the incumbent phone company and the cable company.

In the final analysis, today's hearing goes to the core of our nation's broadband policy. How many apertures will consumers have to reach the broadband Internet? One, two or many more? At what speed? At what price? Will municipalities be permitted to serve their citizens and provide the best broadband service they can? I have certainly battled for such rights.

These choices are vital. For example, we recently saw Verizon's initial and quick reversal of a decision to block certain text messages on its service, as well as the fine print in AT&T's contract terms which seem to indicate it might censor messages it finds unpleasant.

Network neutrality rules could safeguard consumer rights in such instances, but more and better broadband choices would help too. And we're simply not going to reach that goal if regulators keep "knee- capping" those who would provide consumers such much-needed broadband choice.

I look forward to hearing from our witnesses.

I turn to recognize the ranking member of the subcommittee, the gentleman from Michigan, Mr. Upton.

BREAK IN TRANSCRIPT

EP. MARKEY: Thank you, Mr. Rosenbalm, very much.

And that completes the time for opening statements from our witnesses. So we'll now turn to questions from the subcommittee.

Let me just begin by saying that at our international broadband hearing I asked an executive from NTT, Japan's incumbent telephone company, whether NTT was allowed to disable copper loops after it deployed fiber to a home or business. He responded that as much as NTT would like to do so, to dismantle the copper, that the Japanese government had not allowed this practice because it would prevent broadband competitors from using the copper.

So let me begin by asking you, Mr. Tauke: Does Verizon have a legitimate business reason for disabling the copper loops, or is Verizon just simply afraid of a truly competitive broadband market with more than two competitors, the way it exists in Japan?

MR. TAUKE: I'd start, Mr. Chairman, with the facts. The fact is we don't disable the copper loops. We have not disabled copper loops to any home to which we have extended fiber, and we continue to provide services to competitors over copper loops in areas where we provide fiber. The FCC has established a process that we would have to go through if we decided to disable copper loops.

Now, there are instances where, because of connections to the home or something, the last wire from the pole to the home -- in some cases aesthetics, in some cases other issues such as poor wire -- is taken down. But we have an obligation under current rules to provide that copper or last wire from the pole to the home to a competitor if they choose to purchase that service from us.

REP. MARKEY: Well, let me go to --

MR. TAUKE: And -- and I will just say that we have a time frame within which that must be installed, as we do for other units.

REP. MARKEY: Okay. So would you oppose any efforts to disable such loops?

MR. TAUKE: Well, Mr. Chairman, I think that the bottom line is is that this is a technology that is getting older. We are replacing the network. At some point down the road, there will be a point where either you have to put a lot of money into rebuilding the copper network or you decide to not to continue to maintain it. And our view is is that is a decision that we should be able to make down the road depending on what's going on in the marketplace, what customers want, and so on.

REP. MARKEY: So let's go to Mr. --

MR. TAUKE: It's not an issue that we think is frankly right right now.

REP. MARKEY: And who owns that copper wire, is it Verizon or the consumer?

MR. TAUKE: Verizon owns the copper wire.

REP. MARKEY: You don't think the consumer owns it?

MR. TAUKE: No, the consumer doesn't own it. The shareholders of Verizon are the ones that put up the money to continue to invest in the infrastructure.

REP. MARKEY: Well, again, I think there's -- I disagree with that. I do believe that the consumers have through their rates spent billions of dollars in helping to create that lifeline to their homes, that competitive lifeline to their homes, as well in the future, and I think therein lies the core of this debate.

And I'd like to go to Mr. Evans who depends upon this copper wire as a means of competing.

MR. EVANS: Yes, Mr. Chairman. Verizon is knowingly cutting off the wire into the homes when they put the fiber. They are removing the NID, the box that interconnects the copper wire, and totally disconnecting the customer's home. They're putting a roadblock up on the local road so we can't get access. And so in order to do that, then they'd have to go back, we'd have to issue a special order, have a truck roll that they charge us for, and re-put a box on a customer's house. There is no reason to take that box off the house. They are just doing it so that it's not easy for competitors to get to use that copper network.

REP. MARKEY: So Mr. Tauke says that that would just be an accident or aesthetics that would have the removal --

MR. EVANS: We have had proceedings in Virginia and Pennsylvania. It is not an accident. It is happening all the time. It's commonplace.

REP. MARKEY: It's commonplace.

So let me then move on to a question for Mr. Casto. You assert that special access prices have declined since 1999, but the GAO found that list prices and average revenues are higher in areas where AT&T and Verizon were granted unconstrained pricing authority than in those areas where prices are still capped by federal regulation. How do explain that outcome, Mr. Casto?

MR. CASTO: Well, Mr. Chairman, I would first reiterate that in fact prices have declined since the advent of pricing flexibility, in fact double-digit declines over that period of time. I think what the report indicates is that list prices as outlined in the deregulated section of tariff, which, by the way, are analogous to the prices on the sticker of a car, are the prices that are in fact perhaps slightly higher, and those list prices are not prices that very many customers pay at all. The actual real price --

REP. MARKEY: Okay, but let's be clear: Where you have been given under so-called Phase 2 flexibility to set your own special access rates, those rates have actually risen.

Ms. Herda, could you deal with that question?

MS. HERDA: I'd love to comment on that, actually. I think that the statement that their prices have gone down is extremely misleading. In fact, that sticker price has gone up, but what they've done is they've been locking up companies, customers, end-user customers as well as carriers into these long-term contracts that I not so affectionately refer to as the heroin drip. The more you buy the more you have to buy in order to be able to get the discounts where you can be competitive, and every year, the requirement gets higher and higher and higher. And this is a very anti-competitive practice.

In fact, you know, we've been -- Mr. Forsee over there has major commitments. We have major commitments. I've tried to sell to Sprint and the problem is is we can't bring our prices low enough to make up for the penalties that Sprint would have to pay if they move some of their services to us because they're not meeting those commitments.

So it may appear -- I think what's important is context here. If you see the prices, they look like they're going down as the result of these long-term contracts that are very, very bad for us. I mean, one of the issues we have today is that as the world is moving to Ethernet -- and Ethernet is special access, even the incumbents have it in their tariffs as special access and the category is special access. As the world is moving to Ethernet, they're not even allowing us to put Ethernet into these revenue commitments so that as we have to get bigger and bigger commitments every year for special access, when the world moves to Ethernets, we're all going to be stuck with these big commitments with huge penalties at the end of the day without having any kind of recourse.

REP. MARKEY: Let me just conclude by saying that in the United Kingdom, in Japan and other countries around the world, they are using the age of copper to move to a bright, broadband future for their countries. And I think it's very important for us to understand that this copper is invaluable in ensuring that there is real competition out in the marketplace.

BREAK IN TRANSCRIPT

REP. MARKEY: Thank the gentleman.

The chair now recognizes himself. This question is for Mr. Tauke, Mr. Casto, Mr. Forsee, Mr. Evans and Mr. Cheek. And very quickly just a yes or no answer.

By Labor Day next year over 53 million numbers will be automatically removed from the federal do-not-call list. And since many of you have to report numbers that disconnect to scrub the do- not-call list clear, and since a few of you sitting there are responsible for calling me at dinner time to ask me if I'm happy with my long distance carrier, I just want to know, will you support the bill that I introduced with my good friend, Chip Pickering, making the do-not-call registry numbers permanent? Just a quick yes or no, folks.

MR. : Yes.

MR. : Yes.

MR. CASTO: I'm not familiar with the bill, but I will tell you that from a consumer standpoint I am on a do-not-call list, but that's about the extent of my expertise in that area.

REP. MARKEY: I'll take that as a yes. (Laughter.)

MR. TAUKE: Yes.

MR. : Yes.

MR. : Yes.

REP. MARKEY: Okay, very good.

Mr. Evans, now I understand Cavalier is launching service in the Pittsburgh area next week. Can you tell me where you're offering service?

MR. EVANS: Yes. We just built a new switching center, deployed fiber to 18 Verizon central offices throughout the greater Pittsburgh area, from downtown to East Liberty to Northside, Oakland, Squirrel Hill, Perrysville, Sharpsburg, Robinson and Wilkinsburg. So we build very big networks so we can offer services to all the consumers in that region.

Once we get established and start getting successful then we typically expand out to even more offices to provide greater coverage.

REP. MARKEY: And you are going to be able to do that by what date?

MR. EVANS: We're turning on the service the 10th of October.

REP. MARKEY: The 10th of October. Mr. Tauke, can you pledge on behalf of Verizon that you'll role out FIOs (ph) to all those areas that Mr. Evans just described in my district by, what is it, October what, Mr. Evans?

MR. EVANS: 10th.

REP. MARKEY: October 10th.

MR. TAUKE: We won't make it by October 10th.

REP. MARKEY: Well, I see. Well, listen, I want you to know, I appreciate the progress that Verizon is making. I saw your initial buildout plans in Alleghany County, and I sort of felt hurt that it seemed like all the FIOs (phonetic) was going north and south of me.

But more recently I see a little bit more of my district is being included.

But tell me, Mr. Tauke, how do I explain to my constituents, and small and midsize business owners, that I sit here on the telecommunications Internet subcommittee, and I sat back and saw Verizon kill their new telephone Internet provider by playing games with these FCC rules on forbearance?

MR. TAUKE: I'm not sure what carrier we killed.

REP. MARKEY: Without --

MR. TAUKE: If your forbearance is successful we'll have to shut down Pittsburgh. Without the last-mile loops we have nothing to offer.

REP. MARKEY: So how do I explain that back home to the folks?

MR. TAUKE: Mr. Chairman, let's just be clear here. Just because there is forbearance doesn't mean that we aren't selling service to carriers. We've had forbearance, and we've had removal of rules selling services --

REP. MARKEY: So you negotiate rates with Cavalier?

MR. TAUKE: We have negotiated contracts. We have with all -- you know, when UniP (ph) went away, the view was, oh the world is going to collapse because there'll be no UniP (ph). We negotiated contracts with all the carriers who were using UniP, and we still have four or five --

REP. MARKEY: But you're the only game in town. So if they don't like -- if they can't pay your rates, they've got to walk, don't they?

MR. TAUKE: Well, let me, I can give you a great example of that. We just bought a company in December of last year that was one of the largest UniP providers. They had contracts with Verizon. It basically put them in a negative cash flow, so they had to be sold. They were a public company. Cavalier bought them. And the rates for the UniP went from around $18 on average before Verizon did their commercial agreement to around $35 per customer.

There is no economic model that we can pay a cost of $35 and recover in the charge. And that's just for a plain phone service.

So we are harvesting those customers. They are going away. We are not putting new customers, or marketing new customers. It is not a viable business when Verizon does the commercial agreement.

MS. HERDA: We've had the same experience. We recent bought a company that had UniPs (ph), and we had to let those customers go, because you just can't make any money on it. In fact, it's a money loser.

MR. TAUKE: In fact if you go back to the time UniP (ph) rates were changed, both Sprint, AT&T and MCI were the largest providers of UniP (ph) services, and all three of those companies dramatically exited that business as soon as that rule changed because it was uneconomical to sustain the business.

MR. TAUKE: If I might point out, Mr. Chairman, all of those companies went under, or were forced to sell, at a time when the rates were heavily regulated by the FCC and the state commission.

Rate regulation was not the problem with UniP. It was the business model was a faulty business model.

REP. MARKEY: Thank you, Mr. Tauke. I have one little bit of time left, and I don't want Mr. Casto to feel left out.

Mr. Casto, your testimony, I saw where you said that you're, quote, not aware of any significant commercial area where AT&T does not face facility space special access competition today. And I think that's great, because I love competition. But I'm confused.

Can you describe to me what you mean by the term, significant commercial area?

MR. CASTO: Sure. They're generally the MSAs within our 22-state footprint. You can look at our pricing flexibility record. And we've been granted pricing flexibility in a number of these MSAs, and in fact, in areas where we haven't been granted pricing flexibility we've run into competition, and were unable to respond because we haven't been granted -- we haven't been granted flexibility pursuant to the --

REP. MARKEY: With Internet MSA, would you concede that there are some areas where there are not significant -- I mean within your MSA there's obviously some place before you don't have significant competition.

MR. CASTO: If you mean where there's a -- is there a building that's not lit or something like that?

REP. MARKEY: Yes.

MR. CASTO: Or something like that, absolutely. There's instances like that.

REP. MARKEY: Okay, so there's some areas, obviously, where AT&T is indeed the only supplier of special access, right?

MR. CASTO: Consequently, there's areas where we're not the supplier within our territory.

REP. MARKEY: But there are areas where you are the only game in town; is that correct?

MR. CASTO: I'm sorry?

REP. MARKEY: There are some areas where you are the only provider, is that correct?

MR. CASTO: In a particular building that may be the case.

REP. MARKEY: So in cases where AT&T is the only game in town, do you use that to leverage other areas where you do face competition?

MR. CASTO: It actually works quite the opposite. When customers come in and negotiate broad master agreements with us, they utilize that to get us to extend prices across the entire MSA, across the entire region, including favorable terms and conditions across every area. And that is traditional practice that is occurring in negotiations.

And in fact the way the pricing flexibility rules work, we are not allowed to price down to a building level. We in fact have to extend this pricing either to an MSA level or broader on a state or regional level.

REP. MARKEY: Thank you.

Ms. Herda and Mr. Forsee, isn't this really one of the most important parts of this special access debate, that the big guys can sort of leverage where they're the only game in town to take business scenarios where there's competition?

MR. FORSEE: It's -- (inaudible) -- we sent out in February of this year a request to 77 supposed alternative access providers for our 52,000 cell phones. We got a response from 16 of the 77 that could cover 1 percent of our 52,000 cell phones.

The market has not developed, with all the efforts of this committee, of the commission, of competitors around the table, the market has not developed; 52,000 cell phones, 16 responses covering 1 percent of our cell sites. The market has not developed.

REP. MARKEY: Ms. Herda.

MS. HERDA: Yes, sir. It's all about the buildings. At the end of the day if there is not another provider who actually has a physical infrastructure into a building, there are no other alternatives than the incumbents. Even the Department of Justice, as part of the Verizon-MCI case indicated that the vast majority -- and this is after getting all the data that they got from everybody through subpoenas -- the vast majority of commercial buildings in its territory, that they were the only last-mile provider, that they controlled the access.

And that is really, that is the key to competition, is not in the central office.

The central -- it actually amazes me that the FCC used the central office co-locations as a means to determine if there was competition. The only reason why companies build in to central offices is to use the loop that the local exchange carriers have out of the central offices. So when you deregulate them you essentially killed competition, because now they can no longer get reasonable prices on those loops.

REP. MARKEY: Okay, thank you, Ms. Herda. I'm well past my time. The chair recognizes the gentleman from Florida.

BREAK IN TRANSCRIPT

REP. MARKEY: The gentleman's time has expired. And all time for questions from the subcommittee members has expired.

I think everyone will agree that this has been a fascinating hearing, or as fascinating as a hearing on special access and forbearance -- (Laughter) -- can be to anyone.

But I thought that I would note that a lot has changed since 1999 when pricing flexibility went into place. And at that time we still had the seven Bell companies that had been born out of Ma Bell when it was broken up, Pac Bell, Southwestern Bell, Bell South, U.S. West, Ameritech, Bell Atlantic, Nynex. We had an incredible battle going on against AT&T, MCI, Sprint and dozens of other companies.

But today to quote Paul Simon in his famous song, we've seen a mother-and-child reunion, which Ma Bell bringing the children back together. And while they were doing it, gobbling up AT&T and MCI, and then SBC changing its name to AT&T, as Sergeant Jack Webb would say, you know, to protect someone. So AT&T is now over SBC.

So a lot has changed. And I think the FCC obviously has to recalibrated its rules in order to deal with that change in the marketplace. We can't be looking at the future in a rear view mirror.

And I think what we're seeing here is that this examination of key building blocks in our competition policy is vital so that we can ensure that as time goes on that we have enough people at the table to have a real conversation about competition in the telecommunication marketplace.

And so it's not right for the FCC to forbear without giving real justification. It's not right to allow incumbents to modify their petitions without allowing the other competitors a right to be able t respond in a timely fashion. It's not right to have special access fees that aren't allowing for competitors to be able to build out their own competitive system.

These are all central questions in terms of the long term marketplace in the United States. And the reason it's important is that we're in an international competition. We've fallen -- we're actually becoming the Notre Dame of international broadband policy -- (laughter) -- where we're dropping like a rock. And our goal has to be to find a way to become number one again, looking over our shoulders at number two, three and four, in pricing, in access, and in the power of the broadbands which we're providing.

And this hearing today I think has gone a long way in helping to illuminate those somewhat arcane and obscure issues, but in a way that makes it quite clear that all Americans have a stake in its outcome.

I know that it's seven towns and freedom malls, and we have -- Massachusetts, we have to pay thousands and thousands of dollars to New England Telephone, and its successors to have that copper wire coming down our street. And we didn't really have a choice because that's all there was was New England Telephone.

So we didn't have any competitors that we could have given our money to, so we did kind of have a feeling that we owned it too. And I for one don't like the idea that it can just be ripped up, which limits my ability to have other competitors that my family and other families can choose.

So these are all very important debates about what the relationship between competition and consumers and innovation is. We're going to continue in this series as the months go by. We couldn't have had a better panel. We thank you all for coming, especially you, Tom Tauke, returning to our committee once again, thank you.

This hearing is adjourned.

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