Hearing of the Senate Committee on Commerce, Science and Transportation - Telecommunications Policy Review

Federal News Service

HEADLINE: HEARING OF THE SENATE COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION SUBJECT: TELECOMMUNICATIONS POLICY REVIEW: LESSONS LEARNED FROM THE TELECOMMUNICATIONS ACT of 1996

CHAIRED BY: SENATOR JOHN MCCAIN (R-AZ)

WITNESSES: DAVID DORMAN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, AT&T CORPORATION, 1 AT&T WAY;

RICHARD NOTEBAERT, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, QWEST COMMUNICATIONS;

JAMES GEIGER, CHIEF EXECUTIVE OFFICER, CBEYOND COMMUNICATIONS

LOCATION: 253 RUSSELL SENATE OFFICE BUILDING, WASHINGTON, D.C.

TIME: 9:30 A.M.

BODY:
SEN. BYRON DORGAN (D-ND): Mr. Chairman, thank you.

First of all, let me thank the witnesses for the testimony today. I think that this hearing, which is the first of a couple of hearings, is important to kind of set the stage for a broader discussion about some of these issues. Let me also point out that I think while we're talking about different devices by which people communicate, I think the interest of the '96 act was about a set of principles, not devices.

It doesn't matter to me much whether somebody's talking over a telephone that's connected to a wire that goes to a wall some place or someone is speaking on a cell phone or someone else is on VOIP using a computer. The issue is the set of principles. And one of the principles was to promote competition. Now, even when we wrote the '96 act we understood there was robust, aggressive competition with respect to long distance. We knew that because all of us got calls at home every day relentlessly asking whether we would be willing to change our long distance carrier.

There were some 500 competitors, and at least when we wrote the '96 act, the cost of long distance had diminished substantially as a result of that robust competition. The same was not true with respect to local service and the local exchange. So the design of the act was an attempt to promote competition at the local exchanges, number one, number two, the act did talk about reducing regulation, and number three, about preserving the principle of universality.

And the reason that that's important is we long ago decided that communications ought to be universally available at an affordable price. So we did anticipate, although we didn't know exactly what advanced services would be, we did anticipate advanced services because we wrote the provision in law talking about advanced services and we provided in law so that the universal service fund, which shall be continued under the '96 act, would promote comparable service at comparable prices.

Why is that important? It's because in some parts of the country it had traditionally been much more expensive to provide these communication services than in other parts of the country. And so the universal service fund was to drive down those high cost areas so that Donald Trump could call a telephone in Grenora, North Dakota, if he wanted to, not that he would, but the fact is everyone would have access to a telephone at an affordable price.

So those were the principles in the act, and frankly, while I think a lot has changed since 1996, those principles haven't changed and the need to pursue those principles has not changed in my judgment. I think that, Mr. Chairman, a number of bad decisions have been made by first of all an FCC that's made wrong decisions and second, an FCC that's been content to observe.

So you've got two different problems over a period of about eight years, one making bad judgments and then in other circumstances deciding to make no judgments and simply be an observer, despite the fact that we paid them as regulators. So, you know, we come to this point in the year 2004 and we have what I think is an interesting discussion, because I think perhaps these three witnesses represent a pretty healthy slice of most of the competitive circumstances in terms of what changes are necessary and how we proceed.

I understand that if I were in Mr. Notebaert's chair or Mr. Dorman's chair or Mr. Geiger's chair, my responsibility is to my business, the stockholders and advancing the interests of that business, period, end of story. That's the responsibility. And so if I have Mr. Notebaert's customers, I don't want anybody coming to get them. If I have a dominant position at the local exchange I don't want anybody coming to get them, to the extent that I can prevent that and protect my base, that's what I'm going to do.

If I'm in Mr. Dorman's position, what I want to do is maximize my capability of going to get the customer somebody else has and then trying to anticipate with what technology we're going to compete in the future, and how do I best accomplish that. These are difficult, vexing decisions that we have to make both in the private sector and the public sector.

Let me make just one or two other points. Mr. Notebaert, first of all, I think you are a breath of fresh air for Qwest. When I say fresh air I don't mean that you're a kid and you haven't been there for very long, I mean that Qwest --

MR. NOTEBAERT: You could mean that, that's okay.

SEN. DORGAN: I mean that Qwest was a company that's very important to my state and was being run in a way that was devastating in my judgment, and I regret that those who ran it that way did that, but that's changed. I respect the work that you're doing and I'm glad you're there and that you've changed the orientation of that important company.

And, Mr. Dorman, you and I have talked before, I have no idea how you make decisions in this environment, in a business of the type that you're in. But these are very interesting, difficult-in some ways very challenging times and let me just ask one question if I might, because I think-there are many other questions, all right, perhaps what I'd like to do is send you all some questions, because we're going to have some other hearings and I do want to get some of this on the record.

But it deals with this issue of competition. Facilities based competition is not something that happens like that, and we understood that in 1996. We're not going to stand up and we didn't in long distance, not going to stand up a separate industry that says, all right, today we've got facilities, we're going to compete. So the result is we kind of develop an approach like UNE-P and require in bundling and so on, or bundling and try to create this competition. Mr. Notebaert, you indicated you're in Philadelphia, I believe, for a local exchange service. Is that facilities based competition or how do you compete?

MR. NOTEBAERT: We have facilities throughout the United States, we also purchase local loops or private lines from companies. We do not use UNE-P.

SEN. DORGAN: All right. Let me just say I hope in this period post action by the court that when we have these negotiations that are going on for the 45 day period, I hope that to the extent that we can make them available to the public, and let some sunshine in, as I think you have done, Mr. Notebaert, in your area, I hope that occurs. And let me just ask the question, what happens if we don't succeed making any progress in the 45 day period, and things collapse and we don't have the capability under a UNE-P any longer to access other facilities? I assume that the answer to that is it dramatically, dramatically diminishes the opportunity to promote local competition and the local exchanges. Is that correct?

MR. GEIGER: Well, based on our reading of the decision, and what it asks the FCC to do, it would be our belief that without further appeal in the Supreme Court, that UNE-P is a mechanism disappears, because the Bell's don't want us to provide it at the current price levels that are regulated. And my view is that all 50 states didn't get it wrong with respect to setting cost based prices. I think it's been pretty clear from the price increase requests across the Bell companies that we are seeing price increases, you know, that would average nine to 10 dollars per loop, which would translate into 50 to 100 percent price increases in some cases. That would take our all ready very thin margins as the largest UNE-P reseller down to the point where we could not continue. So AT&T from its part would have to exit those local markets because we wouldn't choose to keep doing something we lose money at.

MR. DORMAN: While it wasn't our interpretation, we've been informed by a couple of the phone companies, the incumbent phone companies that it is their interpretation that access to unbundled network element loops, not the platform, not the switching, we don't buy that, but the loops themselves were vacated. And we have been told that as of June 16th, we would not be able to order them anymore and that the price increases, they would revert to the interstate special access tariffs which are between three and 400 percent increases over our UNE-Loop pricing. So my quick answer is there would be Armageddon in the industry nationally because I can speak for all of our members on that.

SEN. DORGAN: Mr. Notebaert?

MR. NOTEBAERT: I think that commercial negotiations are always better. And from out point of view, since we face severe competition from wireless and cable television, maybe more than others, I don't know. I mentioned the Omaha statistics, it's very important for us to find common ground so that our distributors are pushing our product. I think UNE-L and access to the loop is a good thing. Where I have a problem is with UNE-P, because the whole concept is totally economically foreign.

I mean, arbitrage is a bad thing, not sustainable, especially arbitrage built upon taking a cost structure of a future incremental cost, and not the actual cost of the asset that you put in.

And so I have a lot of problems with that. We've put forth a plan at the FCC, we made it public. We've also entered into mediation, I think maybe I'm optimistic. I think reasonable people negotiate all the time, and we've done it with satellite providers, so that we have competition, those negotiations aren't simple, but one has to be willing to compromise. And when one's not willing to compromise, one shouldn't have a guarantee of their business success. There's risk in everything we do.

SEN. DORGAN: Mr. Notebaert, just one final point. The question the chairman asked in response to your testimony about the 24 hours for the cable approval, is that not because cable was defined as an information service?

MR. NOTEBAERT: No, it's because we don't regulate-we've chosen the Telecom Act to regulate copper wires, and not regulate the application or telephony. We don't regulate telephony, we regulate copper wires. And as the court said, you know, we probably shouldn't treat these companies as pi?atas, there's more to this than that, and if we're going to regulate we should regulate applications. And our only plea as I showed in the chart from the New York Times, is that it be consistent, that it be balanced, and that there's a chance for success for those of us who invest billions of dollars every year.

SEN. DORGAN: And my final point is that whatever the application is by which someone communicates, the principles in my judgment that persuaded us to proceed with an act in 1996, remain the same principles today.