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Statement of

William E. Kennard, Chairman
Federal Communications Commission

Before the
Committee on the Judiciary
United States House of Representatives

on

H.R. 1686 - the "Internet Freedom Act" and
H.R. 1685 - the "Internet Growth and Development Act"

July 18, 2000

Thank you Mr. Chairman and Members of the Committee. I appreciate the opportunity to testify before the Committee this morning.

I would like to state at the outset that I agree wholeheartedly with the objective of speeding deployment of broadband services to all Americans regardless of where they live. Nobody should be left behind in the broadband revolution.

Despite the old saying, however, sometimes you do have to look a gift horse in the mouth, particularly if it is a Trojan Horse. I am afraid that is what this legislation is. It appears to be a gift horse to competition, but it is really just the opposite.

The genius of the Telecommunications Act of 1996 (1996 Act) is the delicate balance it strikes between regulation and deregulation to achieve competition in all forms of communications, and to deploy the fruits of that competition to all of the American people. Indeed, the Judiciary Committee's special role in crafting a dual role for the FCC and the Department of Justice in reviewing Bell company applications under Section 271 deserves mention. The process has worked well, and consumers are better off as a result.

I am sure that increased competition is the well-meant intention of the proposed legislation. Inadvertently, however, I believe this legislation will not only upset the balance struck by the 1996 Act, but it actually would reverse the progress attained by the 1996 Act. In an effort to move us forward, this bill mistakenly moves us backward.

The 1996 Act Is A Model For the World

Last week the European Commission (EC) issued a bold package of proposed legislation and directives aimed at bringing the Internet revolution to Europe. It is no coincidence that the EC's initiative looks like a close cousin of our Telecommunications Act of 1996. The European Commissioners have concluded that in order to chart a course towards American-style Internet growth they must build a vessel not unlike the 1996 Act. This course includes such staple items included in our Act as local loop unbundling and collocation.

In fact, government officials from emerging and established nations frequently visit the Commission to study the American network-of-networks that the 1996 Act has created, and how multiple, privately-owned service providers give consumers choices. Increasingly, they endorse the idea of an independent regulatory agency with the power to bust up monopolies, as opposed to relying solely on antitrust litigation to deregulate monopolies. For example, New Zealand is revisiting its efforts to deregulate through antitrust enforcement and considering instead tools similar to those set forth by Congress in the 1996 Act.

We are setting the example for the rest of the world. Changing course midstream by diminishing the BOCs' incentives to open the local markets would not only be detrimental to American consumers, but would also put at risk the leadership role the United States has played in the global telecommunications market.

A Fabric

The 1996 Act is a fabric, with the thread of each part connected to every other part. Unravel one thread, and you risk unraveling the entire fabric.

That is my concern with the legislation before you.

Pull the thread of data traffic, and the seams of the Section 271 provisions are weakened. Pull the thread of data traffic, and the threads of telephony, video transport, and wireless transmissions will fray. As I tell regulators from other nations, you cannot cherry-pick the 1996 Act. In this age of convergence, no network is an island, and the conduit and content of each is entwined with every other.

Under our system, the 1996 Act had to be carried out in three stages: rules had to be written, the rules were tested in court, and now the rules are being implemented. Now that implementation is fully underway it would be tragic to change directions.

This is not an insignificant exemption. In fact, as I discuss below, data traffic has already surpassed voice traffic on long haul networks. Eliminating data from Section 271 would eliminate a crucial incentive for the incumbent BOCs to open their local monopoly markets. The opening of local markets is absolutely critical for accelerating broadband deployment.

My message to you today is simple: the Telecommunications Act of 1996 is working. Because of years of litigation, competition did not take hold as quickly as some had hoped. The fact, however, that it is now working is undeniable. Local markets are being opened, broadband services are being deployed, and competition, including broadband competition, is taking root.

The Commission has a long history of fostering innovation and investment in new technologies, such as the Internet. Specifically, we have consistently refused to impose legacy telecommunication regulations on providers entering new markets. For example, in 1983 the Commission declined to subject information service providers to access charges, concluding that such regulation is unnecessary and would be harmful to the development of the industry. More recently, in order not to stand in the way of successful advanced services deployment, we declined to require incumbent LECs to unbundle packet switched and other advanced services equipment. The Commission found that in a dynamic and evolving market, regulatory restraint was the best way to further the Actís goal of encouraging facilities based investment and innovation. Similarly, as I discuss later, we have thus far refused to impose legacy telecommunications regulation on cable broadband service providers.

Rapid Growth of Broadband Deployment

The Commissionís faithful implementation of the Act has resulted in an explosion of broadband deployment. As of the beginning of the year 2000, we estimate there were 2.8 million broadband, high-speed telecommunications lines that deliver service of speeds of at least 200 kbps. Two million of those lines were serving residential subscribers. This is a six-fold increase from the previous year.

The DSL business is growing so fast that the BOCs are struggling to keep up with demand. The Wall Street Journal reported last week that SBC is installing about 3,500 DSL lines each day. At the end of the first quarter of 2000 there were approximately 800,000 DSL lines in service in the United States. About 75 percent of those lines are provided by incumbent LECs and 25 percent by competitive carriers.

These trends show no sign of slowing down. Analysts project that deployment of DSL will increase by 300 to 500 percent over the next year. Analysts also estimate that subscribership to cable broadband services will at least double by the end of this year, and by the end of 2005 will have 20 million subscribers. Incumbent LECs and cable operators are predicted to invest over 25 billion dollars in infrastructure improvements over the next four years to bring broadband services to their customers.

The market-opening 1996 Act sparked infrastructure investment in telecommunications facilities by incumbent LECs as well as competing carriers. For example:

These statistics do not paint a picture of incumbent companies prevented by legal requirements from deploying new services to consumers.

The vision of the Act and the vision shared by the FCC -- that consumers will have a choice of providers offering a choice of pipes into the home or workplace -- is being realized. It is being realized through the opening of markets required by Congress in the 1996 Act. The rapid growth of broadband services is tangible proof that the market-opening requirements of the Act are working.

The Section 271 Incentives to Open Local Markets

Simply stated, the Act requires the BOCs to open their local markets to competitors. Section 251 states the rules of the game and Section 271 provides a structured incentive for BOCs to play by the rules. At its core, Section 271 is a simple yet clever proposition: in exchange for opening their local facilities to competitors, the 1996 Act provides the BOCs with the substantial reward of the long distance "carrot." Altering this balance by exempting data traffic from the restrictions in Section 271 would inhibit, rather than further, the Actís goal of fostering robust broadband deployment.

As local markets are opened, broadband deployment is both stimulated and accelerated. Specifically, it is the opening of those local markets that is driving broadband deployment and innovation. This is true because nondiscriminatory access to the "last mile" and the ability to collocate -- both components of the competitive checklist -- are critical inputs for the provision of DSL service.

Unfortunately, the first three years of the implementation of the 1996 Act were characterized not by cooperation but by confrontation. Litigation instead of collaboration. The result was uncertainty, confusion, and delay. We lost valuable time. Then, in January of 1999, the Supreme Court largely affirmed the Commissionís implementation of the market-opening provisions of the Act. Once the smoke cleared, we began to witness a sea change. Finally, the battles began to move out of the courtroom and into the marketplace.

Within approximately the last six months, the Commission has unanimously approved Section 271 applications for both New York and Texas. We need only review the state of competition in New York and Texas to know the Act is working. More activity is on the horizon. The BOCs have indicated that they intend to file applications for numerous states across the nation within the next six to nine months. The Commission welcomes, and looks forward to, these filings.

As I have stated before, opening markets can be difficult work, and establishing competition is not easy or fast. But both Verizon (formerly Bell Atlantic) and Southwestern Bell have shown that it is well within the grasp and control of the BOCs. I commend both of these companies, and the New York and Texas Commissions, for their dedication and hard work in ensuring that the fruits of competition are enjoyed by local and long distance consumers in Texas and New York.

As envisioned by the 1996 Act, the Section 271 carrot has fueled the growth of local and long distance competition. Because Verizon and Southwestern Bell opened their local facilities to competitors in New York and Texas as required by the Act, competition in the local telephone market has flourished in those states. One analyst estimates that competitors will serve about 20 percent of the local lines (approximately 3 million lines) in New York by the end of this year. That is a substantial increase from the 7 percent of the local lines that competitors served in New York at the end of 1999 (approximately 1 million lines). Verizon is completing over 270,000 local orders each month for competitors in New York. Local competition is thriving in Texas as well. The Department of Justice estimated that competitors served over 800,000 lines in Texas at the end of last year. That is about an 8 percent market share. Competitorsí customer base, however, has been steadily increasing. For example, in May -- the most recent month for which we have data -- competitors added over 170,000 new lines in Texas. And, I am happy to report, a large portion of the increase in local competition in these states since Section 271 authorization has been in the residential and small business markets.

The hard work of satisfying Section 271 has not only benefited New York and Texas consumers of local services. In the first three months after gaining 271 approval, Verizon captured over 400,000 long distance customers in New York. Analysts estimate that Verizon will take as many as 1.5 million long distance lines in its first year alone (about 10% of the market) -- well ahead of the 1 million lines Verizon set as its goal for the year. Verizon expects to capture 25 to 30 percent of the long distance market within 5 years. Analysts predict that they will meet this goal easily. Many predict that Southwestern Bell will have similar success in Texas. This is no small prize. Texas alone represents about 10 percent of the nationís long distance voice and data market.

The opening of local markets drives competition, innovation, and produces a breadth of offerings. We have witnessed a dynamic market for broadband services develop as a result of the opening of local markets in Texas and New York. Although DSL technology has been available for years, it was not until the passage of the Act that competitive providers -- called data LECs or DLECs -- specializing in DSL deployment were born and began offering DSL service to consumers. Competitors need to collocate their equipment in BOC central offices and require conditioned local loops before they can even offer facilities-based DSL services. Then, to be competitive, DLECs require timely and cost-based loops and collocation. Once the DLECs had access to the inputs necessary to offer their DSL products to consumers, the threat of such competition spurred the BOCs to develop their own DSL products. Competition from the incumbent monopolies, in turn, is spurring the DLECs to develop even more new and innovative broadband products, services, packages, and prices. It is precisely this sort of competitive cycle that will accelerate the availability of broadband technology for all Americans.

Of course, competition among technologies as well as providers is also driving this investment. Wireless technologies -- both terrestrial and satellite -- are also on the scene. High-speed Internet service via satellite is available today virtually everywhere in the United States, including rural areas. Analysts project that wireless technologies will have 6 to 12 percent of the broadband market by 2004. Analysts also project that DSL will overtake cable as the overall leading technology for delivery of broadband services as early as 2002, with cable retaining its dominance amongst residential and small business customers until 2004, when cable and DSL will have equal market shares.

I am proud of the FCCís record in holding firm on the requirements of Section 271. As our experiences with New York and Texas have shown, there is no substitute for the hard work of compliance. The rewards of Section 271 compliance are plentiful. For the first time in history consumers are able to choose their local service provider and take advantage of increased competition for their long distance calls as a strong new competitor enters the market. The rewards do not end there. Competitive markets are also bringing consumers new choices in technology for the 21st Century.

Removing Incentives By Exempting Data

The great competitive success stories we have been witnessing as a result of the incentive structure established by Section 271 would be few and far between if the proposed legislation becomes law. As currently written, Sections 251 and 271 do not draw a regulatory distinction between voice and data services. Carving out interLATA data traffic from the prohibitions in Section 271 would remove a potent incentive from the 1996 Act.

Currently, the majority of traffic travelling over long haul networks is data -- as opposed to voice traffic. Indeed, analysts expect that data traffic will comprise approximately 90 percent of all traffic within four years. The wholesale data service market is expected to generate 41.3 billion dollars in 2005, up from 9.9 billion in 1999. In a world where data is experiencing explosive growth and is rapidly outpacing voice traffic, allowing the BOCs to carry long distance data traffic before they have satisfied the requirements of Section 271 would severely undermine the BOCsí incentive to open their markets.

Changing the rules of the game at this juncture would also undercut the substantial infrastructure investment being made by competitive telecommunications providers. For example, competing carriers have invested 30 billion dollars in new networks since the passage of the Act and are now investing over 1 billion dollars every month in their networks. In 1999, competing carriers have spent over 15 billion dollars on overall capital expenditures, up from about 9 billion the year before. Investors will cut off the spigot when competitors are forced to try to compete with monopoly incumbent providers without full and fair access to the BOCís bottleneck facilities.

I disagree with the notion that further deregulation is the only way to enable incumbent LEC deployment of broadband services in rural and high cost areas. The BOCs simply do not need to provide access the entire way from the customer to the Internet backbone in order to provide broadband access to their rural customers. Rather, they can provide such broadband services to those customers the same way they serve their urban and suburban customers -- by handing data traffic that is headed out of the LATA off to another provider who can carry it across the LATA boundary. That provider then carries the traffic to the Internet backbone.

Is this the most efficient way to provide service to customers? No. Is it the most cost effective? Certainly not. Does it preserve the incentives of the BOCs to open their local monopoly markets to competitors faster than they otherwise might? Absolutely.

The simple reason why rural customers, and other customers in unserved and underserved areas, are not yet being served as robustly as we would like is not caused by legal impediments. Rather it is largely about simple economics. Providing customers with sophisticated services in areas of low density is an expensive undertaking. As such, we are mindful that some rural customers face more limited competitive choices for broadband services at this time. Accordingly, to the extent that there may be instances where a LATA boundary is standing in the way of consumers getting broadband services from BOCs, the Commission has set up a LATA boundary modification process. For example:

Notably, we have not received any requests for LATA modification since adopting this procedure in February 2000, and have received no requests to refile prior petitions. It is difficult to understand how LATA boundaries are a barrier to broadband deployment when no BOCs have even attempted to obtain such relief in the past five months. The Commission has stated its commitment to reviewing, in an expeditious manner, all LATA boundary modification requests that would provide consumers with advanced services.

Cable Access

Another important issue that the proposed legislation addresses, Mr. Chairman, is the question of whether consumers can choose from among multiple Internet service providers (ISPs) independently of how they connect to their ISP. The issue is most often raised in the context of whether cable operators offering broadband access to the Internet. This is often referred to as the "open access" issue, though some call it "forced access." Iíll just refer to it as the "cable access" issue.

First, I agree that much of the growth of the Internet can be attributed to the significant choices available to Internet users and the interconnected network of networks that characterize the Internet. Anyone can send an e-mail to anyone else on the Internet. Anyone using an ISP that is connected to the Web can access websites anywhere in the world. This ability is a core characteristic of the Internet and it should continue.

The issue raised by advocates of cable access is whether regulation is needed to ensure this kind of global interconnectedness by providing consumers choices of ISPs if they connect to the Internet via their cable system just as those who connect to the Internet over their dial-up telephone lines.

Advocates of mandatory cable access want regulators to set rules ensuring competitive access.

I believe that before we impose regulation we should see if a problem develops rather than assume the worst and jump in and regulate.

The Commission has been consistent in its approach to cable access. It examined the issue nearly two years ago in the AT&T/TCI merger proceeding and in the first 706 Report to Congress. In both instances we declined to create a new regulatory regime to address what was only a theoretical problem. The Commission again declined to impose cable access rules in the AT&T/Media One merger earlier this year.

We have adopted this market-friendly approach because we believe that imposing access regulation would impose costs on any new entrants into the broadband conduit business, thereby raising a barrier to entry to potential competitors in this market. The Commission would like to encourage such entry, not throttle it; if the market puts pressure on incumbent cable firms to open up their networks to multiple ISPs, imposing duplicative regulatory costs is simply counterproductive to encouraging conduit competition.

Recent events have been encouraging in this regard. Over the last year, cable operators have made public commitments to allow their subscribers to choose among multiple ISPs. They also have entered into formal memoranda of understanding with ISPs to permit such competitive access. And, AT&T has announced a technical trial in Colorado in which they will provide access to ten ISPs on over its cable network.

These developments support my continued belief that there are powerful marketplace incentives to move the cable platform to an open platform permitting access to multiple ISPs. But it also is time to see how these market driven agreements are translated into concrete commercial arrangements.

Last month the U.S. Court of Appeals for the Ninth Circuit in the AT&T Corp. et al v. City of Portland case confirmed the FCCí s role in establishing a national policy for cable access as well as clearly recognizing the Commissionís authority to forbear from regulation in this area. In addition, the court found that the provision of Internet access over cable was both a telecommunications service and an information service. The categorization of "telecommunications" service does not, however, necessarily mean that the service is subject to all of the traditional common carrier regulations that apply to telephone companies. Indeed, the Commission has the statutory authority to forbear from such regulation.

I plan to propose to my fellow commissioners that we initiate a proceeding that will examine the implications of the Portland decision and establish a framework for cable Internet access. While the current indications are positive, the Commission is of the view that in this fast-changing industry, we must constantly reassess our position on this issue, and be prepared to move quickly should industry conditions change for the worse.

Similarly, the policy of relying on market forces in the first instance to create a competitive dynamic in the deployment of advances services is working in the wireless and satellite industries in which new competitive entrants are investing in facilities for high speed Internet access with a minimum of regulation.

This preference for a market-driven approach to cable access is often noted by incumbent local exchange carriers to be in contrast to what they see as requiring access by competitors to their broadband services.

The reality is that weíve taken a consistent approach to new broadband advanced services across platforms. In the Commissionís Advanced Services Order, the Commission declined to require incumbent local exchange carriers to unbundle their advanced DSL equipment such as DSLAMs as long as competing carriers are able to provide their own advanced service.

The 1996 Act is clear that because of their historic monopoly status, incumbent LECs during the transition to competition must permit competitors to lease local loops in order to connect their own equipment. But, once this is possible, the Commission has chosen to encourage incumbent LEC investment in new advanced technologies and services by not requiring that they make those new investments to competitors on an unbundled or discounted basis.

This policy has been enormously successful. According to industry analyst Telechoice, in the six months ending in March, incumbent LECs more than tripled the number of central offices with DSLAMs from about 1,200 to more than 3,800 while increasing deployed DSL lines from 220,000 to 563,000 customers. The growth of broadband services is explosive.

Conclusion

In conclusion, the 1996 Act is working. The explosive growth in the deployment of broadband services and the vigorous local competition in New York and Texas prove that the Act is working. Passage of the proposed legislation at this critical juncture would disrupt the Act's delicate balance between regulation and deregulation, postpone the benefits of competition to consumers by creating uncertainty and litigation, curtail the flow of investment into new markets, and inhibit the Act's goal of fostering broadband deployment. For all of these reasons, I urge you let the Act continue to work.