Statement of William E. Kennard
Federal Communications Commission
The Telecommunications Act of 1996 --
Moving Toward Competition Under Section 271
Subcommittee on Antitrust, Business Rights, and Competition
Committee on the Judiciary
United States Senate
March 4, 1998
Mr. Chairman and Members of the Subcommittee.
Thank you for the opportunity to testify before the Subcommittee today. I appreciate the
opportunity to report on the Federal Communications Commission's progress in fulfilling one
very important aspect of the mission entrusted to us by Congress and the American people, that
of overseeing the entry of the Regional Bell Companies into interLATA long distance service.
Just over two years ago, when Congress passed the 1996 Telecommunications Act, the BOCs
were directed to open their local telephone markets to competition as a precondition to entry into
the interLATA long distance market, thereby providing the American people with the benefits of
and competition in all telecommunications markets. I am here to report that we
have embraced this complex and difficult responsibility, and that, in spite of delays caused by
litigation, significant progress is being made.
There has been a flurry of activity since Congress passed the Act two years ago: the states have approved hundreds of interconnection agreements between incumbents and competitive carriers entering the local market; new entrants have been able to raise more than 14 billion dollars from the public markets to fund their entry into local telephony; and, in New York City, over 20% of the business market is being served by carriers other than the incumbent Bell Company. Clearly, a lot of progress has been made, though I do not come here to announce my satisfaction with the pace of competition. The pace of competition in local markets should accelerate. I would like to discuss with you today some possible strategies for speeding competition's pace.
The Goal is Consumer Choice in All Markets
The goal of the 1996 Act is to open telecommunications markets to competition. Consumers deserve to have a real choice among carriers. This means we have to eliminate barriers that discourage entry by new competitors, and eliminate barriers that discourage subscribers from switching between carriers.
Common sense tells us that
competition is only truly working where real consumer
choice is present and where the consumer is able to exercise certain fundamental rights. I have
attempted to articulate these rights, which are consistent with the statutory provisions of section
271, in what I call a Consumer Bill of Rights:
The ability of consumers in a given market to exercise these rights is one sure index that true, meaningful competition exists in that market, just as the absence of such rights of selection is an equally certain index that such competition has not yet arrived.
competition is a primary focus of the 1996 Act, we must nevertheless remember that the Act is
not only concerned with introducing competition into the local market, but also is equally
concerned with increasing competition in all telecommunications markets and providing all
consumers with a realistic choice of service providers. Granting the Bell Companies
authorization to provide long distance service through the process outlined in section 271 of the
Act will provide consumers with the choice of yet another long distance provider.
Section 271 also reflects Congress's intention to
give consumers the option of purchasing
a bundled package of services from a single provider. Up until two years ago, legal barriers
prevented most people in this country from purchasing local and long distance telephone service
from the same company. Part of Congress's vision, however, was to permit "one-stop shopping"
in the telecommunications industry, so that consumers, if they wished, could deal with one phone
company, one phone bill, and one customer service representative--all at a competitive price.
Not surprisingly, it appears that consumers value the simplicity of one-stop shopping. Think
about how outdated, inefficient and irrational it would be for the law to force people to purchase
bread at one store and milk at another. If you go to one store because they have the freshest
bread, you should be able to buy your milk there too, if you so choose, and all things being equal.
But what if all things are not equal? What if a lot of stores could sell milk, but only one store sold bread? Clearly, if everyone had to go to that store to buy their bread, then that store would have an unfair advantage when it comes to selling milk as well.
The same is true when it comes to selling local and long-distance telephone service. It
makes sense to allow consumers to purchase a bundle of telecommunications services through
one-stop shopping from a single provider, but only when all providers have a fair and realistic
opportunity to offer each service that goes into the bundle. If a BOC can offer long distance
service before it has opened its local market to competition, then the BOC will dominate not only
the local service market, but also could dominate the market for bundled services. That will
harm competition and harm consumers. And that's why under the Act, the BOCs must open their
local markets to competition before they may be authorized to provide long distance services.
Thus, we must focus on the most fundamental goals of the Act, each integral with the other: opening markets, ensuring free consumer choice of every kind, and lowering all barriers to entry in the name of competition. Once these goals are fully realized through the mechanisms of the Act, the deregulation of telephone markets in favor of market control is possible. This is the vision of Congress and the end to which every action of the FCC is and should be directed.
Section 271 is Critical to Achieving These Goals
To achieve the ambitious goal of deregulating the telephone industry, Congress carefully crafted a plan of action: first ensure that the local telephone market is open to competition, then allow the Bell Companies to offer long distance service. Thus, the Bell Companies would have an incentive to open up their networks to competitors in order to receive long distance authority.
To determine whether the local market is truly open, Congress adopted explicit criteria for the FCC to consider, set forth in the 14-point competitive checklist in section 271 of the Act and in the requirement that entry serve the public interest. These checklist items require the FCC to examine on a state-by-state basis how adequately a Bell Company is providing access to its network so that new competitors in the market are truly able to provide service to customers that is on par with service the Bell Company provides.
For example, checklist item two requires BOCs to share their networks with new entrants to hasten the development of competition in the local exchange market. In order for a new entrant to have true access to a BOC's network, the new entrant needs access to a BOC's operations support systems or "OSS." OSS refers to the information, systems and personnel necessary to support those elements and services. OSS access provides new entrants with the ability to order service for their new customers. OSS access is important because it enables new entrants to communicate effectively with the BOC regarding such basic activities as placing orders or providing repair service for customers.
I have heard discussions of OSS in which the relationship between the new entrant and the BOC is compared to the relationship between a retail merchant and a catalogue wholesaler. In order to serve its own customers, the retailer needs to know such things as: what goods and services a wholesaler offers; how to order from the wholesaler; when the wholesaler will deliver the ordered goods and services; how to check on the status of the order; and how to get replacements or repairs if the goods or services provided by the wholesaler are defective or break down. If the wholesaler cannot guarantee when the goods will be delivered, or if the wholesaler delivers the product in a defective or untimely manner, it is the retailer that will suffer the customer's wrath. Telling the customer that it is the wholesaler's fault will not help.
OSS provides new entrants the type of information and assistance for which a retailer relies on a wholesaler. If OSS works, the new entrant is able to offer the services the customer wants, make them available on a timely basis, and provide repair and maintenance when needed. The BOC relies on OSS to market its own services, and the 1996 Act rightly requires the BOC to give its competitors nondiscriminatory access to the same systems.
Compliance with the other checklist items is equally crucial to make competition
possible. For instance, BOCs (and all local carriers) must provide for number portability, the
ability to retain one's phone number even when switching carriers. If my grandmother had to
change the phone number she has had for the past 50 years in order to change service providers,
that would be a major disincentive for her to switch
phone companies. The same is true for
businesses. Would a pizza delivery service want to change phone companies if that meant
getting a new phone number, when it knows that its current phone number is plastered on
advertising, printed in phone directories, and etched into the minds of its most loyal customers?
Of course not. Number portability is crucial to competition.
Another example is access to 911 service. Competitors will rely on the BOC for access to 911 service. Who would want to get phone service from a new competitor that could not guarantee the effectiveness of 911?
If new entrants are prevented from offering service that is meaningfully comparable to that offered by the incumbent Bell Company, there would be no way for these new competitors to win customers. In this way, the competitiveness of new entrants depends upon the willingness of the incumbents to abide by the checklist. Section 271 seeks to eliminate a BOC's incentive to make local entry difficult, by prohibiting the BOC from offering long distance service until it has opened the local market.
In addition to meeting the competitive checklist, the BOC must demonstrate that it will comply with the requirements of section 272. Section 272 requires that a BOC's in-region, long distance services be provided through a separate affiliate and establishes requirements about how that entity and the BOC may interact.
Section 271 also requires that the BOC demonstrate that its entry into the long distance market in a particular state would be consistent with the public interest. Congress clearly set forth the public interest test as an independent requirement that must be met in addition to the other statutory requirements. The Commission has concluded that it will consider a variety of factors in deciding whether a BOC's entry into the long distance market is consistent with the public interest. For instance, the Commission will consider whether the BOC has agreed to performance monitoring and whether there are appropriate enforcement mechanisms that are sufficient to ensure compliance with established performance standards. In short, the Commission wants to be confident that markets that are open today will remain open after section 271 relief has been granted.
Bringing the Benefits of Competition to the American People
We want and need the 271 application process to bring the benefits of competition to the American people. The BOCs must, however, take the steps necessary to open their markets. Two truths are absolutely fundamental to the FCC's role in the 271 process Congress devised: we will not grant long distance authorization to companies that have not opened their markets; we will grant entry to those that have. The law requires that it cannot and will not be otherwise.
In the past two years, the FCC has received applications by Bell Companies for four states: we received applications from Ameritech for the state of Michigan, from SBC Corporation for the state of Oklahoma, and from BellSouth for South Carolina and Louisiana. We looked carefully at each application. Unfortunately, none of them met the statutory requirements established by Congress. Although the facts presented in these applications were different, there was one common thread: the competing providers in each state did not have the same access to the local network that the Bell Company enjoys. Therefore, the local market was not open. Without the same access, competitors cannot provide customers with the same service and, therefore, consumers do not have a realistic choice of service providers.
Establishing A Dialogue
My vision is for the FCC to develop an objective, transparent process that will provide the Bell Companies with the information they need to file applications that demonstrate that they have opened their markets in compliance with section 271. We are open to multiple means of achieving this goal.
We have visited state commissions, and we expect to visit more in the future. I have also viewed OSS systems. We will look carefully at future demonstrations of OSS systems to see what new entrants need to do compared to what the BOC retail customer representatives have to do to order service.
Since January, we have been meeting with the Bell Companies, the states, the Department of Justice, new competitors, and other interested participants to provide more guidance regarding the statutory requirements that must be met under section 271. I have directed our staff to be as open and responsive as they can be in their discussions with all participants in the dialogue. If we can smooth out the bumps in the road earlier in the process, then the likelihood of a successful application is significantly increased. I believe that future applications will reflect the benefits of these discussions.
Let me be clear, however, that the dialogue we have initiated is not a process of negotiation. We will not prejudge a BOC's compliance with section 271. Each application will be decided on the merits, within the 90-day statutory period, and based solely on the record that is developed during that period. But we can help guide the submission of stronger applications and provide more clarity to all concerned.
Opening Local Markets Must Come First
Some have argued that the best way to create local competition is for the FCC to let the Bell Companies into long distance, regardless of whether the local market is open. The theory behind this argument is that, by letting the Bells into the long distance market and enabling them to offer one-stop shopping, we will create an incentive for the long distance companies to speed their entry into the local market. In other words, the long distance companies will be forced to offer local service in order to keep their long distance customers and protect their core business.
Letting the Bell Companies into long distance before they have opened their markets to competition would be to turn the 1996 Act on its head. As I have often said before, Congress was very clear about the plan of action: first open the local markets, then the Bell Companies can provide long distance service. If the BOC has not complied with the market-opening requirements of the Act, section 271(d)(3) commands that "[t]he Commission shall not approve the authorization requested . . . ."
Opening markets and creating an infrastructure for competition is hard work. Local telephone service has generally been presumed to be a monopoly service for decades. The BOCs designed and built their infrastructures based on such a presumption. Transforming such an infrastructure so that it may accommodate competition will not be easy and will require investment by all parties. But in the long run, the transformation to a competitive environment will be well worth the work and investment that is necessary to take us there.
We then must be able to maintain a competitive environment. The BOC must have as strong an incentive to keep its market open as it had to open it in the first place. Section 271(d)(6) gives the Commission express authority to oversee the BOCs' actions in this regard, through the issuance of orders, the imposition of penalties, and even the suspension or revocation of approval to provide long distance service. These are enforcement mechanisms that I hope the Commission never has to invoke, because the invocation of these provisions would mean that the BOC failed in some material way to keep its market open.
To avoid that possibility, we need to think seriously about strong measures that can be enforced quickly and efficiently by private actions of the aggrieved parties. And to eliminate uncertainty, we need to develop ways and standards for monitoring performance by the BOCs. Only by making our performance monitoring standards clear, and by ensuring swift and certain punishment in a degree that will deter misconduct, can we hope to guarantee that markets that are once opened to competition will remain open to competition.
The goal of the 1996 Act, and section 271 in particular, is to provide the American public with a realistic choice of service providers. We are all working hard to get to the point where choice exists; it's in everyone's interest that we get there sooner rather than later. The dialogue we have begun is helping greatly. No one looks forward with greater anticipation than I to receiving the first successful application -- which will mean that a local market is truly open to competition.
I appreciate the opportunity to testify today and I also look forward to any questions that you and any other members of the Subcommittee may have.