In Re: En Banc on State of Local Competition Pages: 1 through 76 Place: Washington, D.C. Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In Re: En Banc on State of Local Competition Room 856 FCC Building 1919 M Street, N.W. Washington, D.C. Thursday, January 29, 1998 BEFORE: CHAIRMAN WILLIAM E. KENNARD COMMISSIONER MICHAEL K. POWELL COMMISSIONER SUSAN NESS COMMISSIONER HAROLD FURCHTGOTT-ROTH COMMISSIONER GLORIA TRISTIANI I N D E X SPEAKERS: PAGE: HEATHER GOLD, President 5 ALTS ROY NEEL, President 13 USTA LYNN BUTLER, President 29 NARUK MICHAEL MAHONEY, President and Chief Operating 32 Officer, RCN Corporation ALEX NETCHVOLODOFF, 43 COX ENTERPRISES JACK REITCH, 52 ACSI DENNIS DUNDON, Chief Operating Officer of 62 USN Communications Hearing Began: 10:35 a.m. Hearing Ended: 12:14 p.m. P R O C E E D I N G S CHAIRMAN KENNARD: If you could, please take your seats so that we could move into the local competition debate. We are, today, at the eve of the second anniversary of the Telecommunications Act of 1996. This is an appropriate time to step back, pause and assess what's happening in local competition in telephony. We're going to have a heated debate over this issue in the coming months and years, I'm sure. Already that debate has started, and we're hearing some people say that there is no meaningful competition in local telephone markets and others are saying that competition is here. It's eminent, and I think that the truth probably lies somewhere in between, and I think getting to the truth of those questions will involve us going outside the Beltway and talking to people who are out there on the front lines who are competing to bring local telephone service to consumers. So we've assembled a panel of people who have done a lot of thinking about that issue and actually are taking action. Business people who are running companies that are trying to compete in local telephony. So, today's debate -- I hesitate to call it a debate because I think it's really - - we really just want to get the facts. It's more presentations. We want to shine a spotlight on sectors of the industry who are competing. We want to know what's happening out there. We don't want to use this presentation as an opportunity to re-litigate or reargue issues that are pending before the Commission in the 271 context or battles that were fought on the Hill when the Act was being passed and that many of which have now shifted here. We want to get away from the legal arguments and we want to know the facts about what is happening in the market place. We've assembled a very interesting group of panelist who are competing in different ways. We're going to have an overview presentation by Roy Neel who is President of the United States Telephone Association and also by Heather Gold, who is President of ALTS, which is a trade association of carriers competing to provide local service. Then -- and we also have a very special guest who I will introduce in a moment, Lynn Butler, President of NARUK. Then, we're going to hear from four panelist representing companies who have implemented business plans to compete in local telephone markets. We have Michael Mahoney who is President of RCN Corporation of Princeton, New Jersey; Alex Netchvolodoff. Netch, I have never pronounced your full name before. Everyone knows you as Netch. Netch is Vice-President of Cox Enterprises. Jack Reich, who is President of ACSI of Annapolis, Maryland; and, Dennis Dundon, who is Chief Operating Officer of USN Communications in Chicago, Illinois. I will ask after we have the overview presentation by Roy and Heather, I will ask Lynn Butler to make a few remarks and then I'm going to ask the business people to take maybe four or five minutes and give us an overview of what your companies are doing. We want to hear about your business plans, what specific barriers you're facing in implementing your business plans. I, for one, am particularly interested in understanding what is your economic case for bringing competition to local telephony. And all of you, I know, have some very interesting and differing things to say. So I'm very interested to hear that. So, with that, I will introduce Heather Gold, President of ALTS who will give some opening remarks for us, an overview. MS. GOLD: Thank you, Mr. Chairman and fellow Commissioners. Good morning, and I am truly honored to be - - to address today's en banc session on local competition and to be joined by some of leaders in my industry who also talk about their experiences of opening a local market. Many of the companies that are involved in the local market today began as niche players in the late 80s providing special dedicated access services direct to a customer. These companies known as CAPS were in bolding when the FCC issued its 1992 interconnection order which gave them regulatory assurance which allowed them to expand their services through co-location. These early actions were like a road map to competition. They showed the landscape but did not give firm directions. It was only after the passage of the Telecommunications Act of 1996 that our industry had its first ever national framework for effective local competition providing the elements necessary for this success. These elements included removal of regulatory barriers, establishment of seamless interconnections between all carriers, and it allowed the C-LECS to go to Wall Street and gain access to the capital necessary to build alternative facilities. The journey to a truly local competitive market has just begun and the effective implementation of local competition requires the cooperation of all players. First, regulators must stay the course by following the intent of Congress in implementing the Act. Second, all carriers, including the incumbent, should make it their top priority to put the public interest first by cooperating with the rules of local competition. And finally, the C-LECS ourselves must maintain the persistence to forge ahead and create a new competitive environment. One that brings advanced technologies and true consumer choice to the market. Already under the Telecom Act customer needs are beginning to reshape the market and forge new models for serving the local market place. The first evidence of this phenomenon, the creation by the C-LECS of the nation's first digital local networks is in direct response to increased customer needs for broadband capabilities and advanced telecommunications solutions. This represents a major of differentiation for the C-LECS from the incumbents. Many of the incumbents still rely heavily on a cooper wire technology that has been unchanged since the days of Alexander Graham Bell. Whereas, our members operate state-of-the-art networks with ATM backbones that supply both ATM and frame relay services. In fact, the C-LECS are the prime provider of the nation's frame relay systems. In addition to supporting such high bandwidth services, our networks provide an additional advantage, the ability to offer and manage unified voice and data services over a single systems infrastructure. Thus, if a customer wants more bandwidth, we have it and if they want a unified management, a complex telecommunications packages, we can give that, too. Let's, to truly appreciate how far we've come, consider the challenges we face. This has rightly been called a great business but not an easy one. Getting started means going head-to-head with an incumbent that has 100 percent market share, all dial tone providers must interconnect requiring cooperation between all carriers at multiple levels to assure that traffic moves seemlessly between networks and customers. Facilities-based competition is highly capital intensive at the outset and then, once the networks are completed, profitability hinges on reaching significant volume dependent economies to scale. Customers expect and demand high levels of performance and reliability in order to leave the comfort of the incumbent. And finally, competitors must deal with an array - - vast array of multiple tiered regulation at the local, state and federal level. And yet in a remarkably short time we have made great progress. Today there are over 100 competitive local exchange carriers, including both re- sellers and facilities-based competitors, and industry revenues last year are estimated at 2.7 billion dollars. Although we are relative newcomers, we have already garnered 1.4 million access lines and analysts project that we will double that to 3.0 million this year. And finally, as an indication of Wall Streets confidence in our abilities, the C-LECS have raised 14 billion dollars in capital since the passage of the Act. That's not bad work for two years, but it's even more impressive that when one considers in the four years before the Act we were only able to raise 2.4 billion and thus, thanks to the new pro-competitive policies laid out in the Telecom Act we were able to raise six times the money in half the time. However, we do need to put these gains in perspective of the overall market. Compared to our 2.7 billion in 1997, the incumbents last year had revenues of 101 billion. The C-LECS clawed their way to an enterprise value of 26 billion while the I-LECS (ph) posted to a nice 400 billion enterprise value and our 1 million -- 1.4 million access lines are dwarfed compared to the incumbents 161 million access lines. And though our lies will double in 1998 or should, the incumbents are forecast to gain 7 million lines, twice -- three times as much. But we believe it is possible to expedite our growth and thus be the day when all Americans have a choice in local telecommunications. But, in order to do that, all participants, carriers, investors and policy makers at the federal and state level an even building owners who control access to customers must understand and focus to the impediments to progress. These include several major ones. The first is the interconnection agreements themselves. Currently these agreements, many of which come up for renegotiation this year, lack specific measures, standards and enforcement mechanisms to provide quick and effective dispute resolution. The second series impediments impact how quickly C-LECS (ph) can cut over customers after the network is constructed systems deployment and systems integration between carriers. The C-LECS need to interface with incumbents through state-of-the-art systems to ensure that our customers have, at a minimum, the same level of cut over services the I-LEC provides its own customers. And finally, the complex requirements of building networks place extensive demands on new market entrants. Network deployment and switch installation requires massive amounts of resources, including capital, labor and high tech expertise and that most priceless of commodity, time. In fact, even under the best of circumstances, it takes at a minimum up to nine months to install a single switch in a single location. And, finally, every foot of new network must be negotiated for rights of way access and every fiber, lateral or roof antenna must receive the permission of the building owner. Today we've out forth an action plan for 1998 outlining major factors in the market and how we can solve them. The first factor is, as I said, the interconnection agreements themselves. They are going to be renegotiated and they need substantial change. The solution, we hope, is for the FCC and the states to require these agreements to resemble normal business contractural arrangements with performance measures and standards. And like any private contractural arrangements, these new agreements should entail compliance penalties, complete problem escalation and expedited dispute resolution. Systems integration for OSS must be established, tested and put into place. In many instances I-LECS process C-LEC orders manually by Fax rather than electronically or use systems inferior to their own. Given the hassles that the C-LECS face in turning on a finite number of business customers through these tinker toy OSS systems, it is inconceivable to imagine cutting over massive numbers of residential consumers until major changes occur. And the solution is that we all need equal and nondiscriminatory access to state-of-the-art OSS systems for all of our customers. Access to rights of way must be reasonable and nondiscriminatory. Too often, local governments have levied unfair taxes and raised needless regulatory barriers to new entrants in effect viewing us as cash cows and thus curtailing the ability to provide the benefits of competition to their own citizens. We would like the FCC to work closely with the states to ensure that the city sees these unfair practices and when appropriate use its preemption authority under Section 253 of the Act. Sometimes the longest journey to our networks is from the street to the doorstep, just a matter of a few fetes and that's because building entry begins -- continues to be a major factor for new entrants, whereas the incumbents are already in every building, a legacy of a hundred years of monopoly, newcomers to the market face serious discrimination in the form of owner resistance and high costs. As a solution, we would like to see the Commission immediately initiate a proceeding into the entire issue of building and rooftop access and, if appropriate, use its Section 224 authority to intercede. And finally, we have the problem of pricing. It is often difficult for new entrants to obtain pro-competitive pricing from the incumbents for interconnection, unbundled network elements and resale. During the transition to full competition, we need close management of intercompany pricing of services. The competitive industry has come a long way in two years. Our success to date is a tribute to this Commission, to the state regulatory agencies, to Congress, as well as to the entrepreneurs who started the business and took the risks, but we still have a long way to go. But, jointly committing to this action plan, we can follow the Telecommunications Act to its logical conclusion, full and open local competition. Thank you. CHAIRMAN KENNARD: Thank you, Ms. Gold. Mr. Neel? MR. NEEL: Mr. Chairman, thank you. Commissioners, I'm Roy Neel. I am the President of the U.S. Telephone Association which represents more than 1,000 incumbent local exchange companies, everything from very large companies like SBC and Bell Atlantic down to some very, very small companies that serve maybe 15 customers in the deserts of California. Obviously there's been a lot of change, dramatic trim lines here and it's clear that for you to get a real picture of local competition you're going to need a lot more than antidotes or rhetoric, but some real facts and we have facts, but we don't have all of them, clearly. It seems to me that you are going to need some mechanism to get that, and one thing will be to come up with reporting requirements for all carriers that are very simple and not cumbersome. You're not going to have an objective picture until you get that. Today you're really going to get a snapshot. You're going to get a point in time where each of us thinks local competition is maybe where it's headed and you're going to get a lot of antidotes. I'll try to resist that urge, but I won't be able to. I will say that I hope that if you do this sort of thing in the future that you'll invite some of those real companies outside the Beltway, incumbent local carriers to give you their story about what they're doing to meet, not only the requirements but to enhance local competition because many of them are becoming local competitors themselves. So I think bring in three or four I-LECS down the line here would be very helpful to get past that. One of the things, as I say, that you're probably not getting is some of the facts about the real growth within the competitors. I hope the folks here will be able to do that, but we don't have information about the amount of activity within the competitive companies, so it seems to me that -- that you need to bear down on that and not so much raise the regulatory burdens or reporting burdens for new entrants but bring them -- make them even, exactly the same for everyone so you can compare apples and oranges and do it quickly. You've done a really good job in a number of areas in bringing local competition about. Even before the Act, the number in your administration performing the enforcement process and so on, but I think much more needs to be done. Particularly to create this kind of level playing field to reduce regulatory burdens across the board. I want to spend a few minutes talking about the diversification at the local industry because there are some stereo types that come into play, particularly when we hear terms like monopolies or incumbents or controlling a hundred percent of the market. The fact is, we don't control 100 percent of the local telephone market. We don't. We'll talk a few minutes about the business market and it's truly local and it has eroded dramatically for the incumbents. So, 100 percent of residential customers -- it's not even 100 percent anymore and that number is dropping quickly. So, it's not 100 percent. It may be 100 percent of residential consumers that perhaps some entrants have low down on their priority list. But, the fact is, the local market is highly competitive, especially in the business market place. We have within our membership 1,000 local companies, we have over 200 companies involved in some aspect of long distance -- 250 of them are in the internet business. We have many -- we have 500 companies that are into wireless activities and some, even some small companies, like E-Tel (ph) down in Gonzales, Louisiana, they have already started offering PCS services. We have 80 companies among incumbent LECS that have C-LEC operations and there's not much talk about this, but it's growing rapidly. And, if they're not out there doing, each one of them has an internal strategy to build a C-LEC capability to do a variety of things. The Act requires local exchange companies, incumbents to open their markets in an unprecedented way and also in a very costly way, and they're doing it. It's in their own interest to do it, frankly. Particularly those who ultimately will need your approval to get into other lines of businesses. We have over 2400 interconnection agreements between LEC and wire line and wireless competitors. There are 50 local competitive local telephone companies -- I'm sorry -- there are companies in all 50 states and in the District with 1200 certificates having been issued to [provide local service. There are 30 C-LECS who hold certificates in five or more states, companies like PCG and MFS and so on. Now, certificates are interesting. It shows a willingness to go take risks to spend to get into this market. But, as each of you have pointed out, and a number of others, certificates don't make competition. Now, my memory is that the Act requires that markets be open for competition, not that competitors are doing certain things and are flourishing. So I think that's an important point, but we do have pretty clear information of what the -- (inaudible) -- is. Heather makes some very dramatic points about how vibrant this new industry is an how it's taking off, how Wall Street is noticing, and that's exactly right. So, the fact is, local competition is growing at a dramatic rate. I talked about the problem of assessing local competition only for residential consumers. You all know that well before the Act, again, we had competitive access providers arriving in major metropolitan markets. In New York City there was a cap in place before divestiture even. So this is happening -- the competitive access market is alive and well and moving forward. Let's talk a bit about the costs. What the companies are spending to implement local competition. The Bell Companies alone and GTE have spent 4 billion dollars to make -- to open their markets in everything from OSS systems, hiring people, number portability, a very significant issue and other capital requirements. Another 4 billion dollars having been spent by smaller companies to get this done. Cincinnati Bell alone has spent $30 per access line to fulfill its local number portability obligations set by the Commission. You put a strict requirement on I-LECS to meet this requirement some as early as March. I hope you will soon act on the proceeding to provide some cost recovery for all that work. I know you're working toward that and we appreciate that, but it's long overdue. The largest six companies, I-LECS, process more than 8,000 competitive orders every day, and this is an activity that didn't exist several years ago, mandated, underway, 8,000 a day and it's growing at exponential rate. 1600 co-location arrangements and so on. Incumbent LECS have already lost more than one-and-a-half million telephone lines. Now, in the scene of the number of access lines nationwide, that's a small percent. But look who they are. Almost all of them are lucrative, high volume, high revenue business customers with a disproportionate amount of revenues coming from those customers as opposed to residential. So, every issue, the issue of traffic, minutes transferred between companies shows dramatic growth. So, Heather is right. The competitive industry is alive and well and moving forward. So, I think that's an important issue. The business market is absolutely critical to look at. It should not be looked at, only in the residential market alone. Bell Atlantic, more than 35,000 unbundled loops and 208,000 resold lines were in service two months ago. 401 co-location sites. The stores go on and on. Ameritech has provided more than 70,000 unbundled loops and 95,000 interconnection trunks. Competitors using Ameritech's services to serve 230,000 lines in Michigan alone. 240,000 in Illinois. 600,000 lines region wide, and that doesn't include lines provisioned by the C-LECS for their own businesses. In every case we're seeing this kind of activity. In Bell South there are 320 C-LECS that have been authorized to provide service and 41 with switching capability, more than 8,000 unbundled loops and 211,000 resold lines are now being served by new entrants. This is just a vivid example. 76 percent of these resold lines and 65 percent of unbundled loops are concentrated in just two states, Florida and Georgia, high volume areas. Our companies can't make a C- LEC go serve a rural area. They can't make a C-LEC go serve any particular customer. So any kind of assessment based on number of residential customers served is a little bit deceiving here. But, Bell South, even with that, has lost 3 million lines even to intraLATA competitors. I mentioned Bell South and I think it's important to point out -- Heather mentioned some of the problems in making OSS systems work for new entrants, but this is a new thing. It takes a lot of work and expense. Not very much of it which is being recovered yet, but you look in Bell South alone, there's one C-LEC in Bell South and we can get you the details about this, that has achieved a flow through rate of 97 percent over the last few months. That's a real success story and it represents cooperation between the I- LEC and the C-LEC and we expect that will continue. The growth rates, as opposed to the aggregate numbers are even more interesting. We're seeing in Bell Atlantic alone we have seen the number of unbundled loops and minutes of use doubling over the last year. Resold lines have grown by a factor or over seven. Arguably from a small number to begin with but the trend lines are very severe. In Texas, 140 percent increase in resold lines from June to August alone in 1997. As I noted, we have I- LECS now competing with other I-LECS. Lots of good examples. One happening in Nebraska -- by the way, the Chairman of our association, Frank Kozabeck (ph) is with us today -- his company provides all manner of services, wireless, long distance, internet services and has a state wide operation competing with U.S. West. These cases just go on through the line. CAP investment in fiber seven times greater than that of I-LECS. We see these trends throughout the country. So, as Heather mentioned, Wall Street has been particular effusive about the prospects for C-LECS. Merrill Lynch noted the C-LEC lines will double in '98 and revenue and market share would double in '98 and another 50 percent in '99. So, I'll resist going into some prescriptive recommendations that we would have, but just state that I thank you for gathering facts about this industry. I hope you will extend that fact gathering to all of the players in an objective and simple way so we can all meet it and that these companies have a chance to come in and make their pitch directly with you. Thank you. CHAIRMAN KENNARD: Thank you, Mr. Neel. At this point, I'd like to ask if my colleagues have any questions for the panelist that we've heard thus far. COMMISSIONER TRISTIANI: Mr. Chairman, if I may, Mr. Neel and Ms. Gold, I'm into facts because it's hard to gauge anything or to begin to measure if you don't have facts before you, and I -- by the way, I did go over both of your written material and I thank you for that, and I thank you for being here today. But I'm trying to get a sense -- this is not judgmental, but I'm trying to get a sense -- a better sense of what's happening out there. So I hear 1.4 million lines, 161 million total. That's less than 1 percent. I think USTA measured 1.5. That's not going to change that much. But I also hear a great percentage of it is business, which doesn't surprise me. But do either of you -- this is kind of question number one -- have a breakdown on how many actual business versus residential and also how many -- for the total of 161 what's business and what's residential? MS. GOLD: I don't believe we have that material, but I can get it for you. MR. NEEL: We'll give you what we have. But remember, again, we don't have access to the information of our competitors, and I don't know that you even required that. You require it of us but not of competitors, so we'd be happy to give you what we have. COMMISSIONER TRISTIANI: Well, whatever you could. I mean, -- MR. NEEL: Sure. COMMISSIONER TRISTIANI: -- maybe we could at least get a global breakdown of what's what. MR. NEEL: Sure. COMMISSIONER TRISTIANI: The next question you probably don't have either but, you, yourself, mentioned that Georgia is a place that's, you know, active and whatever and rural areas are going to be hard because they're higher costs but are there any kind of breakdowns that you could give me, not only urban rural, but are there certain areas of the country that are seeing more robust development than others? MR. NEEL: Do you mean geographically or types of markets? COMMISSIONER TRISTIANI: Geographically is what I'm interested in. MR. NEEL: Well, basically they follow, I guess, the urban markets. Particularly the growing urban markets is where most of the competition is occurring or is possible in particular. I mean, we have brought to the Commission in the past some very descriptive maps about what's happening in the Atlanta market, for instance, in terms with the laying of fiber in heavily residential areas. We know that the opportunity is greatest to turn on those customers. Whether they go get them? I mean, again, not to be just rhetorical but the important thing is to ask what are the business strategies of those C-LECS because you can lead horses to water, but you can't make them drink. The markets are going to be aggressively opened by the existence of facilities and the ability to get into those markets with regulatory opportunities and other things. So I think it goes without saying that the growing urban markets are where the new entrants want to go. MS. GOLD: I somewhat disagree with that. We have plenty of our members that are going into so-called second tier cities. I think everybody is well familiar with the Grand Rapid situation, and I think it's been a combination of yes, they are in more heavily congested population areas, but that coupled with the strong state pro-competitive regulatory environment has really incented (ph) a lot of development, especially when you move into smaller communities. You know, if there's a good -- if there's good business sense to go into a community, people will go into it. COMMISSIONER TRISTIANI: Just one final -- this is more of a comment, but I'd like you to think -- actually, all of you to think, and in particular, my former fellow Commissioner, Lynn Butler think about how this Commission could gather information without creating burdens on the industry on the state of the market that's more than just total lines. You don't have to answer that, but if you would think about that. MS. GOLD: Well, I just wanted you all to know that that's a very clear objective of my executives and, in fact, they have charged the association with going out and contracting with someone to collect that kind of industry data. COMMISSIONER TRISTIANI: Mr. Neel? MR. NEEL: Commissioner, I think we're all -- I know Heather's orientation and mine and others gather a lot of data about what our own companies are doing. The problem I think you'll have in dealing with that is there may not be a consistency in the way -- in the form it comes to you. I would really urge you to spend a little bit of time perhaps working with us and others to figure out a very simple reporting form because you don't want these companies spending tens of thousands of dollars meeting such a mandate. But we would be very helpful in doing -- I mean, we would try to be helpful in doing that. COMMISSIONER TRISTIANI: Appreciate that. CHAIRMAN KENNARD: Commissioner Ness? COMMISSIONER NESS: Following up on that, Mr. Neel, do you have -- I was very pleased to hear that there are so many of your members, the local -- the incumbents. I think you said 80 of them also have C-LEC operations or planning C-LEC operations. Do you have a sense from those members as to how many have residential customers as opposed to business customers in the new territories in which they are competing? MR. NEEL: I don't, but I can find that out. I'm sure that they meet the same profile as other C-LECS, and we'll get you whatever we can on that. Often we don't know. We -- I mean, a C-LEC -- the incumbent often doesn't know what a customer looks like, and once they take that line too. COMMISSIONER NESS: Okay. Perhaps based a little bit on that experience, if you could tell us what factors would be particularly important for one of the local competitors to provide residential service. What are the factors that would make that business plan an attractive one? What does it need? MR. NEEL: Are you asking me to speak on behalf of the C-LEC operations of our members? COMMISSIONER NESS: Sure, if you could. MR. NEEL: Well, I can only speculate. But I would think that it had, in addition to being able to get the same kind of -- or to get interconnection agreements, which the states manage -- I mean, if there's a problem with an interconnection agreement or pricing and terms, the state has the tools as mandated by the Act to work through that. So, once you get past that, it seems to me part of it is a matter of commitment. They've already decided to go into a market. They've got to put their money where their commitment is. I mean, I promised I would resist, but I can't. We have two of our largest interstate carriers that have essentially backed out of the local business. They made huge, dramatic, public relations commitments and they didn't back them up. I think a lot of the smaller C-LECS are moving much more aggressively and maintaining that commitment, and I think an I-LEC acting as a C-LEC or in C- LEC operations would have the same issues there. Are we willing to spend to the money to go market and to provide quality service, because that's how they're going to compete. COMMISSIONER NESS: That's what I'm getting at. Do you have a sense as to -- as to what the profile is of the customer of those C-LECS -- of the incumbent C-LECS? MR. NEEL: Well, I would imagine it's largely like the rest of it. It's business first. COMMISSIONER NESS: Uh-hmm. Okay. It would be real helpful if you have after this en banc if you have any further thoughts as to what, from the perspective of those members, would make entry into residential service more attractive as an opportunity, and I just can't resist -- since you couldn't resist making your little statement, I can't resist making a statement about how I've been intrigued by some of the advertising that I've heard often from your association about how you can trust your local TELCO. I assume that these 80 C-LEC operations of your members are now going to be competing against their own revenues going into these advertising campaigns. MR. NEEL: But i think that's what you wanted. You wanted everyone competing with everyone else. And regardless of advertising, the fact is it's true. Most consumers do trust and have high confidence in their incumbent local telephone company. So, you know, that's a fact. And they -- potentially, they'll be able to use that reputation for quality and pricing to be able to move into other kinds of markets. Hopefully, maybe some day long distance. But, in this case, particularly it should be -- it's a legitimate business asset. Not simply that they currently hold the customer. COMMISSIONER NESS: Thank you. CHAIRMAN KENNARD: Further comments? COMMISSIONER POWELL: I would just make one quick comment because everybody is so focused on breaking things down residential to business. That's a red herring. It's high volume to low volume. High volume, high density to low volume, low density, at least as an economic business matter, and I think we should be careful about structuring the debate about whether someone is in a house or whether someone's in an office building. I just throw that -- Secondly, I guess in partial response to Commissioner Ness' concerns, which is why I'm anxious to get the to business people on this question is that one of the things that I've heard about some of those providing C-LEC alternatives to their incumbent service, like GTE, for example, their C-LEC operation is the key is in the synergy of packages of services. That is a sense of accepting, to some degree, local telephony, particular residential being loss leader but made up by the synergy of offering a package that includes data, long distance and other forms of services. I mean, that's at least part of what I've heard about the profile of some of the C-LECS, and I think many of the companies here have similar models that will shed some light on that. CHAIRMAN KENNARD: I'd now like to introduce our special guest, Lynn Butler, who is President of the National Association of Regulatory Utility Commissioners. As I think Heather Gold touched on in her comments, the regulatory task of introducing competition or facilitating competition is not only a federal charge, it is going to involve a heavy involvement by state regulators and also to some extent municipal regulators. So, I really feel that we're in this together as regulators, and I for one, and I think I share the sentiments of all my colleagues here, feel particularly fortunate that we begin our tenure on the Commission at a time when you, Lynn, are assuming the presidency of NARUC. You have a wonderful and well deserved reputation as a consensus builder and a problem solver, and I just wanted to publically state how fortunate I feel that you're leading such an important organization at such an important time for us as well. MS. BUTLER: Thank you, Mr. Chairman, and thank you and the panel for continuing the dialogue that we've been striving for for the last few years. We have I think as state and federal regulators come a long way from where we were, I would say, prior to the passage of the Act. And, although, we continue to have our debates about who is going to do it, I think our goals are similar into what needs to be done to open these markets. I don't think there's any doubt of the commitment of this Commission or of the state commissions that we want to have a competitive framework in place that will invite and encourage competition for all customers in the telecommunications markets of this nation. I'd also like to applaud the Commission for assembling this panel this morning and exploring the status of local competition as we near the second anniversary of the Federal Telecommunications Act of 1996. At this point, it would be customary for me to go into about a 30-minute diatribe of how well the states are doing in carrying out the mandates of the Act, and the good news is I'm not going to attempt that today. The bad news is I will say a few more words, but I'll try to hit just the highlights. First, the states are committed to competition in the local telecommunications market. We are doing what I believe are the right things under the Act to allow an encourage the development of competition, and we recognize that competition takes time to develop and it is no surprise to us that competition would develop in those high density, high volume markets before it would develop in the low volume, low density markets. However, competition hasn't, as no surprise, come to all areas, nor to all customers equally and we are concerned that we have the right framework in place for competition to continue to develop rapidly so that all customers do share in the benefits. My message today is that the states share the Commission's concerns and desire to bring competition nationwide to all customers. That desire raises several questions and issues which I'd like the panelist today to keep in mind. I hope that they are going to tell us what is working and what is not working, what are the barriers and are the barriers regulatory? Do the barriers relate more to the underlying facilities or are they related to the learning curve of entering new markets and dealing with new sets of customers? I would ask the panelist to address not just what the FCC can do to further enhance the competitive policies laid out in the Act but also what the state commissions can do. Are there creative ideas out there which would better align the parties interest with our public policy objectives? Do we need to go further and, if so, where and how? That's enough from me. I'm really here to learn, and I look forward to your remarks. CHAIRMAN KENNARD: Thank you, Lynn. As we proceed to the next part of our presentations today, I wanted to urge the panelists to focus on our major objective here, which is to gather the facts, and I'm really delighted that I heard a commitment from Roy Neel and Heather Gold to help us gather the facts, and we're going to hold you to that commitment. We want to work with you to come up with a way that a sort of minimally intrusive way that we can get the information that we need. And it's apparent to me that this is an issue that goes beyond business or residential. Commissioner Powell touched on this. I'd really like you to share with us your views on what is your strategic plan. If it's business, is it large business, small or medium sized businesses? If it's residential, is it exclusively targeting high volume residential customers who are interested in a bundled package of services and for the consumer that isn't interested in a bundled package of vertical services, is it economic for you to compete for that particular consumer because these are the questions that we really need answers to as we develop our regulatory approach. Mr. Mahoney? MR. MAHONEY: Thank you. I'm Mike Mahoney, President and Chief Operating Officer of RCN Corporation, and I'd like to thank the Commission for the opportunity to be here today to present some facts and views on the status of competition in the telecommunications market. Let me start by telling you a little bit about RCN and what makes us unique. First of all, we're the only C- LEC in the market place today selling a bundled package of local and long-distance telephone, video programming and internet access service. Secondly, we're the only C-LEC focused on the residential market place. And third, the fact that we provide so many services puts us in the unique position of competing with everybody. We compete with the phone companies, the cable television companies and the internet service providers. Right now we're working to serve customers in New York City, the Boston Metropolitan Area, Washington, D.C. and the Lehigh Valley Region of Pennsylvania. Through the deployment of our advanced fiber optic network, we're targeting 9 million homes. We view each home as a potential of having three connections, one for phone, one for cable and one for internet access which adds up to 27 million potential connections in the area. We've achieved great success so far and we continue to take steps to expand our market. Just recently we announced our sales results for the fourth quarter. I'm happy to report that our sales end connection increases are up 50 percent over the level in the third quarter. We've also announced the expansion of our geographic territory. We are implementing deployment of the network in the District through a partnership with Potomac Electric called Star Power, which will potentially serve the 682,000 customers that Pepco has in the District and surrounding areas. This compliments an existing arrangement we have with Boston Edison, which targets 650,000 customers in the Boston area. And also, we operate what would be known historically as traditional cable properties. We had cable systems serving 200,000 customers in New Jersey, New York and Pennsylvania, which we are upgrading, changing those networks to full service networks to provide the same package of service, phone, long-distance, cable and internet to those customers. And also in the past few weeks, we've had two very exciting developments, one, we just announced the acquisition of the largest regional internet service company serving the Boston market and the District, Alternet Communications in Boston and Erol's Internet Incorporated in Washington. These two companies bring us 325,000 internet customers which can be migrated over to our network. And, secondly, -- CHAIRMAN KENNARD: Mr. Mahoney, could I just interject with a question? Would you target a customer who was only interested in voice services and would not be interested in video or internet access? MR. MAHONEY: Commissioner, our target marketing and our business strategy is to sell a bundled product and that's how our marketing is geared. The more products you take, the better rate and the better discount you get on our service. But we do serve customers that only take one service. CHAIRMAN KENNARD: Thank you. MR. MAHONEY: Secondly, we're pleased that the Commission just this week approved the open video system application in the District which was filed by our operation here, Star Power. This will allow us to get into business in the District and begin to provide services here. We've been able to prove that a company can make money and can serve the residential market, and that's what we plan to do for years to come. We've been pleased with the success so far, but we continue to face significant barriers to entry. First, Bell Atlantic has stubbornly protected its market from competition. Without going into a great laundry list of the problems that we've encountered, I do want to share with the Commissioners a few of the items that we've encountered. First of all, interconnection agreements, we have an interconnection agreement in Pennsylvania which Bell Atlantic for over a year has delayed the implementation of interconnection on simple things like mid-span meet points for interconnection. Things which are common place in the I-LEC industry but which have been difficult to negotiate and agree to with Bell Atlantic in the C-LEC industry. Secondly, Bell Atlantic's OSS systems which are forced to use in the provisioning of transfer customers between our companies is highly inadequate. Bell Atlantic at any point in time holds between 2,000 and 4,000 of our orders in this process, well beyond the stipulated time frames to convert those customers that they have promulgated to us. With respect to co-location, we've had numerous obstacles that we've encountered. Things like our people not being able to use the restrooms in the same facilities that we co-locate with Bell Atlantic, having to use separate entrances, not being able to use elevators, and have to climb stairs to go up seven floors, not being able to use elevators to move equipment into the building, having to rent lift trucks in order to get our equipment up and through windows as opposed to using the elevators which are built for that purpose. And finally, to protect their market, Bell Atlantic has refused to sell us voice messaging service that we want to use for resale, even though we have offered to pay them full retail rate for that messaging service. Additionally, as I indicated, we, as a company, view the bundled customer as our target market and we have also encountered significant obstacles in entering the video market place. RCN provides much of our video service through the provision of open video service, which is what Congress intended when they passed the Act. Although the potential for competition is tremendous, we have faced significant challenges. First, we face anti-competitive challenges from the incumbent cable operators. For example, incumbents can sabotage new competitors by charging high rates in franchise areas that don't have competition and having low rates in areas where there is competition. This has been most evident recently where we do business in Massachusetts where Time Warner raised its rate 17 percent in the communities where they don't have competition, but in the towns where we're building our network and competing for customers, they didn't raise rates at all. It's a significant impediment. Second, new competitors cannot gain foothold in the market unless we have access to the kinds of programming which consumers demand. The program access rules have gone a long way to make that programming available, and we are very pleased that this Commission has opened the rule making on the topic, and we hope that the Commission amends the rules to provide more deterrents for bad behavior on the part of the incumbents. In addition to contending with anti-competitive behavior on cable operators, we also must go through an extensive and lengthy negotiation process with building owners as well as local officials to enter their markets. And, recently there has been pressure building at the local level to require telephone franchises in addition to either cable franchises or local OVS agreements. These could be stifling to competition, especially if the incumbents aren't required to comply with the same obligations. I'd like to close by saying that we think the future is bright. The potential for competition is enormous but we think the most important factor is getting to the market place soon. It doesn't do us a lot of good to win disputes at the Commission level after lengthy time delays if it just allows the incumbent to entrench his competition. I'd like to thank the Commission for being here, and I'm happy to answer any questions. CHAIRMAN KENNARD: I had one. The example you used about cable competition in Massachusetts I found somewhat interesting because you were saying, if I understood you correctly, that the franchise areas outside the areas where you provide service are, I think, 17 percent higher. The rates are higher than where RCN is competing, and you seemed to suggest that that was somehow predatory, but isn't that also an opportunity for you? I mean, if you were showing consumers that competition is constraining rates, I would assume that consumers would demand that RCN provide service in those areas where they're paying 17 percent more than their neighbor. MR. MAHONEY: Well, let me respond this way. We have plans to build our network in 47 separate communities in the Greater Boston Area. Of course, it takes time to deploy our network and what we're seeing from the incumbent operator is in the markets that we've not gotten to, where we've not -- we can't build our network fast enough. Where we are, they are demanding competition and very receptive to granting us agreements to come in and build. Time Warner is raising their rates there because they have the flexibility of doing that, yet keeping the rate low in the area where we compete. I think that in the cable community, uniform pricing in one system that has a bunch of contiguous systems should be mandated. The ability to raise rates selectively effectively subsidize the market that you're competing with is something that shouldn't happen. CHAIRMAN KENNARD: I see. Commissioners? COMMISSIONER TRISTIANI: I have another factual question. I was in New York last week, and actually I was visiting Bell Atlantic but you're right next to them so we kind of dropped by and -- by the way, you have terrific ads. MR. MAHONEY: Thank you. COMMISSIONER TRISTIANI: They really caught my attention, and I picked up a rate card which I have lost, but I was really astounded at the packages that you offer the -- can you give me off the top of your head what the packages in New York -- MR. MAHONEY: Our rates typically -- stand alone voice rates, if you just want to buy a voice product, they're typically 5 percent lower than the incumbent operator. Our video rates typically are anywhere from 10 to 12 percent below the incumbent operator. Our internet access rates are on par with the internet access business. If you take our product together, if you take our voice product and you're a local customer of ours, your video rate, in addition to getting the 5 percent off your telephone rate, your video rate can be as high as 30 percent lower than the incumbent operator. Four more channels. We have a fully digital state of the art system offering over a hundred channels of programming, which is rare, as the Commission knows, in the cable television industry today. COMMISSIONER TRISTIANI: Are most of your residential customers in buildings, in -- MR. MAHONEY: Our initial focus on construction was in the urban cores within the City of Boston and the City of New York, but our emphasis right now on construction is building the suburbs. And, in fact, in Massachusetts, we're under construction in two towns currently, the Town of Summerville and the Town of Arlington. We expect our growth in customers in 1998 to be much larger in the suburban areas and single family dwellings than they will be in MDUs. COMMISSIONER NESS: What kind of capital requirements are necessary to build in the suburban areas to provide service to houses? You're working in partnership with the local power companies, I believe? MR. MAHONEY: Well, the power -- let me just be clear about the arrangement of the power companies. The power companies have unregulated subsidiaries that are our partners in these markets, and we are together funding the construction and buildout of these systems. And, the economics in the suburban areas because of the corridor that we're doing our construction in, at least initially, which is Boston to Washington which has about 4 percent of the geography in the country and about 26 percent of the telcom and cable television traffic, we find that the demographics in these suburban markets aren't much significantly different then the demographics in a high-rise building. It's almost as if you take the building and just turn it on its side and have fairly high densities per mile of homes passed. COMMISSIONER NESS: What about the cost of providing that service, your infrastructure? MR. MAHONEY: Our infrastructure -- we estimate that when the network is fully constructed and has penetration levels of about the mid 30 percent for services that our cost will be in the range of about $2,500 per connection. CHAIRMAN KENNARD: Do you use unbundled network elements or resale, at all? MR. MAHONEY: We use resale a lot now in front of our network construction, and that was the -- in terms of the interface with the Bell Operating companies and the delays. Most of the delays at this point are on the resale side. CHAIRMAN KENNARD: Anymore questions for Mr. Mahoney? COMMISSIONER POWELL: I'm curious about targeting in package services. To what degree does doing so essentially mean that your target customer is a higher income customer? That is, irrespective of the geographic demographics. I mean, you may not want to reveal what your ideal target is, but it would seem to me that when you ask people to buy that level of range of services, you're looking at fairly sophisticated communications users. MR. MAHONEY: Actually, I think quite the opposite. Our ideal customer is a bundled cable television, local telephone customer, and I can tell you that I spent the first 15 years of my career in the cable television business. And the absolute best cable television customer, the best cable television customer is your blue collar worker who spends a lot of hours in front of the television. So, consequently, our best customer isn't a higher demographic. It's a customer that wants video service at a good price and is willing to bundle his telephone connection with it at a discount. So it's not necessarily a higher demographic. CHAIRMAN KENNARD: Netch? Thank you very much, Mr. Mahoney. It was very good of you to be here. MR. NETCHVOLODOFF: Thank you, Mr. Chairman. I'm delighted to be here. I represent Cox Enterprises which, as you all know, is a multimedia company. We're in the newspaper business, in the broadcast business, in the cable business and to improve and enhance our image, we're the largest used car salesman in the world. We are committed to deploying full service networks and I would like to introduce that subject with a little lighthearted limerick that my uncle produced sometime ago when I was in high school. He said there was a gentleman by the name of Crew that found a rather large mouse in his stew, said to the waiter, "Don't shout and be waiving it about or the rest will be wanting, too." What I would like to do today is sort of shout and waive about the concept of full-service network because I think that utilizing the broad band infrastructure of cable systems for the purposes of providing a panoply of services is a very good business proposition, and we think that our successes will be followed by others in the cable industry. We are, over the last couple of years, complying with regulatory and legal requirements to do this. We have certificates for -- to provide telephone service now in San Diego, in Orange County, in Phoenix, in Omaha and Oklahoma City, New Orleans, the Florida Panhandle, Hampton Roads and New England, and those clusters comprise about 84 percent of our customer base. So we're concentrated by we -- our business plan really does contemplate that the majority -- the vast majority of our customers will have the opportunity to take these services. We have interconnection agreements now with PacTel in California, U.S. Western, Arizona, Nebraska, South Western Bell in Oklahoma and we have the process underway with GTE, SNET (ph) and Bell South in Virginia, New England and Louisiana, respectively. This process has been surprisingly time consuming. We didn't expect it to take so long and extraordinarily litigious. Lawsuits challenging the state decisions for arbitration. The interconnection agreements are pending in Nebraska, not only where jurisdiction was prescribed by the '96 Act in the U.S. District Court but they have also taken us into State Court, Arizona and Virginia. On the operations side, you've heard from at least one of my colleagues a litany of problems. We have all of those problems. I would raise only one beyond that. We even had an incumbent locally change carrier locking traffic illegally in NXX (ph) codes which were lawfully published in the Lurge (ph), and we had to get a restraining order to have that stopped. It's very hard to develop business when your customers are having busy signals show up as a result of misbehavior. But, nevertheless -- nevertheless, Cox's advantage is that regulatory uncertainty is inversely proportional to the amount of infrastructure that you can bring to the party, and we can bring a lot. We're providing, as I say, all of our services over the same hybrid fiber coaxial cable infrastructure and we're able to do that without relying on the incumbent local exchange carriers for anything other than interconnection for the purposes of exchanging traffic, and this is a decided advantage. We are not having to purchase UNEs from local exchange carriers and that has been quite helpful to us in terms of getting our business underway. Our redundant fiber rings and fiber coaxial hybrid networks are the most advanced in our industry, and our network reliability exceeds by some considerable amount the Belcor (ph) standards on reliability. Cox has switches in seven of its nine clusters, and Cox has deployed at considerable expense a system-wide fully integrated information technology platform that supports low cost billing, collection, data base management and all other aspects of customer care so that we expect this MIS system that we have developed to provide a substantial advantage as we begin to market these services. And, clearly, we have a bundle strategy but we are also perfectly anxious to market individual services to all of our customers, as well. We don't require that our cable customers, fro example -- I'm sorry -- we don't require that customers that are in our franchise area that are not taking cable service take cable service in order to get telephony service or high speed data service. That is not a requirement. To develop full-service networks in very, very expensive. Over the last several years, three years or so, we have spent three-and-a-half billion dollars upgrading our networks. I would point out that none of that expense has been passed through to our customers. That's an expense that we've undertaken at the expense of our shareholders. Our business motto is that this upgrade, this high expense that we've undertaken is justified on the basis that, first of all, we're defending our core business by increasing the services that will be available to our cable customers. That incremental revenue isn't the least. Secondly, we believe that our high-speed data service offerings will produce the largest incremental revenue. And finally, the expansion into the full range of telecom services produces a mid-range in incremental revenue. There is a need for clustering. In order for these investments to be made, we really think that you have to have to critical mass of 250- to 500,000 customers in a system in order to justify deployment of switches and in order to justify the high expense of creating management information platforms and all of the other things that we have done. And so, we pursued a strategy of organizing ourselves into clusters. After the '92 cable re-regulation legislation went into place we seriously considered getting out of the cable business and looked at several business models and determined that we could justify staying in only if we clustered, and we looked around for possible ways to do that and wound up firing the times mirror cable system which fit nicely with our existing systems so that we could get critical mass in our -- in our nine clusters which would then permit us to justify to make these substantial investments that I just described. We have a 3.3 million customer base. At the end of last year, more than a million-and-a-half of those customers are data ready, high-speed data ready. That is, we have the potential of being able to sell a little less than half of our customers high-speed data as of the end of last year, and 250,000 of our customers were ready for telephony services -- digital telephony services. By the end of this year, the majority of the clusters will have a digital multichannel video digital telephony and digital high-speed data services available. And by some time in 1999 all of our nine clusters will be ready and we will be able to offer these services to all of the customers that we have in our nine clusters. The next thing I would like to say is that it's important to figure out what these services, these new services look like to the consumer. Are they a good thing? Are they a bad thing? In terms of digital TV, we're talking about 200 channels, 40 CD quality music channels, 25 all new digital program networks, an interactive program guide and heads-up display that will provide what's on, when did it start and what's next on a continuing basis. Search programming by category, heads-up reminders for preselected upcoming programs and elective children's program blocking devices, which I think the Commission has expressed an interest in. Forty channels of enhanced pay per view, up to ten movies starting every 30 minutes, $3.95, never out of stock and never a charge for a late return. Cost for all of the above is $6, $5.95 more per month and if you want all three of the new digital network packages, the cost would be $10.95. We've just launched this service in Orange County. It's a little early for me to give you much detail in terms of customer reaction, but another quarter, I'll be able to do that. In digital telephony, we've launched in Orange County in Omaha, we are offering service, first line at $9 per month. That's 11 percent under the incumbent. A second line at $5 a month. That's 56 percent under the incumbent. We're offering enhanced services, voice mail, caller ID, call forwarding, call waiting at approximately a 10 to 20 percent discount from the incumbent, and we're providing all of this with our own systems. We're not requiring the LEC to provide any of this for us. We have free installation. Finally, we are providing long distance at 10 cents a minute, seven by twenty-four and intrastate at 5 cents a minute, seven by twenty-four and whereas PacTel charges 3 cents for an interLATA or and in intrazone call, in zone three we're not charging anything. In high speed data we're offering 2,500 kilobyte to 6,000 kilobyte per second high speed data services. You can see the range of prices there from $30 to $60 and installation of $100. We are directly competitive with DSL high speed data services at 192 kilobyte per second at $60. 320 kilobytes at 85. 704 kilobytes at $144, and a $514 installation charge, so we believe that's a substantial consumer benefit that we are offering, vis a vie the incumbent LECS. Our installation times are an hour-and-a-half and, frankly, the limiting factor insofar as getting customers is we just have 60 teams trained to do this work, and as we are training more teams we are going to be able to provide more robust marketing. The customer reaction finally is wildly enthusiastic for these new services and we think that having described them, the question is are people willing to buy these new services. In places where we have been offering digital telephony for more than two months, the penetration rate is 17 percent. Cox has 17,000 data customers already. The industry as a whole has 100,000 so we've only been providing data service for three or four months, but we are very excited about the customer take. The incremental costs for high speed data is $350, for telephony $350 and for digital TV $450. The churn rate on high-speed data is zero, and we're installing service as fast, as I mentioned before, we can train service teams. The additional revenue per customer for the bundle package is $130 per home per month. That is a business. We are very excited about our full- service networks. We plan to develop them in all nine of our clusters, and that means that we will be providing these new services for roughly 85 percent of our customer base by the end of 1999. We're, as I say, very excited about it and we believe that the '96 Act has made these new opportunities possible. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Netch. You talked about the consumer reaction which was quite impressive. What has been the reaction of the incumbent providers of phone service and -- I guess you are the incumbent provider of cable in those markets, but how have the phone companies reacted? MR. NETCHVOLODOFF: Well, I mentioned that in one instance in Southern California they were blocking our calls lawfully published in the Lurge we had to get a restraining order -- CHAIRMAN KENNARD: I'm not talking about these alleged anticompetitive responses but in terms of what they're offering consumers. MR. NETCHVOLODOFF: Pricing? CHAIRMAN KENNARD: Yes, pricing and offerings. MR. NETCHVOLODOFF: We're 11 percent under on first line and 56 percent under on second line, and I haven't seen any change in that situation in Southern California. Now clearly, the LECS are arguing that their residential service in areas of Orange County are subsidized because they have argued that all of their services in California are subsidized, so I think it's going to be pretty hard to go in and argue that they should lower their prices if they are not able to offer these services at a profit. We're offering them at a comfortable profit. CHAIRMAN KENNARD: Interesting. Thank you. Mr. Neel, did you want to respond to it? MR. NEEL: Many of these services may in fact be subsidized, but they are subsidized for a reason. The policy in the State of California and throughout this country is that everyone will be able to get affordable, high quality telephone service wherever they live. New entrants are not understandably required to do that. So, I think that the -- and also, the ability of local companies to respond competitively not only in the residential market but in the market is highly constrained by regulators, so it's almost irrelevant how they responded because they had so few tools to respond. CHAIRMAN KENNARD: Thank you. Mr. Reich. MR. REICH: Thank you, Mr. Chairman. We appreciate the opportunity to present here today. My name is Jack Reich and I represent American Communication Services, Inc. We're actually headquartered just down the road in the Annapolis Junction, so we're kind of a neighbor to you here. CHAIRMAN KENNARD: Mr. Reich, could I -- MR. REICH: Yes. CHAIRMAN KENNARD: I'm sorry to do this, but I believe Commissioner Powell had a question for Netch. COMMISSIONER POWELL: I'm curious again about the package and you said some things slightly different than Mr. Mahoney did -- maybe not different but raised questions. How valuable is the data piece to the package? How much is that piece, the engine to the profitability of your service? You talked about it being by far the highest margin. MR. NETCHVOLODOFF: Incremental revenue is the best. COMMISSIONER POWELL: If data is out of the package, do you have a business? MR. NETCHVOLODOFF: Oh, yes. Yes. We do have a business. COMMISSIONER POWELL: Of just cable and local telephony? MR. NETCHVOLODOFF: Yes. I think that -- I think obviously we want to sell all the new services and we believe that they are competitive and priced attractively and particularly the data service at 6,000 kilobytes per second versus a DSL service at 160 kilobytes for roughly the same price is a winner for us. The real problem is you've got to look at the market. The market is 40 percent people with PCs. Only half of those are connected to the internet and so your market shrinks because you are really trying to persuade people that are connected to the internet that your speed is a better service and they need it. You're also trying to persuade people that are not that they need to get connected to the internet, so there are some marketing issues here. Sorry. CHAIRMAN KENNARD: Any other questions? MR. REICH: Since I had already started, was that part of my time? CHAIRMAN KENNARD: No. MR. REICH: Again, my name is Jack Reich. I'm with ACSI American Communication Services. We're headquartered down the road, and actually I'm going to redirect the energy of my remarks -- my prepared remarks to the point that you made up front, Mr. Chairman, about wanting to know more about the economic value and really the market places issues that face us and I think the whole C- LEC community. Basically we really have four things that we're trying to effect in the market place. One is to win customers in the market place with choice, product differentiation, superior customer service and finally price, and offer a difference in price. And we'll say to Ms. Butler's remarks too, is that one of the reasons why we're able to do this is a barrier to entry is less regulation and more market issues and making certain that regulation continues to be served and processed and policed. The fact of the matter is we believe that the regulation is in place for us to be successful. Let me first of all give you a little bit of a description of who ACSI is. We're focused in the southern tier of the United States. We're in 32 markets today with a fiber network technology that serves a connection between the incumbent local exchange carrier, the inter exchange carrier is our own and we extend that fiber optic technology into central business districts to serve business customers primarily. I think it's important to point out there's been a lot of conversation about tier one, tier two and tier three markets. We actually represent tier one markets like Kansas City and Baltimore and Dallas, Fort Worth and the Washington Area. But in addition to that, we have aggressively pursued tier three markets, like Amarillo and Corpus Cristi and Savannah, so we're in the process of also trying to serve those markets, as well. The other layers that we're trying to provide in our package in addition to the fibercon activity is clearly the capability for switch services and we'll talk about that in the full unbundled elements on the switch services side, a full complement of data services and then resale and then offering a bundled solution for our customers. The first area of focus would really be the product differentiation piece, so it's interesting to note the CAP community or the C-LECS really started by only offering dedicated access or the fibercon activity to our customers. But what we have been trying to do is introduce new products and services each quarter for our customers and differentiate along the way. So we have offered switch services and messaging capabilities and a new product that we call East Fire, which is a bundled offering of ATM and frame but it also bundles internet service capabilities as well as local services. So, one of the keys for us is the drive innovative competition for the product side. There's also an important point on distribution. From a distribution perspective we've, as an example, increased from 46 to 200 sales people during the course of the year. So we're proactively trying to provide solutions for these customers and I think it's an important market dynamic that in the past the I-LECS have not been traditionally focused on proactively providing these kinds of solutions, again with a bundled voice and data offering. When we talk about products, you know, clearly people think our technology as the fiber capabilities, the switch capabilities, et cetera. But we believe one of our most fundamental products is customer service. So we look at the billing platforms, the order entry capabilities as an important product differentiator for us going forward, which also incidentally becomes a little bit of an obstacle in the way we have to enter the markets today. I can't emphasis enough, at least from ACSI's perspective, the importance of providing facilities based competition, that from an economic model we have to have the ability to drive our customers onto our lower cost platforms and therefore be able to compete more effectively on price and offer improved pricing for out customers going forward. So there's a never-ending issue of us building our network and extending that low cost capability to where our customers are. Again, we've got the fundamental platform in place in 32 markets but we have to continue working aggressively to increase that. It's incidentally because of this that we're not after just price reform but what we're after is really the opportunity to deliver real choice for our customers. There's been a few questions around the data piece of the strategy, so let me emphasize that a little bit. First of all, we believe that simple choice for POTS, plain old telephone service is important, and we have the opportunity through resale or on our platforms to offer that kind of choice for just plain local service. However, we believe that there is added value by the bundled service offering from two perspectives, one, the customer who does not have all of the answers as it relates to internet offerings, intranet offerings and I would emphasize, as an example, small business today, in order to survive in their competitive businesses, need to get access to these kinds of solutions. So we're trying to aggressively provide those but also under the framework of our own capabilities. We really believe that the full internet - intranet solution and packaging that with local is the primary way that we'll be successful in going forward. Let me show you some fact-based evidence of some of the things that we have been doing in the past. It's interesting to note that at the beginning of the year we first got into switch services. Again, ACSI has only been around since 1994 so we have been aggressively trying to win customers and grow our business. At the beginning of this year we had zero switched access lines installed. At the end of the first quarter we had 360. At the end of the second quarter a little over 9,100. At the end of the third quarter 28,000. You can see a growth trend that will put us around 40,000 cumulatively by the end of the year. It's important to note that part of his market entry strategy is under resale with very thin margins. But, again, that importance of encouraging facilities-based providers so we can have on-net services to deliver lower costs products for our customers. Again, from the perspective of how we're doing as a company and evidence of how well the competitive local industry is doing, at the end of last year we had 9.4 million dollars in sales and revenues. At the end of our third quarter we accumulatively had just a little under 40 million and analyst project us to be in the 55 to 58 million dollar range by the end of this year, for full 1997. Projects for next year from the analysts community have us in the 145 to 150 million dollar range and the 250 million dollar range for the following year. Now, that's very exciting and a big growth opportunity for us but I think that the other important consideration is that that also equates to about 45 -- 50 -- 55 million dollars in ebital (ph) losses in 1997 so there are serious strains on our business for access to capital as well as the burn rates on the actual losses that we have to endure until we're at positive cash flow some time in the year 2001 -- 2002. So there's a thin margin of error as it relates to these kinds of cloth systems from the perspective of order entry and billing and the interfaces that we have to have with the I-LECS and the timing of the deliverables of those so that we can ensure that our business plan is met. Another thing that's important to us and we talked about obstacles for growth, I first of all think about that from an economic perspective. Our company has about 300 million dollars of net property plant and equipment already buried in the ground, but we were also, because of these ebita losses and profit losses were required to get additional funding from the investment committee in 1997. We were fortunate enough to secure 485 million dollars of additional funding which is important for us to sustain our effort to really provide true facilities based competition. We'll probably also have to raise another quarter of a billion to 300 million dollars to sustain us through positive cash flow and to make certain that we're truly a viable choice for competition in the markets that we serve. From an obstacle to continued growth, I'd like to emphasize again that we believe the framework of the Act is in place and important to our continued success. It's also very important that we stay diligent to ensure that all parties meet the expectations of the Act. So, for us, the key obstacles are continued access to capital. We believe that we have a limited access to the quality aspects and pricing elements from the incumbent LECS on unbundled elements. The biggest issue, as you have heard from some of my colleagues today is on the operating support system layer and I think it's important -- a couple of the commissioners asked about the residential and business issues. Clearly, we're focused on the business market place, small and medium sized business customers. However, it is our expectation to move both up market to multinationals as well as down market to residential. However, for that to be economically viable for our company, we have to have the cost and scale of the operating support systems in place and the interfaces in place in order to do that well. And the I-LECS certainly have that in place today. But, again, it's a scale issue on the operating support systems side that is very important to us, and any kind of glitches along the way in those interfaces with the I-LEC inhibit our ability to go further down market and, frankly, to extend our business. Finally, from an over perspective, we're clearly excited about the business opportunity. I happen to have had eight years experience with IXC and CI and three recent years experience with Ameritech, one of the ARBACs (ph). So there's many people, like me, that are entering this business because you see if as a great business opportunity largely because of the regulation in place to offer competition. However, what's it's going to take is clear execution to make certain that we can be successful to meet our shareholders demands and the demands, quite frankly, that you have for true competition in our markets. Thank you very much for the opportunity. CHAIRMAN KENNARD: Thank you. Any questions from the bench? (No response.) Mr. Dundon? MR. DUNDON: Thank you. Mr. Chairman, Commissioners, good morning. My name is Dennis Dundon and I'm Chief Operating Officer of USN Communications. USN is one of the largest and fastest growing competitive local exchange carriers in the United States and a company characterized by Ray Smith of Bell Atlantic as processing more lines in a single hour than AT&T has ordered since the Telecom Act was passed. USN Communications has uniquely positioned itself to take advantage of the unprecedented opportunities present in the Telecommunications Act of 1996. Since initiating service in August of 1996, USN has sold over 200,000 local access lines, and more importantly has installed over 180,000 of those lines, including nearly 56,000 in the fourth quarter of 1997 alone. USN operates as a reseller and is primarily focused on a large under served portion of the market, small to medium sized businesses providing them with a broad array of local, long distance and enhanced telecommunication services, all available from a single source and all billed on a single bill. On the first chart you'll see that USN's current service territory stretches across the Midwest and the northeast portions of the United States. USN communications describes itself as a customer facing organization. By this, we would mean that we strive for direct contact with customers, both in the selling process and afterward. We have 425 direct, face-to-face sales people currently deployed in 34 sales offices you see there located throughout the Ameritech and Bell Atlantic regions, and it's easy to note that those are not just NFL cities. Rather than building facilities, USN has chosen to build a base of customers using a total service resale strategy. By doing so, we have the ability to serve a ubiquitin (ph) customer and rapidly enter a broad geographic market comprising 18 states and 35 percent of the telecom business in the country. As I like to say, we have virtually unlimited network capacity available nearly everywhere, which we can acquire just in time as we need it, and it works. USN has been successful at gaining new customer relationships at a very fast pace. The prospect of choice and participating in the revolution of telecom reform strikes a responsive cord among our small to medium sized business who average just 10 business lines each. In fact, USN presents each prospect with a copy of the Telecon Mag, a copy of which I'll leave with you today. CHAIRMAN KENNARD: We have it. (Laughter.) MR. DUNDON: In most cases, the perspective customer doesn't have an ongoing relationship with the ARBAC from an accountant management standpoint, and they're anxious to learn about how the array of products and services, local, long distance and enhanced can in fact help them compete better and to save money. USN's customers save time, save money and achieve piece of mind by letting USN manage their telecommunications. The next chart shows USN's growth and installed access lines, some of which we've already shared with you. We believe that to be an important measure of success in this business. USN has achieved strong quarter over quarter growth and excess line installations and had a total installed access line base of 171,962 lines at the close of 1997. The sustained growth rate is reflective of our resale entry strategy and USN's commitment to build the operating platforms which can go to volume in the markets we serve as depicted on the next chart. USN was the first company in the country to enter into a resale agreement when we signed up with Ameritech two months before the Act was passed. We then became one of the first two companies to enter into a resale agreement with Bell Atlantic, then called Nynex. This companies were the two ARBACs that USN judged as being most ready with systems to support volume operation. Volume which is both necessary and possible in a resale environment. In order to achieve sustained high volume levels, USN Communications dedicated extensive software development resources to build the necessary electronic interfaces to drive high volumes of resale transactions to the ARBACs electronically. More than just provisioning though, these systems were architected to electronically bond with those companies and USN's other service suppliers, for order and pre-order administration as well as trouble administration. In short, our goal is to flow through information to the maximum extent possible on a systems basis, avoiding the annual intervention. We believe this level of system integration greatly enhances and enables sustained operation of high volume levels. We continue to invest in and enhance these systems regularly. Our value proposition is captured in the next chart which includes round-the-clock customer service and the commitment to continuously integrate best of breed products on one bill. We view the customer as central to our mission. By being customer facing in both sales and service, and offering a broad array of products from a single source, not a single bill and with attractive savings, we offer great value. Your staff requested that we discuss road blocks. Well, we do encounter speed bumps along the way that USN were working with the ARBACs and other suppliers to build a business, not to execute a political agenda. USN Communications urges the Commission to stay the course with respect to preserving three distinct entry strategies, resale, unbundles and rebundled elements, and facilities. Congress wisely set up these three entry strategies and you've been very supportive in preserving them thus far in your local competition decisions. They're working for us and for our customers. I urge the -- and I try not to incent (ph) one versus another or handicap any one of them. Working together they provide the proper entry mechanisms and give the needed incentives necessary for people to have make economic choices that are consistent with their individual business plans. Well, uncertainty regarding the rules for competition could have a chilling effect on the financial markets. Clarity and continued conformation of multiple viable entry strategies allow us to access the capital markets we require for growth and thereby to fulfill the promise of the Telecom Act. Thank you for the opportunity to tell you about USN's development accomplishments and desires. I'd be happy to answer any questions now or any time in the future. CHAIRMAN KENNARD: Thank you very much. Commissioner Ness? COMMISSIONER NESS: I agree with him. Reentry of roots are extremely important and we try to keep all three open, clear and inviting for all. In fact, we have been trying very hard to sell all three abroad, and find a lot more resistance on that score. With respect to your choice to go with resale as opposed to unbundled network elements for example, what were the considerations and what were the factors that lead you chose to resale as opposed to unbundled network elements? MR. DUNDON: Well, from our standpoint, it really allowed us to address the lightest possible market place by having ubicquitos or nearly ubicquitos coverage within the market. We could target our selling efforts as we chose rather than in some way that was dictated by our construction program or our ability to deploy switches, and we thought that the Telecom Act of '96 offered such a great opportunity that a first to market strategy was using resale was the one that was best for our company and our shareholders. You know, with regard to the economics certainly it's been widely reported over the last week of some very large players who have decided that resale doesn't work, and I think that the circumstances really are different from an incumbent who has the opportunity just to pick up the resole local service in a company like USN's that he has the right to address the entire full range of services for that customer. That's an attractive margin opportunity for us and one that we aggressively pursue. CHAIRMAN KENNARD: Well, is your goal to develop a facilities based network at some point in the future? MR. DUNDON: I think that certainly choosing resale doesn't preclude any direction that we might take in the future. But, again, having these three elements working in parallel may well provide an ongoing viable resale opportunity long run that improves in March and over time. Interesting... COMMISSIONER POWELL: I just wanted you to elaborate a little further, I mean, to put it bluntly, one of the ISCs characterized it as a rat hole this week, which is pretty strong talk, and you said, you know, there may be some differences. I'm very curious about how you would -- what would be your explanation of them reaching that judgment. I know you can't read into there, but why do you think? You know, give us some inside as to why you -- why it's not a rat hole from your perspective and contrast it to theirs. MR. DUNDON: I think the key elements are the ones that shows us to recognize the resale and, offered an opportunity to quickly get into the market place and be establishes and that was the fact that you could address a broad segment of customers and you that you weren't necessarily constrained by your ability to deploy resources in order to do that. The rat hole characterization is not one that I would draw nor necessarily give credence to. I mean, we have very carefully analyzed our business plan and have looked at the margins that are available to us under the term and volume discount agreements that we have with Ameritech and with Bell Atlantic and also in some of the month-to-month circumstances in some of the expansion states that we've looked at. But we're not focused solely on the local service discount. We're focused on the entire bundle of services that we believe that we can bring to that customer and by doing so, some of those enhanced services and long distance frankly have higher margin opportunity than does a local resold product. But we think satisfying an entire bundle of the customers needs in fact offers us a very attractive business opportunity. COMMISSIONER POWELL: I can't get you to speculate why (inaudible.) (Laughter.) COMMISSIONER NESS: Getting back on unbundled network elements and UNE's was a part of your decision -- you said you wanted to get out into the market place rapidly -- MR. DUNDON: Right. COMMISSIONER NESS: Was the ability to provide for service based on UNEs deemed to be much more time consuming or much more costly from a capital investment perspective and, if so, in what respect? MR. DUNDON: I think there's some of that but it's also a somewhat more complex operational model with regard to cut over coordination and so on, and, again, with the -- with the window of opportunity that we saw in the market place and the desire to get through it as quickly as possible and to get to the maximum scale that we could drive, we chose a lot of sales people and we chose the resale model as being the best way to get there quickly. CHAIRMAN KENNARD: Was regulatory uncertainty a factor in that decision making? MR. DUNDON: No. CHAIRMAN KENNARD: Before we wrap up, would any of the Commissioners like to make some concluding remarks? COMMISSIONER FURCHTGOTT-ROTH: Mr. Chairman, I'd like to thank you for organizing this en banc hearing today. I haven't asked any questions in part because I've enjoyed listening to the presentations from the business people here. They each have their own strategy. We've heard from four, there are hundreds like them across the country. What has struck me is that each one has a different approach. Some will fail but many will succeed. What is striking to me is that two years ago, these businesses could not have done what they can do today. They could not compete because there were laws and regulations that prohibited from doing that and their customers could not have choices that they have today because there were laws and regulations that prohibited from exercising that choice. The Telecommunications Act that was passed two years ago had but a few pages on local competition. Most of the pages addressed other items which should not have been nearly as controversial. But I leave this en banc hearing today with great faith that the Act is in fact working, that we see that there are many different approaches, that some will work, some may not work. But that ultimately the Act is working and I think that we have ample testimony of that today. CHAIRMAN KENNARD: Well said. Commissioner Ness? COMMISSIONER NESS: I share Harold's sense of optimism that in fact the Act is working from hearing the stories that have been presented today. I was particularly impressed by Netch's recitation of 3.5 billion dollars that has been invested since the Telecom Act to build an infrastructure that would provide for this array of services. It seems to me also as we talk through he is now getting -- or his company is now getting started in providing those services, as are Mr. Mahoney's and Mr. Reich's and Mr. Dundon's companies, but it takes times. It takes time to be able to build the infrastructure. It takes time to be able to make those investments. It also takes time to be able to market, to be able to bring the consumers along, and the customers along and it seems to me that those who have already declared the Telecom Act to be fatally flawed need only to do an instant replay of the session today to hear that the fruits of our labors are in fact beginning to show. So I am very pleased to have been able to participate and want to thank all of you for the reports that you have given today. Thank you. CHAIRMAN KENNARD: Thank you. Commissioner Powell? COMMISSIONER POWELL: Let me just say quickly that one of the most encouraging things about this hearing which I would urge us and everyone else to take heart in and follow from now on is that it does not collapse into the ever tiresome discuss that whether the acts of failure or success. I am so tired of that discussion and it's an irrelevant discussion. The Genie is out of the bottle and we're moving whether we like it or not, and I think what's really important is to do what you have suggested us do, that is, focus on what the barriers are, what's working and what's not working. And, most importantly, keep our thoughts toward the notion of there will always be steps backwards, so let's make sure we're moving two steps forward for every one that we fall back. And so, in that regard, I am very, very encouraged by the hearing and look forward to continuing dialogue with all of you at some point. Thank you. CHAIRMAN KENNARD: Commissioner Tristiani. COMMISSIONER TRISTIANI: Mr. Chairman, I'd like to thank all of the panelist for being here today and offering their differing perspectives, their different experiences and particularly to the business people here hearing about the way you have targeted, you know, the way you have made your decisions, and I did ask about business and residential because it's very important. I know it may be about volume but I think the promise of the act was not made just to the business community, but it was made to all of Americans and I'm delighted that business are seeing those fruits earlier, but what pleases me today is that I'm seeing some targeting of residential consumers and I have no doubts that our business community can figure out how to compete in those markets and make money and offer the fruits of competition to all consumers in America and in the rural areas, too. And, with that, I would like to thank you and one thing that I'd like to add is that one of the reasons the Act is working is not only the good work of the FCC and the diligent work in implementing an Act that had some pretty incredible time lines, I want to thank the State Commissions. I can't help but say that because having worn that other hat, we had some incredible time constraints too and there were many commissions that were poised or were ahead, actually, of everybody else in this business but a lot of other commissions had to do incredible work to get this going, and I thank everyone. CHAIRMAN KENNARD: Thank you, Commissioner. I will also echo the thanks that you've been hearing from my colleagues. I think this was a fascinating and very, very useful presentation that we heard today and, also, reiterate Commissioner Tristiani's thanks to Lynn Butler and the State Commissions that she represents and reiterate my commitment to continue to work with you on this important issue. One of the things that we heard from all of the panelists today is the importance of the FCC's work. That is that, we, as a Commission, need to remain vigilant to promote pro-competitive policies to make sure that what we're seeing happening out there in the market place continues to develop and flourish. I think that's what the 1996 Act was all about. I think we're seeing some very, very encouraging signs and I want to commit to you that we will certainly do what we can to help realize Congress' vision that there be competition, not only in business markets but also in residential markets as well. So, with that, I'd like to conclude the panel today and thank you all again, and we will have just a few concluding announcements. I wanted to thank three people in particular who were instrumental in making this panel happen -- a lot of work went into it -- Larry Strickling, Chief of the Competition Division in the Office of General Counsel; Mike Reardon, our Chief Economist and Dale Hatfield our Chief Technologists, all of them worked hard to make this panel happen today. I just had some general announcements as well, and I'll invite the other Commissioners to make general announcements as well. I would like to take a moment and express condolences on behalf of all of the Commissioners on the recent passing of one of our beloved FCC employees, Billy Campbell. I knew Billy personally. I knew Billy to be a wonder FCC employee, was here I believe 32 years and Billy will be sorely missed. Commissioner Ness, did you have any announcements? COMMISSIONER NESS: I just wanted to note and welcome our -- an intern in our office, Hunter Old who is a third-year student at George Mason University. He spent last Fall interning for our network services division in the Common Carrier Bureau. He's a Virginia native. He had his undergraduate work at William & Mary in Williamsburg and before entering law school he had spent three years as a news reporter in Los Angeles, California so we are really, really pleased to have him and welcome him. CHAIRMAN KENNARD: Commissioner Furchtgott-Roth? COMMISSIONER FURCHTGOTT-ROTH: I simply would like to echo our sorry about Billy Campbell. I did not know Billy well, but I must say that there were many FCC staff who came by my office after his death expressing their sorrow. It was a very touching experience just to see how widely liked he was by the FCC community, and he will be missed. CHAIRMAN KENNARD: Commissioner Powell? COMMISSIONER POWELL: (Nodding negatively.) CHAIRMAN KENNARD: Commissioner Tristiani? COMMISSIONER TRISTIANI: No. CHAIRMAN KENNARD: Well, with that, we will adjourn until February 19th. Thank you all. (Whereupon, the hearing was concluded at 12:14 p.m.) REPORTER'S CERTIFICATE FCC DOCKET NO.: CC92-77 CASE TITLE: Billed Party Preferece etc.. HEARING DATE: January 28, 1998 LOCATION: Washington, D.C. I hereby certify that the proceedings and evidence are contained fully and accurately on the tapes and notes reported by me at the hearing in the above case before the Federal Communications Commission. Date: _1/28/98_ _____________________________ Official Reporter Heritage Reporting Corporation 1220 "L" Street, N.W. Washington, D.C. 20005 Judith Ernstes TRANSCRIBER'S CERTIFICATE I hereby certify that the proceedings and evidence were fully and accurately transcribed from the tapes and notes provided by the above named reporter in the above case before the Federal Communications Commission. Date: _2/6/98_ ______________________________ Official Transcriber Heritage Reporting Corporation Judith Ernstes PROOFREADER'S CERTIFICATE I hereby certify that the transcript of the proceedings and evidence in the above referenced case that was held before the Federal Communications Commission was proofread on the date specified below. Date: _2/6/98_ ______________________________ Official Proofreader Heritage Reporting Corporation Scott David Britt