Department Of Justice

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to testify on behalf of the Administration on critical legislation that will help accelerate the telecommunications revolution and the advancement of the National Information Infrastructure (NII).

An essential and comprehensive legislative initiative in this area is now advancing in the Senate, S.1822, introduced by Senator Hollings. We are grateful for the leadership of Senator Hollings, and to those Senators of both parties who are co-sponsors and have worked to move it forward, particularly, Senators Danforth and Inouye, and Senators Stevens, Exon, Pressler, Rockefeller, Burns, Robb, Gorton, Dorgan, Kerrey, Kerry, Bond, Moseley-Braun and Akaka. I also commend the House of Representatives, particularly Chairmen Brooks and Dingell, Chairman Markey, and Congressmen Moorhead, Fish, and Fields, for their exceptional and bi-partisan leadership in passing what is now H.R. 3626.

I also want to say how proud I am to appear before this subcommittee and you, Senator Metzenbaum, since this may be the last time I testify before you close a long and distinguished career in the Senate reflecting great dedication to the antitrust laws.

Given my role in enforcing the nation's antitrust laws, I will focus my remarks on the portion of the proposed legislation that relates to competition in the telecommunications business, especially issues arising in connection with the Modification of Final Judgment (MFJ) that governs the actions of AT&T and the Regional Bell Operating Companies (RBOCs).

The job of building the NII -- or more specifically, infrastructure that will permit broadband, interactive communication between all members of our society -- has been aptly compared to the building of the nation's interstate highway system. Like the construction of the highway system, the construction of the NII will create hundreds of thousands of jobs. And just as roads have enhanced this nation's productivity and living standards, the completion of the NII will make firms and individuals more productive. The NII will also enhance the quality of our lives by creating new ways to educate adults and their children, improve our health care, give us better and cheaper ways of buying products and services, and entertain us at home.

There is a key difference, however, between the nation's roads and its information infrastructure. Our roads have been built by government. Our NII is being built by private enterprise.

But that does not mean that government has no role in promoting the development of the NII. To the contrary, just as in any other sector of the economy, government is needed to set and enforce rules of fair play.

In a word, government is needed to ensure competition, where technologically and economically feasible. For it is only through vigorous competition in all phases of the telecommunications business -- in the construction of the various information highways and their access roads, wired or wireless; in the operation of those highways; and in the provision of content over the highways -- that the nation can be assured of having the highest quality telecommunications service at the lowest cost.

S.1822 assigns a central role to competition. S.1822 and the legislation passed by the House aim to pave the way for more competition in both local telephone and cable service by stripping away regulations that impede the development of at least "two wires" to the home and opening the telephone companies' "local loop" to full and fair competition. Meanwhile, the bills seek to enhance competition in long- distance telephone services and in the development and manufacture of telecommunications equipment. The Administration, as outlined by Vice President Gore and others, seeks the same objectives.

All of this activity gives us hope that a consensus has emerged in favor of moving telecommunications policy out of the courts and into the statute books so that Congress, representing the public, can establish the far-reaching and comprehensive framework for governing the telecommunications world of the future that the nation deserves. The Administration remains eager to work with the Senate and with the entire Congress to bring about this result.

In the balance of my testimony, I would like to do the following:

• To put the discussion we are having today in a useful framework, by explaining how we got here and, in particular, how the nation has benefitted from the competition in telephone markets that has occurred thus far;
• To suggest why providing even greater competition in both local and long-distance telephone markets is critically important for American consumers and industry;
• To identify the fundamental challenges policymakers face in bringing about this result; and
• To discuss the valuable foundation constructed by S. 1822 (and H.R. 3626) to address these challenges.

The Origins Of The Current Telecommunications Revolution

The telecommunications revolution -- the merging of voice, video and other data transmission and the proliferation of new telecommunications products and services -- has been one of America's leading technological and economic success stories. At bottom, the key reason is that our scientists, engineers and businesses have developed and introduced telecommunications technologies at a faster pace than anywhere else in the world.

Public policies that have promoted competition have been critical to this result. Perhaps nowhere is this more evident than in the case of telephone services, where through the efforts over two decades of the Justice Department and Judge Harold Greene, and the work of the FCC, competition has become the central organizing principle of the industry.

Until the Department sued and eventually broke up AT&T, that company had a monopoly over this nation's telephone market. It was a regulated monopoly, to be sure. But it was also one that thwarted competition and innovation. New companies like MCI that wanted to provide long-distance service could not do so because AT&T's local operating companies refused to provide interconnections to their local loops. Similarly, other manufacturers of telephone equipment wanted to sell equally, if not more, innovative products but were frustrated by AT&T from doing so because of the telephone company's incentives and ability, through its monopoly control of the local loop, to buy such equipment only from its wholly owned subsidiary, Western Electric.

These practices were ended when the Department of Justice, led by my antitrust law professor in law school, William Baxter, obtained a consent decree in 1982. A Modification of Final Judgment (MFJ) has since been administered with remarkable energy and wisdom by Judge Greene, to whom this nation owes enormous gratitude.

By unleashing competition in various segments of the telephone industry, the MFJ has delivered the benefits that competition in other markets routinely guarantees: innovation, better products and services, greater efficiency, and lower prices. Consider that since the MFJ:

• interstate long distance prices for the average residential customer in real terms (adjusted for inflation) have fallen by more than 50% without compromising universal service;
• there has been a virtual explosion in the types of telephones and services that consumers can choose from;
• competition has stimulated the development of hundreds of innovative voice and data services (such as call waiting and voice mail);
• spurred by smaller carriers and MCI and Sprint, the three largest long-distance providers (including AT&T) now have laid fiber optic cable throughout much of the country and thus have already built significant portions of the backbone for the NII; and
• competition in the telephone equipment market has opened whole new markets and spawned the development and sale of new products.

In short, the MFJ has enabled the United States to maintain its technological leadership in telecommunications. Nations that have stuck to the old monopoly model of telephone services have fallen behind. That is why many are now trying to emulate us, rather than the other way around.

Competition has been less well advanced in video services. To be sure, consumers now have an unprecedented degree of choice in video programming, due to the widespread introduction of cable technology. But, with a few exceptions, cable television operators have monopoly franchises.

Yet here too technology is proving that the current video monopolies are far from "natural." A number of Regional Bell Operating Companies (RBOCs) have announced plans for upgrading their telephone networks to deliver video programming. And continuing advances in satellite television promise the delivery of even more television channels to consumers than are now available over cable.

Finally, there is hope that technological innovation ultimately will erode the monopoly that the MFJ, by itself, could not end: the lock that the local monopolies of the Bell System, the Bell Operating Companies (BOCS), still have on local telephone service (carrying more than 99% of local traffic in their service areas). Just as telephone networks can be upgraded to provide video service, cable television systems are expected relatively soon to carry telephone traffic. In addition, while expensive, cellular and specialized mobile radio services --which can transmit calls through the air rather than by wire -- are growing rapidly throughout the country. Shortly, the FCC will auction off additional spectrum for personal Communications Services (PCS), yet another form of wireless communication. Still, it is important to keep in mind that these alternatives are largely prospective, they are not yet widely available and affordable today, and it is not yet clear when they will be. The Need For And Benefits Of Even Greater Competition

Hopefully, technological advances already here or on the horizon will bring even greater competition to telecommunications markets. In particular, technology could soon make possible interactive, digital communications over broadband fiber or coaxial networks (and through the air as well), which should unleash the full promise of the NII.

But there is still a need for policymakers to encourage greater competition in existing telecommunications markets, which both S. 1822 and the House legislation well recognize.

Cable television and local telephone service are the most obvious markets where more competition is necessary. Both are currently monopolized by existing providers, prompting government regulation to protect consumers from excessive rates. Yet even though the technological advances I have just mentioned may make it possible for competition to erode these monopolies and thus end or relax current regulation, government regulations still inhibit this competition. In particular, existing law, at varying levels of government, frustrates providers of cable and local telephone services from offering both services, in full competition with each other, in the same service territories.

Second, while several competitors certainly have made significant inroads in long-distance telephone markets, there is room for more competition. AT&T still has about 60% of long-distance traffic.

Third, while telephone equipment is now probably the most competitive of the markets affected by the MFJ, even this market could use additional competition. Here, too, AT&T continues to have a leading share of the market, although it faces stiff competition from numerous other providers, domestic and foreign. Given their expertise in the industry, some or all of the RBOCs may be natural entrants into developing and manufacturing telecommunications equipment, especially for network switching, but are precluded from entry by the MFJ. Under the right terms and conditions, entry by the RBOCs into these activities could help spur innovation and bring down prices for telecommunications equipment. In the process, the RBOCs could help make American firms even more competitive in the international telecommunications equipment market.

Policy Challenges Ahead

The key challenge now for all telecommunications policymakers - - in Congress, in the Executive branch, and the states -- therefore could not be more clear: To encourage greater competition in all facets of the telecommunications industry in a way that does not distort the marketplace or pose dangers to consumers. In particular, as long as the RBOCs have a monopoly over phone service, they -- as did AT&T -- will continue to have incentives, and the ability, to cross-subsidize and discriminate.

Ultimately, effective competition in local telephone markets will provide the best protection against cross-subsidization and discrimination by the RBOCs, since without market power RBOCs will be unable to leverage their local telephone monopolies into other markets. However, until local telephone markets are competitive, entry tests and structural safeguards, such as separate subsidiaries that allow for objective analyses by regulators of pricing, cross- subsidization, and discrimination are important means available to ensure that local telephone customers are not charged with the costs of long-distance service and manufacturing, and that markets are not distorted by unfair and cross-subsidized pricing.

In addition, policymakers should encourage competition to cable television from other firms and technologies, which will reduce the market power that existing cable operators maintain in their markets throughout the country. Statutory and regulatory restrictions that prevent such competition should be removed-- but in conjunction with appropriate safeguards and removal of all actual and effective legal barriers to cable company competition for local telephone service (and promulgation by the FCC of interconnection requirements). S. 1822 provides for removal of local telephone entry barriers and promulgation of interconnection requirements one year after enactment as presently drafted and we would support LEC provision of video programming in their local service area at that time.

To the extent that the local telephone companies have challenged the prohibition on providing video programming in their local service areas in court (while enjoying, in most instances, continued protection of their local telephone monopolies from competition by cable operators), it is likely that no court higher than a district court will have ruled on these challenges before Congress adjourns. In any event, comprehensive and balanced legislative reform with appropriate safeguards -- not piecemeal litigation -- is the most fair, sensible, and orderly way to move forward. Entry on fair and appropriate terms ought not be affected by whether a BOC may have received injunctive relief from a trial court on a challenge to a provision of law that S. 1822 will change.

The Important Contributions of the Proposed Legislation

S. 1822 is a major step forward toward meeting an important challenge outlined above: enhancing competition in markets monopolized by existing firms. Among other things, this legislation would eventually clear the way for cable and telephone companies to compete vigorously against each other in the same markets. We think this can occur even more quickly than provided in S. 1822, consistent with the principles I have outlined. In addition, the legislation aims to open up local telephone markets by preempting existing local and state restrictions against entry while requiring the RBOCs to "unbundle" their services. In the process, RBOCS would be compelled to provide interconnection to other firms that want to use the "local loop" to provide local telephone services.

The Administration strongly supports those provisions of S.1822 that seek to open the local loop, and we believe that the RBOCs should be required to unbundle and fairly price each element of their local monopoly service at technologically and economically feasible points. Such disaggregated unbundling, coupled with fair pricing, is a critical precondition for establishing truly effective competition in the local telephone market. By requiring before the BOCs may originate interLATA telephone calls in region that they must fully implement unbundling and interconnection, that intraLATA toll dialing parity must be provided, that actual and effective legal entry barriers must be removed, among other requirements, S. 1822 creates important and appropriate incentives for the RBOCs to cooperate with these efforts to facilitate local competition. Structural safeguards for the local loop, such as a separate subsidiary, may also be appropriate at this time.

The Administration also strongly endorses reform that would permit existing cable and telephone companies to offer both video and telephonic services in the same geographic areas. The Administration endorses inclusion of provisions in the legislation that would prohibit telephone and cable television companies from acquiring each other within the same service territory. It is crucial that public policy promote competition between methods for delivering telecommunications services.

For this reason, the Administration believes that for five years there should be a general prohibition on mergers in the same service territory with an exception narrowly limited to acquisitions within rural areas where two wires may be economically infeasible. (There should be a limited exception to any prohibition on joint activity for shared use of the cable "drop wire," because this could facilitate the delivery of broadband services to the home with little threat of anticompetitive effects.) In addition, in order to provide flexibility to deal with technological and market changes that may occur, the legislation should permit the FCC to relax the general prohibition after five years to the extent such action would not harm competition. The Department of Justice would retain the authority both during and after the five-year period to challenge under the antitrust laws any cable-telco merger or joint activity within the telcos' service region (and elsewhere) regardless of any regulatory approval.

Another reason that we believe it is important that the Congress adopt a flat ban on "within region" cable-telco mergers, for at least five years (subject to the rural exception ) is that there should be absolutely no uncertainty in the private sector about the policy of promoting the construction of the second wire. While under S.1822, an antitrust savings clause would permit antitrust review of all proposed buyouts, including those pursuant to exceptions or waivers, these transactions will rarely be acceptable now under the antitrust laws, unless in rural areas, and there is great value in avoiding costly uncertainty and delay, and burdensome antitrust review and litigation.

The legislation also addresses a second key policy objective I have mentioned: specifying the conditions under which the RBOCs, which now have monopoly power in local telephone service, can provide added competition in long-distance telephone service without using their monopoly leverage to distort competition in either or both the local and long-distance markets. S.1822, and the House bill, represent a major step forward in constructing an appropriately competitive environment in the telecommunications industry.

In particular, S.1822 retains entry tests, administered by DOJ and the FCC, for RBOCs to enter long-distance (should they pass the tests). The legislation also would permit the RBOCs to develop and manufacture equipment, although it does not provide, like H.R. 3626 and supported by the Administration, up to one year after enactment for DOJ to object to entry and seek court intervention.

The Administration supports the thrust of S. 1822 and H.R. 3626:

-- While the nation owes deep gratitude to Judge Greene for enormous efforts in administering the MFJ, the rapid pace of technological change suggests that the time has come to do what S. 1822 would accomplish: move telecommunications policy out of the courtroom and into the hands of the two expert agencies charged with protecting the broad public interest in telecommunications (FCC) and competition in particular (DOJ, which helped launch the telecommunications revolution with its suit against AT&T);

-- The Administration endorses competition-based entry tests that require approval of the DOJ and FCC before the RBOCs may provide long-distance as a key safeguard. The Administration supports an approach permitting RBOC entry into the interLATA services market that includes both unbundling and separate affiliate provisions. The Administration also agrees that the RBOCs should be permitted in comprehensive legislation to offer "incidental" long-distance service to facilitate the provision of wireless, cable and certain other services that were not subjects of the AT&T lawsuit. S. 1822 contains provisions generally along all of these lines.

-- The Administration supports RBOC entry into manufacturing, with appropriate safeguards as provided in S. 1822, including a separate subsidiary. The Administration also supports a provision contained only in the House bill, that would provide a notification-and-waiting-period procedure under which a BOC would submit relevant information about its proposal to the Department of Justice, which could investigate and sue to enjoin the proposed entry.

Conclusion

The Administration shares the belief reflected in much of S.1822 and the House bill that the legal framework governing the telecommunications industry can and should promote as broad a degree of competition in all phases of the business as possible, with many viable competitors providing products and services, on a level playing field for all. While removing existing legal barriers to entry in various markets is essential and may appear to promote competition, truly effective competition requires a truly level playing field, where no competitor is able to use its monopoly or market power in one market, such as local telephone services, to disadvantage competition in other markets. Ultimately, it is competition, not regulation, that will provide the best guarantee of promoting new products, lower prices, employment, expanded export opportunities, and innovation in the telecommunications industry.

The Administration looks forward to continuing to work with the Congress in a bi-partisan fashion on an expeditious basis to provide the fair and competitive environment for the telecommunications industry that its participants and consumers deserve. The time to pass this legislation is now, to promote the competition that will provide better and cheaper products and services, that will speed private investment and job creation, and will enable America to compete and win in a global economy.