In Re: ) ILEC MERGER ) EN BANC HEARING ) Volume: 1 Pages: 1 through 231 Place: Washington, D.C. Date: December 14, 1998 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In Re: ) ) ILEC MERGER ) EN BANC HEARING ) Suite 856201 FCC Building 1919 M Street, N.W. Washington, D.C. 20554 Monday, December 14, 1998 The parties met, pursuant to the notice, at 9:30 a.m. BEFORE: WILLIAM E. KENNARD, Chairman SUSAN NESS, Commissioner MICHAEL K. POWELL, Commissioner HAROLD FURCHTGOTT-ROTH, Commissioner GLORIA TRISTANI, Commissioner I N D E X Session 1: ILEC Mergers - Introductory Comments 5 Chairman William E. Kennard 5 Commissioner Ness 8 Commissioner Furchtgott-Roth 9 Commissioner Powell 11 Commissioner Tristani 12 Prof. Thomas Krattenmaker 13 Public Interest Panel 21 Rev. Jesse L. Jackson, Sr. 22 Founder, President and CEO Rainbow/PUSH Coalition Regina Costa 30 Telecommunications Research Director The Utility Reform Network (California) Jolynn Barry Butler, Commissioner 36 Public Utilities Commission of Ohio Timothy S. Carey, 40 Chairman and Executive Director New York State Consumer Protection Board Martha S. Hogerty 44 Office of the Public Counsel, Missouri Chair, Telecommunications Committee National Assoc. of State Utility Consumer Advocates (NASUCA) Richard Jose Bela, Esq., President and CEO 46 Hispanic Assoc. on Corporate Responsibility William E. Kovacic, Visiting Professor 49 The George Washington University Law School Questions and Answers 52 SBC/Ameritech Panel 71 Robert Taylor, President and CEO 71 Focal Communications Corporation J. Richard Devlin 74 Executive Vice President, General Counsel and External Affairs Sprint Corporation Stephen M. Carter, President-Strategic Markets 77 SBC Operations, Inc. Questions and Answers 81 Bell Atlantic/GTE Panel 112 Michael J. Mahoney, President and COO 112 RCN Corporation Jonathan Sallet, Chief Policy Counsel 117 MCI WorldCom James R. Young 120 Executive Vice President and General Counsel Bell Atlantic Questions and Answers 124 Session 2: AT&T-TCI 156 Chairman William E. Kennard 156 Prof. Thomas Krattenmaker 157 AT&T-TCI Panel 162 John C. Gamboa, Executive Director 162 Greenlining Institute/Latino Issues Forum Joni Inman, President 167 Greater Metro Telecommunications Consortium (Denver) Charles M. Brewer, Chairman & CEO 171 Mindspring Enterprises Mark Roellig 175 General Counsel and Vice President for Law, Policy and Human Resources U S West, Inc. Gene Kimmelman, Codirector 179 Consumers Union, Washington Office James W. Cicconi 182 Senior Vice President for Government Affairs and Federal Policy AT&T Questions and Answers 185 Closing Remarks 228 Hearing Began: 9:00 a.m. Hearing Ended: 4:06 p.m. P R O C E E D I N G S Agenda Item: Session 1: ILEC Mergers - Introductory Comments CHAIRMAN KENNARD: Good morning and welcome. Today the FCC will hold the second of two public hearings to examine mergers that are pending before this agency. We are examining three mergers: the proposed merger of SBC Communications and Ameritech; the proposed merger of Bell Atlantic and GTE; and the proposed merger of AT&T and TCI. These mergers are historic. If approved they will have an immediate and profound effect on the structure of the telecommunications marketplace. I am very proud that the Commission is holding these hearings today. Never in recent history has the Commission held public hearings on mergers before, inviting members of the public and many interested parties to appear before the Commission and address these pending proceedings. Why is this important? It is important because the public has a huge stake in the outcome of our decisions. The outcome of FCC decisions on these mergers will affect the pace of competition, service quality issues, the rates that consumers pay, and it will affect millions of American consumers. The public has a right to know who will benefit from these proposed combinations. The public has a right to know how the FCC is going to decide these mergers. The public has a right to know who are the interested parties, what arguments they are presenting before the Commission, what issues we deem important as we consider these mergers. I absolutely reject the notion that these decisions should be made by bureaucrats working in silence and only talking to lawyers and lobbyists and corporate executives. We must have an open process. We need to hear from everybody. The public must know the major questions before us. We must have a robust, open, and comprehensive debate about these important questions and advocates for the public interest must be heard. That is why we are here today. For me the single most important question on my mind is really quite simple and that is, "How will each of these mergers benefit American consumers?" That is the most important question before us. We know that these mergers create compelling benefits for the companies proposing them and their shareholders and executives but we need to know how average American consumers will be benefited from these combinations because it is our job to ensure that the public interest is served. No one else has that obligation but this agency, to ensure that the public interest is served. So, I, for one, will be listening to hear answers to the following questions: How will these mergers affect our national policy to promote competition in telecommunications markets so that consumers have choice? How will these mergers affect the quality of service for consumers? How will they affect the rates that consumers pay? How can we ensure that our poorest consumers and those in underserved communities will get service, quality service? Two of the merger proponents before us, Bell Atlantic and SBC, have already acquired significant telephone companies through merger in the past few years. SBC acquired Pacific Telesis, Bell Atlantic acquired NYNEX. I want to know how those mergers affected competition and service quality for consumers in those areas. Have promises that were made to regulators been kept? Are consumers better off as a result of those mergers? Because those questions will implicate the pending mergers that are before us today. Are the companies that propose to merge complying with the law and FCC regulations? We are living in a new regime in telecommunications today, as a result of the 1996 Telecommunications Act. It is now our national policy to promote competition in all telecommunications markets. Will these mergers promote competition or inhibit competition? Now, before we begin let me say one thing, I approach these mergers with a completely open mind. These are very difficult issues. We are still gathering all of the facts and hearing arguments from many people. My mind is not made up. We still have a lot of fact gathering to do. So, I am looking forward to learning a lot today and also hearing from all of the witnesses and my colleagues up here. Commissioner Ness. COMMISSIONER NESS: Thank you very much, Mr. Chairman. I would like to extend a very warm welcome to all of our distinguished panelists today. This is a second in a series of en banc discussions we are going to be having on the mergers. The first we heard from the proponents of the mergers, what their plans were, what their vision was at the future and a merged entity. Today we hear both from the proponents as well as the opponents of the proposed mergers. I am looking forward to hearing -- each of you has a very different perspective on what these mergers will mean to the American consumer and to our economy. I am really looking forward to hearing from each of you about that and to have a spirited dialogue as to what all of this means. I don't want to repeat the questions that the Chairman has raised. I thought he raised some excellent questions. I share many of those interest in finding out the answers to many of those questions. I want to reiterate, however, that it is essential that we do keep an open mind on this. There is a wealth of information that is being presented, both today and in the record, all of that will be reviewed, assessed, and will help us as we try to come to a conclusion as to whether the proposed merger or mergers are in the public interest. At the end of the day we have to vote as to whether or not it does in fact serve the public interest to approve these mergers and that is a question that deserves a lot of thought and careful review. So, without further adieu I want to again welcome everyone and plan to ask tough questions on both sides to see if we can get at some of the answers to these issues. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. Thank you for holding these hearings that we've been having on mergers. I too would like to welcome our distinguished guests to the FCC. One of the most cherished principles in America is equal protection before the law, that individuals can come before the law and know they will be treated no differently from any other American, that companies can before agencies and before the law and know that they will be treated no differently from any other company. The Commission has been reviewing mergers under a public interest standard, under Sections 310 and 214 of the Communications Act, a public interest standard that applies to the transfer of licenses, not specifically mergers but mergers often involve transfer of licenses. License transfers before the FCC are not an uncommon event. Last year there were more than 14,000 license transfers. Some of these received very close scrutiny, some did not. Those that received close scrutiny were not necessarily different in any meaningful way from the licenses, license transfers that did not. Some small companies received close scrutiny, some did not. Some large companies received close scrutiny, some did not. We have no clear rules in place as of yet to give clear guidance to the public as to which license transfers will receive the closest of scrutiny and those that will not. We have no clear rules in place that describe what the public interest standard is for those that will receive the closest of scrutiny and those that will not. Indeed, we have before us today three of the largest mergers currently in the United States, SBC/Ameritech, Bell Atlantic/GTE, AT&T/TCI. I cannot help but note the irony though that the largest merger in America, the one that involves more telecommunication licenses before this Commission than are currently held by all but one of those telecommunications companies is not likely to receive closest of scrutiny. I am referring to Exxon/Mobil. This Commission has very clear authority to review mergers under the Clayton Act, very well known procedures before the public about how that will be implemented but we had not been doing that. At some point in the future I hope we will get to some greater clarity, a clarity that will benefit the public, a clarity that will provide equal protection for all Americans and for all American businesses to know precisely how they will be treated by the law. I hope that this hearing today will help shed light on these specific transactions and also how we may look at mergers in general at the FCC. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Powell. COMMISSIONER POWELL: Thank you, Mr. Chairman. I will commend you for conducting a hearing in this area that creates a great deal of optimism and anxiety for a significant amount of the communities with interest in these mergers. In the interest of time, with such a robust panel, I will reserve most of my comments for questioning. I would merely, in advance, thank all of the participants for the time and effort and preparation that was involved in their participation today. It is invaluable assistance to those of us who will have to wrestle through a number of very difficult issues. Thank you. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Tristani. COMMISSIONER TRISTANI: Thank you, Mr. Chairman. Good morning. We have a full day ahead of us so I will keep these remarks brief. Just three points. First, I am very pleased that we finally get to hear the other side to these mergers. Looking over the list of panelists I am impressed by the diversity of entities and the quality of their spokesmen. I know they will add a great deal to my understanding of these mergers. Second, I would underscore that my focus in all of this is on the consumer. It can be easy to lose sight of the consumer as we think about market structures and economic theories. In my view, the best advocates in communications are the ones who tie their arguments to the impact on the average consumer. I hope today's session will give me a greater understanding of how the proposed mergers impact consumers. Third, it is important to remember that the burden of proof in these mergers is on the applicants. Congress long ago recognized that corporate self-interest is not synonymous with the public interest, that is why they set up a careful set of checks and balances for telecommunication mergers. At bottom, the applicants must prove that the merger would serve the public interest. I have already noted my initial skepticism regarding the notion that a $25 million company -- excuse me, $25 billion company must get bigger before it can compete out of region. As I also noted, however, I have not yet made up my mind on any of the three mergers we are discussing today. I hope today's session will help me advance my thinking on these very important and very difficult questions. CHAIRMAN KENNARD: Thank you, Commissioner. Before we turn to our panelists I wanted to hear from Tom Krattenmaker, who is the FCC's Director of Research in our Office of Plans and Policy. Tom Krattenmaker is former Dean of the William and Mary Law School. He, together with Dr. Bill Rogerson, our chief economist, head up the FCC's Internal Mergers Task Force, which oversees our staff evaluation of recommendations concerning these mergers. Tom. MR. KRATTENMAKER: Thank you, Mr. Chairman, Commissioners. I too get confused about this millions and billions but I think it is millions for Ricky Henderson and billions for the mergers. If I might follow Commissioner Tristani's lead, I thought I'd just talk about three points, apologizing in advance to you, Mr. Chairman and the Commissioners, you know what I want to review. What I thought I would do is review the basics of these transactions for the witnesses and other participants in the hearings. Following Commissioner Tristani's lead I thought I'd talk about three things: the parties, the standard the Commission uses, and some of the issues that have been raised to date. I think most important to understand would be the parties. Now, the first panel is going to dwell on two of the proposed mergers that the Chairman referred to, SBC/Ameritech and GTE/Bell Atlantic. With respect to SBC and Ameritech there are three things that you need to know about these firms. One is that within its region each is the dominant or entrenched local phone company. In the vernacular of the 1996 Telecommunications Act they are each incumbent local exchange carriers or ILEC. In their regions these are the dominant phone companies. Secondly, each of them is what is sometimes called a "Baby Bell." They each trace to the breakup of AT&T. Both Ameritech and SBC were spun off from the overall corporation that was the Bell system in the early 1980s. Third, their locations. They are located in different parts of the country. SBC is largely based in the western part of the South and up in the northern part of the West of America. It is basically a southwestern based company. Ameritech is based essentially in the middle and the north of the country, think Illinois, Indiana, Michigan. So, they are in geographically distinct areas. With respect to GTE and Bell Atlantic, the parties are similar. Bell Atlantic is also a "Baby Bell." GTE is not, GTE is not part of the old AT&T system but, rather is the largest independent phone company. Each of them, however, in its own area is an ILEC, that is an incumbent local exchange carrier, a dominant firm in its own area. They are in different parts of the country. We see the Bell Atlantic largely on the East Coast, from Maine down through Virginia. GTE is a little harder to describe but, essentially, it kind of cuts a swoop from the middle of the East Coast down around down to Florida and across the southern tier of the country and back up toward California. GTE is more scattered across the country in its locations. These are the parties that want to merge. As the Chairman stated and others of you noted, what the Commission applies is a public interest standard. What this means is that the issue is the welfare of consumers of telecommunication services. It also means the Commission applies a balancing test, that is it considers both the pros and the cons of any merger that comes before us. "Public interest" is a general phrase and is likely to encompass many specific subissue. Again, I think they have largely been mentioned here but for example, an inquiry into the public interest can entail an inquiry, "Are the parties complying with the law?" Or, another type of inquiry that comes up is, "Will the merger increase or decrease efficient interaction between the parties and between the firms and their customers?" Or, another kind of question that comes up under the public interest test is whether the merger will further or retard the achievement of the goals of the Communications Act, especially the deregulatory pro-competitive goals of the 1996 Telecommunications Act. So, the Commission is looking at obedience to its rules, whether the merger is going to increase or decrease the efficient interaction between the firms or between the firms and their customers and whether it will further the goals of the Communications Act, among other things under the public interest standard. Now, what are the issues that these mergers have raised to date? Well, that's what these people are here to talk about today, that is what our panelists and guests are here. I don't want to presume to say, "Here are the issues and there is nothing more to be added." Let me try to highlight some of the principle issues that have been raised so far in the many filings that have come before the Commission, both pro and con. With respect to the positive aspects of the mergers, there is a common thread to both the SBC/Ameritech and to the GTE/Bell Atlantic application in that each assert that the principle benefit of the merger will be the ability to compete outside their territories. SBC and Ameritech assert that once merged they will have the resources, the ability, the know how, and the personnel to move into the territories of other phone companies. They will invade Atlanta, the province of Bell South; they will invade Denver, the province of US West and offer competitive phone service, thereby bringing extraordinary benefits to consumers in those and other areas. Similarly, GTE and Bell Atlantic emphasize the fit of their companies, with Bell Atlantic more or less flowing into GTE. And, as these companies are combined it essentially enables Bell Atlantic and GTE to act as a dual force in all of these areas in which you see either one of the companies presently operating. Now, each also raises other specific claims about the validity of the merger. These are not Tweedle Dum/Tweedle Dee, these are two separate cases. For example, GTE and Bell Atlantic assert that as a result of their merger there will be a significant strengthening of GTE's internet backbone service and will prevent that service from being eroded by competition with other larger backbone providers. SBC/Ameritech assert that the kind of competition they will stimulate outside their territories is going to lead others to invade their territories and, therefore, we will have a kind of a ping pong or double effect, both stimulating competition outside their territories and inside their territories. Now, with respect to these claimed benefits of the mergers the issues that the parties have raised is whether these benefits are credible and whether they are merger specific. That is, are these benefits likely to occur as a result of the merger? Those are the kinds of questions that I hope people will address today and that the documents have addressed in some details. With respect to the other side, the cons, opponents -- I emphasize these are people who have opposed the merger -- have raised a variety of questions. In the interest of time I'd emphasize four. One is what I would call the "efficient oversight" of the incumbent phone companies. The 1996 Telecom Act requires that these firms cooperate with new entrants. Ameritech is required to open up its markets to new entrants, sometimes called "competitive local exchange" or "CLEC" carriers to come in and compete with it in Michigan, Illinois, Indiana and this applies to all of these companies. This requires, for example, that they permit other firms to co-locate, where their wires cross to resell the services of the firm, to use the numbers that had been assigned so if one were an Ameritech customer and one switched over to Krattenmaker Telephone Company one could keep one's same telephone number. The question is that has been raised by some opponents of the merger is whether a diminution in the number of large ILECs from six to five or four will frustrate or impede the ability of states and of this Commission to regulate that process of opening markets. Second kind of question I would lump under the phrase "predation", questions have been raised as to whether the merged parties will have the clout and the incentives to use that clout after the merger to discriminate against new entrant phone companies and against long distance companies. A third type of question that has been raised is whether these mergers will end or restrict competition between the merging firms. Absent the merger would consumers have benefitted from rivalry between the merging parties? For example, might SBC have gone into Chicago while Ameritech attacked St. Louis? Might GTE and Bell Atlantic have clashed in Pennsylvania and Virginia? We don't know what the answer to these questions are but we know that if the merger goes through these kinds of competition will not occur. Fourth, I would mention the service quality. People have asked the question of whether the merged firms will open their markets and provide better services to all customers, business and residential or whether some will suffer a reduction in service quality. Now, I have suggested four kinds of issues: efficient oversight of incumbent local exchange carriers; predation; restricting competition between the merging firms; and service quality. I want to emphasize that the merging parties not only proclaim the benefits of their mergers but deny that each of these is a real issue and assert, very positively, that the merger will in fact be beneficial, that we will not need to have as much oversight over the phone companies because thee will be more competition so the markets will provide oversight, that they are not in a position to engage in predatory tactics against either other local phone companies or interexchange carriers because of Commission rules that they were under no circumstances going to be able to compete with each other because of regulatory burdens and because of financial restrictions and that these mergers will permit them to improve service quality, not to degrade it. These are some of the issues that have been raised so far. What I am hoping is that these will not only be fleshed out but other kinds of questions, if they were on people's minds, will come up as a result of today's panel. Thank you. Agenda Item: Public Interest Panel CHAIRMAN KENNARD: Thank you very much, Tom. I will invite now the first panelist to come forward. While you are doing so let me mention a few of our ground rules today. We will ask each of the panelists to limit their opening statement to three minutes time. We have a very able time-keeper with us today, Lavera Marshall who is very experienced in these matters. She and I have the responsibility to keep this moving so I will ask all of you to try to limit your comments. After your opening statements you will have an opportunity to respond to questioning from the Commissioners here. After the first session we will take a brief break before our second panel. As you begin your presentations I will ask that each of the panelists introduce yourself and also give us a little bit of background of the organizations that you represent and why you are here today. Our first panelist is Reverend Jesse Jackson. Reverend. Agenda Item: Rev. Jesse L. Jackson, Sr. - Founder, President, and CEO, Rainbow/PUSH Coalition REV. JACKSON: Thank you, Mr. Chairman. I want to open with a protest on the time limit. (Laughter.) Because we have too much to discuss, too much ground to cover over a life time proposition not to be able to give some adequate expression to our concerns. I hope that it will be accepted and if some case modified. I want to thank all of you for this opportunity to participate in this historic hearing. They come at a day of the critical junction in the history of the FCC, corporate expansion and America. The FCC has an historic opportunity to enforce standards of fairness, inclusion and competition. The burden is on the applicants to show that these mergers are in the public interest. In some instances these applicants have not yet met their burden and that is why oversight and enforcement are critical to the public interest. We come here today not to destroy the mergers but to enforce the Telecommunications Act of 1996 and its intent and to protect the covenants between the people and the FCC. We are also here to help the FCC set standards and time tables, to open doors and expand opportunities for customers, workers, and those who have been historically left behind. The concern that the recent deluge of telecommunications mergers will likely cause consolidation of wealth, consolidation of ownership, and a resegregation of the telecommunications industry. Mergers in the local exchange market and consolidation among cable companies and long distance companies should concern the Commission because they would put the control of our public lives in the hands of a very few. The Commission must consider whether these companies are willing to extend their telephone lines, offer lower prices, and more opportunities to our nation's rural and inner city areas. I was in a town in Kentucky, for example, in Appalachia, 30 percent of the residents have no telephones to date. Displaced people must have the same access to telephone service as those living in affluent suburbs, that is the spirit of a true democracy. Thus, democratic values must guide your review of these mergers. The Bell companies, the GTE and AT&T, TCI, have expressed confidence that their mergers will pass muster of the Commission because the mergers will help them compete on a global basis and perform service outside their home regions. On the other hand, consumers are concerned about lower prices, workers are concerned about the elimination of their jobs with downsizing and outsourcing, and the historically disadvantaged are concerned with inclusion, opportunity, and access to information. We are here to promote inclusion. The FCC must enforce the law to ensure inclusion. The FCC must no longer bless segregation and exclusion, as it has historically. There are numerous egregious examples of how the industry has been exclusive rather than inclusive. Historically the Commission has been a co-conspirator in this practice of excluding by awarding licenses to a select small group of communications companies. As the century ends there are no minority owned wire line telephone companies, no minority owned cellular system, no truly diverse boards of directors, no minority merger advisors on Wall Street, and very few minority owned cable TV franchises. These facts make an ugly statement about America. These laws must change. Competition among a small group of companies, targeted at a small segment of our society is not real competition. Competition is meaningful only when it breaks down barriers to enter and expand the market. Commissioners, I urge you to dig beneath the surface of each merger application, discover who of these companies are joining forces to improve customer service and the role of the workers or merely protect their territories and make larger profits. In addition, to evaluating the comparative effects of the proposed mergers the Commission must consider other factors. Discrimination is a factor fundamental to FCC's public interest review. Minorities and rural Americans pay taxes, contribute to the Social Security system, vote, and are customers. The public interest is our interest. Some at the FCC argue that a merger analysis is not an appropriate forum in which to access broader social public questions. I disagree. The public interest demands more than a quick cursory review, more than a brief look. I believe it is in the public interest to eliminate all forms of discrimination. In reviewing a merger the Commission should not determine that some discrimination is objectionable while turning a blind eye to other forms. The public interest clearly demands and deserves no less. For example, some mergers, some of the companies propose to merge red line, video, dial tone, pay phone, and cable television service in the past. Inclusion means the end of red lining, a practice which is altogether unfair, unproductive, and illegal. While these companies now have developed anti-red lining policies departures from company policy occur on a regular basis, therefore, the Commission should not act on these mergers without receiving commitments against red lining subject to supervision by the FCC. Irrespective of its decision on these mergers, the Commission should undertake a comprehensive study of red lining in the long distance, long exchange, and cable TV industries, develop strong, specific, and enforceable standards to prevent these companies from marketing or providing enhanced service on the basis of race, geography, or income. There are bad mergers and there are good ones. All mergers are not inherently bad. Merger executives are necessary led by greed or selfishness. Bad mergers preempt the competition with neighboring service providers. Bad mergers create spin offs and advantage only large companies and international firms. Bad mergers generate layoffs for thousands of hard working employees. Bad mergers use combined resources to enter over developed, not under developed, markets. Historically, MCI and WorldCom committed these acts, that's why we opposed the merger. After the closing of their merger they have done little to persuade us to change our position. MCI/WorldCom, through its internet company to a large foreign based firm, has planned to sell its satellite system without a commitment to diversity. Furthermore, MCI/WorldCom last week announced the lay-off of 3,000 workers. They also continue to be cited by the FCC for imposing casual rates charged to their long distance customers. For nearly a year Rainbow/PUSH Coalition has chosen research, education, and negotiation over confrontation. We, however, reserve the right to protect the public interest through legislation, agitation, and demonstration. Our protest and opposition to MCI/WorldCom will continue until an enforceable specific plan of inclusion is executed. Lastly, on the other hand, good people with good intentions, along with enforced public policy, make good mergers. Good mergers create new opportunities for consumers and for entrepreneurs. Good mergers offer new innovative services to everyone at comparative prices. When good companies emerge they spin-off facilities to new market interest at a reasonable price. Good mergers benefit the public interest and do not result in thousands of layoffs. The three pending mergers offer potential to be good mergers, but only if they continue to make enforceable commitments to the FCC and the Department of Justice to promote inclusion and protect consumer groups and labor organizations. First, there was a possibility that these mergers will increase competition among local telephone providers. For example, GTE has facilities in Santa Monica, San Bernadino, and Thousand Oaks, California, to serve as a foundation for Bell Atlantic/GTE to compete for local service in Los Angeles. This facilities base presence will permit Bell Atlantic/GTE to bill out and compete with SBC/Ameritech and other local foreign providers outside the Bell Atlantic region. Also, GTE is exploring ways to create the nation's first minority owned independent telephone company. Second, GTE internet backbone puts the new company in a position to offer enhanced services to residential lower and rural subscribers. However, the Bell Atlantic/GTE plan must include a stronger commitment to internet and technology training targeted to the minority community. We must not leave anyone behind as we move into this new technology. SBC and Ameritech have good internal EEO and minority procurement programs and also consider ways to provide minority ownership through spinoffs. SBC has also shown global leadership with a strong commitment to develop telecommunications systems in South Africa. These are positive steps, however, SBC and Ameritech have outstanding challenges as well. Initially, their proposed merger plan red lines residential consumers by emphasizing the need to serve their large and mid-size business customers. They must do more to serve rural Appalachia for some inhabitants do not have basic telephone lines and many Native Americans in the Southwest region are without access. AT&T's proposed acquisition of TCI raises key issues. AT&T has strong programs that provide training to urban and rural areas and promote minority and women owned enterprise. However, the proposed merger must still be reviewed closely by the FCC because of AT&T's recent tax on low volume long distance customers and TCI's repeated rate increases, questionable employment record, and poor level of customer service. Fortunately, these come as of late by men of integrity with excellent track records of community service. Good men, however, and good women, must be directed by good public policy to lead to good results. In closing, we need to develop a new covenant between the government, the private sector, and our communities. We need to create a new approach to evaluate mergers to foster a policy of inclusion and opportunity for consumers, workers, and those who have been historically left behind. Let's work together to build a new large tent, large enough to include all segments of society and forge an alliance between the FCC and the telecommunications industry to heal the breach of the American dream. Thank you. CHAIRMAN KENNARD: Thank you, Rev. Jackson. Ms. Costa. Agenda Item: Regina Costa, Telecommunications Research Director, The Utility Reform Network (California) MS. COSTA: Good morning and thank you for the opportunity to appear. I am Regina Costa. I'm the Telecommunications Research Director for The Utility Reform Network (TURN). We are a statewide consumer group in California. For the past 25 years we have represented the interests of California's utility consumers. Pacific Bell provides service to approximately 95 percent of California's customers, residential customers and the vast majority of our small businesses. Since the acquisition in 1997 there has been a marked change in the behavior of the company towards its customers and that is what I want to focus on today, although we are also very concerned about competitive issues. Specifically, customers have been directly affected in four areas. The first is quality of service. The second is there have been proposed rate increases for essential services. Service has been diminished. And the fourth area is the introduction of aggressive and misleading marketing tactics. On customer complaints, in June 1997 the California Public Utilities Commission noticed that there was a marked increase in the volume of calls the Commission was receiving on customer quality of service issues. The majority of these and the most serious involved significant delays in service installations and miscommitments for installations and repairs. These service quality problems were the subject of great debate at the Commission and in part prompted the Commission to institute a quality of service rule making and investigation. While precise statistics on the number of complaints are not available from the PUC, due to anomalies in their data collection process, they did cite their concern with customer frustration in their order as one of the reasons for instituting this investigation. Now, the Commission's Office of Rate Pair Advocates has conducted a separate analysis of service quality complaints. The analysis is due to be released publicly very soon. What I have been authorized to say is that their analysis shows a significant problem in the Silicon Valley area where customers there have longer outages and it takes longer to repair the problems than in other areas of the state. We are very concerned about this because that is really the economic engine of California. One area where service quality has been very thoroughly documented is the provision of ISDN. The reason for this is that the company asked for a rate increase and their quality of service came up in this proceeding. One September 17, 1998 Pacific was fined $309,000 because they did not comply with a Commission order instructing the company to file reports showing customer satisfaction with their service. One of the questions the Commission asked was why the company did not follow the Commission's order. The Commission decision on this matter stated that the company provided no satisfactory explanation of why the order was not complied with and that apparently no one in the company had assumed responsibility for ensuring that the Commission's order was met. The second issue that was addressed in a decision that was actually issued September 17, 1998 was that the ISDN service had actually deteriorated following the initial CPCU order which was intended to improve service. The order that was directing the company to improve its service was issued right about the time SBC required Pacific Telesis. So, the service quality deteriorated while SBC owned Telesis. This raises at least three questions in our mind. Number one, if service quality for a service like ISDN deteriorates what is the likelihood that this company will attempt to provide good service quality for less lucrative services. Pacific claims it faces intense competition in the local exchange market and, presumably, this competition is for what people would consider higher end customers and more lucrative services, yet that service quality declined. Second question is the issue of infrastructure. The Commission decision, which I have cited and quoted from extensively in my prepared statement, says that the service quality was very bad through most of 1997. This again was during the time period after SBC acquired Telesis. The third question is we are very disturbed that the company did not comply with a Commission order. They did not provide the information that was requested and they could offer no good explanation for doing so. We think this raises questions about the company's interpretation of its public service obligations. The second area is proposed rate increases. I have a very detailed description of these increases in my statement. There is not time to go into all of them, however, I have cited to the applications, I have cited to advice letters if you are interested in that. One of the most important services was directory assistance. Currently the rate in California is 25 cents. SBC proposes to raise the rate immediately to 50 cents. In California we have a price cap mechanism where there is a price ceiling and a price floor. At the price ceiling you can raise a price to that level with parties having no opportunity to protest. The decision states, "We will not entertain protests for price increases up to the price ceiling." They have proposed a price ceiling of $1.10. So, in essence they are asking for a blank check to raise the price to $1.10. In all of their public statements they insist we are wrong on this and that they are requesting an increase to 50 cents. They have requested similar increases to what we believe are essential services which are busy line verification and emergency interrupt, very high request for price increases there. These issues have met with substantial public opposition. There have been a series of hearings. The third point is the diminishment of service. Public offices have been closed. There has been a proposal to charge to allow alternate payment locations to charge fees to customers who pay their bills in person. There is a proposal to reduce the directories that are available to customers by eliminating yellow pages, yet charging the same price that someone currently pays for a yellow and white pages directory. This effects rural customers because these directories are cobound. We protested this and the Commission staff agrees with us and have recommended that that be rejected, that is due to be voted on Thursday. There are five complaints currently pending on aggressive misleading marketing. They were filed by Latino Issues Forum and Greenlighting, the Utility Consumers Action Network, and the Commission staff, the Office of Rate Pair Advocates. Very briefly, quoting from the description of Latino Issues Forum, they allege that "Pacific has instructed service representatives to use deceptive names for packages of expensive optional services to pressure customers into removing complete caller ID blocking so they can market more caller ID and to withhold information critical for consumers to make informed purchasing choices. The other point in this area was there was a proposal from SBC to engage in direct telemarketing to Pacific customers with unlisted telephone numbers. They tried to do this through an advice letter tariff revision. They withdrew it after a state senator pledged to introduce legislation blocking it. This was after they said our concerns on privacy had no merit. In conclusion, to date, Pacific Bell customers have not benefited in any readily apparent way from the performance of Pacific following the acquisition by SBC. The volume of calls about service quality problems has risen. The company has proposed significant rate increases for essential services, public offices have been closed, there is a proposed fee for customers paying their bill in person, and the company's marketing tactics have raised substantial concern on the part of consumer advocates and Commission staff. Thank you. CHAIRMAN KENNARD: Thank you, Ms. Costa. Commissioner Butler, welcome. Agenda Item: Jolynn Barry Butler, Commissioner, Public Utility Commission of Ohio. COMMISSIONER BUTLER: I am Jolynn Barry Butler. I am a Commissioner on the Public Utility Commission of Ohio. I'd like to start today by thanking you for once again including states regulatory commissions on panels before this Commission. I believe that under your leadership, Chairman Kennard, and with the current panel of commissioners we have today that the states and the Federal Communications Commission have never enjoyed such a close working relationship and I really commend you for that. I am here today not as an advocate, not as a proponent, nor as an opponent of any of the mergers before you. I can't be because I am a judge in these very same mergers. In Ohio, for example, we have cases pending on GTE/Bell Atlantic and on Ameritech/SBC. Therefore, what I am here to do today is to report to you on the issues and the process but not to take a position, it would be inappropriate for me to do so. With regard to state authority and what the states are doing on these mergers, it depends on the legislative background and the legislative authority of each of the state commissions. In Ohio we have clear authority to review the mergers of incumbent telecommunications companies. In other states they use their general supervisory authority to undertake such reviews but in some states there is no authority and the commissions feel that they are not able to undertake any review of these mergers at all. So, it depends on where you are, in which state, as to what level and form of review of mergers will take place. Let me use Ohio as an example because we do have clear authority and that is not at issue. In Ohio both of the incumbent local exchange company mergers are under review. We started our process by not allowing those mergers to be approved automatically, which our statute provides for. If we do not take action as a commission within 30 days of the filing of a merger then it is approved by operation of law by our saying nothing. We suspended the approval automatically and turned our staffs loose to do an investigation. We issued issues lists so that the parties would know what we were going to look at as we reviewed the mergers. The Ameritech/SBC merger is the farthest along in Ohio. We have issued our issues list. The staff has done a preliminary report of investigation and the record hearings are to start on January 5 of next year, just a few weeks a way. Our standard of review is the public interest standard, much as yours is. However, my message to you is that each state has a very different level of review and different level of authority to review. I won't go into the issues in detail because in Ohio, at least with regard to the SBC/Ameritech merger, we have identified the same list of issues that both you and Mr. Krattenmaker have mentioned today. But, again, how those issues play out on a state-by-state basis will be very different. I will cite one example without naming any names. A company that has a very very good service record in one state may have a not so good service record in another state and each state's commission will be looking either to maintain a level of service which is good or improve a level of service which is bad as we review mergers. In Ohio, just speaking as one commissioner, my main goal is to make sure that these mergers further the public interest. First of all, that their effect on competition is to increase the level of competition that we have in our state, particularly for residential and small commercial customers; that quality of service is maintained or enhanced; that carrier-to-carrier issues that have arisen since the enactment of the 1996 Telecommunications Act are resolved; and that we have the ability to do post-merger oversight because we don't have a lack of access to books and records. To sum up, I commend you for your dedication to enhancing the relationship between state regulators and federal regulators. I encourage a continued dialogue on this and other issues and, in particular, I would encourage you to convene a meeting, much like this Commission convened when Bell Atlantic and NYNEX were proposing to merge, to discuss state and federal issues on a one-to-one basis with state regulators. Thank you. CHAIRMAN KENNARD: Thank you, Commissioner Butler, and thank you for those kind words. Mr. Carey. Agenda Item: Timothy S. Carey, Chairman and Executive Director, New York State Consumer Protection Board. MR. CAREY: Good morning, Mr. Chairman, Commissioners, and distinguished colleagues. Thank you for the opportunity to discuss the impact of proposed mergers involving the regional Bell operating companies on the goals and objectives of the Telecommunications Act of 1996. I am Chairman and Executive Director of the New York State Consumer Protection Board, an agency in the Executive Department of the New York State government and I am charged with representing the interests of all New Yorkers. Our belief is that mergers are not necessarily consistent nor inconsistent with competition in telecommunications markets or the public interest. All mergers are not created equal and each potential merger must be analyzed thoroughly by considering the facts and circumstances of each proposal, not only at the federal level but, as the Commissioner said, at the state level. In general, consumer advocates are skeptical of mergers, since tangible consumer benefits are not always easily identified. Merger proponents must demonstrate how they will bring more competition to telecommunications markets and how the public interest and the average American will benefit. Regulators must ensure that the advertised benefits from the mergers are in fact realized in the marketplace. I would like to share with you our experiences that we have had in New York with recent merger of NYNEX and Bell Atlantic. It is a good example of how consumers have been well served by a merger when regulators provide appropriate oversight. Shortly after NYNEX/Bell Atlantic announced their proposed merger in the spring of 1996 on a direction of Governor Pataki, former Chairman of the State Public Service Commission, John O'Meara, stated the PSC would not approve the merger unless the quality of New York State Telephones local service improved substantially. I am glad to report that over the past year the company service quality has improved dramatically. To ensure that the company service quality did not deteriorate after the merger was approved the company was required to hire at least 750 additional employees to address service quality and to invest an additional $1 billion in service related infrastructure. The company service quality standards were also made more rigorous. The New Yorkers also obtained other benefits from the merger. One, the cost savings from the merger are essentially funding the cost of opening of local markets to competition. Such as, substantial cost of developing the OSS. Local rates in New York have not increased to fund these costs. Those cost savings have also partially funded a reduction in New York's intrastate carrier access charge and the NYNEX/Bell Atlantic merger benefitted New York's economy since the merging companies established their headquarters in New York City and committed to maintain all existing work functions in the state. Overall, more than one year after the merger was initially approved, subject to conditions there is no doubt that the average New Yorker is better off than had the merger not occurred because New York PSC ensured the Bell Atlantic status satisfied each of those conditions. If local markets are to be open and competition expanded the FCC must ensure that conditions imposed on mergers are implemented in a timely fashion. Unfortunately, in the Bell Atlantic/NYNEX merger some of the conditions imposed by the Commission, particularly the requirement for uniform OSS interface has yet to be satisfied. Meanwhile, in New York, we are continuing the hard work to fully open Bell Atlantic's markets to competition. Tests by an independent audit of the ability of the company's OSS to handle commercial volumes are now beginning. Under the guidance of the New York State PSC substantial progress has been made, although more work needs to be done. Based on progress to date, I fully expect New York State to be among the first states in which you will find that an RBOCs market is fully open to competition. Accordingly, while a merger could eliminate one would be potential competitor to Bell Atlantic in New York, GTE is not well known in New York and has no particular advantage over the literally dozens of companies that are already serving customers in New York. Since New York's local market is expected to be open to competition in the near future the merger would not materially harm local competition in New York. Overall, we are looking for verifiable and enforceable conditions to be imposed on these mergers at the state and federal levels. At the state level we are working for similar conditions as the ones we obtained in a previous merger involving Bell Atlantic. At the federal level we recommend that Bell Atlantic be required to satisfy the conditions imposed by the FCC on its previous merger and those conditions should be extended to GTE's territory as well. Two, the proponents demonstrate that mergers will enhance local telephone competition, and three, to proponents demonstrate that the public interest will be better served. Thank you, again. I look forward to your questions. CHAIRMAN KENNARD: Thank you, Mr. Carey. Ms. Hogerty. Agenda Item: Martha S. Hogerty, Office of the Public Counsel, Missouri; Chair, Telecommunications Committee, National Association of State Utility Consumer Advocates (NASUCA) MS. HOGERTY: Thank you for inviting me to be here today. I am Martha Hogerty. I am the Public Counsel for the state of Missouri and as such am the rate payer advocate for the citizens of Missouri before the regulators. I have filed comments jointly with 5 similar consumer advocate organizations in the Southwestern Bell/Ameritech case and with 14 other organizations in the GTE/Bell Atlantic case. I have provided for you a statement. I will not read it today but I will simply highlight my major concerns. Our concern, first and foremost, is that these mergers will continue and enhance the monopoly control of the local exchange network. If these mergers are permitted SBC and Ameritech will have control of 56 million access lines, that is 35 percent of the total access lines nationwide. GTE/Bell Atlantic will have 63 million access lines, 39 percent nationwide. This, we believe, will result in a duopoloy with control over 74 percent of the nation's access lines. There is no dispute that still today local exchange is a monopoly controlled by the incumbents. Our development of competition, thus far, has been very slow. With respect to these two companies combined I believe approximately .81 percent of their access lines have been lost to facilities based UNEs. In order to garner control these companies are willing to invest a significant market premium. Based on December 3 stock prices, they are willing to pay an additional $154 per access line in the Southwestern Bell case and $47.50 per access line in the GTE case. It is our belief that these companies will certainly find a way to recover this premium from their most captive customers, our clients. Moreover, there is no commitment to pass through any merger savings or estimated synergies to the bulk of their customers. Because of the current regulatory structures, essentially limited regulation in most of the states we do not expect savings to be passed through. Indeed, as far as we can determine, there have been no significant savings passed through to consumers with the other mergers that have taken place to date. In our opinion monopoly rents will continue and will be used to finance out-of-region strategies. Recall that these companies are currently earning return on equities ranging from the high 20 percent to the low 40s. Mergers are not necessary to enable entry into out-of-region markets and there is nothing in these applications that supports that claim. These companies currently have the wherewithal to compete. They are not willing to compete through the interconnection provisions of the act or through investments in new networks, rather they would further monopolize the local exchange and finance. It is important that the Commission continue to forge the course that it has forged with the Telecommunications Act. The companies are in a position where they must open their markets to competition. Not one company has done so to date, no 271 application has been granted. It is important that this Commission deny these mergers, encourage these companies, hold their feet to the fire and ensure that they open their markets to competition so that competition can truly develop and benefit all the consumers of this nation. Thank you. CHAIRMAN KENNARD: Thank you, Ms. Hogerty. Rick. Agenda Item; Richard Jose Bela, Esq., President and CEO, Hispanic Association on Corporate Responsibility. MR. BELA: Honorable Commissioners, my name is Richard Jose Bela. I am the President of the Hispanic Association on Corporate Responsibility. It is a coalition of the most prominent national hispanic community organizations in the United States. It serves as a watchman agency for the hispanic immunity. We monitor the inclusion of Hispanics in corporate America in the areas of employment, procurement, philanthropy, governance, and service, and we compare that inclusion to our community's contributions to that company's revenue. We call this concept "market reciprocity." In regards to the telecommunications industry today we believe that freedom of speech in the 21st Century will require interconnectivity to our evolving national telecommunication network. To ensure this freedom HACR supports seven telecommunication principles referred to in the industry as "universal service, public access, open competition, community reinvestment, equal employment opportunity, service diversity, and market reciprocity." We believe these seven principles are an essential part of the 1996 Telecommunications Act and that this Commission serves as its guardian. Our community is growing in a dynamic and dramatic manner. By the Year 2050 we will represent 1/5 of all Americans. Already this year Hispanic school age children surpassed all other ethnic minority groups in the country. We are a vital part of our nation's future. Upon the public announcement of the three pending mergers, HACR contacted the CEOs of each of the companies involved. We sought to ascertain each company's commitment to these seven principles. HACR is pleased to support any company that shares this vision and this commitment. To date we have met with the CEOs from SBC/Ameritech and Bell Atlantic/GTE. Our experience regarding the past mergers have shown us that there have been reasonable increases in the employment of minority and women in the inclusion in the areas of executives, board membership, procurements, and particularly in philanthropy where both companies have provided funds to underserved communities at the rate of $50 million. We are greatly encouraged by their expressed commitment to the underlying HACR telecom principles and to their commitment to continue working with us to establish and implement programs to achieve these goals. We commend the Commission on its stewardship over our public airways and for the expressed commitment from leading media companies to abide by EEO principles, whether or not required by law. We ask that this Commission, likewise, ask the telecom companies about their commitment to these same principles. We further commend the Commission for calling these hearings that afford all citizens, not just the rich and the powerful or the opposing competitors, the right to have their voices heard in an open and democratic manner. These hearings certainly serve that purpose. We greatly appreciate the opportunity to present these comments and look forward to keeping the Commission informed of our future progress. Thank you. CHAIRMAN KENNARD: Thank you very much. Professor Kovacic. Agenda Item: William E. Kovacic, Visiting Professor, The George Washington University Law School. PROF. KOVACIC: My thanks to the Commission for the privilege of participating in this hearing. My name is William Kovacic and I am a Visiting Professor at The George Washington University Law School where I teach anti-trust. I want to inform the Commission that my wife is a partner in one of the law firms that represents TCI in the AT&T/TCI transaction before this body and that the views I express today are mine alone. I want to discuss the process by which federal authorities review the competition policy effects of telecommunications mergers. Since 1992 I have worked with a number of transition economy governments on competition policy issues. One of the most urgent issues before the transition competition and sectoral regulators is, "How should competition policy issues be resolved in basic infrastructure industries?" Many of them have spent a great deal of time studying the U.S. system and a basic question they ask is, "Should we do what you do?" I think the general advice that American advisors give is, "No, you should not do it the way we do it." One feature that amuses them is the fact that we have, both in our sectoral regulators and in our anti-trust agencies, in effect, overlapping review of mergers on competition policy issues. Between the Department of Justice and the FCC, for example, we have two federal institutions, which I would suggest end up looking at many of the same issues, though perhaps with a different legal standard but the substantive focus of the analysis in many instances is the same. What are the consequences of having two federal institutions review the same competition policy issues? Let me mention three basic concerns. The first is that having a multiplicity of federal competition policy agents complicates the efforts of any single agent to develop consistent enforcement policies. Inconsistent enforcement policies increase the cost of executing transactions and limit the clarity of federal policy. A second basic concern is that it weakens accountability. By having two institutions responsible for carrying out a specific task neither might feel the urgency to get the issues right the first time, out of concern or perhaps comforted by the possibility that someone else will back stop them. The third concern deals with the international arena. Having a multiplicity of competition policy agents limits the ability of the country to establish consistent procedural rules and substantive requirements which, in turn, increases the difficulty of devising widely accepted international principles. As you are quite well aware, many of the transactions you review have international consequences. What are some policy options for dealing with this concern? Well, the least desirable outcome, I would suggest, is the status quo where we have parallel or sequential review of the same issues by a sectoral regulator and an anti-trust regulator. What options might we consider as alternatives? The first would be that the anti-trust agency makes the basic competition policy decision with advise from the sectoral regulator. An alternative is that the sectoral regulator, the FCC, makes the basic competition policy decision, with advise from the anti-trust agency. In neither instance would we have parallel overlapping review of the same issues. If we don't go that far what interim solution might we adopt if we leave the basic allocation of authority in place? Where the sectoral regulator imposes competition policy remedies beyond those ordered by the anti-trust agencies I would suggest that the identity and purpose of these additional controls be clearly specified to make the process as transparent as possible. Thank you. Agenda Item: Questions and Answers. CHAIRMAN KENNARD: Thank you, Professor. We will now go to a brief question and answer period. I will begin with a question for Mr. Carey. Mr. Carey, I was very interested in your experience in the state of New York in the wake of the Bell Atlantic/NYNEX merger. You seem to be saying that the conditions that this Commission imposed on that merger to open the market for competition seemed to be working. I'm curious if you can suggest to us or give us a little bit more detail as to why you think they have worked, areas where they might be improved and your assessment as to the state of competition in New York State. MR. CAREY: Mr. Chairman, as I stated in my testimony, one thing that concerns us is that as far as the implementation of the OSS in a timely fashion, your time table has not been met. It is important to us in New York State to take a look at what the goals are for the public policy. Of those goals one of the things we have tried to work at, we have partnered with the Public Service Commission and Governor Pataki is in completing the process on the 271 proceeding so that we can open up those markets to the local carriers. The problems that we have had are continually the inability of the incumbent LEC to provide the types of services necessary for the competitors to achieve the kind of success that they want in marketing their products and completing their sales orders. This is the kind of activity that we believe that you can bring to the table from the federal level. At the local level we have been very very effective in working with the company and the company has been very effective in meeting the goals that we have established in order to improve service quality and infrastructure. The Rev. Jackson made some comments about infrastructure and service and quality in underserved areas. Part of our position in achieving the $1 billion investment in infrastructure was to improve infrastructure that the previous company, NYNEX, had allowed to deteriorate in places like Harlem and Yonkers. On top of that we also created a diffusion fund. The diffusion fund allows us to use $50 million over 5 years to target areas such as New Rochelle and Buffalo, Yonkers, areas in Brooklyn and the South Bronx where we can develop internet rings so that we can bring the new technology, the combined bundled technology of not only telephonics but data process and television to areas that have been underserved. So, these are the kinds of things that we have done in New York State. The bottom line is that the company has actually done it. They have hired the workers. They have put in the infrastructure. They have done what they said they would do because the PSC in New York State has held their feet to the fire and that's what we are asking you to do at your level of government. CHAIRMAN KENNARD: Thank you, Mr. Carey. Other questions from the bench? Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Prof. Kovacic, you described a parallel or sequential process for the review of mergers. The FCC actually has two distinct bases to review mergers, one is a public interest standard, which is actually not for the review of mergers but merely for the transfer of licenses under Section 310 of the Communications Act or for the transfer of permits under Section 214. We have separate and distinct authority for Clayton Act review of telecommunications carrier mergers. Yet, we have not exercised that. We have heard today about many issues, both from Prof. Krattenmaker and from our distinguished panel, of issues that the Commission ought to consider in reviewing this merger. My question to you is could many, if not all, of these issues be considered under a Clayton Act review as opposed to the public interest review of Section 310? PROF. KOVACIC: I think most of the competition policy issues do fit within a Clayton Act framework. They do involve extremely idiosyncratic industry circumstances that might very will benefit from the advice and guidance of the Commission but what I would contemplate in that instance is that the Department of Justice performs that kind of analysis with the advice, with the recommendations of the Commission. If you are not comfortable with the Department of Justice then I would be perfectly comfortable putting that function in the FCC with the advice and guidance of the Department of Justice. I simply wouldn't have two windows to which the parties have to go in many respects to get the same review of the same issues where the issues could easily be addressed under one window or the other. COMMISSIONER TRISTANI: If I could follow up on that. Are you saying that DOJ looks at service quality issues? PROF. KOVACIC: They look at the competition policy issues that in many instances affect service. COMMISSIONER TRISTANI: But do they look at service quality? PROF. KOVACIC: In what sense? COMMISSIONER TRISTANI: A company's service quality record. PROF. KOVACIC: It would certainly be important in their evaluation of the efficacy of remedial controls. That is, if you have firms that are saying, "Let the deal go ahead because we are willing to make performance commitments." The past performance and reputation of the firm would be quite important. To the extent that you sense that service quality was not encompassed in the review that the Department of Justice would do, I would be quite comfortable having that be a discreet and separate focal point of Commission attention because the Commission's jurisdiction is certainly broader. My concern would be that the same policy issues not receive sequential review by two different agencies. CHAIRMAN KENNARD: Well Prof. Kovacic, if I could just follow up on that. Yes, would you like to address that, Reverend? REV. JACKSON: Yes, in some sense that the Department of Justice is a broad stroke on the nature of relationships, not on content and service. That is what makes this agency different than the Department of Justice, is that particulars of quality of service and relationships is here. With all of the arrangements, you can have competition behind the walls, you can have good rates behind the walls, you can have oversight behind the walls, you can have good and secure jobs behind the walls, you can have limited entrepreneurship behind the walls but the walls must come down and bridges built for those locked out to be part of the American dream. When you have these walls you lock out market and money and talent, opportunity, justice, and citizenship protection. So, I want to make sure that in all of our deliberations that we see this in big tent terms, not just traditional terms. The Department of Justice will not suffice on the content and character of these relationships. CHAIRMAN KENNARD: Thank you. I also wanted to follow up on your point, Professor, because we heard from Ms. Costa about her experience in California. She mentioned four areas where there has been a diminution in service since these mergers went through. She talked about rate increases, she talked about decrease in service quality, she talked about misleading marketing practices. In my experience as a lawyer and having studied these issues for many years, these are not the issues that the Department of Justice typically has ongoing oversight to ensure that consumers are protected and that is why I am a little bit concerned when you suggest that the Department of Justice alone could take care of all of those issues under its jurisdiction. PROF. KOVACIC: Let me suggest first that I'm not convinced that all of these would fall under the umbrella of its review under the Clayton Act, although I do want to suggest that a number of these issues would. Notice that a fundamental issue in the transactions you have before you and that you have already reviewed involve promises about efficiencies, commitments about the improvements in services that will result from competition and from the transaction. To the extent that past performance provides a guide to evaluating the credibility of commitments about remedies in a Clayton Act proceeding that is enormously important evidence for the Department of Justice. In short, we are more interested in what you have done before than in what you say you are going to do. So, I think the past behavior is a very important lens through which the Department of Justice would evaluate efficiency arguments. But, let's assume that there is not a perfect overlap, and I don't suggest that there is, I am proposing that where the Commission does examine other issues that it feels falls outside of the Department of Justice purview that the Commission's review not be an opportunity simply to re-examine issues that the Department of Justice has reviewed. My reading of the Bell Atlantic/NYNEX decision by the Commission suggests that, yes, the Commission was looking at some different things but I find it hard to believe after reading the opinion that the Commission did not review the same concerns about potential competition as the Department of Justice yet reached fundamentally different conclusions. In that instance I see two agencies looking significantly overlapping issues but coming to different conclusions. CHAIRMAN KENNARD: Commissioner Ness. COMMISSIONER NESS: Thank you. If I can follow up on this issue also. Professor, did Congress address the jurisdictional question in the 1996 Telecom Act? PROF. KOVACIC: In fact, no, in fact I -- COMMISSIONER NESS: In fact, it did. In fact, it did. Go ahead, please. PROF. KOVACIC: Well, give me your sense of how it did resolve this issue. COMMISSIONER NESS: We had originally Clayton Act jurisdiction which could have, if we had exercised it as such, precluded the Department of Justice from evaluating the merger. The Congress in the 1996 Telecom Act changed that provision and eliminated the exclusivity on the part of the Commission, thus, one could conclude that Congress, in fact, looked at this issue. PROF. KOVACIC: Well, I don't dispute that. I suspect -- how would we take my policy recommendation into account in dealing with that overlap? One approach is for the Commission to say, "The Department of Justice has examined the anti-trust issues, the competition policy issues and we are satisfied with the results that they have reached." That is the extent of our competition policy review, to accept that as being the definitive review of those issues and then perhaps to define the additional areas and the bases on which the Commission would address those additional areas. To the extent that you perceive the 1996 statute to mandate parallel review then I suspect that the implication of what I'm saying is that it is time to go back up the street and to ask them to address whether or not in fact we want as a matter of practice to have parallel overlapping review of these issues. COMMISSIONER NESS: As a practical matter in the Bell Atlantic/NYNEX decision the Department of Justice believed that it could not, in its very limited review of whether or not there is a diminution of competition, it could not give the weight that we could give to the issue of whether or not there was precluded competition. It has a very different standard. It has to present a case to a jury that has to prove beyond a reasonable doubt that there is a violation of the Clayton Act. We have very different authority, we have very different ability to look at some of these issues and the two are not necessarily preclusive of one another. PROF. KOVACIC: Well, actually, the Department of Justice doesn't try the merger cases to juries and it is not a "beyond a reasonable doubt" standard, it is simply substantial evidence. It is a preponderance of the evidence standard. I think the Justice Department's hesitation on the potential competition theories reflects the facts that the federal courts, in examining these issues in great detail, have been doubtful about the strength of the underlying policy foundations for that view. So, the inference I might draw from that is whether or not the potential competition doctrine, as such, is a suitable vehicle for making policy choices. I'm willing to fall back, though, on the position again that if we want a broader charter for examining the competition policy issues perhaps it is time for the Department of Justice to come here and say, "We will advise you on what the issues are but we will not exercise our own independent review which has constraining influence regardless of what the Commission does." CHAIRMAN KENNARD: Well, Professor, let's just come back to the real world for just a second and let's focus on what really happened in the Bell Atlantic/NYNEX transaction. As you recall, the Justice Department extensively looked at this transaction, as Commissioner Ness pointed out, and determined that they would not impose the market opening conditions that this agency decided to impose in its review. We just heard testimony from Mr. Carey that it was those very conditions that are serving to benefit consumers in the state of New York. So, I submit to you, sir, that if we had undertaken your proposal, consumers in New York would be worse off today than they are. Commissioner Tristani. COMMISSIONER TRISTANI: I'd like to follow up with Ms. Costa because you have brought up some real concerns about service quality and prices going up. I have a couple of comments and questions. First, I'm looking at the emergency interrupt proposed price. I guess it is at a dollar right now and the proposal is $4. Do you know what other companies like Ameritech are currently charging for emergency interrupt, or does anybody know? MS. COSTA: I personally don't know what rate Ameritech is currently charging. What I do know is that we hired expert consultants with a great deal of experience with SBC and Pacific Bell cost studies, and they have said that those prices -- there is no way they are remotely close to cost, they don't need those increases. COMMISSIONER TRISTANI: And is that the same for the busy line verification which would go up from 50 cents to $2, another 400 percent increase? MS. COSTA: Yes, the analysis was the same for directory assistance, busy line verification, and emergency interrupt. COMMISSIONER TRISTANI: I'm going to ask a pretty pointed question here. You have made some very serious allegations of service quality, as I understood it, going down ever since PacTel merged with SBC. MS. COSTA: Yes. COMMISSIONER TRISTANI: Prices going up, ISDN -- which at one time was kind of the -- PacTel was the showcase for, as I recall -- service going down. What would you suggest we do with the information you give us? I mean, should we say we should stop this merger because maybe that's what's going to happen in Ameritech? Should you say we should condition this merger? MS. COSTA: I would say you should stop it. I mean, we are one of the parties that was a signatory to the filing that Ms. Hogerty referred to because we are very concerned about this. We have our own selfish concerns, we are concerned about now a multi-state company, we are concerned about sufficient regulatory oversight but we are also concerned about the effects of this company's performance on our customers and we really don't want anybody else to have to go through the same thing. What we have seen since SBC took over this company is wave after wave of proposals that are designed to get more money out of Californians. We are very disturbed that they didn't comply with the ISDN order. We wish the Commission kept better service quality data but it is undisputable that the volume of complaints increased and a Commission representative recently made that statement at a forum sponsored by Rand and the Annenberg School of Communications. The reason I typed this up, I did 11 single spaced pages and I quoted extensively from a Commission decision, I cited to Pacific's application and I cited to advice letters, is because this is very serious. We have a good reputation as consumer advocates, we are members of NASUCA, we are not blowing smoke here. People have suffered since this company took over. COMMISSIONER POWELL: May I? CHAIRMAN KENNARD: Yes, please, Commissioner. COMMISSIONER POWELL: Seems we are having a heated debate about institutional competence. It seems to me one question I would ask or at least occurs to me, Ms. Costa, and it is really to everyone, but these companies are heavily regulated by state commissions as well. The data you are referring to is kept largely by state commissions. Prices can't be unilaterally raised at the local level by most of these companies without the acquiescence of state utility commissions. I am particularly troubled because Ms. Butler seems to suggest, which I think is probably right, that even a single company can have a variation in its quality of service record from state-to-state and its different regions. So, rather than fighting over the Department of Justice my question would be, "Why wouldn't those concerns most acutely be addressed by state utility commissions rather than in a grand federal way?" MS. COSTA: I think it would be a mistake to ignore those issues because you are the Federal Communications Commission and you make broad policy and your rulings are important and they have an impact at the state level. It is an important message to states that these issues are taken seriously. We know that the FCC has increased its efforts to monitor complaints and to pay attention to these issues. We think they should be taken seriously and considered by all regulators when they are looking at these mergers. COMMISSIONER POWELL: I think that is fair. I am certainly not suggesting ignoring it but there is sort of a question about -- and I think part of the concern that I'm raising is raised by Commissioner Tristani, which is there is something predictive and speculative about what the future conduct of quality service changes will be, particularly the number of states involved in SBC/Ameritech, for example, there is a significant number and it seems to me at least a difficult judgement to make about what will be the uniform affect on service quality in each and every one of those states, depending on different variables. First of all, I am not even entertaining the notion that these aren't legitimate and worrisome concerns on the part of regulators. I'm just asking whether -- and maybe Ms. Butler would want to comment about your confidence that the Federal Communications Commission is able and resourced and focused to address this rather than state commissions. MS. COSTAS: First of all, state commissions have different levels of resources. California is a big state, at least as big as New York, I think. But, we have so many proceedings going on with telecommunication that our commission is not able to adequately monitor. COMMISSIONER POWELL: We have a similar problem. MS. COSTAS: And if California can't do it it is questionable as to whether other states can. Second, the only way you learn about what is likely to happen is to look at what happened in the past. In our case we were asked to comment on the performance of SBC in California and we've done that. Other states who have had experience with SBC, like Missouri, like Texas, share our views. They have had serious problems. So, I think that there is no easy answer. There is not a neat little diagram that will show you how the jurisdiction or the consideration of these issues should take place. But as a rate pair advocate and somebody who has worked in this stuff for about 14 years I would say nobody has the resources to do all of it and so we better be asking everyone, everyone should be asking these questions. REV. JACKSON: Mr. Powell, consistent with the American dream of one big tent, where we include the all and leave none behind, with some assurances of equal protection under the law, equal access and fair share we at states' rights regulatory commissions on voting before 1965 and they varied according to the politics of that state. We finally had to have a federal oversight on a right so basic as voting. Voting is right basic, but no more basic than access to the lines, access to communications. And, so, the standards that states must honor must be determined and enforced by you . What these companies do, they manipulate, they maneuver state-to-state, they play state off against state. There must be some place to say, "Here are the standards." The reason why Alabama and Mississippi must comply today with New York and California is because there are national standards, there is an even playing field and there are consequences for violating those standards. I appeal to you to be the source of uniformity where California or in L.A. or in Paducha, Kentucky that there is the same basic protection assured. CHAIRMAN KENNARD: Commissioner Butler, did you want to address that question? COMMISSIONER BUTLER: Thank you, Mr. Chairman. Commissioner Powell, I would give three reasons for why the FCC should continue to be interested in these issues, even though I do believe the states do have a very significant interest and concern about them. First of all is what I mentioned in my opening remarks, that we each have different levels of authority, as well as different levels of resources and there are states that will be affected heavily by the proposed mergers that have no authority to review them. I think the FCC has got to step up to the plate and make sure that the rate payers and customers, particularly residential and small business customers in those states are not left behind. Second, as we increase the size and the complexity of telecommunications companies and all other companies it becomes increasingly hard for one individual state to track dollar flows, to track investments. If we don't have good cooperation and a good working relationship with, and shared jurisdiction and authority between the states and the Federal Government then we really lose the ability to make sure that we can enforce the conditions that we place on these mergers, if that is the road that we go down. The third is the FCC does have a national perspective. You have been through this before. You have the ability to take the lessons learned, for example, in the Bell Atlantic/NYNEX merger, and make sure we don't make the same mistakes, make sure we take the good parts from those mergers and apply them in future mergers. I think that is really why the states rely on you to have a hand in these issues that at first blush may be state issues. CHAIRMAN KENNARD: Commissioner, thank you. I think that will have to be the last word because we are running over. I want to thank the panelists for this first session. Yes, Reverend? Very quickly, please. REV. JACKSON: May I beg this of you, I'm very concerned about ending the apartheid system in communications and that the FCC makes some fundamental adjustments in the errors of its historical ways to comply with the laws of '64-'65 to include the excluded. You can have a North/South discussion about quality and workers and consumers and rates that still leave a significant body of people excluded from participation. Removing the East/West barrier for inclusion is very fundamental. After all, when our government came up the science of radio it gave away all of the licenses to white males exclusively, blessed by your antecedent. Before the TV, all licenses issued on that same basis, blessed by FCC. In a sense cable television,more or less, blessed by the same deal. Digital, blessed by the same deal. Then they remove for a moment in time the tax certificate. Now here we are again. My appeal is that a condition while these big companies speak of efficiency, service, and competition for size. The mergers must meet standards of inclusion and opportunity to be American, to be legal and to be fair. I appeal to you, just like with your counterpart, the Department of Justice, to make inclusion and opportunity that all America might be included -- (Technical difficulty.) -- legal standard for passing these new arrangements. Thank you. CHAIRMAN KENNARD: Thank you. Thank you very much for being here. We will reconvene with our next panel at 11:15. Thank you. (Whereupon a brief recess was taken.) Agenda Item: SBC/Ameritech Panel CHAIRMAN KENNARD: The second panel this morning will focus in now on the proposed merger of SBC and Ameritech. I want to extend a welcome to our second group of panelists and our thanks to you for being here. Again, each panelist will have three minutes to present an opening statement. The statement will then be followed by questioning from the bench. We will hear from everyone and then we will have some questioning from the bench, then we will go to our third panel, which will focus in on the proposed merger between Bell Atlantic and GTE. We will begin now with Mr. Taylor. Agenda Item: Robert Taylor, President and CEO, Focal Communications Corporation MR. TAYLOR: Good morning, Chairman Kennard and Commissioners. I appreciate the opportunity to speak here today concerning the proposed merger of SBC and Ameritech, in particular, and the issues of mergers among incumbent telecommunications providers in general. As we approach the third anniversary of the Act, the Commission and various interested parties have gained important real world information that can and should assist in the evaluation of proposed mergers such as Ameritech's and SBC's. Earlier mergers, such as those among SBC and PAC Bell and NYNEX and Bell Atlantic were necessarily approved without much experience about the competitive consequences of these combinations. The advocates of these mergers claimed each would enhance the ability and motivation of the merged entity to compete out of region when compared to the incentives and resources of the individual entities. Now with the experiences that have been gained since the NYNEX/Bell Atlantic and SBC/PacBell mergers we can evaluate the claim that bigger incumbents means more out-of-region competition against reality. And the harsh reality is that neither of these merged mega-corporations, among the largest in the world, are currently engaged in any sort of meaningful land line competition outside of their region. Given that the addition of PacBell apparently had no appreciable effect on SBC's ability or desire to compete out of region there is no rational basis for concluding that adding Ameritech to its assets portfolio will alter the situation one bit. Although SBC's recent statements to the press were intended to counteract this real world evidence they actually confirm it. According to SBC it requires capital in excess of $3 billion, over 8,000 employees, and in-region long distance in order to compete out of region. Such claims are clearly unlinked to reality. MFS Communications successfully raised a similar amount of capital and created a global competitive network greater than the one anticipated by SBC without SBC's AAA credit rating, it's huge imbedded customer base and its employee base. Focal Communications itself provides a more recent example that competitive entry is not limited to the form envisioned by SBC. Focal will be serving over 20 major metropolitan areas by the end of 1999, using less than $200 million in invested capital. Even though we started last year and have none of the advantages enjoyed by SBC and currently employ less than 300 people. As far as in-region long distance authority, Focal does not need to provide long distance. In short, the absence of any out-of-region competition from the ILECs that have already merged, combined with the ability of CLECs to enter the markets demonstrates that SBC's promises are entirely pointless as a policy matter and should play no role in the Commission's evaluation of this proposal. What should be factored into the Commission's analysis is the fact that an attempted creation of Bell System East and Bell System West is clearly anti-competitive and bad public policy. My goal this morning is to simply direct your attention to three undisputed facts that require the merger to be rejected. The absence of any need for a merger in order for either RBAC to participate in out of region competition, the existence of actual potential cross-border competition between adjacent ILECs and the need to benchmark behavior among incumbents. So long as mega-ILECs have the potential opportunity to meld into one big nationwide incumbent and therefore permanently avoid any risk of competition among themselves why would they ever start competing out-of-region and thereby preclude themselves from ultimately merging with incumbents in those out of region markets? With all due respect, the Commission should just say no to the SBC/Ameritech merger. CHAIRMAN KENNARD: Thank you, Mr. Taylor. Mr. Devlin. Agenda Item: J. Richard Devlin, Executive Vice President, General Counsel and External Affairs - Sprint Corporation. MR. DEVLIN: Thank you very much, Mr. Chairman and Commissioners. My name is Richard Devlin. I'm Executive Vice President and General Counsel for Sprint Corporation. We very much appreciate the opportunity today to present our views on the pending SBC/Ameritech merger. This merger would create a massive telephone company that controls about a third of the nation's telephone lines. I'm not saying that big is bad but I am saying that this particular merger and the merger of GTE/Bell Atlantic will harm consumers. These marriages of monopolies would, one, eliminate substantial actual and potential competition, particularly in the St. Louis market where Ameritech had concrete plans to enter. Two, it would decrease the number and comparability of benchmark firms, which thus increases the regulatory and anti-trust challenges. Three, it would decrease rivalry and innovation. Moreover and most significantly, the aggregation of local monopoly markets, the bigger footprint as noted economists have called it, would give SBC and Ameritech an increased ability and incentive to discriminate unfairly against rivals. Just as the former Bell system leveraged its monopoly power to distort competition in other markets, a combined SBC and Ameritech would predictably impede competition in local markets, long distance markets, and markets for new innovative services. This country has spent many years and many billions of dollars to breakup telecom monopolies and to have competition, we simply cannot afford to go back to the days of "Ma Bell" where prices were high and consumer choices were virtually non-existent. These serious problems are not offset in any way by the claimed benefits of the merger. The claim benefit is that the merged companies would plan to enter 30 local markets outside their monopoly territories. This plan has to be viewed with skepticism. First, there are no firm commitments but even if there were commitments it would be dubious because these companies today can engage in out of region competition, they just choose not to do so. Their original attempts to tie the 30 city market plan to the merger did not hold up well under scrutiny so in the reply comments last months SBC and Ameritech now explained that the real reason that they can't each go it alone is that they are afraid their investors would not be happy with the resulting earnings dilution. But, I've got to say, if a massive company like SBC and Ameritech, with each having vast local telephony experience and resources, all the technology, if they cannot profitably compete in local telephone service regulators need to redouble their efforts to eliminate barriers to local competition. The answer is not to allow this merger to go forward. This merger, along with the Bell atlantic/GTE merger implicates nothing less than the future structure of this critical industry and its ability to perform efficiently. If the FCC does not exercise its authority now to ensure an efficient market structure surely we will all pay the price in the future. The Telecom Act of 1996 was supposed to open up local telephone monopolies. What we got instead was stonewalling, incessant legal challenges, and greater concentration. The mergers of large regional monopolies can only take us further away from the goal of local competition, thus, these merger applications should be denied. Thank you. CHAIRMAN KENNARD: Thank you. Mr. Carter. Agenda Item: Stephen M. Carter, President - Strategic Markets, SBC Operations, Inc. MR. CARTER: Thank you, Commissioners. My name is Stephen Carter and I'm the President of Strategic Markets for SBC. I've been made responsible for taking the combined SBC/Ameritech into the nation's biggest 30 markets out of our region. Together, with the 20 markets the 2 companies would already serve on a combined basis, the national local strategy will make us a national competitor and establish our position as a global provider. I'd like to begin by acknowledging that the merger has or soon will meet two key tests. First, I don't think there is any question today that SBC is fully qualified with respect to the necessary financial, technical, and managerial expertise and requisite character to obtain the Commission's approval of this transaction. In addition, the Department of Justice is conducting an extremely thorough review of this merger for any anti-competitive's concerns. We are confident that we will receive the Department's approval. That said, I would like to spend a few minutes explaining why we believe this merger is in the public interest and will be good for consumers nationwide, good for employees of both companies, good for our shareowners, and good for America's place in the global telecommunications arena. This merger is our effort to shorten the distance to the future for our current customers and consumers in markets from coast-to-coast. This merger is about enhanced economic growth, improved customer service and increased competition around the corner and around the world. there are some who pace the perimeter of the status quo, nervously guarding the way things are. Change is their enemy. We believe the time for change has arrived, and with this merger we have put our resources behind our commitment to the future. Once this merger is complete, we will jump start national competition through our National Local strategy for business and residential customers liken thing else has since the passage of the Telecommunications Act of 1996. We will become a new telecommunications alternative for another 70 million people. In the process, we will bring new products and services to consumers in and out of region faster and more efficiently. And, our entry in those markets will force a competitive response from incumbent phone companies, long distance giants and others. I can't overstate this point: We're not pursuing National Local in order to win regulatory approval for the merger. It's exactly the opposite. the merger with Ameritech is a means to achieving the goals of the National Local strategy. It's a decision that both companies made based on our mutual desire to take advantage of growth opportunities in a dynamic telecommunications marketplace. The SBC/Ameritech merger is all about growth. For example, we will need 8,000 plus employees to serve customers in these new markets, which is just one reason why the Communications Workers of America support us. Others have speculated about what this merger will do. I'd rather talk about real results. In the 18 months since our merger with Pacific Telesis, the situation in California is much improved. Ms. Costa could not be more wrong. The full facts show that in the competitive arena when we took over there were almost 20,000 orders backlogged from our competitive customers. There have been no back orders since the middle of last year, there are none now. Service and repair times are better. We are introducing products and services, including the nation's biggest roll out of high-speed Internet access through DSL. Our prices are regulated. DA is below cost. Don't ask about what DA is being charged in other areas, ask about what our competitors charge for DA in California. The truth is that we are too low. We are below cost. Our charitable contributions and community giving have more than doubled. We have created more than twice the number of new jobs that we anticipated. We fully expect that the Ameritech merger will allow us to achieve similar results. If the Commission has any doubts on this matter, I would encourage you to consult with the Commission in California to obtain the full facts, and not to listen to any ill-informed or heavily biased advocacy groups. We know this Commission wants to promote competition and so do we. Our merger is a product of competition -- competition for our most profitable customers requires us to become a national and global carrier, which will allow us to then compete for business and residential customers nationwide. If you have any doubts, just look at how much the competition is doing to stop this merger. The race is on among SBC, Ameritech, AT&T/TCI, MCI/WorldCom, Bell Atlantic-NYNEX-GTE and others -- CHAIRMAN KENNARD: Mr. Carter, you will have to wrap up, please. MR. CARTER: -- to achieve the size, scale, customer base, and employee talent to become a national provider. In the end the consumers will win. I hope you will give them the opportunity to choose and give us the privilege of competing for them. Thank you. Agenda Item: Questions and Answers. CHAIRMAN KENNARD: Thank you, Mr. Carter. Mr. Carter, you made a statement in your presentation about your confidence that the Commission will find that your company has the requisite character to get approval for this merger. Character, of course, is a term of art in FCC parlance because the FCC must find, as a matter of law, that anyone who comes before us and asks for the approval of a license transfer be deemed to have the requisite character. Historically, the FCC in making this evaluation has looked to see whether the applicant has complied with all significant FCC rules and regulations. Now, I know that your company has a dispute with this Commission about the way that we have implemented the 1996 Act and, in fact, so much so that you have now gone to the United States Supreme Court and asked that the highest court in the land rule unconstitutional certain key provisions of the Act, Section 271. Now, putting that aside, because everyone has their opportunity for full legal redress in the courts, I want to ask you this question about compliance with the law and then I want to ask the other panelist to address it. Can you tell us today that SBC has complied with the rules and regulations of this commission implementing the market opening provisions of the 1996 Act, in particular, Sections 251 and 252, which I believe are the heart and soul of the act because they require that the incumbent local exchange carriers open up their markets for competition? Can you address that question for me, please? MR. CARTER: I can say unequivocally that I believe our company has done as much or more than any other to open up our markets. We have, on record, more than 2 million access lines have now moved over to be served by other companies. We have established OSS systems that I believe most people believe are the best in the industry. We've got no backlog of orders from CLEC customers. Although, we have reserved our right to appeal certain issues we have never not -- we have never taken the position that we wouldn't enact orders until the appeal was finished and finalized. So, I can't think of any issue at the moment where we are out of step. We are in disagreement but not out of line with your orders or, indeed, any state orders. The ISDN issue that was mentioned earlier, I will admit, that we had an error. We file a lot of responses and in California we did respond to the ISDN request, regrettably the response was not complete. We admitted it wasn't complete and, indeed, have said that we would complete it. It was not that we were not interested or didn't do it on time but it was incomplete, we made a mistake. Frankly, I'm amazed that we do as many on time and as soon completely as we do. As you can imagine there are a lot of orders. CHAIRMAN KENNARD: Thank you, Mr. Carter. Would Mr. Devlin or Mr. Taylor like to address that question? MR. DEVLIN: Yes, I would, Mr. Chairman. Thank you very much. I took a note down on my pad when Mr. Carter said, "The time for change has arrived." In the notes that I made were, "Does this mean the baseless lawsuits will be dropped? Does that mean SBC will stop fighting in region competition?" Mr. Carter talks about his company's compliance with the Commission's market opening rules, yet I believe it is now five states in SBC territory that have denied or states or Commission staff's that have recommended denial of 271 application in SBC's territory for multiple failures to implement the checklist. MR. TAYLOR: And I'd like to comment. Focal Communications is both a customer of Pacific Bell, Ameritech, and Bell Atlantic. Looking at those three incumbents to date there is a big difference between the best and the worst and I'm not going to say that the best is complying with the letter of the law but I would not put PacBell's cooperation with competitive telephone companies anywhere close to the best. As a customer, most of our orders have been late. CHAIRMAN KENNARD: Thank you. Other questions from the bench? COMMISSIONER NESS: Mr. Carter, you indicate that if this merger is approved that you would go into 30 markets around the country. Is there a reason why you would not pursue the same strategy if the merger were not approved? MR. CARTER: I think we've put on record our reasons why we believe we have to be a national and a global provider and to do that we have to service more than just one or two markets outside of our region. The Ameritech merger brings, of course, certain cities within our region and thus reduces the burden of building outside of the region. It is our belief that to do a build out in the proper way, to give full facility based competition, we need the scale and scope, the talent pool that Ameritech gives us. COMMISSIONER NESS: The inference, however, is that other major local operating companies would also then compete in your region, your expanded region, and there would be more competition, more fierce competition than exists today. Indeed, that is the concept behind the public interest offering that you are making. What would make one conclude that that competition would exist in your region if you are telling us that it would be extremely difficult for you to compete outside your region but for a much more expanded geographic area? MR. CARTER: Well, I can't say how our future competitors would give themselves up to do the competing. They may do it alone, they may do it with others in partnership or alliances but I am certain that by attacking the very heart of their economic base they would have to find ways to spread their overhead load and to compete back in our region would seem sensible. They may not have ambitions to be one of the national competitors. They may believe that they can survive as a more localized entity. Certainly, the AT&Ts and MCIs and Sprints of this world are fully capable of competing around the country today. Those people, I believe, will be prompted to more aggressively pursue competition in our own territories when we are attacking their own bases. In fact, it is, I think, apparent that Sprint's interest in this merger has sharpened considerably since we announced that we would be planning certain of their key markets where they are the local player. COMMISSIONER NESS: Would Mr. Devlin or Mr. Taylor like to respond to that? MR. DEVLIN: Yes. Thank you, Commissioner Ness. I think, first of all, we need to establish why Sprint is here today. We are not here as a competitor of SBC, we are here as a customer of SBC. We are one of SBC's largest customers. We are a captive customer. If we want to complete long distance calls in the South area of the United States we must use SBC. There are competitive alternatives that are starting but I think everyone would agree that virtually 98 percent plus of calls use the incumbent local telephone company. We would love alternatives to SBC, we want to see local competition because that will drive our largest single cost down, which is the cost of access. So, we are here not as a competitor but as a customer. Addressing the specific question, this notion that you have to be a mega-corporation to compete or that you need a large captive customer base to compete, just a few thoughts for you. We have heard already from Mr. Taylor about how CLEC's are doing at a fraction of the size but think back in the old days, the long distance days. Sprint was the first one to construct a high capacity fiber optic digital network. We didn't have a single customer, yes it cost billions of dollars, yes for the short term our shareholders got nervous but we did it and we are doing it again now without a single wireless customer when we started. We bid and we paid the government over $2.5 billion for the right to build a national fiber system. We are a smaller company than SBC. If you are going to succeed in the marketplace you need to take risks, you need to make investments, and if SBC believes that it needs to be global it should be opening up its local markets so it can get into the long distance business and it should be competing right now. It shouldn't be waiting for a merger, it is large enough to compete. MR. TAYLOR: Just a quick comment. It appears that the logic just doesn't seem to make sense. If the merger, as Mr. Carter explains, is the means to achieve the strategy, and he also indicated that the company will sort of pass the benchmark test of qualifications on the managerial, technical, and financial side, how come every other competitive entity who has chosen to do this has done it with far fewer people, far less money, and far faster and in more markets than the combined SBC/Ameritech indicates they will? It doesn't seem to make sense from a common sense perspective. CHAIRMAN KENNARD: Go ahead, Commissioner Powell. COMMISSIONER POWELL: Mr. Carter, I want to get something clear, because people are debating the same thing, perhaps with different terms. Is your statement that it is impossible to do or it is just plain harder to do? MR. CARTER: It is a lot harder to do but not impossible to do. It depends on the criteria that your business sets as its goals. I believe if you want to be a niche player, a CLEC that picks off the ripe business customers, the people that are paying the higher rates of service, if you want to ignore the residential customer, if you don't want to serve a broad base of consumers across a wide range of markets then surely you can enter almost any city you want to pick off that kind of business. But, we believe that if you are to enter a market with a full fledged wide product range, innovative services, your own product range that consumers demand, we believe you have to have the scale that we are talking about. We believe it is only with that kind of scale that you will get sort of competition that was envisaged by the Act. COMMISSIONER POWELL: I want to come back to that in a second but, Mr. Taylor, one of the things I also want to try get straight in my mind, and maybe it is a question of both of you, if someone is talking about a national local strategy -- and I understand they are talking about 30 markets and that might be a qualifier -- is it an appropriate analog to look at the aggregation of CLEC experiences at significantly smaller scales or is the analog, the ones that come to my mind, the large IXCs that are pursing a more comparable national local strategy, that is an attempt to enter the United States in a single significant way at the local level, as opposed to companies such as yourself who may be in 13 states at the moment or so many regions at the moment. I just wanted to get your comment on the notion of national strategies, not really the community of CLECs, like yourself, the smaller midsize CLECs, but, indeed, the similarly situated global carriers like AT&T and MCI/WorldCom and how they are faring with respect to national local strategy. MR. TAYLOR: Well, I think, the short answer to your question is the AT&Ts in the local telephone area aren't faring any better or worse than the Focal Communications. We're certainly able to compete head-to-head with the large global carriers, as well as we are with the incumbents. Size does not appear to be a criteria that favors or hinders. It may hinder more. COMMISSIONER POWELL: I guess what I am exploring, and maybe I'm off base, but would you concede that there may be a difference in difficulty between whether you are pursuing a national local strategy than it would be to pursue on the sort of more market-by-market or discreet market basis? Are there things that an AT&T or an MCI/WorldCom would insist on or need that are consistent with a national strategy that would not necessarily be concomitant with interests of companies like your own? MR. TAYLOR: No, there is nothing that would be different between the two. Focal Communications serves residential customers, we serve the largest corporations. We believe we have a national local strategy as well. We wouldn't phrase it that way but we are coast-to-coast and north to south and we don't see how whether you are a regional player or a national player that is doing local telecommunications how the national local strategy gives you any advantage or differentiates you from anybody else. Local phone service is still local, like politics. COMMISSIONER POWELL: The last thing I wanted to ask, going back to Mr. Carter, and I think I have asked you this question before -- I'm still somewhat at a loss at the suggestion that the global competitive marketplace is demanding a local presence in each and every city to be competitive with the customers that you describe. It seems to me, in the absence of the ability to connect those cities across lattice or internationally you have nothing, that is other than 30 local presence that you -- then you can't go to customers with and make any greater representations about your service abilities than you could now because you really don't have the interlateral relief that is going to be essential. Would you say a little bit about essentiality of being able to connect those local entries that you purport to make on the importance of the interlateral relief as a component of that? Because someone might say your merger might make sense but not now. MR. CARTER: There is no doubt that without the benefit of interlateral relief our national strategy is stranded. However, perhaps the fact that we have been rejected in part in a number of our states shows that we have been early to the party in trying to fulfill a somewhat murky checklist. We thought we had finished, it is apparent that others think we haven't but we are working very closely with our states to try and work out what it is that is required to obtain 271 relief. Certainly in the time scale that we are talking about for the completion of the merger and the launch of national local we would anticipate that we have long distance relief. If we haven't, some four years or so after the Act, then something has gone dreadfully wrong. So, we do believe that is a part of the strategy but we see those as being two separate tracks that we have to take on. It gives us an added incentive, perhaps, to work just a little harder to make sure that we do comply and fulfill 271 appropriately. COMMISSIONER POWELL: Just to understand, is your suggestion that in the combined number of states that would be represented by SBC/Ameritech you would anticipate long distance approval in everyone of them over the course of the next year? MR. CARTER: We would certainly hope that once we have achieved one of the states it would give us a very good guideline as to how to achieve all of them. I can't speak to Ameritech's systems at all, I'm afraid, but certainly as far as SBC is concerned I would expect that once we have the blue print for the one we would be able to achieve an approval for all of them. CHAIRMAN KENNARD: Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. Mr. Carter, I have two questions for you. The first is, is the information that you have been asked to provide to the Department of Justice substantially different from the information that you have been asked to provide to the FCC? Second, of the 14,000 or so licenses that were transferred under Section 310 last year the vast majority were handled in a fairly simple ministerial way without a lot of fanfare. Before SBC contemplated a merger with either PacBell, a couple years ago, or now Ameritech, did you have in your possession or did anyone suggest to you there might be some document that would describe how certain license transfers would be handled in a certain way with a fairly ministerial process and how certain other license transfers would be subject to intense scrutiny? Was there ever in your possession a clear road map of precisely how this Commission would handle your merger and the license transfers involved, as opposed to other license transfers? MR. CARTER: I am not one of the experts that submit all of the information but my impression is that substantially the sort of information that we have supplied to the Department is very similar to that that we are supplying to the Commission. Indeed, from the sort of questions we are receiving it may even be that the Commission is more interested in our detailed business plans than the Department but we will see how that plays out. Certainly, before the Pacific merger I don't think any of us in SBC management talked about knowing what the blue print was. We had a very clear idea about what the DOJ would be wanting. I think since the Pacific merger we're, in contemplating this merger, I don't believe we had any firm idea about what would be required from the Commission. Again, we do have a fairly clear idea about what the DOJ will be using as their standard. CHAIRMAN KENNARD: Commissioner Tristani. COMMISSIONER TRISTANI: Mr. Chairman, thank you. I have two questions for Mr. Devlin and Mr. Taylor. The first one is -- well, you've been speaking from the competitor's point of view but I know you also want to gain and serve new customers but I'd like you to tell me whether you think the FCC should be looking at these allegations of deteriorating service quality in California. That is one question. A broader question is if we say "yea" to these mergers, which is something you oppose, are there any meaningful conditions that the FCC should and can apply? MR. DEVLIN: Commissioner Tristani, I think the two questions are very much related and it is, "Can this Commission rely on promises and conditions and get comfortable that this merger is going to serve the public interest?" I think the answer to that is clearly "no." If we look at the mergers that have taken place, the commitments that were made there or the statements of intent that were made and the conditions that weren't satisfied, the road is littered. But, let's even assume that the conditions can be faithfully executed. I still don't think it fixes the problem. Let's take an example. Someone is hitting you over the head with a hammer, you call the police, the police send their crack negotiator team and they negotiate conditions. The conditions are the guy can keep hitting you over the head with the hammer but he must give you an aspirin every four hours. Let's assume the guy actually faithfully executes that and gives you the aspirin every four hours, you still haven't fixed the problem and that is the problem with conditions here. What we are talking about is the two most likely competitors agreeing not to compete against each other, merging into one big happy family and once that is done you can never unwind it. Those competitors are lost forever and consumers that were relying on innovation and lower prices and long distance companies that hoped to have lower access prices all that is gone forever. So, we don't think conditions work. MR. TAYLOR: In response to your question of should you be looking at what is happening in California, absolutely. Because it sets a pattern of believe ability in what they are going to tell you they will do. Clearly, I think, everybody has said and there have been a number of opinions about what has happened in California. You guys have the information to determine what you believe has happened in California as well. We think it is important because what they have done in California will likely be what they do in other areas. It appears, as a CLEC in California, that we have not seen better service by the merger of SBC and PacBell, we have seen worse service there. So, in our narrow view as a proponent of more competition and bringing service to residential and business customers it has been more difficult for us since the merger. What conditions should you apply? The conditions should have, in Mr. Devlin's analogy, a really big stick so that you have the hammer in your hand and you are hitting the opponent on the top of the head so that when they don't comply, because we don't believe they will, that you have the means to force them and force them painfully into compliance. I think that is the one clear message, if we could send is, should you approve this and we don't think that is in the best interest, you need to ensure that your stick will cause a headache bigger than one aspirin. COMMISSIONER TRISTANI: Mr. Carter, do you want to respond to any of that? MR. CARTER: Thank you very much. I would heartily agree that you look at California because I think it will be a model of what you actually want in terms of promises kept. I would point out that Focal Communications was not trading with Pacific Bell pre-merger so Mr. Taylor has no experience pre-SBC, indeed, we have only been trading at a very limited way in the latter part of this year. To my knowledge, as perhaps you know I was in charge of wholesale before, but I have had no complaints in that capacity from that company. I think, also, on the service side, Sprint awarded SBC no less than 26 awards for service, including "Best in Class" in 1998, 24 individual awards for provisioning, network maintenance, installation, and have declared us a model of what they call their "B Man" strategy, which I understand helps their eye on product. The other thing I would say, again, we've created more than 2,200 jobs, we promised a thousand. We committed to improve service, we have. The Silicon Valley had terrible troubles before we took over. We also had the strange effects of El Nino this year, despite that service in the Silicon Valley is still 80 percent better than it was before. I will agree we still have some room to go but we are making huge improvements in that area and overall service in the state is much improved. Basic service prices have not changed. As I have said before, they are regulated, they have not changed. Competition has been promoted. We have no backlogs. We have committed to giving more to communities, invested more in facilities, we've expanded products and services and I think ADSL is a preferred product over ISDN. We are going to roll that out in a very large way. I would encourage that you look at California extremely carefully. CHAIRMAN KENNARD: If I could just have a couple of follow-up questions to some of your earlier testimony, Mr. Carter. If I could take the liberty of paraphrasing what I think you said, which is that if you were to be able to do this merger you would have a greater incentive to get interlateral relief so that you can make the synergies of the merger even more powerful. Is that right? MR. CARTER: Well, I think I was responding to Commissioner Powell's questions -- CHAIRMAN KENNARD: You were. MR. CARTER: -- about the national strategy. Perhaps you could imply by that the merger but in terms of the national strategy I think certainly that requires interlateral relief to work. CHAIRMAN KENNARD: Okay, well, let me just pose the following question then to Mr. Devlin and Mr. Taylor. If it is true that the national strategy is more attractive to a combined SBC/Ameritech because they can get interlateral relief do you think that increased incentive gives you any sense of hope that these markets within the SBC/Ameritech region will be opened up faster if this merger goes through? MR. TAYLOR: No, it doesn't. What would give me comfort is if it happened the other way around, if the merger could not go through until they received interlateral relief, thereby having opened up the markets. In that case we are very comfortable with this process going forward. We are very comfortable and support companies like SBC getting interlateral relief but they first need to follow the rules that you all have laid out. We will believe that that will make a great hurdle for them to get the merger approved, get interlateral relief, comply by the rules outlined by you all and we would support that kind of merger. CHAIRMAN KENNARD: Mr. Devlin. MR. DEVLIN: Mr. Chairman, Mr. Carter discussed earlier in this context that perhaps SBC was early to the party. I think the implication there was maybe SBC was in some way innovative in getting to the state commissions first. I think what we saw, however, was SBC's attempt to get 271 authority without doing any meaningful upgrades. If SBC really believes that the world is going to one-stop shopping its number one priority should be opening up its local markets so it can offer long distance in its local markets. The incentive is so strong already to let the merger go through, which will distort competition I think would be a very big mistake and will not lead us to local competition at all. CHAIRMAN KENNARD: Thank you. I had a follow-up question to Mr. Carter's comments in response to Commissioner Furchtgott-Roth about the filing procedure here at the FCC. Now, you filed a Hartscott Redino filing at Department of Justice, didn't you? MR. CARTER: I presume so but I can't claim that that's an area that I'm involved in. CHAIRMAN KENNARD: But you are aware that the Department of Justice would require a Hartscott Redino filing in connection with a merger of this size, isn't that right? MR. CARTER: Yes, speaking as an operations guy I am aware of that. CHAIRMAN KENNARD: Okay. And the FCC doesn't require a Hartscott Redino filing, do we? MR. CARTER: I believe you only need to do one. CHAIRMAN KENNARD: That's right. And it is only with the Department of Justice. Now, in the information that I have here it indicates that a combined SBC Ameritech company would serve approximately 55.5 million lines, representing approximately 40 percent of the nation's total access lines. Does that seem right to you, Mr. Carter? MR. CARTER: I heard the number earlier that said it was thirty some percent but... CHAIRMAN KENNARD: Okay, let's stipulate it's over 30 percent of the country. MR. CARTER: It's a lot of lines. CHAIRMAN KENNARD: Let's stipulate to that. Now, certainly you wouldn't expect that a merger of this magnitude would be treated by this Commission in the same manner as, say, the transfer of one AM radio station license in Poughkeepsie or New York or Los Angeles or perhaps one private radio station license in any other community in the country? MR. CARTER: You are really in an area that I am ill-equipped to answer. The gentleman here who was the professor seemed much more in line to answer those sort of questions. CHAIRMAN KENNARD: Okay, I'll let you off the hook. Thank you. MR. CARTER: I appreciate it. COMMISSIONER FURCHTGOTT-ROTH: A follow-up though, Mr. Chairman. I must note that there is a proposed merger that I'm not sure that this commission is going to be taking up, which is Exxon/Mobil which involves more licenses issued by this Commission than is held by Ameritech and that is held by several of the companies that we are looking at today. If the issue is sort of size of merger, if the issue is number of licenses that this Commission issues I'm just not sure how a company such as SBC knows how it is going to be treated versus another company such as Exxon or Mobil. Now, if the issue is we're only going to look at those companies that we traditionally regulate intensely that is fine but I think we ought to put it down on paper. As far as I am aware there is no paper that gives guidance to a company such as SBC as to how they will be treated versus Joe's Taxi Company that may, unbeknownst to itself, wind up in the same position where they are being reviewed in great detail. We certainly have had several C Block licensees that have had licenses that have had a great deal of trouble getting some issues resolved there in the recent past. I would just like to get some clarity to how parties before this Commission will be treated when they come in on 310 issues. CHAIRMAN KENNARD: Well, if there is anyone here that thinks that the Exxon/Mobil merger will affect the future structure of the telecommunications marketplace I hope you will come forward because I would like to know whether that is the case. Do we have any other questions from the bench? COMMISSIONER POWELL: Mr. Carter said something earlier that I feel obliged either to give confirmation or disagreement from the two of you on. Quality has been a significant element raised and clearly we are going to have to sort through a lot of conflicting viewpoints about the California experience. But, is he right in saying, Mr. Devlin, that Sprint has indeed awarded awards for quality to SBC in California with respect to the service that they provided to you in your company? MR. DEVLIN: I don't know the answer to that, Commissioner Powell. COMMISSIONER POWELL: Could we find out? MR. DEVLIN: I will. But it is not uncommon. We have different groups in the company. In dealing with suppliers try and encourage them to do more, to do better. It wouldn't surprise me if Mr. Taylor got the "Best Looking" award for SBC or something like that. I will follow up but I can assure you that is nothing that ever reached the executive levels of Sprint. There is some group in the bowels of the organization -- COMMISSIONER POWELL: You don't get off that way, Mr. Devlin. (Laughter.) MR. CARTER: That's a very risky assertion. COMMISSIONER POWELL: Mr. Taylor, if you could comment as well, because just in the interest of full disclosure it is important to know, as a factual matter, whether you really are able to opine about the benchmark and whether the services deteriorated if you were not a customer of SBC or PacBell previously and/or if your relationship is relatively infantile. I am not disputing any of your observations but I just think it is only fair that we really know whether that is an accurate statement. MR. TAYLOR: Prior to starting Focal I was a senior executive at MFS Communications where I was responsible for building a lot of the MFS network around the United States and dealt specifically with PacBell prior to the merger. So, I am familiar with PacBell's operating experience for a number of years prior to the merger. More importantly, I am also the Vice Chairman of ALTS. One of the things we are going to begin doing is grading the incumbents. Since we are talking about essentially several carriers here today, just among PacBell, Ameritech, and SBC, PacBell and SBC would be at the bottom end of that scale, Ameritech would be at the middle and the incumbent provider on the East Coast would be significantly higher. So, when we are looking at comparing good actors versus bad actors and not necessarily saying the good actors have complied yet, PacBell is at the bottom of that list. COMMISSIONER POWELL: If I could just, again in the interest of clarity, get some distinctions. When Ms. Costa was testifying her focus on quality seemed to me to emanate from that that would be experienced by individual users of consumers of telecommunications services of SBC versus yours, which I take to mean largely the quality of your relationship with respect to interconnection. MR. TAYLOR: Well, but we buy a lot of services. We pay tariff rates for private lines, for construction, for installation of services, just like any other consumer does in the state of California. So, we are right there buying T1s and DS3s and OC48s, along the same lines as Bank of America is. Quite frankly, the way we look at ourselves being served by a customer, it is not a very customer friendly focus. We also buy lines from WorldCom. They call us up, they ask us, "Hey, how you doing? Are you happy? Can we do more for you?" The folks at PacBell don't act that way. We are not treated like customers. We'd like to be, we'd like to be just treated like everybody else. The competitive side will happen. We're comfortable that that is in our hands. COMMISSIONER POWELL: That is fair enough but you would concede that in our granularity there is a distinction between evaluating "quality considerations" in commercial competitive relationships versus evaluating quality considerations with respect to families taking telecommunications services at their homes? MR. TAYLOR: I think that -- COMMISSIONER POWELL: There is no implication by this. It is not a trap, it is just -- MR. TAYLOR: Oh, I know. No, I know. I think that both are buying services from the same company, so the person in San Mateo buying a home phone line from PacBell and Focal Communications or Bank of America or the city of San Francisco are all customers of PacBell and I think you should look at all of them. I don't think you should necessarily look at Focal's experience over the consumer's experience but I think we are a business consumer of services from PacBell. COMMISSIONER POWELL: And a competitor. MR. TAYLOR: And a competitor, and that is what makes it more difficult. MR. DEVLIN: Commissioner Powell, if I may, I think when you look at the relationship here and consider the merger you need to look at more than just California. You need to look at SBC and how open and inviting they have been to competition. I think you should consider their litigation strategy as part of that file, making everything go to arbitrations, appealing Commission orders, and so forth. It is a whole part of the calculus as to how inviting SBC is to competition. Frankly, as a customer, I wouldn't want to have to face that same approach in Ameritech. In other words, once Ameritech gets bought out by SBC and SBC replaces the Ameritech managers that is not a very enlightening prospect for Sprint. CHAIRMAN KENNARD: Folks, we are really going to have to wrap up. We are behind schedule. Did you have one other question? COMMISSIONER TRISTANI: Mr. Chairman, I would, after Commissioner Ness, like to make a comment, if I may. CHAIRMAN KENNARD: Okay. Commissioner Ness and then Commissioner Tristani then we will wrap pup. COMMISSIONER NESS: I wanted to get back to the benchmarking question. Assuming that we were to grant the merger and assuming that 271 approval were achieved and assuming that SBC fulfilled its statements that it is going to be actively pursuing competition in at least 30 markets around the country, would their pursuit of those markets, competition in those markets, against other local exchange companies not generate the kind of market opening activity that would be helpful for Focal or that would be helpful for Sprint? In other words, would that not stir up the mix, as has been suggested? Can you comment on that? I put that against the notion of -- or the concept of four major companies competing vigorously versus six companies that might be staying within their own regions. MR. DEVLIN: Commissioner Ness, keep in mind, first of all, that SBC and Ameritech are very large companies. They are very capable of competing today, they have just chosen not to do it. This notion that you have to be some mega-size I think is put to rest by the Sprint/PCS experience where we spent billions of dollars without a single customer to build a new high quality wireless service and we are running with that. So, keep that in mind. My second point escapes me so I'll defer. MR. TAYLOR: Certainly more competition in more markets is good. We think that would happen if this merger didn't go through, that Ameritech prior to the merger was poised to go into places like St. Louis. So, we think that those benefits would have occurred, were on the verge of occurring, and the SBC and Ameritech folks have documented that they were going to occur prior to this merger. We think that's the ultimate answer, have SBC, have Ameritech compete against each other and that will help open the markets. there is nothing that is going to help open -- you know, Ameritech is not going to be in a position to help open up Texas if this merger goes through and they are certified in Texas and that is an area where we could use a lot of help because Texas isn't as good as California. MR. DEVLIN: Commissioner, the second point, and I apologize, it is the "big foot print" argument. the monopoly is extended to include this now very large geographic region, a third of the lines in the United States. The impact on competition is going to be within that region. It is going to be very hard to compete against a very large monopoly, this marriage of monopolies, because we need their interconnection and we need their access to compete. MR. CARTER: May I just comment? COMMISSIONER NESS: Please. MR. CARTER: I cannot see how our merger will effect in-region competition, except in the most beneficial way. Certainly I'm not aware of any outstanding complaints from Sprint on our interconnection, in fact, I'm not really aware of very much that Sprint is doing to compete in our region locally, especially amongst residential customers. I go back to the point that we want to be a full facility based competitor across the nation, serving not only big customers, and we have to spread across the nation to service big customers, but also consumers because we do believe that there is a strong market for an alternative competitor in the residential sector. COMMISSIONER NESS: Would you have to have 271 approval prior to engaging in your competitive strategy? MR. CARTER: Well, as I said earlier, I believe that the national strategy and 271 are in some way link, otherwise we would end up with 30 stranded cities, or 50 stranded cities. We believe it's a plan that can be made to work. CHAIRMAN KENNARD: What about Mr. Taylor's suggestion that you get 271 relief and then as a condition to merger? Can you respond to that? MR. CARTER: I don't really see how they are connected, other than in the sense that it is hard for us to make the national plan without 271 but I think suddenly making 271 and mergers connected together seems wrong to me. I speak as a lay person but I don't see that as being hand-in-hand. I would also say that as Ameritech/SBC without 271 relief I think even without 271 relief that the merger would benefit those two companies from giving it additional synergy which perhaps could defray its losses from the business customers that are being taken right now by CLECs and the larger long distance companies. CHAIRMAN KENNARD: Thank you. Commissioner Tristani. COMMISSIONER TRISTANI: I will make my comments after the next panel. CHAIRMAN KENNARD: All right. Thank you. Thank you very much -- Commissioner Powell, did you have one? COMMISSIONER POWELL: I just couldn't resist one last question. (Laughter.) COMMISSIONER POWELL: Not because I'm convinced of this but... At a local level, Mr. Devlin, what is merger specific about the evils of monopoly you describe? That is you have a single monopoly you are facing in Ameritech region, you have a single monopoly you are facing in the SBC region, the fact that they are under joint ownership it is not immediately evident to me why the experience immediately is negative to you as a consequence of aggregate market power. That is, If I flip their regions, if they made some weird deal where Ameritech took over in the Southwest and they took over in the Midwest, you would have the same -- at the local level it is the same monopoly so unless what you are saying, which is what I have taken from most of the comments, that you think that SBC is bad and that badness is going to come to Ameritech. MR. DEVLIN: No, I think it is actually a different point. It is a difficult point. We do have economic analysis that we submitted, expert testimony, but it goes like this: When SBC engages in any competitive behavior it not only hurts the entrant in SBC's territory but in other territories around the country. They are less sufficient throughout the country. That is what economists would call "spill over" effects. That is, the SBC, bad act, actually benefits other LECs. If SBC and Ameritech merge SBC is able to internalize those spill over effects. In other words, capture the benefit internally of their acts in Texas, for example. COMMISSIONER POWELL: I understand. CHAIRMAN KENNARD: Again, thank you very much. MR. DEVLIN: Thank you. CHAIRMAN KENNARD: We will take a five minute recess and then we will come back with the next panel. (Whereupon, a brief recess was taken.) Agenda Item: Bell Atlantic/GTE Panel CHAIRMAN KENNARD: We will reconvene our panelists. We will now turn to the proposed merger of Bell Atlantic and GTE. Just one housekeeping matter on scheduling. We are running behind schedule so what we will do is go for 45 minutes on this panel, until 1:15 p.m, then we will take a lunch break from 1:15 to 2:00, then we will reconvene at 2:00 for the AT&T/TCI discussion. Again, the panelists will have three minutes to give an opening statement and then there will be question and answer from the bench. We will begin remarks by Mr. Mahoney of RCN. Mr. Mahoney. Agenda Item: Michael J. Mahoney, President and COO, RCN Corporation MR. MAHONEY: Mr. Chairman and Commissioners, my name is Michael J. Mahoney. I am President and Chief Operating Officer of RCN Corporation. Thank you for giving our RCN the privilege of appearing before you today to address the proposed merger of Bell Atlantic and GTE. Given the size of the merger applicants and the markets served by them today this is one of the most important decisions to come before the Commission since the passage of the 1996 Act. Despite the pro-merger tenor of the times, we urge you to find that it is not in the public interest. RCN is one of the largest CLECs primarily dedicated to serving residential markets. We currently operate in the Northeast, from Virginia to Massachusetts, offering bundled local exchange and intralateral services, high speed internet access, and video services, both as a franchised cable operator and as an open video system operator. You may have seen our recent advertisements in the Washington Post and elsewhere announcing that we are bringing these services to Washington, D.C. and the surrounding areas through our local affiliate, Star Power Communications. We like to think that RCN is the poster child of the 1996 Act because we are doing exactly what Congress hoped the Act would do in bringing about competition. In the Washington area, for example, we are providing the first alternative to Bell Atlantic's local telephone service and the first serious alternative to the incumbent cable companies. Through our ownership of Erols we are also competing for high speed internet access with both telephone and cable companies. My remarks today are not oriented towards the legal issues. Our recently filed comments opposing the merger do that. Instead, I want to approach the issue as a down in the trenches businessman trying to develop and offer services to the residential public. As a CLEC we necessarily devote a great deal of our time and energy to working with the local ILEC, principally in our case Bell Atlantic. On the basis of almost three years of such experience we are compelled to impose the proposed merger. Our opposition is based on facts, not on theory. The applicants have not carried out their obligations under Section 251 and 252 of the Communications Act of 1934. As detailed in our recent formal comments, both of them have failed to discharge in good faith their legal obligations to CLECs, such as RCN. This failure to discharge in good faith their legal obligations arising from the Act is pervasive, covering interconnection agreements, co-location, offering of unbundled network elements, optinagrangements [ph], access to OSS, access to poles and conduit, payment of reciprocal compensation, account management and similar aspect of the CLEC/ILEC relationship. Although both entities are proficient and prolific in touting their pro-competitive efforts in their public relations and regulatory filings I am here to tell you, as a businessman trying to establish a toehold in the telecommunications market place, that their by-word is "delay" in anyway possible. Bell Atlantic and GTE have consistently, with rare exception here and there, demonstrated a pattern of non-responsiveness, including slowness to cooperate, discovery of numerous inhibiting and delaying complications and difficulties and insistence on mindless reargument of issues. Their behavior covers the gamut from the simple failure to return telephone calls to active resistance to pragmatic compromise solutions to practical problems, whether it is waiting an excessively long time for access to conduit space or being denied access to such space so as to preserve its own growth, Bell Atlantic has consistently been uncooperative. Only rarely do we encounter outright refusals. The ILECs understand perfectly well that such outright refusals would be too easy to challenge. While Bell Atlantic is guilty of these stratagems GTE's performance is even worse. I would encourage the Commission to initiate a full scale review of GTE's competitive record, going back to passage of the 1996 Act. As set forth in detail on our recent comments, this performance is so poor that it must proceed not from mere incompetence or even inattention but, rather, from a clear deliberate and consistent corporate philosophy to fight the pro-competitive provisions of the Act. It would be contrary to common sense, let alone sophisticated legal analysis to reward the unlawful behavior of these two companies by allowing them to merge. No doubt they can save money by combining their operations but it is the public whose interest is harder to quantify but also far more important that will pay the price. For these reasons RCN urges the Commission to reject the proposed merger application. However, in the event that the Commission decides to approve the merger it should adopt the conditions, including performance criteria, set forth in RCN's prior written submission. Moreover, if you conclude that the merger can be approved only with the imposition of conditions we strongly urge you require the fulfillment of the conditions prior to the consummation of the merger. Sad experience has taught us that when conditions are to be met subsequent to approval the industry finds itself mired in costly delay and unproductive arguments about whether the merged entity has adequately fulfilled those conditions. A much sounder course would be to set the achievement of the goals or certain performance criteria a condition precedent to the merger, even if preceding in this fashion delays ultimate consummation of the merger. Thank you very much. CHAIRMAN KENNARD: Thank you, Mr. Mahoney. Mr. Sallet. Agenda Item: Jonathan Sallet, Chief Policy Counsel, MCI WorldCom. MR. SALLET: Thank you, Mr. Chairman, Commissioners. I'm Jonathan Sallet, Chief Policy Counsel, MCI WorldCom. MCI looks at this merger from the perspective of a company that was born in competition, a company whose track record includes bringing competition for the first time to closed telecommunications markets with the concomitant benefits of higher quality, better service and lower prices to consumers, a tradition that continues now. Even since our merger in September of this year our customers have seen new advertisements about our residential services, an announcement of a roll out of new DSL services for residential and business customers, new services for business customers who can use our network exclusively. From that perspective, from the perspective of competition, it is our belief that there is no public interest benefit from the proposed Bell Atlantic/GTE merger that would even come close to our weighing the anti-competitive and anti-consumer consequences of such a combination. In the few minutes I have this morning let me note five points. First, there is no support for the proposition that Bell Atlantic and GTE are too small to be successful in entering out of region local markets. These companies are contiguous in two states, Virginia and Pennsylvania. GTE has been planning its desire to expand into Bell Atlantic states, including, for example, West Virginia. GTE has filed for competitive status in other Bell Atlantic states. The fact is that if much smaller competitive companies can make the effort then there is no reason that Bell Atlantic and GTE cannot. Indeed, if the theory of this merger were correct I wouldn't be here today because MCI WorldCom could not exist. But, the fact that it does demonstrates that incumbent monopoly launching pads are not necessary to enter local markets. Secondly, the Commission in its Bell Atlantic/NYNEX order noted the importance of benchmarking a point Commissioner Ness noted in the earlier panel -- the importance of benchmarking two regulatory efforts. But, the two pending mergers that we discussed this morning would dramatically lessen the ability of the FCC to compare the practices of incumbent local monopolies. Let me give just one example, out of the current debate about reciprocal compensation. We went to GTE and Bell Atlantic and said, "We want to use bill and keep." In our MCI Interconnection agreements. GTE agreed, and we have build and keep. Bell Atlanta said, "No." and demanded the very system reciprocal compensation about which they now complain. It is the diversity of these companies that allows the Commission to understand different practices and how they affect competition. Third, and a point that has not been raised yet this morning, I think you must consider the threat to the internet and data markets. Incumbent monopolies already discriminate in favor of the affiliated internet service providers, ISPs. For example, Bell Atlantic charges three times as much for ADSL equipment if its own affiliated ISP is not used. The ability to carry out such discrimination and to move it into internet content providers, affecting internet content providers, would be dramatically heightened if the nation were not dominated by two mega-RBOCs, each controlling about one third of the nation's access lines. Mr. Chairman, with your indulgence, let me briefly note the last two points. CHAIRMAN KENNARD: Please. MR. SALLET: Fourth, a merged company will only have greater incentives to delay local competition in both the local and the exchange access markets, in particular, inflated access charges offer an easy and illegitimate means of raising rivals costs in an artificial and unfair manor and the merged entity would have additional incentives to delay competitive entry that would eat into those inflated access charges. Fifth and finally, Bell Atlantic is right now in violation of the conditions of the Bell Atlantic/ NYNEX merger order. For example, Bell Atlantic has failed to offer uniform OSS interfaces across its region. There are complaints pending in front of the Commission on other aspects of that merger order. Simply put, it is unthinkable that such flouting of FCC requirements could be rewarded by approval of yet another merger. For all of these points we oppose the granting of this merger application. Thank you. CHAIRMAN KENNARD: Thank you, Mr. Sallet. Mr. Young. Agenda Item: James R. Young, Executive Vice President and General Counsel, Bell Atlantic. MR. YOUNG: Thank you, Mr. Chairman. I will be brief. The discussion this morning has already touched on a number of the very important pro-competitive benefits that the Bell Atlantic/GTE merger will offer. In the national market for bundled services, a market that is now dominated by a handful of firms, a market where the old distinctions based on geography and types of service are rapidly eroding. The combinations of AT&T, BTE, TCG, TCI, and now throw in the IBM network on top, together with Sprint -- Mr. Devlin was very modest, he never talked about his partners Deutsches Telecom and France Telecom, which together are larger than Bell Atlantic and GTE -- and of course MCI and WorldCom have all recognized that no single company, no matter how large or well funded, can go it alone and still hope to compete in this market. The major element in the national market for bundled services is advanced data services. When you look at the comments in this preceding none of the commentors dispute that the merger will allow GTE/Bell Atlantic to provide a range of advanced data services to many more markets than either could alone. By affording GTE access to Bell Atlantic's concentrated Northeast customer base and the out-of-franchise affiliates of those customers the merger will allow the combined company to build out on a national facilities based network that will increase competition. We have also heard about internet services and I won't belabor those. But the point is, Bell Atlantic and GTE have important complimentary skills that will help bring forward a new range of internet services that will benefit a whole range of customers, including consumers. We have listed those in our application, some of those. One of the most interesting is internet telephony, where the complimentary skills of the two companies will offer an important new service to consumers. Yes, there have been a number of objections lodged against the merger. First is the claim that this will create a Bell East and a Bell West. I think the simple answer to that claim, at least as it is directed to Bell Atlantic/GTE, is look at the map that we attached to our application. We did the merger with GTE because it offers us the opportunity to go national. If we had been interested in creating a super regional fortress we wouldn't have done this deal, we would have done another deal. A number of other objections have been raised. Let me just touch on those briefly. As for the argument that we are not meeting the merger commitments, that is just flatly wrong. In our reply we will walk through those merger commitments one-by-one. MCI likes to say it is not true but it is true, we have met the requirement for standardized OSS interfaces. Oh, it is true that in every state you don't input exactly the same information because the services are different from state to state but the statement that we have not implemented uniform interfaces is wrong and I would be happy to talk about that. As far as the benchmarking issue, I think the important thing to recognize is that after the Telecom Act benchmarking takes on a whole new meaning. Benchmarking should be done operating company by operating company. You have detailed statistics, company by company that will show you how benchmarking should work. Let me add, that insofar as thee is a claim that losing GTE somehow interferes with benchmarking -- I have been around this industry long enough to remember the day several years ago when companies like mine said we should be benchmarked against companies like GTE and companies like MCI, together with the Justice Department and almost anybody else involved said, "GTE is not a good comparison. You can't benchmark GTE against Bell Atlantic." So, at least as for us there are at least two good reasons why that benchmarking argument doesn't make any sense. Before my time is done, we have had a lot of discussion about procedure this morning and I would like to end, if I could, on a positive note. Regardless of what differences we might have on the Commission's review authority, one of the things I would like to congratulate the Commission on is the fact that in this merger, unlike the Bell Atlantic/NYNEX merger, the Commission has seized the initiative, is moving ahead promptly in parallel with what the Justice Department is doing. I have to tell you that I think this has expedited the process and I want you to know that we appreciate it greatly. You have listened to a lot this morning so even though the red light hasn't come on I'd be happy to answer your questions. CHAIRMAN KENNARD: Thank you very much, Mr. Young. Agenda Item: Questions and Answers. CHAIRMAN KENNARD: There are some pretty serious allegations flying around here this morning. Mr. Sallet, you've alleged that Bell Atlantic is not complying with conditions imposed by this agency in connection with the Bell Atlantic/NYNEX merger. Mr. Mahoney, you allege, I think, that Bell Atlantic is not complying with the very important market opening provisions of the law. These are serious allegations and we must take them seriously. I think that it is incumbent on anyone making these allegations to be specific so that we can have a basis for understanding what these allegations are. So, I'm going to ask you, Mr. Mahoney, if you can be more specific in outlining for us how you believe Bell Atlantic is not in compliance with the law. MR. MAHONEY: Yes, Chairman, sure. I really think the best way to do that might be to frame our experience in dealing with Bell Atlantic. Let's take in the state of Pennsylvania. The state of pennsylvania we were granted our CLEC certification in 1996, in February. We began negotiations with Bell Atlantic in September of that year on our co-location interconnection agreement. We signed it on October 29, 1996 and shortly thereafter began the actual technical negotiations for interconnecting, collocating into their central offices, meet points for handing off traffic, the unbundled rates that we were going to be offered and how the elements were going to be unbundled. That process which began in late 1996 stretched through 1997 and into 1998, to the point where in the spring of 1998 when we threatened to initiate a formal complaint we began to get some cooperation from Bell Atlantic. In June of that year we actually filed the formal complaint with the Commission about their unresponsiveness. It wasn't until that time that of the 9 issues or 11 issues -- and they are detailed in our comments -- that of those 9 issues about 5 of them were resolved, 4 of them remain open to this day. Bell Atlantic's insistence at the time was that the only way they would continue to negotiate and make concessions was if we withdrew our complaint, which we agreed to do. We withdrew our complaint because entry to the market is much more important to us. So, that is one example I can provide you. Another one, and I guess one that is very important to us as a local competitor to the residential marketplace is access to conduit and right of way that we try to obtain from Bell Atlantic in certain areas in Massachusetts where we are building our own plant. We are attaching to the utility poles that are owned, primarily, by the power company, however, there are certain segments of the plan which require, by necessity, access to Bell Atlantic poles. In some cases we have been eight months in the process of attempting to obtain pole clearance and attachments. By not being able to obtain that clearance we have effectively cold spots in our plant where we can do most of the construction but because we can't interconnect from one point to the other our plant is still idle today waiting for that clearance. That process also involves access to conduit in the state of New York and particularly in the City. We have waited upwards of six months, at times, to get access to conduit from Bell Atlantic in New York. So, that gives you a flavor for the types of obstacles that we're encountering in order to bring competition to the area. CHAIRMAN KENNARD: Mr. Young. MR. YOUNG: Yes, I'd like to respond to that. Let's take the conduit first. I must admit I never thought that my first opportunity to talk to the Commission, rather than being the potted plant next to Mr. Sidenberg at the last hearing, would get into issues like conduit. But, let's take conduit in New York. Conduit in New York is provided by a subsidiary of ours called "Empire City." We keep detailed records of how long it takes to provide conduit to ourselves and to others. The average time it takes to provide conduit to Bell Atlantic in New York is 112 days. It is a shorter period of time for our competitors and we will lay that out for you in detail in the complaint. Does it take time to get conduit in New York? Yes, it does. Getting conduit under the streets of Manhattan is a complicated matter but we are completely non-discriminatory in this matter. In terms of access to the other pole and conduit matters, I must admit, when I read that in the pleading I called our people in Massachusetts. They told me they didn't know anything about it so it is hard to respond to that. To step back from the details, to give you a flavor of the big picture here, two weeks ago RCN's CEO, in an interview with TR Weekly said that RCN was expanding -- remember RCN's presence is in the Northeast, in my footprint -- he said that RCN was expanding beyond his wildest expectations and the principle problems it had encountered was because their growth was so rapid they were having internal operational problems. I think when you here a lawyer's list of conduit here, pole there, a little thing over here you have to look at that and take that into perspective. I would also ask you to think about the remarks that Royce Holland made a the ALTS Convention a couple of weeks ago where he singled out Bell Atlantic for its efforts in opening its markets to competition. I think when you look at those, you look at the fact that people like AT&T have paid top dollar for CLECs in our footprint, you put all those market facts together I think they tell a pretty compelling story that we have opened our markets to competition. CHAIRMAN KENNARD: Mr. Young, these complaints are always somewhat difficult because they often involve disputed issues of fact, sometimes disputed issues of law. Of course, our job is to sort all that out and come to a determination. Let me just pose this question to you, assuming that this Commission were to find that there was a pattern of non-compliance by Bell Atlantic with these very important market opening provisions in the law and in our rules, then why should we grant the merger? If the company is not in compliance and if there is a pattern of abuse here why should we grant the merger? I'm not saying that there is, I'm just saying assuming that there were to be such a finding. And, I would like the other panelists to address that question also. MR. YOUNG: I think the good thing is that, at least in the context of Bell Atlantic/GTE merger, you don't have to address that because there is no pattern. Mr. Chairman, I do think that when it comes to the issue that has been brooded about this morning about what the appropriate standard for review of FCC in mergers, there is no question that you and I have a difference there but I guess I would like to leave it with you this way, I don't think there is a need for us to go legal on you, in terms of what the standard is, because we are very confident that our merger meets your standard. So, I don't want to seem evasive but I want to be clear that I think I do have a difference with you on the merger standard. What we are trying to do on our papers is show that we meet the public interest standard as you have laid it out. CHAIRMAN KENNARD: I guess my question though is if there is a pattern that is demonstrated, adjudicated, of violations of the market opening provisions in our rules could a company still meet the public interest standard? MR. YOUNG: Well, I suppose it is like asking, "Should you have approved the MCI WorldCom merger in view of MCI's long pattern of slamming which is an abuse of the customer marketplace?" I guess my view is if you found that the pattern was so substantial I guess I'd have to concede you could take it into account but, as I say, in our case that is not the case. CHAIRMAN KENNARD: Okay. Would the other panelists like to address this question? Mr. Sallet. MR. SALLET: Mr. Chairman, just on one point. It is not surprising to hear a response to your question that attacks us because that is a typical strategy we see. Just for the record let me make plain that MCI has a long history of seeking ways to combat slamming. We've been an industry leader in seeking third-party verification so that there would not be slamming because we are the company that is hurt when unethical slamming takes customers away from us. It is not a surprise that this goes on because in the last three years, since the passage of the Telecom Act, what we have heard from Bell Atlantic consistently is blaming everybody else for its problems. Most recently, even last week, with a Bell Atlantic executive starting to criticize the third-party testing process in New York State that it designed precisely so you will not be face, Mr. Chairman, with factual questions that are difficult to unwind but so that a neutral party will judge the efficacy of operating support systems. That test has not even begun because of delays attributable to Bell Atlantic and it is a disappointment that Bell Atlantic is now criticizing the process. Mr. Chairman, you asked for specifics. If I might just give you one on the suggestions we made that the merger conditions were not being met. As you know, in November of this year it was incumbent upon Bell Atlantic to have a uniform interface within its region, its whole region. The purpose of that being included in the merger order was very obvious, so that we would be able to train our people once to use the same system for entering orders in all of Bell Atlantic region but, in fact, if we want to purchase a simple unbundled parts line with one feature, say call waiting, for a new customer, of the 48 fields, computer fields that need to get filled in that are listed in the CLEC hand point, Bell Atlantic North and Bell Atlantic South share only 9 of them. There are only 9, in other words, that are going to be filled in the same way in both regions. This is not just a difference between regions, within the state of New York, to give one example, in Massapequa Park if we want to enter an order for residential service and someone lives on 45th Street, we must put in the abbreviation for street "ST." or else the order is rejected but in Yonkers, in the same state, if we use that same abbreviation the order is rejected, it is not in conformity with the ordering function. That is not a uniform interface. When Bell Atlantic says its interface is uniform I suppose it means they all use the same English language but the fact that James Joyce and Mark Twain both wrote in English did not mean they wrote the same book. The purpose of the FCC's merger order was to ensure that the same book was in use whenever our people had to enter orders and it is demonstrably not. CHAIRMAN KENNARD: Thank you. Mr. Mahoney. MR. MAHONEY: Mr. Chairman, first of all, we don't think the merger should be approved. We do think that the pattern in terms of compliance with the 1996 Act has not been met. We would encourage the Commission to hold some hearings and have it demonstrated. We will provide our evidence and let Bell Atlantic enter evidence on the record as well to see whether or not they have in fact been compliant because we think that is the cornerstone to this whole issue. We have been dealing with Bell Atlantic now for three years in terms of trying to gain competition and we have made in roads and we have made inroads through persistent negotiations, through threats, through filing of complaints. Our concern, quite frankly, we have also had some dealings with GTE in Pennsylvania and in Virginia and they have been far worse. Bell Atlantic has at least had the desire to get 271 clearance, encouraging them to be somewhat cooperative. GTE, on the other hand, does not have the same kind of incentive and so just getting interconnection agreements out of GTE has been like pulling teeth. So, our concern is that you put the two entities together and an affiliate then of Bell Atlantic already has 271 clearance or did not clearance because they didn't need it and is able to provide intralateral calling, we are concerned that the cooperation level is just going to become that much more difficult. CHAIRMAN KENNARD: Thank you. Other questions from the bench? COMMISSIONER NESS: I want to return to the concept of benchmarking. Mr. Young talked about benchmarking from state to state. I assume you meant that the state commissions, by virtue of their regulation and oversight, provide the benchmarking capability. Is that right? MR. YOUNG: What I meant, Commissioner Ness, was operating characteristics company-by-company. I mean, we already see it happening in our region. Other commissions, like the Pennsylvania commission, the Massachusetts commission look at the operating results of our company in New York and then ask, "Well, why shouldn't we see the same thing in Pennsylvania and Massachusetts?" And, of course, they can also look to the operating capabilities of what is going on in Wisconsin or Illinois or Michigan or Ohio. My point to you, simply, is the 1996 Act, I think that is one of the most important sources of benchmarking information, which is all still there regardless whether the merger occurs. COMMISSIONER NESS: Mr. Sallet, did you want to address that or Mr. Mahoney? MR. SALLET: Yes, if I might, Commissioner Ness. The suggestion was made earlier that somehow GTE is not relevant to benchmarking. I would read the following sentence form the Commission's order in Bell Atlantic/NYNEX where the Commission said, "Further reductions in the number of Bell companies or comparable incumbent LECs would present serious public interest concerns." I can't think of anything else that qualifies as a comparable incumbent LEC more than GTE. So, it seems to me clear that within the Commission's own precedent the Commission very much is looking at GTE, along with the Bells, to establish what it said in that order to meet the additional burden in establishing that a proposed merger will on balance be pro-competitive. The fact of the matter is we will see the number of companies coming be cut in half from eight to four at the time of the Telecommunications Act to the point of the two mergers we are discussing this morning are approved and we will see, and I gave just one example in my own opening statement, a series of ways in which the ability of the Commission to assess how best to regulate until a competitive market takes away the need for that regulation. The Commission's efforts will be thwarted by having such a few number of companies that, frankly, can eliminate diversity that exists even today in the regulatory marketplace. COMMISSIONER NESS: Mr. Mahoney? MR. MAHONEY: Just one quick comment, and that is that when you talk about benchmarking and to the point of whether GTE is an appropriate company to be compared in those benchmarks, I would urge the Commission to look at the statistics and results of GTE to date in terms of opening up their markets to competition. The numbers are incredibly low in terms of access lines that they have lost to competition so if the Commission looks at benchmarking we would encourage them to look at the elements that will make up the merged entity going forward. COMMISSIONER NESS: Mr. Young. MR. YOUNG: Might I respond very briefly to that? COMMISSIONER NESS: Sure. MR. YOUNG: One of the reasons that GTE has never been considered a benchmark is because the service territories that they have are very much different than the traditional Bell company service territories. We tend to serve more urban concentrated areas. GTE serves places like Paw Paw, Michigan, where I grew up. That is reflected in these numbers of unbundled elements. You can play the same game with Sprint. Sprint, you know, is a local telephone company, serves more than 8 million lines. They have yet, despite -- I'm sure Mr. Devlin's commitment to the principles of the Act -- Sprint has yet to provide a single unbundled network element. They have at least six states where they have yet to provide a resale line. When you look at their percentages based on lines of UNIs and of resale elements compared to GTE, GTE looks great, about three times the competitive development of Sprint. Now, I don't say that to necessarily tweak Mr. Devlin, the point is that service territories are different and the results are different. COMMISSIONER NESS: Thank you. CHAIRMAN KENNARD: Commissioner Powell. COMMISSIONER POWELL: It is important to me that some of these broad reaching and generic comments get tailored to the question of merger specificity, which I think is important. Mr. Sallet, if I can with you, you mentioned a number of things that don't seem to me immediately evident as concerns that should be -- not necessarily not that they are not concerns but that they really flow from the specificity of the merger. For example, the well worn and understood dissatisfaction that companies like yours have with access charges seems to be legitimate but I question what specifically about the merger makes that a source of legitimate concern for us in this context, rather than through our normal regulatory process which is addressing access charges. There will be other questions. MR. SALLET: Commissioner Powell, I think that is clearly a critical question in your separate opinion and the MCI WorldCom order. In a speech last week you outlined criteria for how the Commission ought to look at mergers. Last week, if I understood it, words that there be a strong nexus between the complaints of people like me and the circumstances of the merger. So, I appreciate the opportunity to address that head on. The difficulty with inflated access charges is that when and if 271 approval is granted the incumbent LEC will have the ability to artificially price squeeze competitors, will have the ability to raise rival's costs by forcing us to pay real money in access charges while it internalizes the costs, basically becoming indifferent whether the money goes from one pocket to another. This is not a theoretical concern. A few years ago NYNEX did precisely this. COMMISSIONER POWELL: That's right but that's not true today, as you have argued frequently in my office, without the consequence of the merger. MR. SALLET: And the consequence of the merger is it gives them more access charges with which to price squeeze. By one calculation in the record after the merger 42 percent of long distance calls that originate in Bell Atlantic territory will terminate in Bell Atlantic territory. As they capture both ends of more calls their ability to price squeeze goes up dramatically because now they -- there is no independent LEC to which at least, say, the terminating charges must be paid and, so, for this reason capturing both ends of the access charges makes a significant qualitative difference in their ability to execute a price squeeze regime. COMMISSIONER POWELL: I want to follow up -- and I've read your statement with respect to internet discrimination. As I recall, this was a significant issue with respect to your own merger in MCI WorldCom. Though I'm not familiar with the statistics UUNet and some of the backbone structures under the control of your own company are as significant, if not significantly more significant, than what might be at issue with BBN and then GTE. I just ask you an open ended question with respect to that because I was somewhat surprised the emphasis placed on it in your statement when there are many who make similar complaints, including GTE, about your own dominant position with respect to backbone infrastructure. MR. SALLET: The backbone market is a competitive market. I want to be very precise on this. Our complaint about the merger is not a complaint about BBN as a backbone provider. BBN is relevant to the merger, it is relevant to what the effect of applying 271 to the merged company will be. It is relevant to demonstrate that GTE can easily penetrate the Northeast because it has got 200 points of presence off the BBN network, a majority of which are in Bell Atlantic territory. But, our internet point does not rest on the backbone, it rests on the bottleneck. The bottleneck is the copper. The local loop is the bottleneck to internet access right now. What we are seeing with Bell Atlantic, with US West, with other Bells, is an attempt to roll out xDXL Services and then use those services to affect adversely the now competitive market among internet service providers. So, for example, both PacBell and Bell Atlantic, if you want to buy ADSL service would charge you more if you wanted to go to an independent ISP, say one that RCN owns. Now, that is an attempt to use their bottleneck power over the last mile for data to distort and influence the internet services marker which to date has been very competitive. COMMISSIONER POWELL: But before using loaded terms, I mean another economist might say that is an efficiency, that is companies are dragging through our office singing the praises of bundled offerings and the ability for aggregate pricing values to be increased by the combination of these things. I'm not saying that this isn't a legitimate concern but I'm pushing back a little bit on the quick jump to it being market monopolistic discriminatory pressures versus simply a valued economic efficiency for customers. MR. SALLET: Yes, Commissioner, and so I will point back, as you have done, to the MCI WorldCom merger. In that merger the theory which caused the FCC to order us as a condition to devest one of the internet backbone markets was a concern not that we had a majority of internet traffic but that because of network externalities and possible tipping of the leader into a position of unfair dominance in the internet market it was necessary to order divestiture. That logic applied to these two Bell mergers, each of which would control one third of the access lines in the nation, each of which are aggressively rolling out wide band width in which they are trying to attempt in various ways to tie it to an independent internet service provider market. That theory applied to these facts, we believe, Commissioner, demonstrates that the effect on the internet market would be against the public interest. COMMISSIONER POWELL: Does MCI WorldCom offer internet service? MR. SALLET: Yes, sir. COMMISSIONER POWELL: Does it have networks over which it provides those services, at least to large significant business customers? MR. SALLET: Yes. COMMISSIONER POWELL: Does it take advantage of the efficiencies of that combined offer? MR. SALLET: Yes. And the difference is, if I might, Commissioner, is that we built those networks competitively. We didn't come to you and say, "We have to merge with a large monopoly in order to be able to build out those networks." We built those in a competitive marketplace. We do not, and never have, exercised bottleneck control. We are not failing to live up to the Telecom Act as, I must say, Bell Atlantic is when it fails to offer conditioned loops of the kind that would allow us or RCN or anyone else fair opportunity to access internet customers. So, absolutely right, Commissioner, I am trying to be careful, it is not efficiencies that I am noting, it is the possibility of tipping into a position of dominance of the kind that the MCI WorldCom merger order focused upon. COMMISSIONER POWELL: I had another question but I'll get to you later. I'll let me colleagues. CHAIRMAN KENNARD: I wanted to jump in there on the internet access issue. I am wondering, Mr. Sallet, you made a very interesting argument about the bottleneck but I'm wondering if you are stuck in a 1998 marketplace and whether if the internet access market develops as we all would hope and there would be alternative networks providing internet access like the cable networks that are emerging to do this, whether that will in effect cure this problem that you are concerned about. MR. SALLET: We have been all waiting for the technological leap frog that makes copper obsolete. If and when that comes, obviously, concerns about the control of copper from a consumers vantage point will be very different but at the moment copper remains the dominant means of providing voice service and, frankly, data service. Many more home internet connections today go over the copper, even at 56k, than over cable modems. That is why the Telecommunications Act unbundles the copper for both voice and data and that's why we believe so strongly that that market must be open and competitive before it is, we believe, possibly worsened by the consummation of this merger. CHAIRMAN KENNARD: Commissioner Powell, I didn't mean to cut off your last question if you had one. COMMISSIONER POWELL: I just wanted to yield to others but I was going to ask a question about benchmarking. It seems to me that it is easy to throw that around as well but what has to be focused on is benchmarking for what purposes. The thing that occurred to me in response to the question about benchmarking, whether GTE is legitimate, is whether anyone's opinion changes if you think that the greatest value of benchmarking is in the context of 271 application in which GTE will never be a party by virtue of historical accident, more than anything else. Professor Krattenmaker started his introduction by saying what is important to note is their box. I meant to ask him what the significance of that observation is but, it seems to me, in benchmarking one might ask if what is really driving your anxiety is local marketing opening measures that are a component of that process, whether you would still say that GTE plays a valuable process. I can't help but to chuckle that all of you think they are so horrible which means to me that they are a horrible benchmark by which to measure anything by. But, leave that one out in the interest of time. MR. SALLET: Well, Commissioner, two points. First of all benchmarking is not important solely in the 271 process. I refer here the Commission to the Sprint comments which includes an affidavit from, I believe, Joseph Farrell, in which Dr. Farrell points out the use of benchmarking in two different ways in the Commission's price caps regime, just one example of its use outside the 271 process. Secondly, GTE can be of relevance even within the 271 process, although 271 does not apply to it. Why? If for example, something is said to be not technically feasible as part of the satisfaction of a checklist item then if hypothetically GTE were doing it, were engaged in it, that would be relevant evidence within the 271 process, even though GTE was not itself governed by that section of the statute. CHAIRMAN KENNARD: Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. I have a question for all the panelists. Two years ago the Commission approved Bell Atlantic/NYNEX merger, a merger that ultimately involved combined entity with roughly a thousand licenses. Today, outside of this Commission, there is a proposed merger between Exxon and Mobil that will lead to a combined entity with nearly 1,600 licenses from this commission. Can any of you point, in the statutory language of the Communications Act, specific language that guides this commission about which types of license transfers to review? I should also note that each of you, perhaps, have in the past few years had routine license transfers from your company, to your company, that have been handled in an administerial manner, even though you were large telecommunications companies. Is there language in the Act that instructs this commission about which license transfers to review with great scrutiny and which ones not to? If there is such language is there specific guidelines that this commission has issued for parties outside of the Commission to understand how best to proceed with license transfers? MR. MAHONEY: Commissioner, we don't profess to be a communications law expert so I am really ill-equipped to answer that question. I am not aware of any specific guidelines, per se, that would discriminate the way you handle one license against the other but I'm not really an expert in that field. MR. YOUNG: I may regret answering this question. The way I have read the Communications Act I think the important language is actually -- I mean it is actually Section 7 of the Clayton Act that sets out procedures for this commission to review mergers and in one particular subparagraph, Subparagraph 4, of that lays out very particular rules to be applied to regulated company mergers. That, to me, has always been the starting point. COMMISSIONER FURCHTGOTT-ROTH: But is there a public interest standard in the Clayton Act? MR. YOUNG: That's a competition standard, that's a Clayton Act standard. COMMISSIONER FURCHTGOTT-ROTH: But it's not public interest per se? MR. YOUNG: This goes back to my point a little while ago. I know that I have a difference with some members of the Commission about what we think the standard is but it seems to me that's a point we may come down to down the road, I hope we don't have to, because of what I can show you about the benefits of the merger, including benefits, just to touch on Mr. Sallet's point, benefits to making the internet backbones, which is the real place where there are competitive problems in the internet, not the handful of DSL services that we are selling in a few isolated markets but it is the internet backbone that is dangerously concentrated and needs more competition and this merger will make more competitive. COMMISSIONER TRISTANI: I have to interject that it may be some isolated markets but you are marketing pretty heavily in this area, DSL. MR. YOUNG: Oh, yes. COMMISSIONER TRISTANI: Including to my home. MR. YOUNG: I hope you'll buy it. (Laughter.) COMMISSIONER TRISTANI: It may be too expensive. (Laughter.) MR. YOUNG: But my only point is that when you talk about something as big as the internet -- Commissioner Powell talked about using loaded words like "leverage" -- it is inconceivable to me to say that a service like this that is just being rolled out that reaches now a very small number of homes, which as the Chairman has pointed out, is being marketed in competition with cable modem -- the idea that you could use that relatively small piece of the business to leverage market position in the internet is unthinkable. COMMISSIONER TRISTANI: I may follow up on that. Excuse me for interrupting. CHAIRMAN KENNARD: Mr. Sallet. MR. SALLET: Commissioner, obviously the public interest convenience and necessity test contained rather broad language. It may not be as specific as matters of process, for example, as your question suggests is possible. But, I will say, Commissioner, as somebody who had some responsibility for two large telecommunications mergers, one of which was closed, in the last two years, I do not believe that we are seeking this commission's scrutiny on these mergers in any manner that is more severe, more strict, or more searching than the scrutiny that the BT MCI and then the successful MCI WorldCom mergers received. CHAIRMAN KENNARD: Commissioner Tristani. COMMISSIONER TRISTANI: Actually, I'd like to follow-up on your difference in legal opinion on what our review should encompass because you have alluded to it several times today and I'd like to hear it. MR. YOUNG: Well, if I might -- and I'll be very brief about this. We have indicated in our pleadings our view that this commission does have the option of reviewing the merger under the Clayton Act, there are certain procedures the Commission has to go through to do that. I believe, as Commissioner Furchtgott-Roth noted before, the Commission hasn't taken that route. So, we have preserved in the filing that we made with you the notion that I know some Commissioners object to that in that case the Commission standard is very very narrow. It is character and fitness. But, as I said, I don't think this is the place to have that argument because we are very much trying to demonstrate to you that we meet the standard that the Chairman has outlined. COMMISSIONER TRISTANI: So, I guess you have an alternative that -- I guess I don't quite get it. You're kind of questioning, are you really questioning, or are you saying that public interest doesn't matter? MR. YOUNG: Forgive me, I guess I'm being a lawyer. COMMISSIONER TRISTANI: You sure are. MR. YOUNG: But what is important to us, what is most important to us -- and let me put a very dark underline under this -- what is important to us is to try to convince you that under whatever standard that you are going to apply that we pass. COMMISSIONER TRISTANI: I have one question to all of you. We have talked about benchmarking. It seems to me we are talking about many different things. I hear more answers attuned to benchmarking that the companies do a mark themselves. I'm thinking about benchmarking for the regulator, how it aids the regulator, whether it is a federal regulator or the state regulator or state consumer advocates, to compare performance. I know that there are many differences between, let's say, GTE and Bell Atlantic and territories but GTE does serve some sizeable urban areas, at least that's what I'd heard. So, I would think there might be some comparence there. But, leaving aside specifically just GTE and Bell Atlantic, what are the values for regulators of having not -- if we end up with four companies to compare against each other as to eight? MR. MAHONEY: What are the values? I think the way I'd answer that, Commissioner is -- COMMISSIONER TRISTANI: Well, how is it valuable? MR. MAHONEY: I think the potential value, of course, in all benchmarking is to give he regulators, you the Commission, an opportunity to determine how a particular company is doing in terms of opening up their network, in terms of complying with the act. The danger of limiting the number of companies within the benchmark to four RBOCs, if you will if all these mergers take place is the ability -- I should say how you look at the data. Do you look at the data on a company wide basis which has the ability for such huge numbers to lose some of the impact on how a particular competitor is doing in an area in a particular state. I think the key should be to come up with meaningful information that can be used by the regulators in determining compliance with the Act. COMMISSIONER TRISTANI: Am I correct that you're still looking at it under a more narrow perspective of how competitors benefit from this? I guess I'm thinking of service quality of all these other issues that are very important to regulators. Also, technology, I mean, some companies say, "We can never do that." and then some companies all of a sudden they are doing it already. I don't know if anybody can address those. MR. SALLET: In the Bell Atlantic/NYNEX order the Commission noted that benchmarking allows it to "ensure just and reasonable rates, constrain market power, establish and enforce the pro-competition rules necessary to achieve competition and deregulation." In a world that is still dominated by monopoly providers we believe that benchmarking is a very important tool for regulators in order to test the otherwise untestable veracity of assertions about what is or is not feasible. Often times, Commissioner, in debates before state commissions or in proceedings before this commission a new entrant such as us will say, "We need an electronic interface, we need performance in a certain time frame." An incumbent will likely say, "Well, that's not possible to do." It is the experience of other companies that helps, so long as there is enough to actually provide a diverse set of experiences that helps the regulators decide who is right in a debate about feasibility. COMMISSIONER TRISTANI: Mr. Young. MR. YOUNG: IF I could bring this down to practice. If you assumed that the Bell companies were the only ones who were knowledgeable about systems technology maybe that argument would hold some water. In the way the telecom marketplace has evolved, we are not the only ones who come to the regulators with ideas. If you look at how the collaborative process has worked out in New York, the New York Commission has made a number of decisions about detailed technical issues with MCI on one side, AT&T on that side, Sprint -- lots of sophisticated people. That mix of sophistication is still at the table for the state regulators and the federal regulators, even if this merger goes through. COMMISSIONER TRISTANI: In every state? MR. YOUNG: Well, every state where people are seeking interconnection,. COMMISSIONER NESS: Mr. Young, you argued earlier that look at the operating company level as a method for benchmarking. MR. YOUNG: Yes. COMMISSIONER NESS: Would it be likely, in your experience, that one Bell Atlantic operating company would say that something is technically feasible, whereas another Bell operating company would say that it is not feasible? MR. YOUNG: Well, the truth is we have done that. (Laughter.) I don't mean to be flip with you. The point is -- COMMISSIONER NESS: I'm delighted to hear that you've done that. That's fascinating. MR. YOUNG: Well, we do a lot of things. COMMISSIONER NESS: Was anyone reprimanded for having said so? MR. YOUNG: Not as much as those people at Sprint are going to be reprimanded, I think. (Laughter.) But I think the important thing is that source of technical information that is available to the Commission, the real source of the diversity comes not from one Bell company differing from another Bell company, it is somebody else like an RCN or an MCI, somebody else coming to the table saying, "We're sophisticated about these networks. We're sophisticated about these systems. We think this can be done." I think that is the real answer to the question. CHAIRMAN KENNARD: Commissioner Ness, you had something else? COMMISSIONER NESS: You state in your joint application that if you do not have the necessary 271 approval by the time the merger closes you'd request the transitional relief, rather, from the Commission. What transitional relief would you be requesting and what is the legal basis for that? MR. YOUNG: Let me be very clear about this. Our principle approach here is to get 271 relief in our states as quickly as possible. You will be seeing an application for New York after we go through the Baldridge-level OSS testing requirements that we have been through, the mother of all OSS tests. You will be seeing that very promptly and then you are going to be seeing us after that come in with Pennsylvania, Massachusetts, applying that template in every other state. We are the one Bell company that has been committed to this process, as I think you know. And, we remain very committed to it. Now, the interim relief -- COMMISSIONER NESS: See, that's benchmarking against other companies but go ahead. (Laughter.) COMMISSIONER NESS: I couldn't resist. MR. YOUNG: I better shut up while I'm ahead. The point is that -- let me give you a hypothetical. Let's say we get to a point where we've got New York, we've got Massachusetts but there are some states in New England that we don't have. We may very well at that point be coming back to you, under your 706 order where you indicated your ability, your authority to create different data boundaries. I think the sense was that that was going to be limited in scope and also our sense would be that would be limited in time because we are going to continue to push the 271 applications, that's what we have in mind. I apologize for any lack of clarity. COMMISSIONER NESS: Now, for example, in Virginia and Pennsylvania, which are two states where GTE presently operates, how would long distance or other 271 issues be resolved there? MR. YOUNG: Again, our principle approach, Pennsylvania and Virginia are very high on our list for getting 271 relief and one of the reasons is when you look at GTE's internet working business, they have significant numbers of customers in Pennsylvania and Virginia so you are going to see those very very high on our list. I hope we don't get to the situation where we are trying to close the merger and not have 271 in Pennsylvania and Virginia because, as I said, when you look at the list those are in the top 5. CHAIRMAN KENNARD: If there are no further questions from the bench we will adjourn for 45 minutes until 2:15 p.m. sharp. Commissioner Tristani, did you have something else? Okay. I wanted to again express our appreciation for this excellent panel of panelists. Thank you very much. (Whereupon, at 1:30 p.m., the proceeding was recessed to reconvene at 2:15 p.m. this same day, Monday, December 14, 1998.) A F T E R N O O N S E S S I O N Agenda Item: Session 2: AT&T-TCI CHAIRMAN KENNARD: Good afternoon. This panel will address another major merger that is pending before this agency, the proposed merger of the largest long distance carrier in the country, AT&T, and the nation's largest cable television operator, TCI. These companies have come before this agency and proposed to marry. They have proposed some very attractive features for the American public. They proposed a bundled offering of services of local and long distance telephone service, high speed internet access, multi-channel video, things that every American would love to have in his or her home for the right price. It is a very attractive offering but it leaves a number of questions unanswered, which we are here to explore today. First and foremost again we must consider how will average Americans benefit from this combination. Will all Americans have the opportunity to get the benefits of these wonderful services that are being proffered by these companies or will only some Americans benefit? When AT&T makes the investment to upgrade these cable networks in order to roll out these services will they roll them out to all Americans or just some Americans? Will the poorest and underserved communities in our country get service? We also have some important issues to consider about the internet and whether this combination will help advance competition for internet service or not. We also need to know when these services will be deployed. These companies have proffered this combination as a way of accelerating facilities-based competition in the telephone networks. We all know that we desperately want all Americans to have choice in local telephone service. We need to know when Americans will get the benefit of local phone service from this proposed combination, when will these networks be up graded to provide that service? Those are a lot of questions. We have a very distinguished group of panelists here to address them. Before we get to our visiting panelists I would like to turn again to Tom Krattenmaker, our Director of Research, so he can sort of set the stage. Although, before I do that, Tom, I did want to ask if my colleagues on the Commission had any comments. Tom. MR. KRATTENMAKER: Mr. Chairman, there must be some confusion, I think you just gave my talk. CHAIRMAN KENNARD: I'm sorry. (Laughter.) MR. KRATTENMAKER: When your folks asked if they could have a copy of my remarks I didn't realize it was for... Well anyway. (Laughter.) CHAIRMAN KENNARD: I never saw them, Tom. Believe me, I never saw them. (Laughter.) PROF. KRATTENMAKER: Since I just work here I need to justify my salary. I will try to explain, although really this does remarkably echo what the Chairman just said, to try to set the parties and the issues as it has been with respect to this merger. I think maybe the key thing to note is that the parties are different and the issues are different in this merger than they were in the mergers that we discussed in the morning. Here the parties are TCI and AT&T. TCI is the largest cable operator in the country, it serves about 25 to 30 percent of all cable subscribers. It is a major investor in various cable networks. So, it is also interested in cable programming. It is a 20 to 25 percent shareholder in the Sprint Cellular nationwide cellular operation. AT&T is the largest long distance provider in America. It has some, but not many, local wired local exchange telephone operations and it also operates a nationwide wireless cellular network. These two firms are proposing to merge. Those are the parties. The standard is the same as we talked about this morning, that is the standard is a public interest standard that asks, "Will the merger on balance probably further consumer welfare?" The issues, however, are really quite different from any of those that were explored this morning. In support of the merger, as the Chairman has reported, AT&T says that what it is going to do after the merger is to upgrade TCI's cable plant and then AT&T will use that cable plant for two important purposes. One, is to provide local telephone service, provide local telephone service over the cable, service that would be in competition with whoever the local incumbent telephone company is. Secondly, AT&T says will also upgrade the TCI facilities in order to provide high speed internet access for homes and for businesses. The question with respect to these pro-merger assertions is the same as we saw with respect to the ILECs, that is how credible and how merger specific are these claims. Will these benefits be realized and are these benefits that require a merger between the firms? With respect to questions that have been raised by opponents of the merger I think it is best simply to say that a number of legal questions have been raised. It is hard to characterize them with a single slogan. Indeed, I was going to say that the opponents have raised a congeries of issues but then I realized I wasn't sure how to pronounce congeries or what it meant so I am going to say they raise a heap of issues. I'm pretty sure about that one. Here are, I think, the four that recur most frequently in the filings so far but I want to indicate that that is not without prejudice to the ability of the people here on the panel to raise other issues, perhaps issues that are more significant or more to their concern. One, wireless. The merged firm, if it were put together today, would violate our rules regarding aggregation of wireless licenses. The parties know that and they will come in compliance with what we call our "spectrum cap rules" but the question is how to remedy that, how to avoid creating another problem, say, with respect to the value of Sprint stock as a divestiture remedy is fashioned. Second issue that is written about frequently in the comments so far is the issue of program access. There is a federal statute and our rules implementing that statute that require that dominant cable firms not be allowed to deny cable programming to their rivals, such as direct broadcast satellites or fledgling cable upstarts. Commentors have raised the question of how these rules will be applied to a post-merger AT&T as it enters the cable industry. Third is what I call the "internet access service" issue. TCI already provides an internet access service, which is known as "At Home" which AT&T will acquire and proposes to extend as part of this merger. "At Home" is not an open ended pipeline to the world, as is a telephone line, but it is rather a single path pipeline to the internet, just as a cable channel is a single path pipeline to ESPN or HBO or BET. "Would it be lawful for AT&T to provide such a service?" is a question that is being much debated in the comments. Final one I would mention is the question of service quality. A number of people have filed and asked whether AT&T will upgrade TCI facilities and if that is an issue whether it is an issue that is within our jurisdiction or something that is left to the local franchising authorities. So, again, without meaning to be comprehensive what I meant to indicate was how varied, how disparate these issues are and how strictly legal they often seem to be. But, we've got issues about wireless, about program access, about internet access, and about service quality. Again, I mean to say not that these are necessarily problems with the merger. Again, AT&T and TCI intend to come into compliance with our wireless rules, vigorously defend that they will after this merger be compliant with the program access purposes of federal rules, that their internet access service is specifically permitted by the 1996 Communications Act and that as a result of the purchase of TCI they will substantially improve and upgrade the facilities of TCI. So, these are the kinds of issues that so far have been predominating in the staff's analysis of the merger to date. Agenda Item: AT&T-TCI Pane CHAIRMAN KENNARD: Thank you very much, Tom. We will now begin with our panelists. I will remind our panelists to please keep your statements short and please introduce yourself and also state your affiliation. Mr. Gamboa. Agenda Item: John C. Gamboa, Executive Director, Greenlining Institute/Latino Issues Forum. MR. GAMBOA: Thank you. My name is John Gamboa and I'm the Director of the Greenlining Institute, a coalition of 36 community organizations in California. Membership includes the Chambers of Commerce of the Hispanic, the Asian, and the African American Chambers of Commerce. We also have the two largest business associations, Latin Business Association and the Asian Business Association, as well as the largest African American church west of the Mississippi. Before I begin I would like to state that if you see me get up and run out of the room it is not a statement of how I feel about how these hearings are going but simply that I have an 11 year old daughter who has a piano recital in San Francisco tonight. (Laughter.) With that, I hate to start my statement, but we have a different opinion than your staff does. The constituency that I represent are the most at risk consumers, the limited English-speaking, the poor, the recent immigrants, and the minority community. This merger, we believe, should be looked at in the context of all the mergers. The parties are different but the issues, to us, are not so different. Historically we have seen we have opposed mergers because mergers have not produced for our constituency the promises the competition was supposed to bring, better services and new services at lower cost. On the contrary, our communities have been victims, if you will, of the mergers that have happened, in particular in California. You had asked earlier, Mr. Kennard, this morning to address what has happened in California and, Commissioner Tristani, you had also asked what were the conditions that should be imposed when a merger takes place. I'll try to address those. In California in the SBC/PacTel merger, since that merger, telephone penetration of the poor has decreased dramatically. We enjoyed at one time a penetration above 91 percent, we are now in some communities down to 85.7 percent. The Mung community, a 50,000 member community in Fresno, less than half have telephone service, basic telephone service. In addition, our communities have been victims of marketing fraud, in a large large way. Our communities, even the few that stay on the system, have been targeted by most of the Teleco companies on it. What seems like what is happening is as mergers take place and the companies come the regulatory oversight has lessened for our communities. We are the victims of slamming and cramming. In fact, there was one company here today, the largest company in California, who is -- if you can believe this -- on calls, inward calls, from poor people asking for payment arrangements to keep on the service are met with, "We can provide you those payment arrangements, however, I also want to talk to you about Caller ID." Do you know the impact that makes on that poor person? That says, "I feel I have to buy Caller ID to make payment arrangements. They have also targeted the limited English-speaking communities, who we feel are marketing fraud. They have what they call "basic services" that are not basic at all. Every custom calling service available is on that. That is what is marketed and promoted to below income and in particular limited English-speaking communities in California. The other company in California is recently settling a marketing abuse case to the Hispanic community and to their credit they have set goals of increasing penetration and in the last two years working with community organizations they have increased penetration in their particular area -- I'm talking about GTE -- to 95.7. This is not to say that we believe all mergers are bad. Mergers can be good if the right conditions are done. There are two cases when mergers can be good. One is when a corporation that has a positive record and a social commitment to communities merges and is a dominant party with another corporation, such as CTI, who has a poor record and a poor social contract with the community, when that merger comes it could have a positive impact to our community but it can only have a positive impact on our community if there are conditions. I think Commissioner Tristani had earlier asked what kind of conditions should we impose on mergers. These are the conditions that we feel make a merger positive to our community: first of all, a commitment to universal service, that everybody in every community will have equal access to basic telephone service; second, a strong commitment to narrowing the digital divide between the have and have nots. I have seen studies that you have done, our community is falling further and further behind. A commitment to minority businesses, that is the economic engine for our communities. Most critical for absentee type mergers like the GTE/Bell Atlantic merger a commitment of investment in our communities, a marketing outreach to minority communities, the development of new products and services that meet low income communities' needs that also provide a profit for the companies, a philanthropic contribution that at least matches the pre-tax earnings of the five top executive's compensation packages -- I don't think that is too much to ask, and a diversity goal at all levels of management. The three mergers in question today offer no public benefits, instead they accelerate the concentration that the Department of Justice sought to break at AT&T less than two decades ago. Only a very strong public interest commitment should tilt the balance in favor of a merger, even then these commitments must be clear, dramatic and enforceable. We feel the only way that can be done is if they are filed with you. Thank you. CHAIRMAN KENNARD: Thank you, Mr. Gamboa. Ms. Inman. Agenda Item: Joni Inman, Director, Citizen Relations for the City of Lakewood, Colorado and President, Greater Metro Telecommunications Consortium (Denver). MS. INMAN: Thank you. I'm Joni Inman. I'm the Director of Citizen Relations for the City of Lakewood, Colorado and I am the President of the Greater Metro Telecommunications Consortium, representing 25 franchising authorities in the Denver Metro Area, 2.2 million people in the Denver Metro Area. I'd like to thank you for the opportunity to be here today. With roughly 5,000 local franchising authorities representing 12.5 million cable subscribers affected by this merger it is critical that the local voice be heard. I'd like to address three issues that directly impact citizens. The first being the possibility of cross-subsidization of products offered by AT&T. The second being the access to TCI's cable network by other internet providers. Third, the preservation of local authority for the protection of public property and quick responsiveness and resolution to citizen problems. The cross-subsidization issues are perhaps the easiest to understand, yet the most difficult to address. It is clear that AT&T is spending a great deal of money to acquire the TCI system but how will AT&T recoup this investment? It is also understood that AT&T wants to get into the local phone market. How can this occur in a competitively priced manner? One possibility could be through increased cable rates. As you are aware, regulation of all but basic cable rates goes away in April 1999. This opens the door for AT&T to increase individual cable rates in order to use the revenue to subsidize below market rates on telephone services, thus allowing AT&T to break into the local markets using the extra revenue from the cable side. TCI representatives have said that they won't do this. They have questioned why they would do this. They have told me that it would reduce their cable market share but when we have a parent company offering many different services it is the overall market share that really matters. In addition to that I would like to point out that in my community over the past weekend I just received information that a provision that we were including in our transfer resolution that would ensure no cross-subsidization was rejected by TCI and AT&T. I have the document here. This does give me great concern, by the way. Let me talk briefly about open network provisions. Cable broad band systems are an important part of the race for speed and internet service providers. Many of them have asked the local franchising authorities condition approval of transfers on a requirement that AT&T offer access to cable modem platforms. There is not much debate about whether access to the system by other providers is a good idea, it probably is a good idea. There is not much debate about whether it is in the best interest of competition, I believe that it is. But different jurisdictions have varying views on whether this is something that we should compel as part of our transfer. In markets where there is only one cable provider, in fact, it could be anti-competitive not to require it. Having no open network policy could be bad for customers, causing unreasonably high rates for customers who want higher speed broad band access. On the other hand, the cable plant was costly to build and acquiring it is costly. Perhaps some reasonable price for use of that system is appropriate. This issue deserves more debate. The local franchising authorities' concerns about effective competition, protection of public's interest in this area and the impact that it could have on rates needs to be addressed and it needs to be addressed after much more dialogue with a larger number of communities, with the FCC and with the providers themselves. Finally, let me address local authority. Our primary concerns, as are yours I'm sure, are two-fold: access to services by all of our citizens and continued enforcement authority over customer service standards. Cable customers and other citizens are comfortable today calling the local franchising authority when there is a problem and this can range from the very serious severing of gas lines, which occurred in my community during a rebuild, to just simply trampling over tulip gardens. In order to address specific issues in individual communities some of our communities have in fact enacted stricter customer service standards than the FCC has issued. The merger of a cable company and a telecommunications company with merged services presents some new challenges in this area. AT&T will, of course, have ultimate legal authority to determine the management structure and operational structure of the parent company and its subsidiaries. We urge that local authority to resolve issues at the local level not be lost in this restructuring and that at a minimum existing levels of technical and customer service employees be maintained. We urge that any discussion of the definition of cable versus telecommunications services be held in a way that maximizes local authority to directly protect citizen interests. Finally, we ask the Commissioners and industry leaders here today to keep in mind that what we are really looking at is a for-profit company that wants to use public property, paid for with your tax dollars and mine, and as such we urge that all services be made available at a reasonable cost to all of our citizens. We would oppose any attempt to redline our communities. We have a responsibility to the citizens that paid for this public property to ensure that we are not allowing services to be offered in only profitable areas, thereby creating a system of telecommunications have and have nots that my colleague addressed earlier. With the proper public protections, the local franchising authorities look forward to the opportunities that this merger can present to us. CHAIRMAN KENNARD: Thank you very much, Ms. Inman. Mr. Brewer. Agenda Item: Charles M. Brewer, Chairman and CEO, Mindspring Enterprises. MR. BREWER: Hi everyone. I am Charles Brewer. I am the Founder, Chairman and CEO of Mindspring Enterprises. Mindspring is, I think, the fifth largest internet service provider, as measured by number of customers who operate nationwide. Headquarters is in Atlanta. I want to thank you very much for letting me participate today. In late 1993 when I was trying to get started with Mindspring there were essentially zero internet access customers in the grand scheme of things. Now, 5 years later, something over 25 million households use the internet at home and it really is rapidly reshaping the way many of us live our lives. This phenomenon never could have happened if it were not for one crucial fact and that is today's internet access is a wonderfully open system. The last mile connection in the narrow band world of today is a phone call and because of regulatory supervision the local telephone company can do nothing to block that call and, therefore, as a result consumers in most American cities have a choice of literally dozens, maybe even hundreds, of ISPs. We ISPs do compete very fiercely on price, customer service, ease of use, network performance, reliability, and many other factors. Together we have really driven the incredible growth of the net. I'd like to ask a hypothetical question which is, "What if local telephone companies had not allowed consumers to connect to the ISP of their choice?" I think it is pretty clear that the internet revolution that we are seeing today would not have happened at all. Even now, which is years after the critical importance of the internet has been clear to all these last mile owner companies, the last mile owners are essentially non-players in the internet access field and of 25 million plus customers, residential customers in the United States for internet access last mile owner companies, both cable companies and local telephone companies, have just over maybe 1 million of that 25 million plus. So, simply put, if we were waiting for the last mile owners to bring us the internet revolution we would still be waiting. It would not have happened. So, I would like to repeat what I see is the crucial lesson from this, that is if last mile owners did not allow consumers access to the ISP of their choice the internet phenomenon that we are seeing today would not be happening. Now I'd like to shift attention to the future. I think some things about the future are pretty clear. First, it is clear to me that the core telecom offering of the future will be connectivity to the broad band always on packet switched internet. This is not a radical prediction. I think it is shared by most of my telecom industry colleagues. Second, for the large majority of residential and small business customers the only economically viable way to deliver this connectivity for many years to come is going to be through a wire and there are really only two realistic choices, there is the telephone company wire and the cable company wire. Third, it does not make economic sense to repetitively rip up neighborhoods to install a new wire for each new competitor. Fourth, I think is proven by the experience in the ISP world, the benefits of having a competitive market for the core telecom service of the future are just huge. So, if you accept those four points, and I really think that one must, there is only one conclusion and that is if we are going to have a competitive residential market for the core telecom service of the future then we must have an effective way for competitive service providers to share the broad band wires that lead to homes. For many homes the cable company wire is likely to be the only one capable of delivering this high band width two-way service for many years to come. Unfortunately, it is the expressed intention of TCI and of most of the cable industry, to not offer access to their last mile networks on any terms at all to competitive service providers. So, I urge you to condition approval of this merger on a commitment from AT&T and TCI to make the underlying data transport service of their last mile networks available to competitive service providers on a non-discriminatory basis. I would further urge you to promptly require other cable operators to meet these same open system requirements. There really are not significant technical issues that would make this requirement overly difficult to implement. Open networks would encourage investment, not retard it. There are thousands of ISPs, both large and small, that stand waiting to proactively drive our millions of subscribers to broad band last mile connections. We can drive traffic, revenue, and profit for the last mile owners. The FCC does not need to regulate the internet and please don't confuse what I'm saying to mean that. But the country emphatically does need competitive open access to last mile broad band facilities or we will not have the vibrant thriving broad band internet that we all want. Competitive access to the broad band last mile connectivity is the single most important issue of the telecom future for residential customers. This is the core service of the future. This merger provides a crucial opportunity for the Commission to speak to this issue and I urge you to grab it. Thank you very much for the opportunity to participate today. CHAIRMAN KENNARD: Thank you, Mr. Brewer. Mr. Roellig. Agenda Item: Mark Roellig, General Counsel and Vice President for Law, Policy, and Human Resources, U S West, Inc. MR. ROELLIG: Good afternoon, Mr. Chairman and Commissioners. I appreciate the opportunity to present the points of view of U S West at this en banc. As you know, U S West has a significant interest in this proceeding. U S West filed comments on the AT&T/TCI merger, focusing most of its discussion on the public interest benefits of requiring AT&T/TCI to provide capacity on its local broad band transmission facilities to other carriers at cost based rates. In addition, we have stated that the merged entity should be required with Sections 251 A, B, and C of the Telecommunications Act for its broad band services to the extent those provisions apply to the incumbent local exchange carriers. I think it is important that we put the proposed merger into context. The combined entity will be the largest domestic long distance wireless, cable and competitive access provider in the world and one of the largest internet service providers. The Commission has a statutory obligation to examine the public interest and to impose conditions on a merger, as is done in the past, that are necessary to prevent anti-competitive harm and promote competition. The communications industry is in a state of constant change. It is, therefore, critical that the Commission focus on the whole pie and not just a small slice of residential voice telephony. As this proposed merger and the 706 proceeding made clear, broad band and data are the technology and services of the future. AT&T-TCI has acknowledged there are two primary ways for a customer to get broad band access to the internet, cable and DSL. AT&T-TCI wants regulators to treat these modes of access differently. Why? Because it is a lot easier to win in the marketplace if your competitors are hamstrung with a lot of regulations and separate subsidiaries while you are free to provide the same type of services -- in this case high speed access - free of regulation, integrated, proprietary, and unencumbered. As I see it, the delivery of broad band services to the customer can be divided into four simple parts, access to the customer, co-location, choice of internet services, and backbone network. U S West recognizes that access to loops and co-location are essential to getting new services to customers. AT&T, however, wants to keep access to its high speed data network closed while at the same time demanding that U S West DSL network be unbundled. AT&T-TCI argues that it will not be a monopoly provider of broad band services. I disagree. Today there are alternatives to wire line service and the Communications Act specifically opens the local exchange to competition. There are yet no realistic choices to cable. There have been reports in the press that the Commission will not consider placing conditions on the AT&T-TCI merger. While I understand the Commission's desire to examine these issues in a broader context the fact is that the Commission now must statutorily address them, to not do so will, from the very beginning, result in a lopsided marketplace for high speed broad band services. Once the merger is approved AT&T will invest in a platform that is proprietary and argue in subsequent rule making proceedings that it's too late, costly, or difficult to mandate open access to the local broad band network. And, in addition, and I would probably say "more importantly," AT&T has made it clear that it believes this commission has no legal authority to impose access conditions over its broad band network, therefore, if the Commission does want to consider delaying a decision on this issue for a later rule making it should make absolutely sure that AT&T agrees and will be bound by any decision in that rule making. The Commission should realize that government imposed rules and regulations necessarily affect the business incentives of companies and, hence, the marketplace. Parity of regulation -- let me be really clear, we're not talking about traditional voice telephony, we are talking about the new competitive broad band services that AT&T-TCI, others, including U S West are currently providing -- it is absolutely essential to ensure rapid broad deployment of those services and we need to have parity of regulation in order to do so. Thank you very much. CHAIRMAN KENNARD: Thank you. Mr. Kimmelman. Agenda Item: Gene Kimmelman, Codirector, Consumers Union, Washington Office. MR. KIMMELMAN: Thank you, Mr. Chairman, Commissioners. On behalf of Consumers Union, publisher of Consumer Reports Magazine, I truly appreciate the opportunity to appear today. I have been listening to my colleagues. I would like to associate myself with the thrust of much of what they are saying. It is one happy opportunity to say that I probably actually would encourage you to do a little less regulating than U S West but I think the general thrust of all the comments are right on point. I don't want to repeat them and I don't want to repeat what we have filed with you. I want to take up the average consumer perspective. I think, Mr. Chairman, you hit the nail right on the head of what is a critical basis for looking at these issues. Commissioner Furchtgott-Roth, I think you are absolutely right, it is incumbent on the Commission to develop a clear standard for license transfers and I think, looking at it from a consumer perspective, you can come up with a standard for license transfers in highly concentrated telecommunications markets that clearly distinguishes certain transactions with licenses from others. Here is how I would suggest you look at it. Think about what happens if the Commission does nothing to these mergers, nothing. What does it mean for the consumer? We go from a world at the Telecom Act of eight almost equally sized local exchange telephone companies, supposedly entering new markets various to entry broken down. We end up with six companies shrunk to two enormous monopolies, two companies each with about a third of all access lines still almost exclusively monopoly going into the home. This could be the final nail in the coffin to local telephone competition in a broad based consumer market, for the average consumer. AT&T-TCI comes along and promises a solution. They promise to enter new markets but everyone of the Bells promised to enter new markets. The promises aren't enough. We urge you, from a consumer perspective, to look at the market forces and the technology and the conditions to see what will happen. Here is what we fear. Based on the behavior of these companies in the past and the model of the satellite market where open entry satellite into cable has brought entry at the high end of the market has not brought competitive pricing. The market forces indicate that AT&T and its own behavior, state of Florida, has said local rates maybe should double in order for them to come in and compete for the residential consumer market. A $10 increase is what they suggested as a price point to enter to compete. That is the form of local telephone competition for the residential market. AT&T will be inheriting cable systems, systems with more than 20 percent rate increases since passage of the Telecommunications Act, 3 to 4 times the rate of inflation. With the opportunity to leverage substantial ownership in some of the most popular programming, a network where high speed data internet access can be controlled without public responsibility to open access rules, as is the case on telephone networks. It would give AT&T the perfect opportunity to expand market, expand market at the high end, expand market not for local telephone service but for other very highly profitable telecommunications services for consumers who want them, who at this point in time tend to be 10, 20, 30 percent of the market, the most wealthy, the high end of the market. Importantly, in its own core market, AT&T has recently begun pricing policies where almost half of their consumers pay up to $5 a month before they ever place a long distance interexchange call. Small volume users getting hit with substantial rate increases. So, if you fail to assert a strong public interest vision, a strong standard, identifiable for highly concentrated telecommunications markets consistent with the goals of the 1996 Telecommunications Act consumers are likely to face entrenched monopolists, possibly expanding monopolists into new markets like high speed internet access, and higher prices without more choice except at the high end of the market, not the market the average consumer faces. So, consumers want a very strong clear rejection of the two Bell company mergers that expand local monopolies and at least a significant conditioning of the AT&T-TCI deal or we fear the Telecommunications Act will remain an abysmal failure at meeting its goal of broad based competition for the average consumer. Thank you. CHAIRMAN KENNARD: Thank you, Mr. Kimmelman. Mr. Cicconi. Agenda Item: James W. Cicconi, Senior Vice President for Government Affairs and Federal Policy, AT&T. MR. CICCONI: Thank you, Commissioners. Jim Cicconi, Senior Vice President with AT&T. I want to thank the Commission for the opportunity to talk to you about our proposed merger with TCI today. Simply put, this merger represents AT&T's tremendous commitment to residential customers, and I would emphasize the "residential", in its leadership in bringing local phone competition and its benefits to them. This merger is a big part of the future of AT&T. We believe it will be a driving force behind some very important positive changes in the telecommunications industry. I would like to make two points about the merger today. The first is that it will move us all much closer to achieving one of the primary goals of the Telecommunications Act, that is facilities-based local telephone competition for residential customers. I know I emphasized that word "residential". The Commission has heard a number of statements by the Bell operating companies and others, allegations that AT&T and other potential competitors are only interested in business customers and skimming the cream, things of that nature. This is a $48 billion statement of proof by AT&T that this allegation is false. This merger represents the most widespread significant effort being undertaken to get local competition and broad band to residential customers. It is already delivering significant benefits in the form of increased investment and interest in the cable plant and other efforts to deploy broad band. In fact, I would suggest that a good part of the debate that we are having today about how quickly to deploy broad band has been spurred in part by this investment by AT&T. As the upgrades to TCI's systems are made consumers in the areas served by TCI will begin to see the benefits of the merger more directly, first in the form of new and faster internet services and in the form of a new facilities-based alternative for local telephone service. With this competition will come more, better, and cheaper services for customers, consumers, just as the authors of the Telecom Act had hoped. The other point I want to make today is that after this merger is approved consumers will have more choices than they have today. They will have the choice of obtaining local exchange services from a carrier that does not use the facilities of the incumbent LEC. They will also have access to broad band services and all of its advantages in their home, not just at work. The will be able to access the internet more quickly, enjoy the benefits of At Home's always on, always accessible services, and discover new content being developed for broad band and much more. AT&T's local telephone services, as well as the other services that AT&T will offer over TCI's facilities will have the quality and reliability that people have come to expect from the name "AT&T". Of course consumers will still have all of the choices they have today when they subscribe to the local services of an incumbent LEC and receive their cable services from TCI. Any consumer who selects AT&T-TCI's local telephone services will continue to be free to pre-subscribe to MCI, Sprint, or any other long distance company of his or her choice. Any consumer will be free to use the AT&T-TCI exchange to dial up any internet service provider or any online service provider. Similarly, the merger will have no effect on the provision of any service to any cable subscriber. These consumers will continue to be able to obtain content from providers of online services and video programming in the same way as they do today. They will be free to obtain these new local services, either by themselves or in bundles and include other services as well. In closing, I'd like to say that the AT&T-TCI merger passes, we hope, with flying colors any test you would apply. The merger will enhance competition and raises no, we feel, contravailing concerns. More importantly, consumers will be better off as a result of the merger. Thank you and I look forward to hearing the statements of the other panelists and answering your questions. Agenda Item: Questions and Answers CHAIRMAN KENNARD: Thank you, Mr. Cicconi. Mr. Cicconi, the other panelists have really piled the plate high of issues that unfortunately you are the only person here to respond to but I know you are able enough to handle the situation. Let me go back to some public statements that I have been reading recently from the CEO of TCI, Mr. Hindery, and also from you, Mr. Cicconi, where you have said that if the FCC were to impose a condition on the AT&T-TCI merger which would require you to provide non-discriminatory access to ISPs you would just walk away from this transaction, you would just throw in the towel. On the other hand, I read statements by you and others at your company that the Commission shouldn't be concerned about open access because you are going to have capacity for everyone and everybody is going to be happy, basically, and you are going to negotiate deals with all the ISPs. We should, basically, don't worry, be happy. There is a contradiction there and I am hoping that you will be able to resolve this issue for us a little bit today. MR. CICCONI: Well, I can certainly try, Mr. Chairman. First of all, I think what we said or tried to say is that this would seriously jeopardize the merger if the Commission were to impose the type of unbundling and other conditions that have been suggested in some of the comments. We wanted to stress first of all that this is an industry issue, not just an issue connected with this merger and that it wouldn't be appropriate to consider things that disadvantage one company in a competitive industry. Secondly, in responding to some of the suggestions about conditions, what we would emphasize is that these things are really based on a series of hypotheticals. These areas are very difficult to judge. First of all, they're hypotheticals with regard to consumer demand for high speed internet services. I know what Mr. Brewer has said but I dare say if five years ago when he started Mindspring he probably couldn't have projected himself the growth of the internet and I don't see how any of us can say with any degree of reliability what consumer demand will be two to five years from now. In fact, Steve Case of America On Line said earlier this year that he fully expects that five years from now that 75 percent of people accessing the internet will still be doing through narrow band dial up method. So, even within the industry there is a good bit of disagreement. I would stress that in this area it is still in its nascent stages. There are subscribers only in the hundreds of thousands to the existing high speed broad band offerings out there versus the tens of millions that are using other forms of internet access. There are hypotheticals in terms of the problems and projections of bottlenecks and things of this nature. These are all built upon each other, the projections based on consumer demand and projections as to how we would respond to that and if that creates a projected bottleneck and we are supposed to, according to the conditions, consider essentially rebuilding or redesigning a good part of the cable system that is set up for this access in order to accommodate a capacity that even the ISP industry doesn't have today. By the time we finish that, who knows what capacity they would have in fact needed at the end of that. What I am trying to say, Mr. Chairman is that there is a great deal of uncertainty in this area. We haven't even made the investment yet. The capacity to deliver these services, broadly speaking, is not yet there and already we are being asked to consider additional investments which could seriously jeopardize the calculus that went into this particular one. I dare say that if others come along and consider investments in cable for the delivery of telephone service which is -- remember what this is really all about -- they would have to think twice if conditions had been imposed on some merger to that point that would make that investment less than economical. CHAIRMAN KENNARD: I understand your point about uncertainty but is it your testimony that there is no set of conditions here, even incremental conditions, taking into account some of the uncertainties of demand in the marketplace, that would not cause you to abandon this transaction? Is that what you are saying? MR. CICCONI: I wouldn't use the word "abandon", Mr. Chairman, but I'd like to stick with "seriously jeopardize", which is -- I know it sounds close but I think there is a judgement that goes in there in terms of any conditions that the Commission would put on but I think there is a risk there. There is a calculus in any investment as to the dollars and the rate of return and in many investments it is -- especially ones of this size and magnitude -- that is a very close calculus and if conditions are imposed that affect the way the revenue flows were projected that could have a concern. In terms of the Commission's authority in this area I would argue that the Commission certainly is justified in watching this very closely and exercising its oversight, exercising its responsibility to watch out for consumers and make certain the problems of this nature don't arise, make certain that bottlenecks don't arise, and it would certainly be able to act or attempt to act or seek authority from the Congress to act if problems indeed arose but to act based on projections on the part of some parties that problems should arise and require additional investments and expenditure of funds before any problems have in fact arise strikes us as unjustified, Mr. Chairman. CHAIRMAN KENNARD: Mr. Cicconi, I want to get a response from you to Mr. Kimmelman's point about his concern that you are really only interested in the high end consumers, the 20 or 30 percent of the market that is willing to pay for high speed internet access. It is my view that the Communications Act -- and I think it is one of our core responsibilities is that we ensure that all Americans have access to technology and to advanced technology in particular. Can you address Mr. Kimmelman's concern about the way you are going to deploy and market these new services? MR. CICCONI: Sure. I have a great deal of respect for Mr. Kimmelman but on this issue I think he is just dead wrong. The entire transaction is geared at volume of residential customers. When we go into a city and build out this system the build out will be for the entire city. It would be extremely foolish of us to leave out any customer, just from an economic standpoint. Keep in mind that this platform that we are constructing there and we are investing and expanding is designed, from our standpoint, to offer an array of new services, particularly telephone service. We want to attract as many people as possible to that platform. So, there is really no incentive for us, in fact quite the contrary, for us to simply go after one end of the market. I think that when one looks at the broad reaches of territory that TCI is currently servicing we are going to building out in all of those areas over the coming years and providing these services. CHAIRMAN KENNARD: Mr. Kimmelman, would you like to respond? Mr. KIMMELMAN: I would just like to respond. I am not raising a question about the motives of AT&T, and certainly not Mr. Cicconi. I will accept at face value that they would like to serve everyone. I am pleased that they would. I want you to look at the hard economics of these markets and how competition unfolds and the nature of the services. These network upgrades are enormously expensive. AT&T itself has projected as much as $750 per household. The market has frowned on this. The market, not me, the market has said, "We're not sure this is feasible, doable." Possibly with the Bell mergers I don't know that it makes sense but there certainly is a lot of money to be made at the high end of the market. It's not just a build out, it's a set top box. It is a variety of costs for consumers that, from what I see today in usage patterns and demand, more than half of the public isn't there, either not wanting or can't afford. It is not a question of motive, it is a question of what's the likely result of this transaction. It is not in isolation whether they are offering some potential benefits. If 10 or 15 years from now some of this occurs it would be wonderful. In the foreseeable future, though, there are substantial dangers to the development of competition in core markets that are extremely monopolistic, in emerging markets where -- I'm totally confused by Mr. Cicconi's answer. If they are going to be fair to everyone and open up to everyone and conditions will drive the economics of the deal south and it is gone then how can they voluntarily be fair and open to everybody? It just doesn't make sense. There is something missing here. So, I just urge the Commission to set a standard that truly is based, Mr. Chairman as you said, on the average consumer and get a straight response about how these services in the foreseeable future are there at a reasonable price. CHAIRMAN KENNARD: Anyone else on the panel like to address that? Commissioner Ness. COMMISSIONER NESS: Than you, Mr. Chairman. Just following up on this line of questioning. I believe that AT&T's proposal would include competition for telephony in the local marketplace. I don't know what telephony would be priced at but presumably it would not be well in excess of what the local telephone company would be offering or you wouldn't get very many subscribers. Certainly we have seem a broad where there has been a combination of cable and telephony that the telephony has been attractively priced. Mr. Kimmelman, the question goes to you. Is this a tangible benefit that the consumer would have based on the development of that infrastructure? MR. KIMMELMAN: If we really were talking about that price I think it would be. The problem is AT&T told us two years ago they could do this wireless. First they told us they could do it through resale and they were going to have a third of the market by 1999. This was about the time of the Telecom Act. Then it was wireless. Then it was, "We can't do it at all without acquiring a local exchange carrier like, for example, an SBC." Now all of a sudden it is TCI. I'm sure there is a tremendous amount of uncertainty in a very vibrant marketplace. Again, I'm not questioning motive here. I just don't see the economics. I think Wall Street's reaction indicates that the economics aren't there. Again, I'm not making a statement that they shouldn't be allowed to try, try under fair conditions so there is not a cross-subsidy. A number of years ago -- I'll finish this -- it was the cable industry itself that came to this commission, to the NCTA, and through member companies like TCI and said, "You should not allow a telephone company to raise local telephone prices one penny, one penny, to cross-subsidize entry into the cable business, overcharging telephone customers in order to provide what? Competition for video services. The excitement of more competition." Why shouldn't the same principle apply to the cable industry? COMMISSIONER NESS: Mr. Cicconi, would you like to respond? MR. CICCONI: Certain, Commissioner. I respect Gene, I think it is hard to have it both ways. On the one hand you can't make the point about how much this transaction costs and how difficult the economics are to justify it. On the other hand, solve it by imposing conditions that levy even more costs on the transaction. I think that is really a non-sequitur and for us it is a non-starter. In terms of telephone service, which was really the original premise for your question, Commissioner, you really phrased it in a way that answers it. The fact is, that is a competitive market and if we are going to hope to break into that monopoly market, if we are hoping to take away the 99 percent plus share, even a few percentage points of U S West market share in their territory and local phone service we are going to have to price it competitively with theirs. That is just a simple fact and we're not going into this transaction with our eyes shut in terms of that fact. We are going to have to do that and we feel we can. CHAIRMAN KENNARD: Please. COMMISSIONER NESS: If I can continue. We have talked extensively in the last go round about the unbundling issue and I'd like to pursue that a little further. The argument is that the unbundling of the access to the internet and the provision of broad band service would make it impossible for you to provide that service. Now, can anyone on the panel address the -- would anyone like, on the panel, to address the question as to the availability of capital to be able to build out broad band infrastructure in an unbundled basis? Then, I would also like for Mr. Cicconi to answer the specific question, do you feel that the same opportunity ought to be provided to U S West to be able to bundle its ISP services as it rolls out broad band? So, first the question, Mr. Brewer. MR. BREWER: Yes, I'd love to respond to that. Mr. Cicconi mentioned some additional investment that would be required or additional capacity that would be required to support multiple ISPs for the broad band cable facilities. I think the additional investment part is minimal, I mean almost zero. We have a working arrangement with a competitive cable company -- actually that is doing over builds, frequently of TCI systems, oddly enough, in the Southeast. Here is the way it works: Mindspring plugs in its network into a router in the cable company's head end -- the company is called "Knowledge-E" -- transports the bits from there to the customers residence, through their hybrid fiber coax network, their cable network. We do the sales and marketing. We do the service and support. We do the installation. We do the billing. Mindspring does all that and Knowledge-E provides us with that local data transport service. The cable modem infrastructure is at its heart an ethernet. There are many different approaches that are very workable for providing that basic data transport service and there is in fact a -- there have been a couple of meetings underway here at the FCC which your staff has been participating in with representatives from At Home and Mindspring and other companies, which I think has already shown quite conclusively that the basic data transport's function is eminently doable and is not difficult. COMMISSIONER NESS: Let's go back to Mr. Cicconi's point in terms of the incentive to be able to provide the internet service, including content, in fact, it looks at it from a content perspective, as a content provider, and not distinguishing that from internet service provider. Is there incentive for it to be building out its plant if, in fact, it would not get the benefits of a bundled product by virtue of having others have access to the network? MR.BREWER: We, and I don't think anyone else that I'm familiar with in the proceeding, we are not saying AT&T could not have a bundled product. What we are saying is that we need to have access to the basic local transport services ourselves. It is very very clear that Mindspring and AOL and all of the other thousands of ISPs have many many customers who we could very successfully migrate to broad band connectivity were it available to us. We don't want this connectivity for free, we want to pay a fair price. I personally very strongly believe that the cable industry in particular has taken a risk in investing in the upgrades to provide the two-way data transport functionality and they deserve a good return on that investment. They took a risk, they deserve the reward but the form that reward should take cannot be the granting of a monopoly or duopoloy control of the core telecom service of the future for residential subscribers. The cost of that are just too great. The return needs to come in the form of profitably carrying traffic for a variety of service providers that will serve those end user customers. COMMISSIONER NESS: Would anyone else like to address that issue? Mr. Roellig. MR. ROELLIG: Commissioner Ness, a couple of comments. First of all, we are doing that today. We are incented, we are providing what we call a "mega central service" where an ISP can basically connect up directly with a customer and not go through our At Home like they are going to try to require all customers to do. We don't require that you go through the USWest.net. You can choose to use the DSL service and go to your provider of choice. Second of all, I believe that if you look at the comments that AT&T has made in the past, in the 706 proceeding these stated that advance services are more likely to reach all Americans if incumbents are subject to unbundling obligations to permit additional competitors to provide service. So, what they have done in the 706 proceeding is say that it is appropriate to have everybody be unbundled. They have also said in the 706 proceeding that you ought to be in separate subsidiaries and frankly somebody even ought to own a percentage of your separate subsidiary, then when it comes to them coming before this commission and talking about the public interest they say we ought to have a closed system, we ought to have a proprietary system from beginning to end. In order ensure that we have true competition in this marketplace we need parity of regulation. We need to be able to compete with them effectively and we can't do it if there are different rules for the various providers. COMMISSIONER NESS: Mr. Cicconi, would you like to respond to that? MR. CICCONI: I'm pleased to hear U S West's commitment to competition in their territory there because we are going to be, hoping to take them on it when it comes to local telephone service which is, again, what this is all about. If these investments are conditioned, if there are restrictions placed on them people aren't going to make them. There is a tremendous commitment of capital that is required to bring about facilities-based competition to these local monopolies. The reason it hasn't happened in the scale that people had hoped over the past three years is because it is darn difficult to do. The monopolies do not yield easily, one would expect that, I would suppose. In point of fact, they have resisted every step of the way, U S West among them. They have actually been fined in Iowa for failure to comply with internet interconnection agreements between AT&T and MCI. These are not isolated instances. I know I am not telling the Commission anything it hasn't heard many many times on a daily basis. The fact is that this investment by AT&T is a $48 billion commitment providing that competition at all levels. When it comes to the question about the unbundling for internet access I would make a couple of points. Again, I would stress that if there is an issue here it is an industry wide issue and it is not something that should be addressed just in the context of the merger or even considered in the context of a merger just involving this particular company. It really does affect the entire industry. In terms of Mindspring and other ISPs, I would stress again that on this system any consumer will have all of the internet access options they have today, plus more. If they want to access Mindspring they are able to do so. There will be dial up telephony connections possible with any internet service provider. I would remind you again of the projections that some people in the industry have made that narrow band is going to persist for quite a long time as a means of accessing the internet for the majority of Americans, not only that but we fully expect that it will be able to compete fairly well for their business with the RBOCs. Over cable we feel it is quite possible, at least our engineers tell us, that you are much more likely to get the rated speed of your modem than you are over a twisted pair of phone lines. So, if you've got a 56k modem you are much more likely to achieve speeds of 56k, which we again will be making that type of offering that Mindspring could make, over the cable system much more attractive. When it goes beyond that to high speed connections of the type that At Home provides the simple fact is At Home arrived in this market a number of years ago and made the type of investment many other people could have made in order to provide this type of capability. In fact, the system that TCI has was co-engineered with At Home to provide this service. It would be very difficult to break that apart in some manner. I think the overbuilder that was cited by Mr. Brewer is in fact somebody that, at least on their website, indicates that they are an affiliate of Mindspring. I'm not sure what that means but I think it does make a point that high speed internet over cable is not exactly the same thing as over a phone line. There is a technology involved, there is a great deal more engineering involved, it is just very different and it requires a great deal of cooperation in order to build a system that delivers that product. That was, in fact, the case here. COMMISSIONER NESS: So, you have now twice suggested perhaps -- and I'm reading into your answer a little bit -- that instead of having this be the focus of a particular merger that instead perhaps this is an appropriate thing for us to be addressing in a rule making proceeding. Am I correct that you would not object to that? MR. CICCONI: I would agree with the first part but not the second, Commissioner. (Laughter.) What I would say is this, the Commission has ample authority to monitor these things on an ongoing basis. If there are problems that develop of course you have the obligation to act. The point I'm making here is that all of these problems that are being cited are simply hypotheticals that are being cited by a number of people, they are not actual problems affecting consumers, in fact, far from it. As a result of this transaction consumers will not only have, continue to have, all the choices they have today even enhanced but additional choices. COMMISSIONER NESS: So, basically, the Commission should recognize its authority in this area but perhaps forebear from exercising the authority to see what happens. (Laughter.) Thank you, I have no other questions. CHAIRMAN KENNARD: Commissioner Tristani. COMMISSIONER TRISTANI: Thank you, Mr. Chairman. Ms. Inman, you raised three concerns: cross-subsidies; the internet access, which has been explored a bit here; and, local authority. I'm not quite sure what your concern was about the local authorities. I'd like you to expand on that. MS. INMAN: Of course. As we are looking at a merged company with merged services and possibly merged customer service centers and the like, right now local franchising authorities have the authority to resolve issues directly with the company, directly with TCI's local government entity. We fear that perhaps with the merged services that some of those services that the cable company currently provides will be combined and we won't have that direct contact anymore, we won't have that direct impact. Now, we wouldn't lose our franchising authority over cable services but as the services themselves merge it could get murky so we just ask that as you are looking at telecommunications services versus cable services that that authority be preserved in those issues. COMMISSIONER TRISTANI: Earlier, and I'm tired so I've forgotten what the piece of paper that you waived was about, but you said we requested this. Could you talk a little bit more about this piece of paper and also if you could give us a copy and staff. MS. INMAN: I will get a copy to you. This is in the cross-subsidization concern. We had drafted a resolution in the Denver Metropolitan Area on behalf of our 25 communities that conditioned the merger approval on, among other things, this one phrase that simply says, and I will read it to you, it is very short, that "neither franchisee, TCI, and/or AT&T will increase rates for cable services within the franchise area in order to cross-subsidize non-cable services." They told us over the weekend that they will not approve it, they will not accept that, but what they will agree to do is simply adhere to basic cable rate regulation. So, my contention is if they are not planning on cross-subsidizing why would this be a problem in the approval of the merger? COMMISSIONER TRISTANI: You asked at the end of your testimony that we implement the proper protections. You didn't call them conditions but you talked about protections. What would you suggest the Commission could do to address this concern? MS. INMAN: Well, keep in mind that we're, at the local level, we're looking at the same things that you are looking at. We are looking at the same internet access conditions and the cross-subsidization issues but we have 120 days to do it and that 120 days is expiring mid-January for most of our communities. You have unlimited time to look at these issues. One of the things that I would suggest is perhaps that the FCC issue, a notice of proposed rule making on both of those issues, allowing us at the local level to condition our approvals on the outcome of that rule making. That then would allow the local communities and others to provide input into that rule making procedure. It in essence, buys us a little bit more time to have input into those issues as well. As it stands now, we have a few weeks left in our approval process. COMMISSIONER TRISTANI: Mr. Chairman, I have one more question for Mr. Kimmelman. You also talked about conditions, proper conditions, what would those be? MR. KIMMELMAN: These are conditions -- I'm going to agree with Mr. Cicconi, this is a very expensive transaction and getting local competition has been extremely difficult, if not impossible in most instances. The conditions that we are looking at, we urge you to look at, are conditions that make the promises come true without cross-subsidy, without overcharging consumers, without expanding monopoly. You have authority, under the 1992 Cable Act, to look at cable. Structurally, after March 1999, for upper tier even though rate regulation disappears, up until March 1999 you have the authority to look at it in a price regulation fashion. I'm not suggesting that doing that for a few months is meaningful here. I am suggesting, though, that you look at structural protections that prevent the evasion of the principles of the Act, the evasions of the rate regulation section of the 1992 Act, not repealed by the 1996 Telecommunications Act. I suggest that you look at the broad language on prevention of discrimination, use of horizontal concentration, use of coercion, both in the programming market and in this fast emerging high speed internet access market. I would suggest that if it is appropriate for AT&T to come in with streamlining proposals, proposals to ensure that these promises can be carried out, to suggest that it be done through a rule making rather than the merger. I think that is all really appropriate, if they really are suggesting that, across the industry. I think the purpose of conditions should be exclusively to make sure that a $48 billion transaction either will accomplish the promises that are made or, to the extent the market cannot bear that, and I don't hold them to it, I don't think anyone can promise broad based competition, we have yet to see whether it is feasible, but all that they do they not abuse other bottlenecks, other monopoly customers under your jurisdiction in their efforts to do so. CHAIRMAN KENNARD: Commissioner Powell. COMMISSIONER POWELL: As much as one might commend or applaud AT&T's interest in cable for telephony services I think it is important to point out that they aren't the first to try. I am a little astonished at how speculative we are being about cross-subsidies and price bundles when there are people out there doing it quite effectively as we speak, unfortunately not represented on the panel. Cox Communications in California has had, to my understanding, a relatively successful run with respect to the provision of basic bundled telephony and cable services, as well as other companies, I think in the New York area, Cable Vision and others. It seems to me to be responsible here we would look at what is going on in those experiences. If I am being correctly informed, the telephony offerings are relatively significantly lower than that being provided by local exchange companies. If I am being correctly informed, their take rates are significant, that is customers of all stripes seem very interested in the potential for that bundle. Indeed, as I understand it, and again I am more than willing to be correct on these points but I'd rather them be used rather than speculate about these things, that we have not seen a significant amount of evidence of dramatic cross-subsidy, that is, cable rate increases that are being flowed to the telephony side for the purposes of the efficiencies to lower the rates, not that the rates are not increasing but anymore dramatically than they are increasing in cable companies that are not providing the telephone services. So, I would sort of encourage everyone who is going to enter this debate to try to flesh out some of those issues. I have visited a good number of those companies because of my interest in cable telephony and at least this is the story that I've been told. I think that is important evidence for the concerns that Mr. Kimmelman rightly raises about cross-subsidy, and Ms. Inman, and the concerns about whether there are significant public benefits in the cost of the telephony option. I would note, too, that I think this is important that you cannot read the 1996 Telecommunication Act without leaving it convinced that one of the bases for Congressional optimism about the pace of local telecommunication was that it envisioned that cable telephony was going to be a significant ingrowth in that. That is not to say that that answers the question but I think some of these concerns being raised about whether it works economically or at what cost and stuff can't be read outside the context of Congress's optimism about this as an alternate provision of local telephone service. So, I put that on the table. The other thing that I might ask Mr. Brewer this question. It has been explained to me by AT&T and some that one of the difficulties of making the transport provision available to other people is that there is an enormous dynamic engineering function going on that allows them, through their collective management, to keep prices at a point at which they can sell them to residents. I think AT&T has suggested -- is it proprietary -- I shouldn't tell what your rates might be but $49.99. I mean, we always hear magic numbers about $40, $40 to $50. Some have suggested that without the ability to have some level of control, with respect to the full range of the transport and the content, that yes you could do it but the rates would be significantly higher than the acceptable price point and, indeed, the benefits Mr. Kimmelman is concerned about indeed are pushed even further toward higher end customers, rather than kept down. Why don't I ask that question before I ask another one. Are you the right one to ask? MR. BREWER: Yes, and I'm glad you asked because I was dying to get a chance to respond to an earlier comment about a claim of technical difficulties and expense in supporting multiple ISPs on the cable plan. I would very very strongly submit that those technical difficulties do not exist and that the issues involved in successfully serving customers with this last mile transport capability are essentially the same in a one provider environment or in a multi-provider environment. We at Mindspring and others, I know, would be eager to proceed in that into any depth of technical detail that is required but I would very strongly assert that those issues are not real, that the technical issues are essentially the same be it a one provider environment or a multi-provider environment. COMMISSIONER POWELL: I guess the question I would really want to know is -- I though you suggested you have had one experience with this. MR. BREWER: Yes. COMMISSIONER POWELL: Are you confident that you could offer service at a price point competitive with the $40 to $50 range or that that would be accessible to the vast majority of residents? That is, some have made the argument that, yes, maybe technically you could do it but that the expense to you wold result in prices for cable modem services that were sort of beyond the pale of most average consumers or what marketers say are acceptable. MR. BREWER: What our price would be would be largely a function of what we paid for that last mile transport. Right now our local loop cost per customer for a $20 per month revenue customer is in the vicinity of $5 to $7 and I am anticipating that in the broad band scenario that would be higher. We are able to generate a reasonable profit on a $20 customer with local loop cost in the $5 to $7 range. So, there is that $13 to $15 of additional revenue above and beyond what we pay for the local loop, works for us. I would submit that we are going to be much more economic in operating the rest of the business than a cable company or their new ISP partner that is sort of fresh to the game. We have more scale, more experience and we, the industry collectively, have vastly more and will be able to operate more economically, not less. Again, what the appropriate price for that last mile transport is should be no different in a one provider versus a multi-provider environment. If I could just add one more thing, there is so much more to providing a service that customers actually find appealing than just speed, there is so much more. There is user interface, making it easy to use, making it easy to have a good experience. Technical support is so critically important in the ISP business and will only become more so as we move to an environment where there is an always on connection and multiple devices hooked up to that connection. Technical support, in my opinion, really will become the primary thing that a telecom provider gets paid for at the retail level. To be forced to pick all of those other important customer choice criteria based just on who can deliver the bits into your house is a horrible unacceptable outcome. COMMISSIONER POWELL: I would just submit that I think one of the things that has to be examined and someone has to put meat on it, it is fine, I think, theoretically, to accept that there should be -- and I think it is a defensible proposition that there would have to be some reward for the return on an investment that I do think companies took at their own great risks but the question I'm struggling with, and I won't ask for follow up is, that that price might lead to a retail price that is pretty significant in terms of what customers are used. I don't know the answer to how that comes out but it is at least a subject of inquiry. I thought I would also ask -- a lot of people have discussed the concern about access as well as other context -- I want to ask each of you to answer this question. Irrespective of the merits of those arguments I understand everyone wants presentation to suggest that it would be equally true of any and every cable company that was attempting to offer broad band service in this way and not specifically TCI. Is that right, Mr. Brewer? MR. BREWER: Yes. That is correct but I -- and I am obviously not a legal scholar -- but as I understand the jurisdiction which the FCC holds the context of an important merger like this is one of the times when you have the most latitude to address important consumer issues and this is, to me, the most important consumer issue for telecom people. COMMISSIONER POWELL: Let me follow up. Here is what I'm worried about fundamentally, even if we did as you asked what would you do about the other two-thirds of America? Wouldn't you just need to turn around and ask us to do the same thing in a broader more comprehensive way with respect to everybody else? MR. BREWER: Yes, absolutely. COMMISSIONER POWELL: And so does anybody offer the explanation as to why then we should take such a comprehensive issue with as many complex issues on the plate as people have described and attempt to address it specifically in a merger context? MR. ROELLIG: I guess I can try to respond to that. I think the reason you should do it is because the law requires that you do it. COMMISSIONER POWELL: Where does -- MR. ROELLIG: The law requires that you look at whether this is in the public interest. Clearly, it will not be in the public interest if in fact you are taking a company that due to its unique and really unique size and also the various segments of the market that it has -- COMMISSIONER POWELL: Public interest doesn't require with respect to the other two-thirds of the nation? MR. ROELLIG: Well, public interest may require with respect to the other two-thirds but you've got this issue before you now and you have to look at whether it is appropriate in the public interest. COMMISSIONER POWELL: No, no, no. We have any number of tools and institutional mechanisms available to us for the consideration of the public interest standard and its broad applicability and some seem to me more appropriate than others. While I don't dispute the leverage point, which I think is legitimately before us, the suggestion that the public interest requires one tool over another I find to be insupportable. MR. ROELLIG: I guess my response is, number one, that because this matter is before you you need to look at the public interest. Number two, I think the fact, due to the size of the entity, and what is being put together requires that you look at what is going to happen in this broad band marketplace if this merger is allowed to go through in its current form. If it is, due to the size, due to the speed to market, due to the unique advantages it is going to have, in essence it will really sort of tilt the marketplace for broad band services. As far as trying to address it in some later rule making that goes broader, again, looking at the pleadings of AT&T they are basically taking the position that you don't have the authority to do that. So, if you don't take the opportunity now and if you don't deal with the issue now -- COMMISSIONER POWELL: Let me tell you, if you don't have the authority in that context you don't have it now. Okay. That is just the truth. I mean, we haven't reached that question but I don't understand the argument that the same authority that you are point to is the same authority we would use in that context as we would have to rely on in this context, I think. MR. ROELLIG: Commissioner, my view, and I believe the law support its is that in looking at a merger like this you, in order to do the license transfers, you have to determine whether it is in the public interest and that you can, if you see a problem in the marketplace it will create you can put conditions on the merger that will ensure that it is in the public interest. I am positive that it would make appropriate sense to put those conditions on to ensure that we do not have a marketplace where there really is only one player that has a clear competitive advantage and basically is able to put together a proprietary network that nobody else can. COMMISSIONER POWELL: My last question, and I will leave it at that because I don't want it to get too late because I'm exhausted. There is a lot to be said about the worrying about the tipping effect. We have heard it in the last panel in network industry. That is, someone has an advantage to the point that the network effect is that they then gain a monopoly so that customers wouldn't substitute for a new provider, even if one were to come along. I do find it somewhat strained to suggest that the tipping effect would occur at this stage in the development of broad band in the context of, say, the next year which would be at most the amount of time before the Commission would undertake a rule making and, certainly, in light of the AT&T case. I mean, Mr. Kimmelman suggested the substantial financial investment and raw work that has to happen before there is even a network, at least in TCI's case. I just ask for a sincere answer because I seriously accept the risks of tipping effects in network externalities. I just am not so sure that anyone has made a credible case that we are at that moment, that that moment is so imminent with respect to broad band capability that not to do this in this context would result in the tipping effect in the foreseeable future. MR. ROELLIG: The way I would respond to that is your question assumes that you can deal with it in a rule making. Again, I think if you look at the AT&T pleading it would be our view that you could not do that. So, the only way you would be able to deal with it would be some Congressional change. By the time there is a Congressional change or by the time we work through our legal process about the authority to do it in a rule making we aren't talking about a year. My guess is you are talking two or three years out and during that time period with what is happening in the internet and the broad band market I believe it would significantly tip the competitive marketplace. MR. KIMMELMAN: Commissioner Powell, if I could just jump in. I think your questioning is very important. I think you are actually right about legal authority. But, I think the issue here is if this is a truly important problem of open networks that the Commission has the authority to look at, I believe it does, this is an appropriate place to start to look. I'm not suggesting it is the appropriate place to end the look. I'm not suggesting it is different from the other players in the industry. I do think on some of the other issues, the horizontal size and vertical strength of the TCI networks and programming are significant towards the market plan that AT&T has laid out and is different than just an incremental few community approach by Cox, a very different kind of company. It has been presented in the license transfer as a broad based investment approach. I think, given that that is what they want you to look at is the public interest on the positive side, it is appropriate to look at the danger on the other side. This particular, I think, you are absolutely right, can be done -- can be looked at in a variety of contexts but using Mr. Cicconi's own reasoning, if it is within your jurisdiction to do this, and I believe it is, he has made a very strong important point that the more investment that is made the more that has to be undone if you are changing the rules of the road. If there is a legitimate problem here it is best to deal with early on. I think it probably can be dealt with cooperatively with a company that seeks to do so many other things with a $48 billion transaction, that is a matter of convenience, not leverage, a matter that ought to be dealt with broadly throughout the industry though. I do not think it is a one company problem. MR. CICCONI: Might I respond, Mr. Chairman? CHAIRMAN KENNARD: Please. MR. CICCONI: Just very briefly, Commissioner. I think it is important to recognize that the practical effect if there was a conditioned imposed just on this one merger is that you would end up with a company in this industry that was hobbled by conditions that the rest of the industry would not have. I think if that was your point -- that was certainly the point I was trying to make earlier when I mentioned that this was an industry wide issue. Obviously, we don't think conditions of that nature are appropriate in either context but they are certainly not appropriate from a legal standpoint to be going in and picking out one company in an industry and imposing conditions on that that are not imposed industry wide. I would just like to make one other comment too because I think we should be flattered by the fact that U S West regards us as such a potent competitor here in all of these areas where right now we have zero market share and they have got about 99 percent. I think it is important to keep in mind that when one talks about conditions of this nature and hears from an RBOC discussions about anti-competitive effect and the competitive threat and things of this nature we are talking about a competitive threat from somebody with zero market share in these areas from somebody that has got in excess of 90 percent. I think that is an important point to keep in mind. MS. INMAN: If I might... We were approached, local franchising authorities were approached by the internet service providers and asked to include these as conditions of our mergers. I'm not a lawyer. I'm probably one of the few non-lawyers on the panel here today, yet I've heard legal arguments on both sides of this issue provided to us by the industry. I think that, to answer your question, Commissioner, I think it is just an opportunity to look at that now. This is the first opportunity presenting itself. In my comments I simply urged that if you apply this type of condition that it simply be applied in a fair manner at a reasonable price. So, the local franchising authorities certainly wouldn't be that that type of access be provided at no cost but in a reasonable manner. CHAIRMAN KENNARD: Commissioner Furchtgott-Roth. COMMISSIONER FURCHTGOTT-ROTH: Thank you, Mr. Chairman. I would like to just note for the record my deep admiration and respect for Mr. Gamboa who obviously came to this hearing at great expense and great disruption to his personal schedule and left early to go to his 11 year-old daughter's recital in San Francisco. I believe that any father with that dedication to his daughter is a man to be respected. COMMISSIONER POWELL: I think he's an expert. COMMISSIONER FURCHTGOTT-ROTH: Yes, I'm only sorry that -- COMMISSIONER NESS: Or mother, I would add in passing. COMMISSIONER FURCHTGOTT-ROTH: Absolutely. Mr. Cicconi, I would like to extend my admiration to you for being a good sport today, for putting up on a panel where you had not just two people suggesting lots of things you may have found a little distasteful but a few more than that. I'm intrigued. I would like to follow-up some comments by Mr. Roellig about the public interest standard in the transfer of licenses. I simply would like to note that in Section 310 it makes no reference to mergers, the same standard by statute would apply to most routine of license transfers, frankly, Mr. Roellig, many of which U S West may have bee on the giving and receiving end in recent years. I would like to ask you, Mr. Roellig, and you, Mr. Cicconi, if you think, since you all have had many license transfers in recent years, if you all have any clear indication of whether or not the Commission would apply a higher public interest standard to one type of license transfer than another and, particularly for you Mr. Roellig, why you think that it should -- where in the statute you think it should apply based on a merger in particular. MR. ROELLIG: To respond to your question, Commissioner, I believe that, first of all, why would you look at this one as compared to maybe a transfer of a license in Des Moines? The reason you do is that this is clearly a unique situation of license transfer. COMMISSIONER FURCHTGOTT-ROTH: Where in the statute does it say that? MR. ROELLIG: Well, you have to look overall in what is in the public interest. I would say that when it is, frankly, something that may be pretty minor under those circumstances you may say, "It is easy for me to see this in the public interest." I think when you are dealing with a major merger then you look at the license transfers relating to those and you could say, "This may have a big public interest affect and it may not." So, I think you have to look -- COMMISSIONER FURCHTGOTT-ROTH: Is there anything bigger than Exxon/Mobil? MR. ROELLIG: We'll wait and find out. I don't know. But, I believe when you look at the transfer that is occurring the statute requires that you look at the public interest of standard and -- COMMISSIONER FURCHTGOTT-ROTH: But does it ask for a different public interest standard for one license transfer versus another? MR. ROELLIG: I would say, "No." I would say you have to to look at all the facts, look at the impact on the market. Again, a license transfer for a small community in Des Moines may have very small impact on the market but what we are looking at here has the potential to dramatically impact a growing market, which is the broad band market. We heard comments about this being an issue about telephony. It is not an issue about a voice-grade telephony. As a matter of fact, if you go through AT&T's pleadings you don't even find commitments as to when they are going to be in the telephony market, you do find in their announcements commitments about when they are going to be in the broad band digital market. They plan to be, I think, 90 percent by the end of the Year 2000. So, that is the market we ought to be looking at and seeing whether this transfer will be in the public interest but for some conditions that could be placed on it. COMMISSIONER FURCHTGOTT-ROTH: Could the Commission do the same thing to U S West on a routine license transfer? MR. ROELLIG: I believe it could. COMMISSIONER FURCHTGOTT-ROTH: And request U S West to do all sorts of things that may be completely unrelated to that transfer in Des Moines, could the Commission go to U S West and say, "We would like to see unbundled network elements in pricing in Washington State and if you don't do that we will hold up the license transfer in Des Moines? MR. ROELLIG: I would have to talk to the lawyers to find out exactly whether it could be totally unrelated but I guess what I'm saying is with respect to the conditions we are talking about today they are totally and integrally related to the issues before the Commission. COMMISSIONER FURCHTGOTT-ROTH: Is that your position, Mr. Cicconi? MR. CICCONI: Will, let me at least try and state it, Commissioner. First of all, I wouldn't want to be in a position here of suggesting to the Commission how it ought to interpret the statutes and authorities that govern its role in these areas. What I would say, though, is that to me public interest speaks much more in terms of impact on consumers, not impact on Mindspring, not impact on U S West's competitive position but impact on consumers. I think that is consistent with much of the other authorities vested in the Commission and, in fact, the whole reason for being of the Commission. We certainly don't dispute the Commission in anyway, the Commission's authority to take a look at this merger. Having said that, I think when one gets into conditions one can have different views depending on what conditions are being discussed. I wouldn't suggest that consistent with that authority the Commission could not impose conditions on certain mergers. What I would suggest is that the type of conditions that have been discussed in this merger would not be appropriate, they would not be wise from a public policy standpoint, they would certainly not be wise from the standpoint of consumers. We feel that they would have a discriminatory effect in terms of singling out one company in the industry for special conditions that would not bind others. COMMISSIONER FURCHTGOTT-ROTH: Thank you. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you. I just had a couple of clean-up questions in the interest of making sure we have a complete record here. Mr. Cicconi, I was listening to you very carefully today and I didn't hear you respond to the request from Commissioner Ness that you respond to Mr. Roellig's request that you somehow reconcile the arguments that you have made on behalf of AT&T in the Section 706 proceedings where you have requested that this Commission require full-unbundling of the telco networks with your position here on behalf of AT&T today that we should not look at unbundling as a remedy in the cable context. I heard you bash U S West in response to that question but I didn't hear you specifically reconcile those two arguments and I'd really like to hear that. MR. CICCONI: I apologize, Commissioner, if I skipped over that a little quickly. Our position is, as we stated in a number of filings, the fact is we feel the Telecom Act distinguished between these two areas of telecommunications and cable. It does not distinguish between voice and data, we feel, in its definition of telecom services. As such, we felt pretty strongly, as we have stated, that they have to meet the requirements of Section 251. Our feeling is that by breaking one out from the other that that is simply a dodge by U S West and others in an attempt to get around requirements in the Telecommunications Act. CHAIRMAN KENNARD: Another question that I think was not asked to you specifically but I think the record would be incomplete if I didn't pose this to you. As you may recall, shortly after you announced this merger I made a public statement in which I said that if this merger represents a serious commitment to facilities-based competition in telephony it is something that we should certainly entertain and perhaps welcome. What I have not heard from AT&T is specifically when consumers are going to see the AT&T-TCI combination actually deploy local competition in telephony for consumers. I want to know your plans for doing that, when we can say that consumers are going to get the benefit of that service. MR. CICCONI: We hope over the next couple of years, Mr. Chairman. Obviously, there is a great deal of money involved in this. TCI has already begun some of the upgrades, nearly $2 billion of upgrades are underway there right now. As Mr. Kimmelman has acknowledged, there is a great deal of cost involved in that. We are hoping that despite those rather daunting costs, assuming you get a timely approval, that we will be on track to be at roughly 60 percent build out by the end of 1999 and upwards of 90 by the end of 2000 and beyond that we hope to be completely built out. CHAIRMAN KENNARD: Further questions? COMMISSIONER NESS: Just following up on that. Is that co-terminus with offering telephony? MR. CICCONI: Yes, Ma'am. The internet, obviously, would come first because of the stages of the build out but that would be involved in telephony, yes. COMMISSIONER NESS: Co-terminus. In other words, by the end of 1999 60 percent of the TCI systems would offer telephony? MR. CICCONI: I think that's right. I may have to get back to you in terms of exactly where the overlaps are there because there are two stages to the build out. I believe the 60 percent does speak to a complete build out though. COMMISSIONER NESS: Is there still time for me to ask a slightly different question? CHAIRMAN KENNARD: Certainly. Go right ahead. COMMISSIONER NESS: I just wanted -- I didn't -- in the idea of wrap up and cleanup here -- one aspect of the AT&T-TCI merger is the disrobing, if you will, of Liberty Media, putting it into another entity. There will, however, be the chairman of that operation serving on the board of AT&T, et cetera. And some of the relationships there raise the question of whether in your, the view of AT&T-TCI, Liberty Media would continue to be a vertically integrated provider of programming and, as such, would continue to be required to make its product available to satellite companies and others. MR. CICCONI: Commissioner, they would be continued to be vertically integrated and they would be subject to the program access rules. COMMISSIONER NESS: Thank you. Agenda Item: Closing Remarks CHAIRMAN KENNARD: Are there any closing statements from the bench? Commissioner Ness. COMMISSIONER NESS: If I can do so, please. I first want to thank all of the panelists from today. I know it has been a very long day. Your schedules have been discombobulated by virtue of our asking questions on what is an absolutely fascinating series of topics and very important ones for the American consumer. So, for me, this has been an extremely helpful debate. My mind is and continues to be very open to the arguments that have been presented and the arguments that will continue to evolve as we review the record in these proceedings. We had a very good and robust discussion about the public interest standard that would be employed here. Obviously, much of what we do today and what we decide as we review these mergers will depend on what that public interest standard entails. I would note that Congress, in entrusting us with the public interest standard, expected that it would be exercised carefully with discretion. Such discretion, for example, was exhibited in our recent decision on MCI WorldCom. If folks were to read our WorldCom MCI order you would see that there were an awful lot of issues that had been raised where we declined to include them in our merger analysis. For example, there were issues that we thought were better addressed by the NLRB, issues that we thought would be better addressed by the EOC, issues we thought could be better addressed by some of the state commissions, issues that we thought could better be addressed in rule makings, and issues we thought could better be addressed in pending adjudicatory proceedings. As we look at these issues, certainly there have been a lot of issues that were raised and where and how we address those issues will certainly be a part of our deliberations. Some might prefer, perhaps as a matter of econmity that we hold en banc hearings on other topics like oil company mergers -- only kidding -- but indeed, we take the issue of public interest very seriously, in my view, will review such matters for the benefit of the consumer. Thank you very much, Mr. Chairman, for holding this timely hearing. I want to thank the bureaus for all of their hard work in preparing us for today. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Powell, any closing remarks? Commissioner Furchtgott-Roth? MR. CICCONI: Mr. Chairman, I just wonder if I could correct the record and Commissioner Ness here on the 60/90. I have checked with one of our experts here. The 60/90 build out is for two-way broadband. The trials are going on to see how much, how quickly we can do the telephony build out on top of that. We hopefully can get back to you soon with some more precise figures on that. We are hoping it is, obviously, quickly, but it is a two-stage build out. CHAIRMAN KENNARD: We do need that information, Mr. Cicconi. MR. CICCONI: We will get it to you, sir. CHAIRMAN KENNARD: Thank you. With that, I will adjourn by thanking our panelists and apologizing that we are now almost -- well, actually over two hours over the schedule today but I think that is a testament to the quality of the witnesses and the complexity of these issues. Just for the record, lest there be any concern out there in the marketplace, this commission will not be holding public hearings on the Exxon/Mobil merger. (Laughter.) Thank you all very much and thanks, especially, to Tom Krattenmaker, Bill Rogerson, Michael Kende, Radhika Karmarkar, Quyen Truong, and Royce Dickens of the FCC who put all this together. Thank you all. (Whereupon, at 4:06 p.m., the hearing was adjourned.) // // REPORTER'S CERTIFICATE FCC DOCKET NO.: N/A CASE TITLE: FCC MERGER EN BANC HEARING DATE: December 14, 1998 LOCATION: Washington, DC 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: __________ ___Elaine Kim________________ Official Reporter Heritage Reporting Corporation 1220 "L" Street, N.W. Washington, D.C. 20005 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: __________ ___Rose Kulb__________________ Official Transcriber Heritage Reporting Corporation 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: __________ ____Lorenzo Jones_____________ Official Proofreader Heritage Reporting Corporation