Segment 1 Of 2 Next Hearing Segment(2)
SPEAKERS CONTENTS INSERTS Tables
Page 1 TOP OF DOC Segment 1 Of 2 THE ANTITRUST ENFORCEMENT AGENCIES: THE ANTITRUST DIVISION OF THE DEPARTMENT OF JUSTICE AND THE BUREAU OF COMPETITION OF THE FEDERAL TRADE COMMISSION
WEDNESDAY, NOVEMBER 5, 1997
House of Representatives,
Committee on the Judiciary,
The committee met, pursuant to notice, at 10:35 a.m., in room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
Present: Representatives Henry J. Hyde, George W. Gekas, Howard Coble, Charles T. Canady, Bob Inglis, Bob Goodlatte, Stephen E. Buyer, Sonny Bono, Ed Bryant, Steve Chabot, Bob Barr, Bill Jenkins, Asa Hutchinson, Edward A. Pease, John Conyers, Jr., Barney Frank, Robert C. Scott, Melvin L. Watt, Sheila Jackson-Lee, Martin T. Meehan, William D. Delahunt, Robert Wexler, and Steven R. Rothman.
Also present: Joseph Gibson, chief antitrust counsel; Michael Bolinder, staff assistant; Julian Epstein, minority staff director; Samara Ryder, minority counsel.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. The committee will come to order. I want to apologize for keeping you waiting. The great attribute for being a successful congressman is the power of bi-locationbeing in two places at onceor tri-location, as long as you're indulging in miracles, and I haven't accomplished that yet, but I do apologize for keeping you waiting. Are we ready? Ready down there?
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Today, the committee conducts a general oversight hearing on the antitrust enforcement agencies: the Antitrust Division of the Department of Justice and the Bureau of Competition of the Federal Trade Commission. We hold this hearing because Rule 10 of the House of Representatives requires us to exercise continuing oversight of the agencies that administer and execute the laws under our jurisdiction. Under that same rule, we have jurisdiction over the antitrust laws.
Our committee has not held a general oversight hearing on either of these agencies since 1989. Before that time, our practice was to hold such a hearing every year or at least every Congress. We would like to reinstitute that practice and this hearing represents our first effort in that direction.
Let me emphasize, I did not schedule this hearing for the purpose of criticizing any particular action of these agencies. In general, I believe that they are doing a good job, and I am glad that we have two agencies to enforce these important laws.
Nonetheless, I think the practice of having such hearings on a regular basis will foster ongoing communication between us and the agencies. It also allows the general public to hear that communication and to comment on it. By having such regular communications, we can understand each other better and criticize each other less often.
We will hear first from the heads of the two agencies, and then we will hear from other witnesses who will testify on some antitrust topics that are of current interest. These topics will be: implementation of the Telecommunications Act of 1996, competition issues in the airline industry, and merger policy generally.
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Let me say a word about why we chose these particular topics. With respect to the implementation of the Telecommunications Act of 1996, this Committee played a pivotal role in fashioning the Act, and we fought hard for the Justice Department's authority under the Act. As part of our oversight function, we continue to monitor closely developments in telephone competition.
Today we want to hear from our witnesses how the Justice Department's authority is being used and also what is actually happening in the field. This hearing continues our oversight of the implementation of the Act which we began with hearings on the ''State of Competition in the Cable Television Industry'' in September. We will continue to hold oversight hearings on these matters as events warrant.
With respect to competition in the airline industry, my constituents well know that I have long been concerned about a variety of issues raised by O'Hare Airport, which is located in my district. Of particular relevance to today's hearing, I am concerned about various practices in the industry that appear to be anti-competitive, including the development of fortress hubs, the use of lockstep pricing, and opposition to additional airports that can increase competition. So we will take a look at those issues today.
Finally, with respect to merger policy generally, we've seen an unprecedented wave of mergers in the last few years. I think it's a good idea for us to hear about this wave of mergers and how the antitrust enforcement agencies are dealing with it. So we will also consider that, which should make for a full day.
Page 4 PREV PAGE TOP OF DOC Segment 1 Of 2 Members should feel free to ask questions of the agency heads on any topic within the area of antitrust. You are not limited to these three areas on which we have scheduled other witnesses.
With that, I will turn to Mr. Conyers for an opening statement and I suggest to the members we have a lot to cover today, so we will adhere to our usual practice and ask other members who may have opening statements to submit them for the record or make them during their question time.
[The prepared statement of Chairman Hyde follows:]
PREPARED STATEMENT OF HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
Today the Committee conducts a general oversight hearing on the antitrust enforcement agencies: the Antitrust Division of the Department of Justice and the Bureau of Competition of the Federal Trade Commission.
We hold this hearing because Rule 10 of the House of Representatives requires us to exercise continuing oversight of the agencies that administer and execute the laws under our jurisdiction. Under that same rule, we have jurisdiction over the antitrust laws.
Our Committee has not held a general oversight hearing on either of these agencies since 1989. Before that time, our practice was to hold such a hearing every year or at least every Congress. We would like to reinstitute that practice, and this hearing represents our first effort in that direction.
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Let me emphasize that I did not schedule this hearing for the purpose of criticizing any particular action of these agencies. In general, I believe that they are doing a good job, and I am glad that we have two agencies to enforce these important laws.
Nonetheless, I think the practice of having such hearings on a regular basis will foster ongoing communication between us and the agencies. It also allows the general public to hear that communication and to comment on it. By having such regular communications, we can understand each other better and criticize each other less often.
We will hear first from the heads of the two agencies, and then we will hear from other witnesses who will testify on some antitrust topics that are of current interest. These topics will be: implementation of the Telecommunications Act of 1996, competition issues in the airline industry, and merger policy generally.
Let me say a word about why we chose these particular topics. With respect to the implementation of the Telecommunications Act of 1996, this Committee played a pivotal role in fashioning the Act, and we fought hard for the Justice Department's authority under the Act. As part of our oversight function, we continue to monitor closely developments in telephone competition.
Today we want to hear from our witnesses how the Justice Department authority is being used and also what is actually happening in the field. This hearing continues our oversight of the implementation of the Act which we began with hearings on the ''State of Competition in the Cable Television Industry'' in September. We will continue to hold oversight hearings on these matters as events warrant them.
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With respect to competition in the airline industry, my constituents well know that I have long been concerned about a variety of issues raised by O'Hare Airport, which is located in my district. Of particular relevance to today's hearing, I am concerned about various practices in the industry that appear to be anticompetitive, including the development of fortress hubs, the use of lockstep pricing, and opposition to additional airports that can increase competition. So we will take a look at those issues today.
Finally, with respect to merger policy generally, we have seen an unprecedented wave of mergers in the last few years. I think it is a good idea for us to hear about this wave of mergers and how the antitrust enforcement agencies are dealing with it. So we will also consider that, which should make for a full day.
Members should feel free to ask questions of the agency heads on any topic within the area of antitrust. You are not limited to these three areas on which we have scheduled other witnesses.
With that, I will turn to Mr. Conyers for an opening statement. We have a lot to cover today, so we will adhere to our usual practice and ask other Members who may have opening statements to submit them for the record or make them during their question time. Mr. Conyers.
Mr. HYDE. Mr. Conyers.
Mr. CONYERS. Good morning, Chairman Hyde, and members of the committee. I'm delighted to second the observation that these hearings having to be regularized inside the Judiciary Committee. I think it's very important.
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Now, I'm not as happy as the Chairman today. Two reasons: One is that Bobby Scott did a heroic job in Virginia and failed, so that doesn't make me very happy. Two is the subject matter that brings us here. You seeno, I don't mind the witnesses misunderstanding me, I don't want the members to misunderstand me. You did a great job, Bobby.
But, here's the problem. We might as well, you know, face this right off the bat here. We're in an era of unprecedented mergers, takeovers, joint this and that, ventures, everything, and it's started, it's going, it's getting worse and worse, it's piling up to the sky, there are now global ventures. The big guys have already joined up with each other as much as they can, so now we're scouring the globe for places.
We have a weakened antitrust attitude in the Federal government. We might as well face it. Weak. Puny. I would like to see it enormously strengthened and it is in that interest that I join the committee today to find out how we can best do this.
I will be lectured to, I know, about the dangers of bringing suits in which you get punted out the courtroom door, that you'd be attacked by all the conservative business forces as being anti-commerce, anti-free market, anti-everything. I do not come here this morning to represent that should be the way that you move; recklessly or with abandon. We've got to get control of this.
The main problem is that after the mergers come the joint ventures which nobody looks at. It's the action after the mergers that create the potentials for violations that don't get dealt with. So, here we are in trillion dollar merger activities, 10,000 major transactions, $700 billion in this country alone. We have all the big guys getting bigger. Who cares about the most important anti-monopoly suit that's ever been brought? I mean, that wasthe judge was nuts. That's the street analysis of it. So, in video, unprecedented wave of consolidations following the Japanese version of unprecedented waves of joint venture activity.
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What is this doing to competition? Well, you don't have to be an expert to figure this out. It's stifling it in the worst sort of way. It's making itmaking a lot of the people that were little and got bigthere will never be another wave for anybody to come behind them to do that. These guys are closing the doors behind them and it's amazing what's going on here even despite the Telecommunications Act which was claimed to usher in a new era of competition. A competition which hasn't yet developed.
So we need some ideas, Assistant Attorney General and Chairman. We need a road map of how between the law, the regulations, and the enforcers, we can do the kind of job that will make us proud to be reviewed by those that will come after us to look at this subject matter.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Conyers follows:]
PREPARED STATEMENT OF HON. JOHN CONYERS, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
Last year the world experienced merger activity totaling $1 trillion, including 10,000 transactions in the US adding up to more than $650 billion. So far this year, merger activity totals more than $700 billion in the U.S.
And we've seen that in among the behemothsBell Atlantic/NYNEX; Southwestern Bell/Pacific Telesis; Time Warner/Turner Broadcasting; MCI and either British Telecommunications, GTE, or Worldcom; Spring and F(2), D(2); Nationsbank/Barnett Banks; Ernst & Young and KPMG Peat Marwick; Starwood Lodging/ITT; Boeing/McDonnell Douglas; and Home Shopping Network/Universal Studios.
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Perhaps the most vibrant economic activity is occurring in the telecommunications industry. The new Telecommunications Act was supposed to usher in a new era of competition to replace the old era of regulated local monopolies. But we are yet to see that competition.
In the local telephone markets, the Regional Bell Operating Companies enjoy near total market domination in virtually every market. Not one of the Section 271 applications for long distance entry have been approved because of the lack of competition. There are few if any facilities based competitors, and interconnection and resale agreements are being impeded by many problems including Operational Support Systems and non-recurring costs. Even the cable industry, with its sophisticated HFC transmission lines, also resists entry into the local telephone industry.
It is truly amazing to me in that context that a merger such as Bell Atlantic/NyNEX could be approved by this Department of Justice without any conditions. No conditions to open up the local loop, so that this $26 billion dollar local monopoly will have to compete. And yes these two merged companies were potential competitorsthat's what the entire Telecommunications Act was about. Conditions have been routinely placed on merging companies, and it is unclear to this member how none could have been imposed here.
On the video side, there is an unprecedented wave of consolidations and mergers. Six of the world's largest communications companiesTime Warner, Walt Disney Co./ABC, Telecommunications, Inc. (''TCI''), Microsoft, GEINBC and News Corp.have recently initiated an unprecedented wave of joint venture activity and have formed what some call a 'multi-industry cartel' similar to the Japanese Keiretsu.
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Such a structure often allows these companies to restrict programming to operators with whom they are affiliated, to evade price regulation imposed by the 1996 Telecommunications Act by asserting increased prices are on the programming side rather than the operations side, and to evade the rebroadcasting restrictions contained in the Satellite Home Viewer Act of 1994.
The bottom line in both the local telephone and video industry is that there still is no competition, and incumbents want to keep it that way. But any consumer who is seeing rates rise could tell you that truth. In many ways we see an increase in anticompetitive conduct.
There are other areas that are of significance to today. The FTC's successful challenge of the Of lice Depot/Staples merger, and the DOJ's aggressive action against Microsoft in a technologically very complex case, to name just two.
Mr. HYDE. Thank you, Mr. Conyers.
The vote is on approval of the journal. I'm not going to go over on it if there are procedural votes this morning. I'm going to proceed and if any members want to go vote, to preserve your spotless record, why, go right ahead.
Mr. CONYERS. What about if your record is down in the basement? [Laughter.]
Page 11 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. HYDE. Well, move over. [Laughter.]
Mr. HYDE. Our first panel consists of the heads of the two agencies we're considering today.
On behalf of the Antitrust Division, we have the Assistant Attorney General for Antitrust, Joel Klein. Mr. Klein is a graduate of Columbia University and Harvard Law School. After law school, he clerked for Supreme Court Justice Lewis Powell before going into private practice from 1976 to 1993. From 1993 to 1995, he served as deputy counsel to the President. In 1995, he moved to the antitrust division, and became its head in July of 1997.
Next, we have Robert Pitofsky, the Chairman of the Federal Trade Commission. Chairman Pitofsky is a graduate of New York University and Columbia Law School. He is now serving his third tour of duty at the Commission. He was the director of the Bureau of Consumer Protection from 1970 through 1973, and was a commissioner from 1978 through 1981 and became chairman in April, 1995. In between those stints, he has been both the dean and a professor at Georgetown University Law School and of counsel to the Washington law firm of Arnold and Porter.
We welcome both of you, and look forward to your testimony. I respectfully suggest that if you could hold it to about 5 minutes that would be helpful to us because we have many other witnesses, but I don't want to impinge on some idea that you're in the middle of expressing, so use your judgment. Your full statements will be made a part of the record.
So, Assistant Attorney General Klein.
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STATEMENT OF HON. JOEL I. KLEIN, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
Mr. KLEIN. Thank you, Mr. Chairman, members of the committee. I am pleased to be here today to represent the administration with respect to the enforcement of the antitrust laws. I applaud the committee's decision to regularize the oversight process; I think there is much to discuss in antitrust enforcement; and I welcome the opportunity for a full and fair exchange.
This committee and the Antitrust Division have long had a constructive relationship, one that I think both parties are proud of. It has not been marred by partisanship, but really has been characterized by professionalism. I know that the Chairman has followed and will follow in that tradition. So, this is really an important part of our work and we look forward to engagement.
Let me just take a few minutes, Mr. Chairman, to just
Mr. HYDE. Would you just pull the mike closer?
Mr. KLEIN. Sure, is that better?
Mr. HYDE. That's better.
Page 13 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. KLEIN. Let me just take a few minutes to highlight some of what I think are the important things that are going on in antitrust enforcement, particularly, at the Department of Justice.
I do think this is a very important period in terms of antitrust policy and antitrust enforcement in the United Statesbecause of the globalization of our economy and the role of new technology in competition, and also because of the deregulatory processes that we are looking at.
I want to thank the committee, Mr. Chairman, for the role it gave us in the Telecom Act. I believe it is a constructive role and, mine may be a minority view, but I think progress is being made and I will say more about that during the course of the proceedings.
Let me just highlight what I see as the two or three major things going on right now.
First and foremost, the internationalization of the process is extraordinary. I will give you just a couple of basic statistics to indicate what I am talking about. Last year in criminal enforcement, the Antitrust Division received $205 million in fines. That is five times higher than we ever previously received and the difference comes from the fact that we are now cracking large, international cartels that are bringing real harm to America's consumers. Today, we have 25 grand juries focused on these huge, huge cartels and we're dealing with countries all over the world. We've got companies that are investigatory targets or subjects in over 20 countries and we're beginning to get real cooperation from foreign governments with respect to this kind of enforcement matter; and I do think that we will have a major policing job to do, in terms of international cartelization.
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At the same time, we're concerned with market access and private market restraints that make it impossible for new competitors to compete on foreign soil. We've been working hard with our colleagues, in Europe in particular, to develop mechanisms so that we can collaborate in these market access cases in a way that is mutually advantageous. Along with Chairman Pitofsky and the members of the Federal Trade Commission, we're about to announce a new agreement with the Europeans that will enable us to refer such cases to each other.
You mentioned the airline industry. One of the cases that we now have on referral to the Europeans has to do with computer reservation systems in Europe, in which we think the European system and organization is disadvantaging effective entry by U. S. competitors.
Second, Mr. Chairman, there is no question that as we sit here today; we are going through a technological revolution that is quite remarkable and this presents new and important challenges for antitrust. The action we brought a couple of weeks ago against Microsoft represents one dimension of the concerns we have, where we are seeing technology that leads to winner take all, or at least winner take nearly all, of a particular market and then the possibility of moving from one market to an adjacent market to a third market, and these are concerns that are particularly present in high tech industries.
We are actively engaged in reintroducing antitrust enforcement to the Federal courts. There really have been relatively few cases before the Federal courts. In the last 18 months we have brought 5 civil cases in Federal court. That is the most that has been brought, I would think, in modern memory, in terms of antitrust enforcement, spanning a range of important issues.
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In addition, of course, we are very active on the merger front. I think we have a constructive, balanced approach. I do think we are concerned about consolidation and certainly the economy is going through some rapid consolidation, but globalization helps one understand that. We have taken, I think, a surgeon's approach to this. We have looked to eliminate the anti-competitive dimensions; we just did this in a couple of huge defense mergers, but where there are real synergies and efficiencies and pro-competitive concerns, we don't want to unduly regulate America's industry, because I think competitive power and competitive juice is desirable, even as anti-competitive power has to be blocked. I think we've done a fair amount in that regard.
Lastly, I do think we are making real progress in telecom. I know everybody else is going to tell you otherwise today. I just want to remind the committee of one salient fact: The Justice Department has a long history of this. In 1974, one of the people I really admire in antitrust, Tom Kauper, brought the AT&T case. It wasn't until 1983 that another man I admire, and that was Bill Baxter, settled that case, effectively having prevailed in court. It is now 23 years since Kauper brought it and probably, what, 14 years since Baxter settled it, but we are seeing real competition in long distance. Prices to the American consumer have come down, on average, adjusted for inflation, by more than half. What you're reading day in and day out is new offerings, new entrants, new competitors.
Mr. Chairman, we will see that in local telephony. I am confident we will see that. The fact that everybody wants to get it done quickly is understandable, but it is better that it be done right, and we at the Department of Justice will ensure that it is done right so that there are not some short-term gains that won't be replicated. I pledge our efforts to that and I believe that over time, and it won't take 23 years this time, over time this country and this Congress are going to be enormously proud of what we did together in this area.
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[The prepared statement of Mr. Klein follows:]
PREPARED STATEMENT OF HON. JOEL I. KLEIN, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
Sound antitrust enforcement is vital to America's economic health, helping consumers obtain more innovative, high-quality goods and services at lower prices, and enhancing the worldwide competitiveness of American businesses by promoting rivalry, encouraging efficiency, and ensuring a level playing field for all competitors. As markets increasingly become global, vigorous antitrust enforcement will help ensure U.S. businesses have the necessary incentives and ability to compete successfully on a global scale. For these compelling reasons, antitrust enforcement has enjoyed substantial bipartisan support through the years.
Antitrust enforcement is more crucial than ever, and also more challenging. Increased globalization, a growing economy undergoing rapid technological change, and deregulation are all combining to lead firms increasingly to be involved in mergers and novel business arrangements that require antitrust scrutiny to ensure that they do not threaten competition. Five factors especially account for the increased challenge facing antitrust enforcers: the increasing globalization of markets; the increasing emphasis on antitrust enforcement in other countries; increasing technological advances that can transform major industries in relatively short time frames; increasing deregulation and the advent of competition in deregulated markets; and the increasing number of mergers.
We are in the midst of a record merger wave. In Fiscal Year 1996, a record 3,094 transactions were filed with us under Hart-Scott-Rodino, and Fiscal Year 1997 has set a new record with 3702 transactions filed. As opposed to the last merger wave of the 1980s, which was primarily motivated by financial considerations, today's mergers are primarily strategic in nature, raising true competitive questions that need to be reviewed carefully. We brought 30 merger cases in the recently ended fiscal year, which tied last year's record for the most in any year in our history. At the same time, our enforcement record shows that we carefully review these matters and do not hinder procompetitive, efficiency-enhancing transactions from going forward.
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We have moved more strongly than ever against hard-core antitrust violations such as price-fixing and market allocation. We have not been content to let businesses treat these criminal antitrust violations as merely a incidental cost of doing business. In the past year alone, criminal fines totaling approximately $205 million have been imposed in cases brought by the Antitrust Divisionfive times higher than any previous year. Our experience has shown that for the largest, most harmful conspiracies, the current $10 million ceiling under the Sherman Act is inadequate, so we are proposing that the ceiling be raised to $ 100 million.
Our recent enforcement action against Microsoft demonstrates again that we will not tolerate private agreements designed to thwart the introduction of competition in important industries.
Good morning, Mr. Chairman and members of the Committee. It is a pleasure for me to appear before you today on behalf of the Antitrust Division of the Department of Justice.
I would like to talk to you today about the current state of antitrust, including some areas of important focus for antitrust enforcers, some recent enforcement initiatives, Antitrust Division budget and staffing, and a proposal that may assist overall antitrust enforcement.
Purpose and Significance of Antitrust
Before I do that, however, I would like to make one basic, but important, point. Sound antitrust enforcement is vital to America's economic health. American consumers and businesses benefit from a free market economy with antitrust enforcement. Protecting against anticompetitive actions helps consumers obtain more innovative, high-quality goods and services at lower prices and enhances the worldwide competitiveness of American businesses by promoting rivalry, encouraging efficiency, and ensuring a full measure of opportunity for all competitors. Indeed, contrary to the suggestions in some quarters, I believe that, as markets increasingly become global in nature, vigorous antitrust enforcement will help to ensure that American businesses will have the necessary incentives and ability to compete successfully on a global scale.
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Because of these compelling reasons, antitrust enforcement has enjoyed substantial bipartisan support through the years. It is vital to our consumers, to our businesses and to our economy. And it is extremely important to antitrust enforcement that this strong, cooperative bipartisan support continue during the years ahead.
We are at an exciting and important time in the antitrust field, and antitrust enforcement is more crucial than ever in benefiting consumers and businesses and protecting them from illegal anticompetitive actions. Antitrust enforcement also is more challenging than ever. Increased globalization, a growing economy that has undergone, and continues to undergo, rapid technological change, and deregulation are all combining to lead firms increasingly to be involved in mergers as well as other strategic business arrangements, many of them somewhat novel. While most mergers and other alliances foster efficiency and thus bring increased benefits to consumers and businesses, some are pursued forand result inmarket power, which, in turn, decreases competition. That is why we must review these arrangements and protect the American consumer from those that threaten competition.
Current State of Antitrust
Antitrust enforcement probably has never before been as time-consuming, as complex, or as central to the functioning of our economy as it is today. Five factors especially account for these conditions:
increasing globalization of markets
Page 19 PREV PAGE TOP OF DOC Segment 1 Of 2 increasing emphasis on antitrust enforcement in other countries
increasing technological advances that can transform major industries in relatively short time frames
increasing deregulation and the advent of competition in deregulated markets
increasing number of mergers
Let me briefly spend a couple of minutes on each of these.
Globalization of Markets
The increasing globalization of markets presents many challenges to an antitrust enforcer. First, in analyzing markets it is especially important to define properly the market in which competition is occurring. A merger or other activity that may violate the antitrust laws if the market is national in scope may be permissible if the market actually is international in scope. This is because the broader geographic scope of the market is likely to result in additional competitors being included within the market, which is one of the main indicators for whether a merger can go forward without harming competition and consumers.
A second challenge resulting from globalization is the need to ensure that our jurisdiction is sufficient to protect U.S. consumers against anticompetitive actions by foreign companies. In March of this year, we received a critically important ruling from the United States Court of Appeals for the First Circuit in United States v. Nippon Paper Industries Co. Ltd., reaffirming that Congress gave us jurisdiction to prosecute anticompetitive activities that take place off U.S. soil but have their effects here. This strengthens our ability to combat effectively the anticompetitive activity that increasingly takes place in the international marketplace to the detriment of U.S. consumers and businesses. And third, at a very basic level, the increasing globalization of markets leads to increased complexity in investigations, making it more difficult, time-consuming and costly to pursue an investigation to its ultimate conclusion. Often, we must seek assistance from competition authorities in other countries in order to get evidence that we could not otherwise reach.
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Global Antitrust Enforcement
The increasing importance of antitrust in other countries and the increasing enforcement presence of foreign competition authorities likewise creates some difficult challenges, but also many opportunities, for an antitrust enforcer. The kind of challenge that I have in mind was perhaps best evidenced by, although it is by no means limited to, the Boeing/McDonnell-Douglas mergerwhere U.S. and European Union authorities reached differing conclusions regarding the merger. We need to establish and cultivate good relations with foreign enforcers and understand each other's enforcement policies and practices, so that this kind of conflict is minimized, if not eliminated altogether. At the same time, increasing antitrust enforcement by other nations presents several excellent opportunities for American enforcers as well. Given jurisdictional limitations imposed by national sovereignty, effective enforcement may require action by more than one antitrust authority. Referrals of matters among antitrust enforcement agencies can also help save resources of the various antitrust enforcement agencies around the globe.
A crucial step in these matters is negotiating and implementing ''positive comity'' agreements with other antitrust authorities. Under such agreements, the antitrust agency of one country makes a preliminary determination that there are reasonable grounds for an antitrust investigation, typically in a case in which a corporation appears to have been denied access to the markets of another country. It then refers the matter, along with the preliminary analysis, to the competition authority whose home market is directly affected by the matter under investigation. After consultation, the referring country can accept the conclusions, seek to modify them, or pursue its own action. Such an approach has many helpful aspects. First, competition authorities have a great stake in taking such complaints seriously. Second, such a process maximizes the likelihood that the kind of evidence necessary to properly decide such cases can be obtained. Finally, this process can defuse trade tensions by providing a sensible, systematic approach to fact-gathering, reporting, and bilateral consultation among competition authorities. I would note that we currently have such agreements in place with the European Union and Canada and are working diligently to reach such agreements with other competition authorities as well.
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As one example, earlier this year, we announced our first formal positive comity request to the European Union. We requested an investigation into possible anticompetitive conduct by certain European airlines that may be preventing U.S.-based computer reservation systems from competing effectively in certain European countries. This matter is being actively pursued by European competition authorities.
Similarly, as sophisticated technological advances permeate more and more industries, the job of an antitrust enforcer becomes increasingly complex. It is important to understand both the technology at issue, and its likely effects, in order to reach the proper competitive conclusions. But this is not always easy and sometimes requires significant time and expertise as well as forward vision. Technology can also bring industries previously considered separate and distinct into the same competitive marketplace, as we are increasingly likely to see in the field of communications where, for example, telephone and cableor, who knows, maybe wirelessappear headed for direct competition with each other at some point.
These dynamic economic considerations have important ramifications for how we analyze mergers as well as other conduct. The existence of rapidly changing technology is, of course, always a challenge in a court case where future effects are at issue. The defendants to an action will no doubt argue that the existence of new technology will change the industry in such a fashion that there will be no anticompetitive effect of their conduct. We need to be able to critically evaluate such contentions in our investigations, and to rebut them in court when they are incorrect.
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Deregulation and the Introduction of Competition
Deregulation and the advent of competition in important industries also presents major challenges to antitrust enforcers. Last year, Congress passed the Telecommunications Act of 1996, which is intended to bring increased competition to the communications industry. As with any change in law, the events unfolding immediately after passage of the 1996 Act may not be exactly what was envisioned during the debate leading up to its passage. Nonetheless, members of this committee were instrumental in ensuring that the Department of Justice Antitrust Division remained centrally involved in protecting and promoting competition in this industry, and we intend to see that the responsibilities set out for the Antitrust Division in the 1996 Act are carried out as they were intended.
We have an important role in commenting to the Federal Communications Commission on section 271 applications. There have been two section 271 matters decided by the FCC thus far, and a third one is pending before the FCC. In the SBC/Oklahoma and Ameritech/Michigan applications earlier this year, we set forth in great detail our competitive analysis. I believe that our evaluations in these matters have greatly assisted the FCC and the applicants. Our analysis has established the framework to bring increased competition to consumers. Our mission now is to ensure that the Bell operating companies and their competitors will implement that framework. We will continue to carry out our important role in the section 271 process to ensure that competition is furthered as Congress intended.
Of course, the antitrust laws continue to apply fully to the communications industry, and we intend to ensure that all companies in the industry adhere to them. The 1996 Act has resulted in a substantial increase in the number of radio mergers, for example, and we have brought several actions seeking to prevent anticompetitive results in that area.
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Congress is currently considering electricity restructuring, and it is important to ensure that any restructuring in that industry takes into account important competitive principles. Indeed, some of the developments we have witnessed in the process of telecommunications deregulation may be worth keeping in mind in the electricity context. As the Committee moves forward in this area, I would welcome the opportunity to work with you on this important issue. In addition, I believe that after restructuring, we probably will see more mergers in this industry as well, and we will need to ensure that any such mergers do not violate the antitrust laws. We will work closely with this committee and with Congress to assist in any way we can.
Finally, the last factor I mentioned in my list is the continuing merger wave. In Fiscal Year 1996, a total of 3,094 transactions were filed with us under the Hart-Scott-Rodino Act, the most in our history. Fiscal Year 1997 has set yet another record, with 3,702 HSR filings. As opposed to the last merger wave of the 1980s, which was primarily motivated by financial considerations, today's mergers are primarily strategic in nature. This means that more than ever before the mergers raise true competitive questions that need to be reviewed carefully to ensure that the mergers will not harm competition and consumers. This merger wave presents significant challenges to an antitrust enforcer, including how we are able to keep up with the influx of mergers, how we can effectively review them in a timely fashion without imposing substantial unnecessary costs on businesses or sacrificing consumer interests, and how we resolve cases when anticompetitive concerns exist after the investigation. I believe we have taken a number of important steps in these regardssuch as speeding review of matters that do not raise serious anticompetitive concerns, focusing our investigation of any matter raising anticompetitive concerns at its earliest stages, and working closely with parties regarding our concerns, so that they can take steps to alleviate them. And we need to be ever watchful, of course, that we are doing the best we can with the resources we have.
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As you can see from this lengthy list, it is an exciting and important time for antitrust and for antitrust enforcers. The challenges are many, the opportunities great, and the workload tremendous. I would like to spend a short time detailing some of our workload for the past year, and some of what can be expected in the future.
Recent Enforcement Initiatives
I have been serving as head of the Antitrust Division for a little over a year, most of that time as the Acting AAG. During that time, the Division has taken many important enforcement initiatives. I would like to highlight just a few of them for you.
First, in the area of criminal enforcement, we have moved more strongly than ever against hard-core antitrust violations such as price-fixing and market allocation. We have not been content to let businesses treat antitrust violations as merely a minor cost of doing business.
Instead of limiting the fines we seek in large criminal antitrust cases to the $10 million Sherman Act statutory maximum figure, we have been aggressive in utilizing the alternative fine provision contained in 18 U.S.C. §3571 to seek fines that are more consistent with the sentencing ranges provided by the United States Sentencing Guidelines for antitrust violations involving substantial amounts of commerce and great harm to consumers. As a result, in the past year alone, criminal fines totaling over $200 million dollars have been imposed in cases brought by the Antitrust Division. This is almost 500 percent higher than the level of criminal fines imposed during any previous year in the Division's history. Fines of this magnitude are crucial to ensuring that companies do not treat the antitrust law as merely something that they can flout with little repercussion when and if their violations are discovered, essentially treating the antitrust laws as an incidental cost of doing business.
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Our food and feed additives matters are a prime example of the importance of our criminal enforcement work. These investigations involved pursuing a massive international criminal antitrust conspiracy that resulted in a global cartel exacting inflated prices from millions of American consumers, businesses and farmers. We sought and received fines dwarfing our previous records because of the scope and importance of the violation. Companies involved in the matter have been required to take corrective action to prevent the possibility of future violations. Indeed, our experience here has shown that we need to increase the ceiling for criminal antitrust fines in general and, to that end, we are seeking to increase the maximum level of fines contained in the Sherman Act, so that the punishment can fit the crime.
Second, in the area of merger enforcement, we have been as active as ever. As I said earlier, in the recently ended fiscal year we received a record number of Hart-Scott-Rodino filings. A record $725 billion in U.S. merger transactions have taken place in 1997, as of October 20, an increase of more than 40 percent over the same period for last year, which was itself a record breaker at the time. International mergers increased significantly as well. We brought 30 merger cases in the recently ended fiscal year, which tied the record for the most in any year in our history.
But, at the same time, our enforcement record shows that we carefully review these matters and do not hinder procompetitive, efficiency-enhancing transactions from going forward. In reviewing these mergers, we are charged with distinguishing the transactions that will not harm competition (which are the majority of the transactions), from those that will injure competition and consumers. Mergers that do not threaten competition can increase efficiency, improve research and development, and lower prices to consumers. Because of these benefits, even when we do have reason to believe a merger may be anticompetitive, we work to prevent the anticompetitive aspects of that merger from going forward, while not prohibiting parts of the deal that do not raise anticompetitive concerns.
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A prime example of this is our action with respect to Raytheon's acquisitions of the defense electronics division of Texas Instruments and of General Motors' Hughes Aircraft subsidiary. In the Texas Instruments matter, we reached a settlement that allowed the acquisition to go forward, but required Raytheon to sell the Texas Instruments business that produces a key component for radar systems. I believe that the merger as originally proposed would have resulted in significantly higher prices paid by the Department of Defenseand ultimately by taxpayersfor advanced military radars used in major weapons systems. We examined a number of narrow alternative remedies, such as requiring licensing of certain technology, but we would not accept a band-aid solution to fix a serious competitive problem. Instead we required major surgery, the largest post-war divestiture ever in the defense industry.
In the Hughes Matter, we also concluded that as proposed the merger would harm competition. We required a broad range of remedies to preserve competition prior to letting the transaction go forward. As part of the remedies we required wholesale divestiture of two defense electronics businesses in order to preserve competition in sophisticated technology for U.S. weapons systems. We also required, as a separate remedy, that Raytheon establish procedures that prohibit a team of employees from Hughes and a team of employees from Raytheon from disclosing to each other information regarding the development and production of a new antitank missile for the Army, thus preserving the independence of these teams in this competition. Finally, as an additional remedy, Raytheon agreed to firm prices with the Air Force on certain air-to-air missiles for which there had been competing bids by Raytheon and Hughes.
It is important to note, however, that partial remedies, even those involving large divestitures (such as Raytheon/TI and Raytheon/Hughes), will not necessarily work in all cases and we must and will be prepared to go to court to challenge an anticompetitive merger in its entirety, if necessary.
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Third, in the area of civil non-merger enforcement, we must ensure that important principles that have wide applicability are established and that industries important to our economy are not being harmed by anticompetitive means. In Rochester Gas & Electric, we recently brought an enforcement action against an electric utility for inducing a potential competitor to enter into a contract designed to prevent the competitor from providing low-cost electricity to consumers. We have brought actions against health care plans for anticompetitive agreements that prevent lower prices to consumers through the use of ''most-favored-nation'' clauses. We have also brought an action against a major medical supply corporation for intellectual property licensing practices that deter effective competition.
Last month we brought a contempt action against Microsoft charging it with violating the terms of our August 1995 settlement. In that settlement, Microsoft had agreed to refrain from certain practices that we believed restrained competition in violation of the Sherman Act. One of those practices was requiring personal computer manufacturers who desired to install Microsoft's operating system software in any of their computers to pay Microsoft a set fee for every computer they shipped, regardless of whether or not it contained the Microsoft software. Microsoft's software was in such high demand that manufacturers could not afford to do business without it. And because manufacturers almost invariably pre-install an operating system on their computers before shipping them to retailers, Microsoft's restrictive license made it decidedly more difficult for competing operating systems to even get a foot in the door and offer consumers a competitive choice. Consumers received and paid for Microsoft's operating system whether they would have chosen it first in a competitive market or not, and in order to get another operating system, they would have had to pay twice.
Page 28 PREV PAGE TOP OF DOC Segment 1 Of 2 As part of the August 1995 settlement, Microsoft also agreed not to require any licensee to purchase another Microsoft product as a condition for licensing a Microsoft operating system, and agreed to stop requiring independent applications software developers to sign restrictive non-disclosure agreements that prevented them from developing software for Microsoft's competitors long beyond any reasonable time needed to protect proprietary information regarding Microsoft's operating system.
In our recent enforcement action, we have charged Microsoft with violating the terms of the August 1995 settlement by requiring personal computer manufacturers to license Microsoft's Internet browser, called the Internet Explorer, as a condition of licensing Microsoft's Windows 95. Unfettered competition in Internet browser technology has the potential to create a competitive personal computer market environment in which business and consumer applications could work regardless of which operating system is installed on the computer. It is therefore important that Microsoft not be able to use its current operating systems monopoly to stifle competition in Internet browsers.
We are also asking the court to strike down portions of the non-disclosure agreements Microsoft requires its licensees and business partners to sign, which purport to prohibit them from disclosing broad categories of information deemed confidential and often require disclosure to Microsoft prior to compliance with government subpoenas. On the face of it, these agreements cover disclosures to our investigators and the courtsat least implicitly, and sometimes explicitly. Based on information from third-parties, we are concerned that these non-disclosure agreements may unduly hamper our efforts to monitor compliance with the August 1995 settlement, as well as with our other on-going enforcement efforts relating to the computer industry. Microsoft has recently informed us that it does not interpret the agreements to cover disclosures to us, but we believe there is too much risk of a chilling effect unless those portions of the agreement are struck and Microsoft's licensees and business partners are specifically notified.
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These recent enforcement actions show that we will not tolerate private agreements designed to thwart the introduction of competition in important industries. We also have important on-going enforcement priorities in banking/commerce, communications, musical licensing, and health care, to name just a few of the other important industries that we are currently looking into.
Finally, one area that cuts across all of the previously-mentioned substantive areas is international enforcement. Whether it be criminal matters, merger matters, or civil non-merger matters, we increasingly have important international aspects associated with our work. For example, approximately 30 percent of our current grand jury investigations are focused on international cartel activity; the subjects or targets of those investigations are located in more than 20 foreign countries on four continents. Many of our merger matters involve foreign firms as parties to the merger. On the civil non-merger side, we are concerned with foreign companies taking market-closing actions against American corporations in violation of our antitrust laws. The increasing globalization of markets will only increase the international nature of our work in the future.
In view of the far-reaching effects of economic globalization on the American economy, American businesses, and American consumers, the Department of Justice has recently established a new federal advisory committee, the International Competitiveness Advisory Committee. It mission will be to provide the Antitrust Division with outside expert advice to help us in our continuing efforts to internationalize basic antitrust principles and make them the foundation for commercial relationships among nations.
Page 30 PREV PAGE TOP OF DOC Segment 1 Of 2 More specifically, I will ask the experts who are appointed to this Committee to concentrate on three key issues. First, how can we build an international consensus that horizontal cartel agreements are condemnable and must be challenged by competition enforcement authorities around the world? Second, at a time when increasing numbers of mergers involve international transactions that directly affect competition in more than one country, how can the various competition enforcement authorities best coordinate their merger review efforts to achieve results that are fair both for the parties to these mergers and the countries affected by them? And third, how best can the fundamental principles of competition policy be made an integral part of U.S. trade policy, so that the pursuit of the latter reflects, rather than rejects, the goals of the former? I strongly believe that getting the right answers to these questions is essential to the maintenance of free and fair international commerce, which greatly benefits the U.S. economy.
While this advisory committee is still in its formative stage, its ultimate recommendations will be of great assistance to the Department of Justice as we continue our efforts to expand the understanding and importance of competition policy as it relates to the burgeoning commercial relationships between the United States and its international trading partners.
Our workload is expanding, its complexity is increasing, its importance to American businesses and consumers has never been greater. To effectively continue to carry out our mission we need increased resources.
Antitrust Division Budget and Staffing
Page 31 PREV PAGE TOP OF DOC Segment 1 Of 2 For the last Fiscal Year and in the Continuing Resolution, the Antitrust Division's budget is $92,447,000, providing for a total of appropriated staffing level of 831 positions. We sincerely appreciate the support of this Committee in providing the Division these resource levels.
We currently are fully staffed, working hard to protect American consumers through enforcement of the antitrust laws of the United States. This level of staffing is vitally necessary to our mission. I would note, however, that this level is still significantly lower than the staffing levels of the Antitrust Division in 1980 (when we had 982 employees), a time when the economy was significantly less complex and smallerthere were far fewer mergers then and the international dimensions of enforcement were almost non-existent.
In light of our tremendous ongoing workload and its projected expansion, the President's FY 1998 budget for the Antitrust Division is $97,542,000, which includes increases to handle cost-of-living expenses and $3,814,000 to hire additional attorneys, paralegals, and other critical support. Congressional action to date on our FY 1998 budget request includes a House-passed level of $94,540,000, a cut from the President's request by $3 million. The Senate passed an authorization of exactly the same as Fiscal Year 1997, or over $5 million less than the President's request. The current Senate level will effectively require the Antitrust Division to take a funding cut to absorb $1,200,000 in cost-of-living expenses. To say the least, I am extremely concerned about our FY 1998 funding level, especially in light of the enormous tasks facing the Antitrust Division in the near future.
We are in the midst of a continuing wave of strategic mergers, and are contending with increasing globalization and internationalization in markets. We are being forced to deal with increased complexity in antitrust analysis given lightening-paced leaps in technology, and are grappling with the increased role of the Antitrust Division in preserving and protecting competition in important industries being subject to competition to an extent never before. It is clear that increased resources are necessary to successfully meet these challenges. I want to assure you that we are frugal with our spending and we are working hard to implement the Government Performance and Results Act, which should have positive effects in emphasizing efficiency.
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Our mission is absolutely critical and I do not think that any fair assessment of what we are doing and its importance to the economy can lead to any other conclusion. I believe that increased resources are necessary.
I mentioned earlier in my testimony the importance of hefty criminal fines to ensure that antitrust compliance is not considered a mere minor cost of doing business. The statutory maximum fine established for antitrust violations is currently $10 million. The methodology adopted by the U.S. Sentencing Commission appropriately calculates fines for antitrust offenses based on a percentage of the volume of commerce affected by the conspiracy. In an increasing number of our prosecutions against corporations that involve very large volumes of commerce, however, the objective of the Sentencing Commission methodologywhich in those cases would result in fines greater than $10 millionis thwarted by the $10 million statutory maximum. In such cases, the only alternative to a fine statutorily capped at $10 million is for the offending corporation to be sentenced under the ''twice-the-gain or twice-the-loss'' alternative sentencing provision, 18 U.S.C. §3571(d). The Division has on four occasions been able to use that provision to obtain fines greater than $10 million in negotiated plea agreements. Unfortunately, in antitrust offenses, proving actual gain to the conspirators or loss to the victims from an antitrust offense is extremely difficult.
The end result is that for the largest, most harmful antitrust conspiraciestypically conspiracies involving international cartels and foreign corporationsthe standard methodology adopted by the Sentencing Commission for calculating antitrust fines is mooted in favor of a fine calculation that tends to be more and more lenient towards bigger and bigger offenders. The current statutory scheme provides less deterrent effect for firms harming the largest volume of commerce and causing the greatest injury to U.S. firms and consumersa perverse result. Raising the maximum antitrust fine in the Sherman Act would help rectify this problem and ensure that multinational corporations that commit antitrust offenses involving hundreds of millions or billions of dollars in U.S. commerce are punished just as severely, in relative terms, as local firms that commit antitrust offenses involving far lesser sums. Our recent experience suggests that $100 million would be a more appropriate statutory maximum. I would welcome the opportunity to work with the Committee on such legislation.
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The Antitrust Division has worked hard to carry out its responsibilities to the American consumer and has much more hard work in front of it. We will work to protect the marketplace so that it is free of anticompetitive conduct and all companies can compete on a level playing field.
Carrying out our responsibilities requires hard work and intelligence, among many other traits. I believe that we have an excellent staff that is prepared and trained to do the best job possible to protect the American consumer. We all look forward to the challenges that we face, as well as the opportunities that we have, to ensure that consumers are benefited by competition that produces low prices, high quality and innovative goods and services.
Mr. HYDE. Thank you very much, Mr. Klein. Chairman Pitofsky.
STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE COMMISSION
Mr. PITOFSKY. Thank you, Mr. Chairman, members of the committee. I, too, am delighted to be here and to have an opportunity to discuss what the FTC is up to and why, and I, too, believe that regular oversight can only be constructive in an exchange of views with members of the committee.
If I were to try to summarize what we're up to in the antitrust field in just a sentence or two, I would say that we're pursuing twin goals. First of all, to enforce the antitrust laws with some commitment, energy and vigor, and at the same time be aware that some antitrust enforcement can produce unnecessary burdens on the business community. In that respect, we particularly want to be alert to the possibility that the laws that we enforce, many of which were interpreted by the Supreme Court 40 and 50 years ago, ought to be up to date, ought not to be obsoleteought to be relevant to the commercial world as it now exists.
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On the enforcement side, it is true that there now exists one of the most remarkable merger trends, waves, that this country has seen ever. Our agency saw 3,700 mergers filed last year. That's about twice as many as just 5 years ago. We and the Justice Department each brought four times as many merger cases last year as either agency brought just 10 years ago. I don't think our response is weak or puny. These are not small cases. For example, we challenged successfully in court the Office Depot/Staples merger. We managed to block that combination of 1,000 superstores. Roughly, we think that we savedwe will saveconsumers $200 million a year as a result of preventing that merger.
Less attention has been given, but an equally important case, is a proposed merger between two Swiss pharmaceutical companies, Ciba Geigy and Sandoz, where they were miles ahead of everyone else in research and development on gene therapy which is a promising approach to cures for cancer, AIDS, and other diseases. We insisted that they spin off their patents, their know-how, their technology to a separate firm, so as to preserve competition in that area.
In the non-merger area, we, like the Justice Department, give priority to arrangements between horizontal competitors, between actual rivals. We brought a case against the Dentist Professional Association in California that, using an ethical rule, prevented price advertising among all members of the association. We found a violation and I'm glad to say the 9th Circuit, just two weeks ago, affirmed what the Commission did.
We continue to be vigorous in our enforcement against minimum resale price maintenance, because we think that the result of that practice is to cost consumers money, to raise prices to consumers and to give them little in return. We haven't brought a maximum resale price maintenance case, and as you know, from the front pages of the paper this morning, the Supreme Court, nine to nothing, reversed the rule declaring maximum resale price maintenance illegal on a per se theory. My colleague, Joel Klein, argued that case and argued it successfully in the Supreme Court. We also are active in the distribution area. We brought, I think, the first exclusive dealing case in a decade and we're active with respect to boycott enforcement.
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As to minimizing burdens, perhaps the thing I'm most proud of is our review of the rules and guides that were on our books when I came to office. I should say, however that review started under the direction of my predecessor, Janet Steiger. We embraced that process and, I'm pleased to report, that we have, in two-and-a-half years since I've been there, eliminated 44 percent of the rules and guides that were on our books previously. Many of them were obsolete, they'd been superseded, maybe they weren't a good idea in the first place. We also have sunsetted our orders at 20 years on the theory that after 20 years the market has probably changed so much that the order doesn't make too much sense and we eliminated several hundred orders as a result of that.
Next, we restored what I think is an immensely important tradition at the FTC, that is, to serve as an arm of Congress, conducting studies, hearings, reports, about the nature of competition in the country and in the world. We held hearings on global competition, on high tech competition. Those, in turn, led us to clarify and amend our guidelines with respect to efficiency defenses to mergers. We're now looking at joint venture law and whether we can clarify the law in that area.
Finally, I would mention the health care guidelines that this committee knows so much about. We were able to work with the Chairman, with the committee staff. We reviewed the health care guidelines, which many out in the country were misinterpreting as finding that networks of doctors would usually be challenged in a per se proceeding rather under the more flexible rule of reason. We clarified that a wide range of efficiencies would be taken into account and the early returns from all elementspatients, doctors, hospitalsare that those guidelines are working well.
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Let me conclude by saying, I believe antitrust is an essential feature of the U.S. economic policy. It produces efficiency, it encourages innovation, it helps to insure fair prices, it has served the country well for 107 years. My hope is that we can continue to protect the free market with vigorous enforcement of the antitrust laws.
I thank you and, of course, I'd be glad to answer questions.
[The prepared statement of Mr. Pitofsky follows:]
PREPARED STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE COMMISSION
Mr. Chairman and members of the Committee, I am pleased to appear before you today to present testimony of the Federal Trade Commission that will provide an overview of our antitrust enforcement activities.(see footnote 1) I will review the Commission's activities during the approximately two and a half years since I returned to the Commission to serve as its chairman.
I. ANTITRUST POLICY
The Commission strongly believes in the bedrock principle that protecting competition from the improper exercise of market power will enhance the welfare of consumers. That is the purpose of the antitrust laws. Congress long ago decided that a competitive economy would provide more benefits for consumers in the form of lower prices, optimal quality and quantity of goods and services, and greater innovation than would an economy based on government control or the accumulation of market power by private interests. That conclusion has proved true over time.
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Starting with those basic principles, the Commission's approach to antitrust enforcement is twofold: to enforce the antitrust laws with vigor and protect consumers from abuses of market power, but also to avoid unnecessary intrusions and burdens on businesses. We also have a responsibility to make sure that antitrust policy makes sense and is sensibly applied. It must stay in tune with the competitive realities of the modern business environment, so that we can continue to advance consumers' interests into the 21st Century.
I will start with a broad overview of enforcement activities.
II. AN OVERVIEW OF ENFORCEMENT ACTIVITIES
We have been very busy. One measure of our workload is the level of merger activity. The number of mergers reported to the FTC and the Department of Justice pursuant to the Hart-Scott-Rodino Act has more than doubled in the last five years, from 1589 transactions in fiscal 1992 to 3702 transactions in fiscal 1997. Thus far in fiscal 1998, the trend is continuing. The volume of filings last month was the highest ever for October.
Merger enforcement is an important part of our work, not only because we have specific statutory responsibilities with respect to mergers, but also because merger enforcement serves to prevent the creation of market conditions that are likely to lessen competition and harm consumers. The current merger wave has made this an even larger part of the Commission's antitrust mission. Through productivity gains and old fashioned hard work, the Commissionmore specifically, its dedicated staffhas handled the increased workload with basically the same staffing level it had in 1991.
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Unlike the conglomerate merger wave of the late 1960s, and the leveraged buyout, hostile takeover, junk bond activities of the 1980s, this current wave of mergers does not seem to be mainly motivated by financial market considerations. Rather, a larger percentage of these transactions appears to be a strategic response to changes in the world economy. Many are a response to the sharp increase in global competition (e.g., pharmaceuticals), others to new economic conditions produced by deregulation (e.g., telecommunications and electric utilities), and still others to over-capacity in some industries and to a perceived need to bring supply more in line with demand (e.g., defense industries and hospitals). While many mergers in this current wave appear to be motivated by a legitimate response to quickly changing business conditions, a larger proportion than in the recent past seems to involve direct competitors. As a result, the threat of increased market power, and potential adverse effects on consumer welfare, must be carefully assessed.(see footnote 2)
We have sought to target our scarce resources on the most important areas of the economy. The bulk of the Commission's antitrust enforcement effort is devoted to six market sectors that are important to us all in our everyday lives: health care, pharmaceuticals, energy, information and technology, other consumer goods and services, and defense. It is indicative of the changes taking place in several of those markets that during the three-year period from fiscal 1995 through fiscal 1997, about 78% of our competition actions were in those six sectors, compared to about 63% in the previous three-year period.
Rather than recite a litany of cases, let me discuss a few examples that illustrate significant Commission actions in various sectors of our economy, and how consumers have benefitted.
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A. Merger Enforcement
A prime example of consumer benefit from merger enforcement is the important case earlier this year in which the Commission challenged the proposed $4 billion merger of Staples and Office Depot, the two leading office supply superstores.(see footnote 3) This was the largest merger challenged in court by the government in recent years. The two firms together had about 1,000 superstores and competed head-to-head in numerous metropolitan areas across the country. In 15 major metropolitan areas, including Washington, D.C., Baltimore, San Diego and Tampa-St. Petersburg, Staples and Office Depot were the only superstores, and the merger would have resulted in a monopoly. In 27 other metropolitan areas, the two firms had only one other superstore competitor.
The Staples/Office Depot merger was very likely to result in increased prices, and also prevent increased competition in areas where one of the firms was planning to enter the other's territory. In fact, Commission staff developed evidence that in markets where three superstores competed, prices were lower for some products than in markets where only two stores competed. The staff's estimates indicate that by blocking that merger, we may have saved consumers around $1 billion over a five-year period, or about $200 million per year.(see footnote 4) Such projections are always subject to some degree of uncertainty, but in this case the data available to make such an estimate were unusually rich, because we were able to compare actual pricing patterns in one-, two-, and three-superstore markets. Thus, it appears that the annual savings to consumers from this one case are roughly double the FTC's annual budget.
Another example involving consumer goods or services is the case challenging the merger of two firms, First Data Corporation and First Financial, that operated the only two consumer money wire transfer services in the U.S., MoneyGram and Western Union. These services are used by thousands of people who need emergency cash when they are away from home, such as travelers and students, and by people who do not have a bank accountestimated at around 25% of U.S. households. The Commission's consent order requiring divestiture of one of those businesses saved consumers an estimated $15 million to $30 million each year in money wire transfer fees.(see footnote 5)
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A different kind of consumer benefit was at stake in the merger of pharmaceutical giants Ciba-Geigy and Sandoz earlier this year.(see footnote 6) That merger would have given Ciba-Geigy a monopoly in certain patents and trade secrets for the development of gene therapies, which hold promise for the treatment of some forms of cancer and AIDS. As a result, there would have been less competition in the research and development of those products, and the race to commercialize the products, assuming there would be a race, would have been on Ciba-Geigy's terms. The Commission's consent order required Ciba-Geigy to license certain patents and technologies so that the effort to develop those products would not be dominated by a single firm.
The Ciba-Geigy case illustrates the importance of enforcing the antitrust laws carefully but assertively in high-technology industries. A firm's competitive strength in high-tech markets is often derived from its intellectual property. We are cautious in dealing with intellectual property because it is important not to lessen the incentives to innovate. But it is as important to protect against anticompetitive consolidations or other abuses of intellectual property as it is to prevent the acquisition or abuse of market power with respect to other assets.
At the retail level in pharmaceuticals, the Commission challenged several mergers involving large drugstore chains so that consumers would continue to have the benefit of price competition. Some of these cases, such as Rite Aid/Revco,(see footnote 7) prevented the acquiring company from garnering market power that would give it undue leverage in negotiations to provide pharmacy dispensing services to pharmacy benefit plansan important segment of the industry.(see footnote 8)
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In the area of medical devices and equipment, a recent injunction action resulted in the abandonment of a merger of the two leading firms engaged in the rental of medical equipment to hospitals,(see footnote 9) and the consent order in another case preserved competition in the market for cranial shunts used in the treatment of hydrocephalus.(see footnote 10)
In hospital mergers, the vast majority of transactions do not raise substantial antitrust concerns, and we do not challenge them; but we do take action when the evidence indicates that consumers are likely to be harmed. The Commission issued consent orders in several cases,(see footnote 11) but there were also disappointments in preliminary injunction actions in two other cases involving mergers of local hospitals.(see footnote 12) Despite those setbacks, we have an obligation to review each transaction on its own merits.
In the information and technology area, one of the more important enforcement actions involved the acquisition of Turner Broadcasting Corporation by Time Warner.(see footnote 13) This merger made Time Warner a powerhouse in the production of video programming (such as HBO, CNN and TBS) for cable television and other non-broadcast distribution, and it also increased the level of vertical integration in the industry by linking Turner Broadcasting's video programming with Time Warner's cable operations. After an extensive investigation of some very complicated issues, a majority of the Commission voted to issue a consent order that prevents competitive harm in three ways: (1) it prevents Time Warner from exercising market power in the sale of video programming to cable companies and other distributors by bundling the sale of programming on an all-or-nothing basis; (2) it prevents Time Warner from discriminating against potential competitors of its cable companies, such as DBS systems and wireless cable, by selling important video programming on unfavorable terms; and (3) it prevents Time Warner from requiring its cable companies to favor programming produced by Turner Broadcasting and thereby discriminating against competitors at the programming production level.
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The consent order also required Time Warner cable systems to accept carriage of a new all-news cable channel to compete with CNN. The use of an access requirement deserves some discussion. Access requirements are not common in antitrust because they have regulatory overtones and complications with which antitrust is not entirely comfortable. The competitive concern in Time Warner was that an all-news channel needs broad distribution in order to be viable, and that carriage by some Time Warner cable systems would be important because of Time Warner's substantial share of the distribution market. However, Time Warner's ownership of CNN would reduce the incentive for its cable companies to carry another all-news channel. The Commission's order dealt with that problem in the most practical way, by requiring carriage of a competitor to CNN for a limited period. It left the selection of the second competitor and the terms of carriage to be worked out by the parties.
Cadence Design Systems(see footnote 14) is another case that illustrates the role of antitrust in protecting market access in industries that are undergoing deregulation or technological change. In that case, a majority of the Commission voted to issue a consent order that prevented Cadence's acquisition of Cooper & Chyan Technology from lessening competition for key software used to automate the design of integrated circuits, or ''microchips.''(see footnote 15)
In the energy sector, our recent cases have been in the natural gas area. Most notably, the Commission blocked Questar Corporation, the exclusive transporter of natural gas to Salt Lake City, from acquiring a major interest in a firm that not only was planning to enter the Salt Lake City market, but whose early negotiations for sales were already having a downward effect on the price of transportation services.(see footnote 16) The Questar case illustrates another reason antitrust enforcement is important in newly deregulated industries. Deregulation of major sectors of the natural gas industry has made possible the emergence of competition in the sale and transportation of natural gas to industrial customers. These changes were starting to occur in Salt Lake City, but competition could have been nipped in the bud if the acquisition had been permitted. Antitrust enforcement preserved the benefits of that emerging competition.
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In the defense sector, our staff has maintained a productive working relationship with Department of Defense staff in accordance with the Defense Science Advisory Board guidelines for antitrust review of defense industry mergers. The Commission has been careful not to interfere unnecessarily with the positive, procompetitive aspects of defense mergers, and we take careful account of special characteristics of defense procurement. However, we have taken action when a merger, or certain aspects of a merger, threatened to increase market power and result in higher prices, lower output, or reduced quality, service or innovation. The product markets involved in recent cases in which we negotiated consent orders include high altitude endurance unmanned air vehicles and space launch vehicles,(see footnote 17) military tactical fighter aircraft,(see footnote 18) satellite communications systems,(see footnote 19) a component for an anti-missile program,(see footnote 20) and Aegis destroyers.(see footnote 21)
The Commission also reviewed the defense industry aspects of the Boeing/McDonnell Douglas merger.(see footnote 22) Although both companies develop fighter aircraft, the evidence indicated that there are no current or future procurements of fighter aircraft by the Department of Defense in which the two firms would likely compete. Therefore, the merger was not likely to lessen competition in defense procurement.
B. Non-Merger Enforcement
Page 44 PREV PAGE TOP OF DOC Segment 1 Of 2 The FTC also plays a special role in antitrust enforcement because it engages in administrative litigation, primarily in non-merger cases. In substantial part, the FTC was created because Congress believed that it would be helpful to have the assistance of an agency with specialized expertise in analyzing complex business transactions to resolve the difficult competition issues that may arise. The Commission has applied this expertise on numerous occasions over the years, resulting in important antitrust decisions such as the American Medical Association(see footnote 23) case in 1979, which opened the door for alternative forms of health care delivery at a time when the AMA's actions deterred change from more expensive fee-for-service health care delivery, which was then the predominant system. Later cases established the principle that consumers can be harmed by collusive and unjustified denials of important services as well as by collusive arrangements that more directly affect price competition. For example, in FTC v. Indiana Federation of Dentists,(see footnote 24) the Supreme Court upheld the Commission's finding that a group of dentists had harmed their patients by refusing to provide their dental x-rays to insurance companies to facilitate the insurers' pretreatment review.
A current case provides another example of the Commission's adjudicatory function.(see footnote 25) In late September, an administrative law judge issued a decision upholding an FTC complaint that charged Toys ''R'' Us, the nation's largest toy retailer, with using market power to force toy manufacturers to stop selling their popular toys to warehouse clubs, or to sell the clubs only combination packs so consumers could not easily compare prices.(see footnote 26) I cannot discuss the merits of the case since it is pending on appeal before the full Commission, but the ALJ's decision addresses a number of interesting issues. The case alleges that a buyer, rather than a seller, exercised market power and that the buyer orchestrated agreements among the sellers to adhere to the restrictions on sales to the buyer's competitors. Resolution of these kinds of complex issues requires the kind of expertise that Congress expected the Commission to apply when the FTC was established.
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The Commission's non-merger enforcement, like its merger program, has focused on cases that have an impact on consumers. One recent case illustrates the continuing role the Commission plays in protecting competition in health care. The College of Physicians-Surgeons of Puerto Rico and three physician groups recently settled charges that they engaged in an unlawful boycott and agreements related to prices for services under Puerto Rico's government-managed health care plan for the indigent (Medicaid).(see footnote 27) According to the complaint, the physicians attempted to coerce the Puerto Rican government to recognize the College as the exclusive bargaining agent for all physicians of Puerto Rico, and called a strike of all physicians for all non-emergency patient care. There was no efficiency justification for the attempted collective fee setting. The boycott forced many indigent people to go to local hospital emergency rooms for care they ordinarily would have received in a physician's office, while others had to forgo medical care altogether. In addition to agreeing not to engage in those boycott and collective fee setting practices, the College agreed to pay $300,000 to the catastrophic fund administered by the Puerto Rico Department of Health. The Commission's analysis and the remedy embodied in the consent order reflect the care we take to ensure that consumers are protected from anticompetitive conduct, while also ensuring that legitimate efficiency-enhancing joint venture activities are not discouraged.
Another case involved allegations of boycotts and other agreements to fix the prices physicians would accept from third-party payers as well as to impede the entry of managed care.(see footnote 28) The consent order in that case does not prohibit the respondents from operating legitimate joint ventures, but the agreements in question were not justified by any efficiency-producing integration among the health care providers. Enforcement actions such as this one serve to ensure that consumers have a competitive range of health care delivery and financing options from which to choose.(see footnote 29)
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In another case last year, a majority of the Commission found that an association of California dentists unlawfully restrained truthful and nondeceptive advertising by dentists regarding the price, quality and availability of dental services. The Commission's decision was recently affirmed by the United States Court of Appeals for the Ninth Circuit.(see footnote 30) That case continued a line of Commission cases challenging anticompetitive aspects of codes of ethics adopted by professional associations, dating back to the landmark case in 1979 against the American Medical Association.(see footnote 31)
In addition, the Commission continued to enforce the law against minimum resale price agreements. Two recent cases involved manufacturers of athletic shoes.(see footnote 32) Another case, earlier this year, involved an unusual rebate scheme that amounted to resale price fixing in a $1 billion market for agricultural chemicals.(see footnote 33) These cases illustrate the Commission's policy of joining in cooperative investigations with the states whenever there is mutual interest and advantage in a joint investigation. In appropriate cases, that is an effective way to pool resources and advance the enforcement interests of both the states and the Commission.(see footnote 34) Another example is the Staples/Office Depot merger case, where a number of states cooperated with our investigation and filed an amicus brief in support of the Commission's case.
While the Commission continues to apply the rule of per se illegality to minimum resale price agreements, it no longer supports the application of the per se rule with respect to vertical restrictions on the maximum price downstream sellers may charge. In April of this year, the Commission joined with the Department of Justice in urging the Supreme Court to abandon the rule of per se illegality for maximum resale price agreements.(see footnote 35)
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Finally, in what may have been the first case of its kind, a majority of the Commission decided in 1996 to issue a consent order involving charges that a computer manufacturer had abused a standard-setting process by certifying that it had no patent or other intellectual property claims to a technology that was being proposed as a standard, and then asserting patent claims after the standard had been adopted.(see footnote 36) Knowledge of those patent claims might have allowed the standards organization to make an informed choice that may have resulted in the selection of a different standard. The manufacturer's conduct, if successful, would have imposed costs on its rivals, either in the form of royalties or in the form of costs to redesign their products to use another standard. To prevent those effects, the Commission's order prohibits the respondent from enforcing its patent rights against computer manufacturers that have adopted the standard. The Commission's order is consistent with the common law doctrine of equitable estoppel, and it serves to protect the integrity of the standard-setting process.
In sum, the Commission has been active in reviewing and, when necessary, challenging a wide variety of non-merger conduct. That is not to say that the Commission has achieved the optimal level of enforcement. The resource demands of dealing with the merger wave have forced the reassignment of some staff from non-merger investigations to merger work. As a result, the number of new non-merger investigations has decreased since the merger wave beganthere is a clear and predictable inverse relationship. This will have effects in the future because non-merger investigations can take a significant amount of time to develop. As a result, over the next few years these resource constraints may cause us to experience a drop in the number of non-merger cases and some delays in bringing these cases to fruition. Nonetheless, we will attempt to maintain a healthy level of non-merger enforcement that produces major benefits for consumers. A broad-ranging benefit is the deterrence of other persons from engaging in anticompetitive conduct similar to that challenged in our cases.
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III. ENFORCEMENT STRATEGIES
The success of the enforcement program depends on its implementation. The Commission employs multiple strategies to ensure antitrust enforcement that best serves the public interest and achieves the twin goals of making antitrust enforcement effective, while keeping it efficient and minimally burdensome.
Foremost is an insistence on rigorous analysis, to ensure that reasons for competitive concern are valid and well-supported by the evidence. Our goal is to stop real threats to competition, but to refrain from intervening unless it is necessary. That policy is exemplified by the Commission's analysis of the Boeing/McDonnell Douglas merger this year.(see footnote 37) While the companies' market shares in the commercial aircraft sectorroughly 60% for Boeing and slightly less than 5% for McDonnell Douglasdid raise some initial concerns, the staff's extensive investigation revealed that McDonnell Douglas was no longer a significant competitive factor; its prospects for future commercial aircraft sales were dim, and so were its prospects for a turn-around. As a result, it was unlikely that the merger would significantly lessen competition, and the Commission decided not to take action.(see footnote 38)
But when there is a real problem, the Commission insists on a meaningful solution. To that end, the Commission has renewed its focus on ensuring effective, targeted remedies. In 1995, the Bureaus of Competition and Economics undertook a pilot study of orders in recent Commission merger cases to determine whether they were achieving the intended results, to re-examine what kinds of order provisions generally work well, and to assess what kinds are more likely to have complications. As a result of that study, the Commission's policies regarding consent orders were revised in a number of respects. The Commission prefers that divestitures be accomplished in a shorter time so that competition is restored more quickly and assets are less likely to deteriorate in the interim. In addition, in some cases the Commission requires the respondent to identify a purchaser for the assets before the consent agreement is accepted. As a result, the average time for divestiture was reduced from about 15 months in 1995 to slightly less than nine months in 1997. In addition, the Commission continues to ensure that divestiture packages are competitively viable and provide effective solutions to problems that have been identified.
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The Commission's orders are monitored closely to ensure compliance, and trustee provisions are invoked if a respondent fails to divest in a timely fashion. Moreover, civil penalty actions are initiated for serious violations of an order. In a recent example, a company agreed to pay a $3 million civil penaltythe largest ever for an order violationfor allowing some supermarket stores to deteriorate pending divestiture.(see footnote 39)
While most enforcement actions are resolved with a settlement and issuance of a consent order, which is an efficient and effective way of handling many cases, the Commission has also taken a strong stance when settlement negotiations do not produce an adequate remedy. A strong bargaining position requires a credible back-up positiona willingness to litigate if necessary. A recent example is the Staples/Office Depot case. The companies offered a settlement, but a majority of the Commission concluded that it was not enough to prevent consumer injury. As a result, the Commission sought and obtained a preliminary injunction, and the merger was abandoned.
Finally, the Commission has maintained an active enforcement program to ensure compliance with the premerger notification provisions of the Hart-Scott-Rodino Act. Premerger notification is an essential part of merger enforcement, and full compliance with the Act is critically important. Therefore, the Commission has taken firm action against serious violations.(see footnote 40)
The Commission also uses several non-case-related tools to advance its competition policy goals. One is the issuance of staff advisory opinions to inform private parties whether a proposed course of action may violate the antitrust laws. For example, last month Commission staff issued an advisory opinion on a proposal by the Direct Marketing Association to implement a program that would protect consumers from unwanted mail and telephone solicitation. The program would require DMA members to honor requests by consumers to have their names removed from direct mail advertising lists and telephone solicitation lists, and to prevent the sale of a customer's name, address and other information. In effect, the DMA's proposal is a form of industry self-regulation to protect the privacy rights of consumers. Based on the information provided by the DMA, Commission staff concluded that DMA's program is not likely to be anticompetitive, and that it may well be procompetitive by making consumers more willing to deal with marketers that provide assurances of confidentiality.
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The Commission also undertakes special projects, such as the request by the Congressional Task Force on Tobacco and Health for an analysis of the potential economic impact of the proposed settlement of tobacco litigation. In September, Commission staff issued a detailed report on the likely effect of the proposed settlement on cigarette prices, industry profits and government revenues.(see footnote 41) In addition, staff provided an analysis of the industry's proposed antitrust exemption for activities relating to the settlement. As you know, the Commission has a very long history of preparing special reports on important economic and legal issues. For example, an early study of the securities industry led to the enactment of the Securities Exchange Act in 1934.
IV. MINIMIZING BURDENS ON BUSINESSES
The last several years have also seen a number of steps to further reduce burdens that antitrust enforcement places on businesses. Some burden is inevitable because rigorous antitrust analysis requires a great deal of information, but unnecessary burdens must be avoided. The Commission has implemented significant changes in three areas: investigations, order termination and administrative litigation.
A. Investigations and Orders
Building on reforms announced by my predecessor, Janet Steiger, and the Assistant Attorney General for the Antitrust Division at the time, Anne Bingaman, the FTC and the Department of Justice have worked to streamline the merger review process. For example, the agencies have substantially reduced the time needed for the clearance process to determine which of the agencies will handle a particular matter. That, in turn, has allowed more time for the initial investigation of proposed mergers, which enables the Commission to make a better-informed decision on whether a full investigation, with the issuance of requests for additional information (a ''second request''), is needed.
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The agencies also jointly adopted a model second request, so that the investigative procedures of the two agencies are more similar. In addition, Commission staff use a ''quick look'' procedure in appropriate cases, which can relieve a company from full compliance with a second request if information on a threshold issue leads to a conclusion that the transaction is not anticompetitive. This procedure can result in savings of time and effort for both the parties and Commission staff.
Another major burden reduction initiative was the adoption of additional exemptions from HSR filing requirements. In 1996, the FTC, with the concurrence of the Assistant Attorney General, promulgated new rules exempting five categories of transactions.(see footnote 42) As a result, the number of reportable transactions is about 710% lower than it would have been without the new exemptions. Incidentally, these exemptions reduced the agencies revenues from HSR filing fees, on which they are dependent for a substantial part of their funding. The staff is exploring the possibility of additional exemptions, as well as a revision to the premerger reporting form to eliminate the need to provide certain information. The staff is also seeking to provide additional guidance on specific information requirements, to ensure that merging parties understand their obligations.
The Commission also broadened its policy of terminating orders after 20 years. As adopted in 1994, this ''sunset'' policy applied only to competition orders, and respondents under existing orders that met the 20-year requirement had to file a petition to terminate the order. In 1995, the Commission made the sunset policy applicable to both competition and consumer protection orders, and the sunsetting of old orders was made automatic; respondents no longer have to file a petition to make it happen. These steps removed remedial requirements that were no longer necessary and may even have been counterproductive by constraining business conduct unnecessarily.
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These efforts to reduce burdens are part of a larger Commission-wide effort to remove unnecessary regulatory burdens. For example, since 1994 the Commission has eliminated 42% of its trade regulation rules, primarily in the consumer protection area, which are no longer necessary because industry or state requirements exist or technology has changed.
B. Administrative Litigation Rules Reform
In September 1996, the Commission announced a set of procedural rule changes designed to streamline the Commission's administrative trial procedures for both antitrust and consumer protection cases. The perception, and sometimes the reality, was that administrative litigation took too long. The amendments establish new and shorter deadlines, streamline pre-trial discovery, and speed up the trial itself. In most cases, the amendments require the administrative law judge to issue an initial decision within one year after the Commission issues an administrative complaint. This one-year deadline means that trials will be significantly shorter than they were prior to the rule amendments; the deadline may be modified only in extraordinary circumstances.
There have been no cases fully litigated under these new rules to date, but the Commission is hopeful that they will succeed in substantially shortening administrative trials. The benefits will be significant, but the changes themselves are not without cost. Cases likely will need a larger litigation staff, at least on complaint counsel's side, to handle the expedited schedule. That will not deter us from our commitment to further streamline administrative procedures, however. The process of procedural reform is continuing.
Page 53 PREV PAGE TOP OF DOC Segment 1 Of 2 V. ANTITRUST FOR THE 21ST CENTURY
In another area of major antitrust initiatives, the Commission has acted on its responsibility to make sure that antitrust policy recognizes the needs of the contemporary business environment. The Commission has done that in several ways.
A. Global Competition Hearings
One of the early initiatives during the past two and a half years was to hold a series of hearings on antitrust and consumer protection policy in the new high-tech, global business environment. Business leaders, antitrust scholars and members of the bar from across the country were invited to testify and submit written papers. The FTC staff issued a comprehensive report in May 1996. There have been two major outgrowths from those hearings to date. First, Commission staff and their counterparts at the Department of Justice conducted a study of how efficiency considerations should be analyzed in merger investigations and cases. That study resulted in a recommendation for a revision of the efficiencies section of the 1992 Horizontal Merger Guidelines. The agencies adopted the recommendation and revised the Merger Guidelines in April 1997. The revised guidelines clarify what kinds of efficiency claims will be considered, and how they enter into the overall analysis of the competitive effects of a merger. The revisions provide merging firms, the agencies and the public a clearer roadmap for determining whether efficiencies will result in lower prices or new products or will otherwise enhance competition.
Second, the Commission, in collaboration with the Department of Justice, initiated a project to determine whether antitrust guidance to the business community can be improved through clarifying and updating policies regarding joint ventures and other forms of competitor collaborations. There are no agency guidelines covering those activities, except in certain areas such as health care and intellectual property. One outcome of the project, now in its initial stages, could be the development of additional guidelines or a series of policy statements that describe the antitrust analysis of these types of business arrangements.
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B. Multi-Provider Networks in Health Care
Last year, the Commission participated in a dialogue before this Committee on the appropriate legal standard for reviewing certain activities of health care networks. The Commission's testimony before this Committee noted that enforcement actions concerning physician networks involved those that had a direct and substantial effect on price but lacked the compensating consumer benefits that can occur when there is financial integration within the network. Those kinds of networks are subject to the per se standard of illegality. We also noted, however, that some physicians may have been reading the agencies health care antitrust enforcement policy statements too strictly in terms of what kinds of network efficiencies might justify the more flexible ''rule of reason'' standard of review. Our testimony further noted that the FTC staff was then engaged in a review, involving discussions with all segments of the health care industry, to re-examine whether there might be efficiencies other than financial integration that would justify rule of reason treatment. This was part of an ongoing effort to encourage efficient arrangements for delivering health care, and to provide antitrust guidance for health care providers who wish to participate in such arrangements.
In 1996, Commission staff completed that review, which resulted in a more thorough understanding of the potential procompetitive benefits of newer forms of network arrangements. As a result of that study, and thanks to the efforts of this Committee, in August 1996 the Commission and the Department of Justice revised their enforcement policy statements regarding physician network joint ventures and multi-provider networks. The new guidelines make clear that a wider range of physician networks will be reviewed under the more flexible rule of reason standard than was announced in previous policy statements. As a result, the new guidelines give providers greater latitude to develop alternative forms of efficient networks and, together with the agencies advisory opinion procedures, provide greater assurance that such efforts will not run afoul of the antitrust laws.
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C. International Antitrust
In an economy that is increasingly international in scope, antitrust cannot be insular. International cooperation is essential. To that end, in April of this year the Commission and the Department of Justice announced an antitrust assistance agreement between the United States and Australia, the first under the International Antitrust Enforcement Assistance Act of 1994.(see footnote 43) The agreement is an important first step in protecting consumers and the business community from international anticompetitive activities. The Commission also works with international organizations such as the OECD, and with the other parties to NAFTA and the proposed Free Trade Area of the Americas, to promote competition policies and enforcement practices that are consistent with the goals of maintaining competitive and open markets and enhancing consumer welfare. With financial support from the Agency for International Development, the Commission also provides technical assistance on competition issues to new antitrust authorities in Central and Eastern Europe, several states in the former Soviet Union, and Latin America.
In summary, consumers are well served by antitrust enforcement, which produces substantial dollar savings by preventing anticompetitive price increases and preserves the benefits of innovation for the future. The Commission continues to ensure that these benefits are achieved with the minimum possible burden on business.
I would be happy to take your questions.
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Mr. HYDE. Thank you very much, Chairman Pitofsky. I will commence the questioning.
Mr. Klein, as you know, O'Hare Airport is located in my district and competitive issues are of great interest to me there. On October 1, Congressman Jesse Jackson, Jr. and I wrote to Attorney General Reno and other administration officials about various issues relating to O'Hare, including competitive issues. Could you give me an indication of when we might receive the Department's answer to that letter?
Mr. KLEIN. Yes, I've talked to the Attorney General's staff about it, and I believe sometime in the next two weeks you should have your answer, Mr. Chairman.
Mr. HYDE. Thank you very much. Currently, United Airlines and American Airlines control almost 90 percent of the landing slots at O'Hare. My understanding is that antitrust theory suggests such a dominant share of the landing slots would lead to higher prices. A GAO study, dated October 1996, found that prices at O'Hare were 24 percent higher than at airports without slot constraints and other operating barriers. Do you have any reason to doubt that this is an accurate estimate of what this domination is costing O'Hare passengers?
Mr. KLEIN. I have no reason to doubt the number, although I certainly wouldn't want to vouch for any specific number, but there's no question that this kind of concentration can lead to aggressive pricing.
Mr. HYDE. One of the solutions to this problem is building a third airport in south suburban Chicago. Holding other things equal and looking at the matter wholly from the perspective of competition which is your focus, isn't a third airport with many new slots more likely to increase competition and lower prices than adding a few incremental slots at O'Hare?
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Mr. KLEIN. I think holding everything equal and given the constraints that you've discussed on slotting at the current airport, I think a third airport would increase competition.
Mr. HYDE. In the early 1990's, Congress imposed a ticket tax, known as a passenger facility charge, for the purpose of funding new airports. That was when the mayor at that time was considering an airport inside the city limits of Chicago. I remember because I voted for that tax. This administrationthat was abandoned sometime agoand this administration is about to sign off on the city of Chicago's plan to spend nearly a billion dollars of those funds to upgrade O'Hare without significantly increasing its capacity. From a purely competitive perspective, wouldn't this money be better spent on building a third airport? In other words, what justification can there be for using taxpayer dollars to subsidize and strengthen the monopoly hold over O'Hare? Isn't this the sort of corporate welfare we all are critical of and won't it be totally contrary to antitrust principles?
Mr. KLEIN. Mr. Chairman, I don't know the specifics of the tax or the rationale of the limitations. The basic point that I just made to you I would certainly reiterate, and that is, as a general proposition with things being held equal, I think that a third airport is usually pro-competitive. I might add, Mr. Chairman, I commend you in the current era for acknowledging in public that you voted for this tax. That is a rare thing, and I appreciate it.
Mr. HYDE. Remorse has consumed me from that moment hence. [Laughter.]
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Mr. HYDE. I certainly do hope, though, that you're raising these antitrust considerations in the administrations deliberations on this matter, but assuming the administration continues on this path, do you have anything in the works, do you have any plans for ending the monopoly situation at O'Hare or considering it? Are you going to take a look at it?
Mr. KLEIN. We have had a really wide-ranging look at the whole problem of hub domination, its implications for pricingand not just at O'Hare, although O'Hare is obviously one of the major dominant hubs in the United Statesand we have under investigation several cases looking at issues about price gouging and so forth. We will continue to thoroughly investigate and, where appropriate, certainly bring challenges.
Mr. HYDE. Well, I just would like to suggest to you as forcefully as good manners lets me that you take a look at O'Hare, because an awful lot of people come into O'Hare and go out of O'Hare and that's something I think that you could well look at.
Mr. Klein, and I'm picking on you, I have questions for Mr. Pitofsky, but
Mr. KLEIN. He goes to O'Hare also, Mr. Chairman.
Mr. HYDE. He has that harassed look, yes.
Mr. KLEIN. He's a world-class traveler. I don't think we ought to limit[Laughter.]
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Mr. HYDE. Mr. Klein, this committee, as you know, fought hard to provide for a Justice Department role in considering when the Bell companies could go into long distance. We hear complaints that you're going way beyond what was intended in the act and I have no opinion on that other than wanting to know what the facts are and I would like to give you an opportunity to respond to those complaints.
Mr. KLEIN. Sure, I appreciate the opportunity, Mr. Chairman. I certainly think that the role assigned to us in the statute was very broad; I think sensibly so. It is hard for me to imagine a statute which gives us a broader and more wide-ranging responsibility than to make a competitive assessment under ''any standard that the Attorney General deems appropriate.'' I think there's a good reason for that, because there are very strong interests that are obviously concerned about long-term market share, both in local and in long distance, and these people are locked in the kinds of battles that you would expect from powerful groups. I think our job is to really sort of referee these competitive interests in a way, as I said during my opening, to ensure long term constructive engagement at both the local and the long-distance level. We have now commented on three RBOC long-distance applicationswe've opposed all three, although in two of them we've indicated that substantial and important progress has been made and we've commended the specific RBOC in each instance. I understand the RBOCs are extremely interested in getting into long distance and I actually think good things will come when they get into long distance, but until their competitors locally can be assured that the market is fully and irreversibly open, and to some degree that may depend on using the current facilities of the existing RBOC which is certainly a difficult process, we have got to make sure that is in place, because once the RBOC is into long distance the statute works in different ways in terms of the incentives. So we are being careful, we are being cautious, but I also think we are constructively engaged. I think a number of the RBOCs continue to constructively engage with us to find solutions to the problems we have identified. I am optimisticand I've said this beforeI am optimistic that we will begin to see RBOC entry into long distance and the benefits that come from that, but equally true, and right now more important, that in the monopoly local areas, we will begin to see meaningful local competition. We haven't seen a lot of it yet, Mr. Chairman, and we need to get that process going full blast.
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Mr. HYDE. Thank you. Chairman Pitofsky, as head of the FTC, an independent agency, I know you can't speak for the administration as such, but you do have jurisdiction to enforce the antitrust laws and do you have anything you want to add to our discussionMr. Klein and myselfon this antitrust situation at O'Hare?
Mr. PITOFSKY. Well, it's under review by the Department of Justice. I don't know the details. I did work in the matter relating to the airline industry before I came back to the government and I agree with the exchange that you've had. Slot constraints often are the key way in which competition is hampered in the airline industry and quite often, if the slots can be opened up, consumers will profit. When the slots are not available, consumers suffer. So I agree with both of you to that extent.
Mr. HYDE. Thank you, and Mr. Klein, this committee also fought hard to make sure that telephone company mergers were reviewed under the Hart-Scott-Rodino process. How is that working out and has that proven to have been a prudent move?
Mr. KLEIN. I think it is the right move, Mr. Chairman. I think there are some people who have been disappointed that the Justice Department did not challenge the Bell Atlantic-NYNEX merger and I have certainly heard a great deal about that. What I would say to this committee and anyone who would ask is that this was a priority investigation for us. That my staff and the leadership of the Division spent an enormous amount of time on it and in the end, Mr. Chairman, having reviewed literally millions and millions of documents, testimony, and so forth, we could not bring a credible case to show a competitive effect. Much as one might have a philosophical view about it, under the Clayton Act we have to apply the facts to the law as they exist and we made a decisionone that I remain comfortable withthat it would have been imprudent and unsustainable to challenge that. That does not mean that other mergers won't be challenged. And there's a lot of merger activity going on. When MCI first merged with British Telecom, we put some significant, competitive restrictions on that transaction. There will be other mergers, and I can assure you that we will give them the time, attention, and care that they merit and pay careful, careful attention.
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Mr. HYDE. Thank you. My last question, and I appreciate your patience, this is directed to both of you. I believe you have said that there are lessons to be learned from the telecommunications deregulation experience that we are having and they may apply to electricity deregulation. I'll give you the option of suggesting to us any lessons you think we can apply. If you want to do it verbally today, that would be most welcome. If you'd rather think about it and send us a letter, that's welcome, or do both. That applies to both of you, gentlemen.
Mr. KLEIN. Sure. I can't see, fortunately, from the back of my head, and I'm sure my staff will say, take the time and write a letter, but let me go right ahead and answer the question. I'm sure there are many lessons to be learned. There are two or three points that I would certainly want to highlight today and would be happy to follow up on with the committee.
First and foremost, Mr. Chairman, we have to be realistic about our expectations. We cannot have rosy scenarios sell legislation and then disappoint ourselves and the American public. I think these kinds of deregulatory efforts are complicated and certainly electricity will be no walk in the park.
Second, I think we need to deal very, very carefully with issues of cross-subsidization in these industries where you have some users subsidizing the cost of service for other usersdifferent cost structures in rural and urban areas; different cost structures for business and residential. We need to get a good handle on that, because those create serious problems, both of competition policy and of equity, and we need to deal with that in electricity, as well.
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Lastly, it goes back to an issue you've mentioned. It might be worth, in a deregulatory scheme, considering some period in which to impose some moratorium on certain kinds of mergers, mergers that might not violate section 7 of the Clayton Act. One might still want to say, in a shakeout period, that we don't know enough to know where new competition is going to come and where new opportunities are going to develop and for a period of 3 years or whatever, why don't we just fix the status quo, at least at a certain size, or have a screen.
Those are the kind of things I think that I would like to develop further in discussion as we look at electricity, Mr. Chairman.
Mr. HYDE. How would we do that? How would you impose a moratorium on private industry from merging other than you
Mr. KLEIN. Well, you could give us the power to say that you don't have to follow section 7, you can follow a sort of a basically status quo application. One could, I think, do that as part of a statute.
Mr. HYDE. You think 3 years is appropriate?
Mr. KLEIN. Well, I would like to think specifically about timeframes, about circumstances and so forth, but I think it's an idea that is worth considering, because one of the hardest problems of considering anti-competitive effects in fully regulated markets moving to deregulation is that you don't have a status quo ante, you don't have a competitive market that exists. So your ability to look forward and make analyses of competitive effects is somewhat different. Now, there are going to be arguments in terms of the value of certain kinds of mergers and so forth, and I'm not suggesting that mergers cannot be pro-competitive in certain circumstances, but I think in these deregulatory efforts that are industry-wide, when we go through a shakeout, one might want to think about some form of moratorium.
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Mr. HYDE. That's very interesting. Chairman Pitofsky?
Mr. PITOFSKY. I, too, would like to think about your question and get back to you, but as I've said to this committee before, I'm a true believer in the free market protected by antitrust, and therefore I think deregulation, has served consumers extremely well over time. The problem is the one that Joel Klein just cited. People think that deregulation is going to happen like that, overnight, and it never does. There is a transition period. It is a transition period in which it's very difficult to get from regulation to a free market, especially when you get halfway there and some of the players are regulated and some are unregulated, half-slave, half-free, that sort of thing. We ought to address the question of how to handle that transition, because eventually we're going to get there I believe in all these areas, but it's very difficult during the interim.
Mr. HYDE. Well, we'll look forward to your correspondence on that, both of you, if you're so disposed. Thank you.
Mr. CONYERS. Thank you, Mr. Chairman. I'm told that nobody here mentioned the multi-industry cartel problem in cable. OK. This subject matter discussion is on multi-industry cartel and cable. Does that throw any signals like this could be a problem-type thing to either of you?
Mr. PITOFSKY. Well, yes, I think we're all alert to the market developments with respect to programmers, cable companies, telephone companies, new types of distribution like direct broadcast satellites. We're all concerned about the integration of ownershipstock ownership, voting ownershipamong those firms. We faced it in an exceptionally difficult and complicated matter in which Time-Warner, Turner, and TCI tried to merge and that deal went through, but only after we had extracted quite a number of unprecedented conditions from the companies before we let it go through.
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First of all, we essentially required the divestiture by TCI of their stock ownershiptheir voting ownershipin Time-Warner. We were very concerned about access, whether programmers can get access to subscribers, whether new kinds of distribution systems could get access to programming, and we required the companies to agree as a condition of the merger, to accept non-discriminatory limitations on what they could do. We also, looking at what seemed to be the most exceptionally dominant market situation, that is to say CNN's overwhelming market share in the 24-hour news service. We required as a condition of the merger that Time-Warner allow a second all-news programming service to get on their system. So, we're concerned with the problem. What we wanted to try to do was condition the merger in such a way that consumers would not be hurt, but we felt in the end we got as much of a remedy as we could in that particular case.
Mr. CONYERS. Well, Time-Warner, Disneywhich is now with ABCTCI, Microsoft, GEwhich is with NBCand the News Corp. That's probably six of the world's largest, dealing with joint venturing. We'll talk with your people afterward about what conditions had to be imposed as a result of this. But what we have here is not only that problem, but we had that each of the six companies then formed a joint venture with one or more of the others, both in the United States and around the world, or both in some instances. So, five of the six have a connection in PRIMESTAR and we now have a structure that allows these companies to, in my view, restrict programming to operators with whom they are affiliated to evade price regulation imposed by the 1996 Telecom law by asserting increased prices on the programming side rather than the operations side, thereby evading rebroadcasting restrictions contained in the 1994 Satellite Home Viewer Act. Right?
Page 65 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. PITOFSKY. Yes, it's a problem we're concerned about.
Mr. CONYERS. OK. So, that's what we're talking about: The problem, the huge problem, the monstrous problem that evadesand thanks to good lawyering and so forthI mean, we are busy writing broad laws and they're busy looking at fine print. So the question is: How does this conductof which we have not seen the last lessonincrease competition? Well, it doesn't. How does it decrease consumer prices? Well, it doesn't. Which is why I'm raising the subject.
Mr. PITOFSKY. Let me just, briefly, Mr. Conyers, let's make sure we distinguish between two problems.
Mr. CONYERS. OK.
Mr. PITOFSKY. One is that company A invests in company B, it's a competitor, it's a supplier, it's a customer, the kind of network of interrelationships that you're describing. We must all understand that Congress, in its wisdom, put a solely for investment exception into section 7 of the Clayton Act, so if it's just a dollar investment, there's really nothing we can do about it. It's simply off the page as far as enforcement is concerned.
The other problem you raise is, when it's not solely for investment, but there are stockholdings of various kinds, there are interconnections, one company buys the other. We have brought cases in that area. We have challenged, for example, cable company overlaps, where there areit's rarebut where two cable companies serve the same area, they try to merge, we challenge it, I think, successfully every time. So, we're bringing cases in that area. The biggest case was Time-Warner, which I already described, in which we extracted a considerable number of conditions.
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Mr. CONYERS. But, I'm not talking about the letter of the law. It's the problem that we are both faced with; you as enforcer, me as a lawmaker, that brings us to this subject. It's the consequences of what they can do that is what we are trying to discuss, not whether they're criminals or not. That's the problem, Mr. Chairman. So I need your attention to that.
What about PRIMESTAR, for example? I mean, what'swell, I won't ask you whether it will increase or decrease competition, I mean, that's a pretty lame question, but, you know, what about PRIMESTAR?
Mr. KLEIN. Well, Mr. Conyers, as you may know, the PRIMESTAR merger is right now before the Antitrust Division, which of course, restricts my ability to say anything about the substance in the matter, but again, I can assure you that these are issues of real concern to us as well as to the Federal Trade Commission.
Mr. CONYERS. Well, I don't want to get in front of your, you know, your work
Mr. KLEIN. Sure, I know.
Mr. CONYERS [continuing]. But, here is an outfit owned by five of the six largest communication companies, a joint venture designed by the vertically integrated programmers, operators, distributors, to compete in the direct broadcast satellite market against direct TV and EchoStar services. Now in order to consummate the arrangement, Justice and FTC must approve a proposed stock merger with MCI's interest in the orbital satellite slot. PRIMESTAR needs this slot to deliver the signal. So we're talking about something thatand I'm notI mean let's all look at this thing as carefully as we can. It's something that is not going unnoticed.
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Now, telecommunications, Mr. Assistant Attorney General, we need to be reassuredI have been told there have been vigorous statements that the concerns of antitrust will be given a very particular attention, but could I get some assurances this morning about competition in the telecommunications marketplace? We're already looking at a $26 billion merger between two of the guys that were busted up by the Supreme Court and I know we've been through thisthey weren't competingbut now they're merged and they're competing like mad with everybody else.
Wouldn'tI hate to ask you thiswouldn't consumers have been better off if these were kept independent competitors or some different conditions? I hate myself for doing this to you. [Laughter.]
Mr. CONYERS. Because you know the answer and I know the answer.
Mr. KLEIN. Well, Mr. Conyers, let me say a couple of things in response. First of all, I do believe conditions were put on the deal by the Federal Communications Commission and I think that was the appropriate agency to impose regulatory conditions. For the Antitrust Division, ours was a question of should we challenge it or not. My own view, Mr. Conyers, is that based on the evidence before us, we had no basis for challenging it in court. I raised with the chairman the possibility of whetherfor the reasons you've alluded toone ought to consider some form of moratorium on mergers in a deregulatory process and that's something that I would be happy to work with the committee on. I will predict to this committee that in the history of telephony in America, the Bell Atlantic/NYNEX merger will have very little impact on overall competitive conditions. What we are moving toward, ultimately, is going to be worldwide markets in which you're going to see major competitors on the stage and I think we are seeing so many new entrants and so many new opportunities in this area, that my own prediction is, whatever one's view of the merger was, it will not ultimately have a significant competitive impact.
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Mr. CONYERS. What about the local loop opening as a condition of the merger?
Mr. KLEIN. Well, that is in part the condition that the Federal Communications Commission put on the merger and
Mr. CONYERS. After the fact.
Mr. KLEIN. Well, after as a condition.
Mr. CONYERS. We're talking about before.
Mr. KLEIN. As a condition of it.
Mr. CONYERS. OK, Mr. Hyde has turned the light on for me, or somebody turned that light on. [Laughter.]
Mr. HYDE. I have the feeling that I wasn't the one who turned the light on.
Mr. CONYERS. I just want toI got to bring this to closure here. Let me ask you, just between us in the room here, do you think we ought to review the Clayton and Sherman Acts, I mean, because you give me the notion we're dealing global, we're dealing with things that, with all due respect to our predecessors and the court, probably weren't being contemplated when they wrote that decision and when the implementation came from the court and then from us?
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Mr. KLEIN. My basic view is that we should not. I think that the Sherman and Clayton Acts are remarkable for their resiliency and their ability to adjust to an evolving economy. I view these statutes as essentially the Constitution when it comes to America's free market economy. I think the courts are willing to adjust the doctrine to apply to evolving conditions. I have every confidence that will occur and I think we are engaged in a process. The chairman talked about a Supreme Court case decided yesterday which I thought was a case that was pro-consumer, essentially opening up some maximum resale price opportunities. I think we can get there, Mr. Chairman.
Mr. CONYERS. OK. I give up, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Conyers. The Chair has been exceedingly liberal in time for himself and Mr. Conyers. The Chair is moving towards an illiberal mode. [Laughter.]
Mr. HYDE. So, I just thought I would warn you, because we have another panel and lots of testimony yet to cover. So with that, Mr. Inglis is recognized.
Mr. INGLIS. Thank you, Mr. Chairman. I have no questions at this time, but I'd be happy to yield to Mr. Goodlatte.
Mr. HYDE. The gentleman yields to Mr. Goodlatte.
Mr. GOODLATTE. Thank you, Mr. Chairman, and the gentleman from South Carolina.
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Mr. Klein, I'd like to followup on some questions that the Chairman asked you regarding the Telecommunications Act of 1996, but during the debate on that legislation, which I was very involved with as was the Chairman, an amendment was offered by a member of this committee on the floor of the House that would have expanded the role of the Department of Justice into a significant decision-making one in determining Bell Company entry into long distance. That amendment was defeated, rather overwhelmingly, and I was curious about your comments earlier that you had been given broad discretion in this area, because my understanding was that your role was limited to a consultative one. In fact, I can remember having very lengthy discussions with your predecessor, Anne Bingaman, in which she very diligently attempted to make the case for a Justice Department role, and so I'm a little concerned in your answer to the Chairman. I understand that, in applying the standard that you are applying, you may have overstepped your bounds in some of the specific situations that you've dealt with, the three cases that you've mentioned so far, you focused on sophisticated software systems and electronic gateways through what you call operational support systems that the Bell-operating companies are using to allow new entrants to connect to their databases. Is this true?
Mr. KLEIN. That is true, yes, sir.
Mr. GOODLATTE. Can you tell me where, in the statute that Congress passed, the term operational support systems is defined as a prerequisite for determining Bell-operating company entry into long distance? At least by the Department of Justice?
Mr. KLEIN. Well, let me make two points, Mr. Goodlatte, and I think it's important. My point was that Congress gave the Department of Justice the responsibility, applying any standardthat's the words of the statuteto make a competitive assessment. I said that those wordsany standardwere very broad and authorized us to have a broad and far-reaching competitive assessment. I absolutely agree with you that the decision belongs to the FCC, and under the statute they have to give us a substantial weight, but our views are not the controlling views and I respect that distinction.
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Now, to answer your question directly, Mr. Goodlatte, if you cannot interconnect with the Bell, if I cannot change my customer. Let's just take it, I'm a new entrant and I have sold Chairman Pitofsky a telephone service. If I am not able to go on the computer or to be able to get the company to change him from the incumbent Bell to my telephone company, he's going to blame me. He's not going to blame the incumbent, he's going to blame me. That is a real-world problem, which has real competitive implications. In California, significant money was spent by potential new entrants to line up customers who were never able to be transitioned, because the computer systems didn't work, they went down because people didn't have the right manpower and resources available. That has huge competitive significance and we in the Department, in applying our competitive assessment, will take it into account.
Mr. GOODLATTE. Can you tell me what the Department's expertise is in evaluating these technologically sophisticated systems?
Mr. KLEIN. Well, I would say two things. To begin with, we do have experts who we have as part of our consulting network. Second of all, we have had a great deal of experience in the area, and third, and equally important, we look to what the State commissions do. Just yesterday, there were several State commissions in the South that had raised problems about the operating support systems in BellSouth. We took that into account in our evaluation of BellSouth. So I think we do have the ability. I think perhaps we ought to be cautious in terms of over-claiming expertise, but I think we have a process at work that enables us to comment effectively on these matters.
Mr. GOODLATTE. I happen to have Bell Atlantic in my particular part of the country, but you mentioned BellSouth. Let me ask you, I understand that BellSouth has lost 80,000 business customers to long distance and other carriers who have essentially cherry-picked their business at the same time that they've been precluded from getting into long distance service. Is that a fair arrangement? In other words, their argument is that there are people who don't want to get into offering residential local service, because it's not profitable. So at the same time they continue to provide residential local service and lose the more profitable business base, they're faced with the prospect of getting competition in part of the local service while they're precluded from offsetting that by getting into long distance service.
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Mr. KLEIN. The point you raise is certainly a concern and our view, which we've made clear, is that we're not interested in helping people who are trying to game the system. If there are people who are trying basically to cherry-pick while they tie up BellSouth and prevent them from going into long distance, we will not support that. On the other hand, when there are real impediments to entry that remain at a time when there are real new competitors who are trying to break into the market, it's more important to open up the local market for America's consumers, where there's really no competition, than it is to add a new entrant in long distance. We welcome the opportunity to put in a new entrant, but that balance, I think, was cast properly in the statute in favor of open markets. While they have lost some customers, if you look at the numbers they're talking about, it is a small percentage, a tiny percentage of their overall base.
Mr. GOODLATTE. Eighty thousand business customers
Mr. HYDE. The gentleman's time has expired.
Mr. GOODLATTE. Thank you, Mr. Chairman.
Mr. HYDE. Does the gentleman which to use his own 5 minutes? Is that
Mr. GOODLATTE. No, Mr. Chairman.
Mr. HYDE. Thank you, you're a real gentleman. The gentleman from Massachusetts, Mr. Frank.
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Mr. FRANK. Mr. Chairman, to begin I'll yield briefly to my ranking member.
Mr. CONYERS. Thank you, Barney. I just wanted to remind my friend from Virginia, Mr. Goodlatte, that section 27.d. that he
Mr. GOODLATTE. 271
Mr. CONYERS [continuing]. 271.d. that he referred to that was authored by myself and Chairman Hyde, gives the Attorney General any standard it deems appropriate in advising the FCC.
Mr. GOODLATTE. Would the gentleman yield?
Mr. CONYERS. Briefly.
Mr. GOODLATTE. That is true, but the statute also reads, such evaluation by the Department of Justice shall not have any preclusive effect on any FCC decision.
Mr. FRANK. Let me ask my friends to take this back on the rest of theon the time. I may have some time at the end.
I did want to note at the outset, Mr. Chairman, that we've had people say that antitrust has become very unimportant to the American economy and we have a refutation over here today, we have a rule whose gross domestic product annually exceeds that of several U.N. members, so I don't think anyone could argue thatI mean, if you want to see a subject that has fallen in importance, go next door, as I soon will, to the Banking Committee, where we are debating homelessness and then you will see a subject that in today's America has no real impact. Obviously, some people pay attention to antitrust.
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I have a generalized question. I am concerned, and you both touch on it and I appreciate that, with the impact of both technology and globalization. It seems to me that what they are both doing is really producing a qualitative increase in the mobility of capital. Physically, technology has made capital extremely mobile. Trade agreements and other things are an effort to provide legal mobility and that has overall good implications because it's promoting efficiency vastly. On the other hand, the short term effects are to erode the relative position of working people who are really kind of the third leg of this. I mean we have the owners and the consumers, but we also have in this increased mobility, it seems to me, an erosion in the relative position of working people. I think that that's really the fundamental issue that's at stake in the whole trade debate. Trade is no longer a debate of things being made in one country and things being made in another country and then being exchanged. The real importance is the ability of people to relocate and co-locate and move their businesses. It strikes me as I read this that we have not looked at what the antitrust implications are. There's clearly the antitrust statutes were written for one country with a much lower level of technology and there really has not been that kind of upgrade. You both mentioned the extent to which you're working to try and deal with that, but my question is to what extent is the whole framework in need of a total restudy, because we clearly have a world economy today that is both physically and legally vastly different that it was when we wrote the antitrust laws. With obviousI mean, my problem is thisif you look at the world economy today, it is easy to kind of refute some traditional antitrust doctrines because they were written for one country and, I don't know, maybe we need to do a new updated antitrust in one countryis it possible? The question, though, is when you focus on the national it can be easy to argue, well, competition's become global and multinational and you can't just have this focus. The problem with that is that it's only half an argument, because we don't have in place, it seems to me, any significant internationally based antitrust. So I'd be interested in your general responses. As you are doing your jobs, as you are mandated to do by statutes, etcetera, should we not also be looking at really maybe a fairly fundamental revision to take into account the enormous changes, particularly in the globalization of this and are the laws you now have really adequate as structural framework to deal with that? Mr. Pitofsky.
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Mr. PITOFSKY. Well, it's a wonderful question and exactly what we ought to be thinking about.
Mr. FRANK. I mean, when you taught me antitrust 23 years ago, Bob, this never came up.
Mr. PITOFSKY. I know, but I can see how well the course went from your question.
Mr. FRANK. I didn't even bother to take international conflicts.
Mr. PITOFSKY. You're absolutely right. The world is changing at an incredible pace and the two factors that you cite, global competition and the increased importance of high innovation competition, are where the action is. The question is whether or not we ought to change the law. I don't think we should. I think the laws are not the problem. I think it's a question of applying those laws to an entirely different set ofnot entirelybut a radically different set of facts and being sensitive to those changes. That's why we held four months of hearings on whether or not American anti-trust is up to date in a global economy and in a high tech economy. It's a little like asking should we revisit the First Amendment because speech now occurs on the Internet. The First Amendment isn't the problem; it's that the enforcers must pay attention to the fact that they're operating in a new world, in a radically different world. One of the good things about antitrust has been its tradition of the facts, the facts, the facts. I think the Sherman Act is fine. I think the Clayton Act is fine.
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The other two issues you raise are first, in all this drive for efficiency are we losing sight of the person who gets hurt, which is the worker who is laid off when the firm is downsized. I believe that's a tremendously important problem, but I think it needs to be addressed by retraining, by subsidies, by welfare programs; not by blocking otherwise legal transactions, because workers will have to change jobs.
The other issue is do we need an international antitrust code because so many of these transactions are international? If I have to predict, I would say 100 years from now, you probably will have something approaching an international antitrust code, but I would say that countries are at too different stages of development right now to expect that to happen, except in rifleshot instances.
What we need to do is stick with the Sherman Act, stick with the Clayton Act, but make sure we pay attention to the way the world has changed.
Mr. HYDE. The gentleman's time has expired.
Mr. FRANK. Can Mr. Klein answer?
Mr. HYDE. Surely.
Mr. KLEIN. I can be mercifully brief. I'd be pleased to associate myself with those views.
Page 77 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. FRANK. Thank you.
Mr. HYDE. Thank you. The gentleman from Indiana, Mr. Buyer.
Mr. BUYER. Thank you, Mr. Chairman. I have two issues I'd like to cover. One is on telecommunications and the other is on the multi-provider networks in health care. So, the telecommunications would be to you, Mr. Chairman.
I have a sense, if I'm being a good listener to many of the consumers whom I represent, there is a lack of patience out there by people. They heard a lot of overselling about how great, we move the Telecom bill and when we take these large companies that have monopoly power, even though they may not exercise it and that can be debated, that great things will happen and that the consumer will then get the advantage and have lower prices. They're saying, we haven't seen it. We can be very impatient at times, but you know one of the things thoughI'll take my own cable as an examplewhat do they do? Let's see they improve the system, they laid out new wire, they now give me greater options than I've ever had before, and every time you have a new athlete sign a $125 million contract, who does that cost get passed on to? People in America just don't realize that every time their cable bill goes up by 20 cents, we're paying for all those multi-million dollars salaries out there by athletes, and people think, well, I just won't go to these games anymore. We're paying for that. From our ESPNs toyou've got programmers out there can't afford to carry or they can't say no to ESPN. ESPN 1, ESPN 2, and the NBCsI'll get off my stump there, but that's another subject on salaries and sports and everybody else picking up that one. So, I just want to let you know I'm watching and I'm interested in your comments out there on what's happening with the Telecommunications bill and how long must consumers wait, OK. Now, let me
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Mr. PITOFSKY. Let me gracefully defer to Mr. Klein here on the telecommunications.
Mr. BUYER. Gracefully defer? Well, I'm not certain I can let you.
On the other onelet me extend a compliment to youwe had a good dialogue. The Chairman forced that dialogue on the whole issue on multi-provider networks in health care. Ed Pease and I kind of share Lafayette, Indiana. He has two hospitals that are merging. He also has something called Arnett Clinic. You've got doctors out there who formed their own networks and are being treated under different standards and the per se versus the rule of reason and as they're trying to decide whether it's appropriate for these two hospitals in a smaller community to merge, what's its impact upon doctors whom have moved to thesetheir own networksfor greater efficiencies, let me complement you. To permit doctors to move toward greater efficiencies and give them greater flexibility, so I complement you in that direction and I'd like for you to share with me a little bit further on what you're seeing out their across the country on that front. Thank you, Mr. Chairman.
Mr. KLEIN. Sure, I'd be happy to say a word and I'm sure Chairman Pitofsky would like to comment too because it's really been a very strong joint effort between us, as well as with the committee.
Our experience has been since the implementation of those changes in which Bob showed a great deal of leadership, we essentially have had probably seven or eight business reviews, maybe ten, of people proposing a wide variety of different arrangements and I think, in general, we have been very supportive. I think the medical community, the patients and the professionals, have all found that this was a constructive process and I think it continues to work that way. One of the things that we do that is very helpful in that regard is if people have a proposal and the lawyers are concerned about whether it would raise any concerns, we do a thorough business review for them, and give them a no-action letter unless we think there are real competitive problems. I think that's helped develop and build on the process you commented on.
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Mr. PITOFSKY. Briefly, this is an example of what we were talking about a moment ago. The health care market in this country is changing radically and what we try to do in these health care guidelines is move from an abbreviated, rigid per se approach to a much more flexible rule of reason. We, too, give these advisory opinions. My impression, as I said in my opening statement, from people who are out there and have to live with these rules, is we're getting along a lot better now than we did before. At least tentatively, I think we've moved in the right direction and it's a success.
Mr. HYDE. The gentleman's time has expired. Do you have one more?
Mr. BUYER. With brevity, if you could just answer the telco on how long must consumers wait?
Mr. PITOFSKY. I think the solution to the cable monopolies, which are troublesomeI pay very high rates myself and it troubles me every monththe solution is going to have to come from new technologies like direct broadcast satellites. When we reviewed Time-Warner, the defendants all said, look, why do you have to do anything about this, the new technologies will take care of it. We concluded that those technologies were years away from being effective competitors: 3, 5, 7, 8 years something like that. DBS only has about 5 percent of the market right now. But it's growing and, in my opinion, the solution to the cable monopolies will have to come from these new technologies in the longer term.
Mr. BUYER. Thank you.
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Mr. HYDE. Thank you. The gentleman from Virginia, Mr. Scott.
Mr. SCOTT. Thank you, Mr. Chairman. I'd like to follow through on that last question just a little bit, because we talked about whether or not there's competition and all that. Can you tell us how the inclusion in the Department of Justice has actually reduced cable or TVcable or telephonerates for consumers?
Mr. KLEIN. Well, certainly, it's part of the process. I think what you've seen is that some consumers are beginning to see new competitive opportunities. We know from evaluations in Michigan and elsewhere, that there are consumers in Michigan, for example, who have more than one local telephone option and they're beginning to see lower prices in other packages.
Mr. SCOTT. On that, can you give us an example of where the competition has actually resulted in lower prices for consumers?
Mr. KLEIN. Well, there have been lower prices in Michigan with some of the new entrants that are there. It's just beginning, Mr. Scott, and I don't want to suggest to you that there is a nationwide rush to lower prices for local telephone service, but what I think is important and if you look at the process in long distance telephone service, since the time the Justice Department broke up the AT&T monopoly, in the last 13 years those prices have come down by more than half and that is good for America's consumers and over time America's consumers are going to see those kinds of results in terms of local telephones, in terms of one-stop shopping. It's not going to all happen at once, unfortunately.
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Mr. SCOTT. On another issue, can you tell us where we are on antitrust involving professional sports teams?
Mr. PITOFSKY. What aspect of professional sports are you thinking about?
Mr. SCOTT. Well, we had a hearing on the National Football League in terms of theirexcuse me, baseballand their antitrust exemption and other sports leagues do not have an antitrust exemption. Have youis that on anybody's agenda?
Mr. PITOFSKY. It's not on ours. That'sthat is not a matter that we've been called upon to testify about and we haveI'm not aware that we have any investigations going right now, involving professional sports.
Mr. KLEIN. The Senate Judiciary Committee has been looking at the baseball exemption and there are some proposals that the committee has made and we have been working with the committee on that. I don't know whether they intend to move it or not, but we have certainly been engaged.
Mr. SCOTT. OK. I guess one final question, Mr. Pitofsky. This is an oversight hearing and I guess I'd just be interested to know whether or not you have enough funds to fulfill your mission and if you had more money, what could you do for consumers with it?
Page 82 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. PITOFSKY. Well, thank you for that question. It is tough right now. I already described that fact that we review twice as many mergers now as we did 5 years ago, yet the agency is roughly the same size. We're trying to monitor the Internet, which is booming with marketing sales pitches. We are extremely busy, we're extremely stretched, we try to get the job done as best we can, but if we had more people, those are the two areas where I believe we would put them. It would be in merger review and internet monitoring. Finally, I worry that we're slighting non-merger work, because we have so many merger cases that we have to review and bring to court.
Mr. SCOTT. What are some of the other non-merger work that's getting slighted? You mentioned the Internet.
Mr. PITOFSKY. I think in the health care area, we could do more. I think there are situations in the country where incumbent doctors are concerned about the challenge that's presented by new forms of health care and they get together in what may be unjustifiable boycotts. Now, we brought some of those cases, we've reviewed a lot of behavior like that, but I would be concerned that if we had more resources and reviewed more, we'd find more problems.
I also think in distribution. We're active there. There's a Toys-R-Us case in litigation. We have brought resale price maintenance cases, distribution cases, but I think we could do more in those areas if we had more staff.
Mr. SCOTT. Mr. Klein.
Page 83 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. KLEIN. Mr. Scott, I would just like to add, I think first of all, it's very important to know, last year we had a budget of under $100 million. In criminal fines from international cartels and domestic cartels we brought in over $200 million. We are actually a significant profit center for the United States government and I think that we do need more resources across the board. I would put them into chasing down these international cartels, which are just taking money right out of the pockets of American consumers. These are people who fix a price that can be 10, 15, 20 percent higher than what the market would allow and our people are paying that. These are hard things to track downit involves relationships with governments all over the world.
Second, I agree with Chairman Pitofsky that the merger wave has certainly taxed both agencies significantly and so I think this is an area that ought to be seriously revisited.
Mr. HYDE. The gentleman's time has expired. The gentleman from California, Mr. Bono.
Mr. BONO. Thank you, Mr. Chairman. I'd like to make a comment and this comment is not directed at our guests. I'd just like to make a general comment.
These issues that we're talking about are very complicated and, of all people, I'm not one that clearly understands the technicalities of these issues. However, I am a member here and I am required to vote on issues. It's important that I be as educated as I possibly can. I must say that I'm surprised that these issues that are now coming forward, I haven't heard much from anybody who represents the industry at all. I haven't seen a reach really. If it were me, I would be making a tremendous reach to educate everybody I possibly could, especially me, but it hasn't come forward. That bothers me, because that's what this House is for, it's for us to know what we're talking about, make a choice and do it intelligently. But if we're expected to do that all on our own, I think that's a mistake on the part of the people who are inventing and creating all these new things.
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When I saw the computer come, I told my staff, we are going to have a multitude of problems. It's not just going to be a wonderful education source. It's going to be a million other problems. I come from an industry that did educate me for 30 years, so I do have some education. I am a staunch protector of copyright. I probably fight harder for copyright or as hard as anyone in this House to protect copyright. But when I reached to the companies that needed protection and said, China is stealing billions and billions of dollars of your copyright material, would you come and talk to me, I again, have not heard a word. I think it's kind of ironic that we are now sitting here talking about these huge issues and that the industry itself is not making a reach and coming back to us. In the area of copyright, I feel slighted. I have fought incredibly hard to protect copyright for 3 years. Haven't heard from anybody. I called and asked to hear from anybody.
I just want to suggest to you that if these issues are as important as you say they are, you better get involved. If you want the right vote, you better make sure that the people that are voting for you understand what you're talking about. If they don't, they can easily cast the wrong vote and you can easily lose something that is very important to society.
Mr. HYDE. The gentlelady from Texas, Ms. Jackson-Lee.
Ms. JACKSON-LEE. Mr. Chairman, and Ranking Member, thank you very much. This is part of our responsibilities, but truly a very important hearing and gentlemen, thank you for your presence.
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Let me focus on two concerns and certainly there are other agencies that overlap the responsibilities of this particular topical issue I will raise, but still I'd like to have your insight as we talk about antitrust and competitiveness. I had the privilege ofsome would say otherwiseof being on the conference committee of the telecommunications legislation in 1996 and one of the issues that was certainly of great concern to those of us on Judiciary, we wanted success, but we wanted competitiveness. I'd like your response to where we are with respect to the workings of the Baby Bell's if you will, regional Bells, and AT&T, as the Telecommunications Act is unfolding. How are we in responding to urban and rural needs of service, cost issues, what is your oversight responsibility in terms of what we handed to you was a responsibility or a role in assessing competitiveness, because we first went with the modified final judgment to enhance competitiveness. Have we really done that?
The other issue I would askand that's why I said there is a joint commission that handles thiswhich is the cable TV. I have a particular concern in my community of Houston in terms of the quality of programming, the access to program, the public and educational governmental access, this so-called swapping one for another, which they call must-carry is a provision, but sometimes that comes back to bite you, and the treatment of low-income neighborhoods.
What role are you playing in those major, both of those seem to fall in the communications industry, but those major new structures, what oversight do both of you have in those areas?
Mr. KLEIN. I think I'll speak to the telecom issues, and then Chairman Pitofsky can say something about cable.
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In general, first of all, I appreciate the role that you played in the conference in supporting the Department of Justice role. I think it's an important role, I think it has been a constructive role. I believe we are on a path that, as I put it in my testimony before the Senate, is not a sprint, but a long distance run. What I mean by that is, it's going to take time to get the full benefits to consumers. They're impatient, and I understand the impatience, but it's much, much more important that we do this right, than that we do it quickly. I think what you will see in the next year, 2 years, 3 years, certainly, is that there will be more and more local markets coming open to competition, and then more and more local carriers going into long distance. That's going to lead to one-stop shopping, there are real efficiencies in that. That's going to lead, I believe, to greater and greater competition and lower prices. One of the things that is on the horizon and that will happen is the situation where a long distance carrier has the same customer as a local carrier and when they can both fight over that single customer, good things are going to happen. We're putting the work together right now to get us there.
Ms. JACKSON-LEE. Chairman.
Mr. PITOFSKY. On cable, there are two situations. One isthere are some places in the United States where consumers have the benefit of two cable companies and quite often the companies try to merge and restore a monopoly situation. We challenge those cases regularly, we don't allow that to happen. If people have the benefit of two cable companies we want to preserve that situation.
In most parts of the country, however, consumers only have an opportunity to sign up with one cable company. In that area, I couldn't agree with you more. The key word is access. What you've got to do is preserve the ability of new technologies to invade that marketplace of new programmers to challenge existing programming that's on cable and so forth. We do what we can. When transactions come up, that's the first question that we look at and frequently we either block transactions or we condition transactions in such a way as to preserve access. Until there's real competition in the cable industry, and that means getting away from these monopoly situations, because of the entry of new technologies, that's about all we can do at this point.
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Ms. JACKSON-LEE. So you are keeping oversight?
Mr. Chairman, would you indulge me an additional minute? I have a final question for the gentleman.
Mr. HYDE. Certainly.
Ms. JACKSON-LEE. I thank you. Interestingly enough, the concept of antitrust and our attention to it was borne out of the monopolistic early industries, family-directed, huge and maybe, we had to start that way. Some believe maybe that you are antiquated and that we have come to a point where business regulates itself, that in fact, consumers are more sophisticated and Congress, back off; FTC, back off; Justice Department, back off. I come from populations where you find violations every day. Not the sophisticated persons that happen to be in this room: the elderly, those who are subject to quick and easy buys, credit situations. Tell me how you are being 21st century, how you are aggressively looking for places where your oversight is needed and that you are being diligent and, if you will, directed in your effort to the new antitrust and anti-competitive approaches?
Mr. PITOFSKY. Let me say first, that those who argue that antitrust is obsolete, I can just say I disagree. I profoundly disagree. I believe it is essential to protect the free market and if you don't protect the free market, you're going to get abuses, just as you saw 100 years ago and WE need to be diligent.
I mentioned the fact that we're facing a tremendous merger wave, we bring four times as many cases as we brought before a decade ago. Should we be bringing eight times as many cases? I don't actually think so. I think we're picking off the cases that are most likely to lead to consumer abuse. We're looking carefully at high tech industries, pharmaceuticals, the defense industry, distribution, and we're insisting that competition either be preserved or that there be an awfully good case that the transaction is going to produce those kinds of efficiencies that lead to consumer welfare. That's our oversight role and we do what we can in that direction.
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Mr. HYDE. The gentlelady's time has expired.
Ms. JACKSON-LEE. Mr. Chairman, can I allow Mr. Klein to briefly and quickly answer, and I would also ask unanimous consent to submit my statement for the record?
Mr. HYDE. Without objection, so ordered, and certainly, Mr. Klein may answer.
Ms. JACKSON-LEE. Thank you, Mr. Chairman, for your kindness.
Mr. KLEIN. I think that's the right question, Ms. Jackson-Lee, that you've asked and for our part, certainly we agree that antitrust enforcement is critical to this Nation's economy and, indeed, has served this Nation extremely well. We are the envy of the world in terms of what our economy has been able to achieve, and a part of that has been rigorous enforcement.
For our part, I would say there are two or three things. One, we are global now. Five years ago, fewer than five percent of our cases were international. Today, a third of our cases have an international dimension. That tells you a lot. Second, we are high tech. We are involved in issues that Mr. Bono talked about in terms of copyright. I was here testifying before the Chairman about a year, year-and-a-half ago on those matters. We are looking at the important developments in terms of technological change and how it impacts antitrust enforcement.
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Ms. JACKSON-LEE. Thank you very much.
[The prepared statement of Ms. Jackson-Lee follows:]
PREPARED STATEMENT OF HON. SHEILA JACKSON-LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Chairman, I want to thank you for calling this hearing this
morning as a part of our Committee's responsibility to provide
oversight of the government's antitrust enforcement agencies. I look
forward to hearing from our distinguished witnessesto hearing from agency heads, Mr. Klein and Mr. Pirofsky, about the focus of the work at their respective agencies; from our invited experts in the area of antitrust law; and from the representatives of companies touched by the agencies' efforts at enforcement of antitrust law.
This is a complicated area of law and one that in recent times has attracted my attention as I read again and again about the mergers of large corporations and about competition in the airline, telephone service, and cable industries or, as some critics argue, the lack thereof.
There are currently a number of areas of particular interest in the antitrust areacompetition in the airline industry, competition in the software industry, and implementation of the Telecommunications Act of 1997.
Page 90 PREV PAGE TOP OF DOC Segment 1 Of 2 I would first like to raise the question of competition in the telephone service industry. Prior to the 1980's, one company, AT&T, provided the majority of local and long distance service in the United States. In the late 1970's, however, the Antitrust Division at Justice brought an antitrust suit against AT&T. That lawsuit resulted in a consent decree that divided AT&T into a new, smaller AT&T and seven regional Bell operating companies. AT&T continued to provide long distance telephone service and the seven regional companies assumed control over local telephone service in their respective areas.
Then, in 1996, Congress passed the Telecommunications Act which allowed the regional companies to enter the long distance business contingent on those companies opening up their networks to allow new companies to compete in the local telephone service business. There has been considerable disagreement surrounding the question of whether the regional companies have sufficiently opened their networks to competition. I hope that our witnesses this morning will touch upon this issue and will share with us their perspectives, concerns and suggestions about how to resolve this controversy.
Next, I would like to draw your attention to the question of competition in the airline industry. Congress substantially. deregulated the airline industry in 1978. Since that time the industry has experienced numerous mergers and bankruptcies. Today, the industry is significantly more concentrated and ticket prices for travelers who cannot purchase them well in advance are very high.
Further, recent years have seen the development of ''fortress hubs.'' Most airlines use some form of a hub and spoke system. For example, United has a hub in Chicago and Delta one in Atlanta. If a traveler wants to fly one of those airlines, they usually have to fly through one of those cities. The term ''fortress hubs'' refers to the practice of an airline controlling a dominant share of the landing slots at a hub airport which allows the airline to control the price of flights to and from that hub and arguably constitutes an antitrust violation.
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It has been argued by many that these are signs that deregulation of the airline industry has failed and that the industry needs to be re-regulated to some degree. Again, I hope that our witnesses will share with us their perspectives on this issue.
Finally, I turn to the issue of competition in the software industry. Recently, attention has been focused on whether Microsoft has violated antitrust laws with its aggressive practices. Microsoft has been the subject of a great number of complaints of antitrust violations from the software industry. In mid-October of this year, the Antitrust Division at the Justice Department charged Microsoft with violating the consent decree it signed with the Department in 1995 which, among other things, prohibited Microsoft from tying other products to its dominant Windows operating system.
At issue in the Microsoft case is whether Microsoft's Windows operating system and the company's browser, Internet Explorer, are two distinct products or one integrated product. The Justice Department has asked the court to stop Microsoft from forcing PC makers to take the Internet browser as a condition of installing Windows 95, and to fine the company $1 million a day until it complies. The government's view that they are separate products rests heavily on Microsoft's own marketing and advertising practices, as well as internal company memos. The government is challenging Microsoft's practice of binding its customers to nondisclosure agreements that effectively prevent them from providing information to the government without first telling Microsoft. Once again, I hope that the witnesses will discuss this issue either in their testimony or in the question and answer period. I look forward to hearing from all of you. Thank you, Mr. Chairman.
Page 92 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. HYDE. The gentlelady's time has expired. As we move along, I would like to suggestand it's just a suggestionto the remaining members, who have been very patient and are entitled to their full turn at bat, that we have three panels, and where this is the first panel and other folks have been here a long time. So what I'm pleading for, and it is only a request, is a measurea modest measureof restraint on the questioning, so that we can accommodate the other two panels, who have been here patiently, as well.
Now, the gentleman from Tennessee, Mr. Bryant.
Mr. BRYANT. Thank you, Mr. Chairman, and I will certainly try to accommodate, not only this committee and the Chairman, but also the distinguished panels of witnesses that we have and be somewhat brief.
We all were here during the battle of the telecommunications effort and I think we understand what we're after, what we sought, and now we're at that point where the rubber meets the road and we're having to enforce some things and trying to see how it actually does work in reality. Representing an area of Tennessee that covers both urban and rural parts, I am very concerned about competition in the whole context of the telecommunications laws and how they're working. Obviously, I have interest on both sides if you divide this between long distance and local Bells and I'm not taking sides on this, but I am, at this point, very interested in seeing how this is playing out. That's why I commend the Chairman for holding this hearing and giving us the opportunity to hear so much.
Mr. Klein, let me ask you, is the Department of Justice doing everything in its power to ensure that local competition develops and that the consumers get the benefit of choice in all segments of the telecommunications market?
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Mr. KLEIN. I believe we are, Mr. Bryant, and I believe that we will continue to do so in a very aggressive way because I think the fruits of this effort will ultimately benefit America's consumers in a huge technological change in opportunity.
What we are trying to do is not to just sit back, but to extend a hand. I have personally talked with all of the RBOCs, all of the major long distance carriers, many of the new entrants at the local level. How can we crack the ice? There's a lot of people who are sitting around like wrestlers, you know, sort of waiting and waiting. We want to get them in the ring and let them have at it, because we think when the sparks fly, we're going to see some good things. We're trying to do that, but we want to do it in a way that assures long-term success. You can always get a short-term hit out of this, but if you want a fully deregulated, effective market, we must make sure it's done properly.
Mr. BRYANT. Again, I've learned that I need to be extremely careful up here when I ask questions because it sends signals to different sides that I'm either with them or not with them and I should probably just stop right now. [Laughter.]
Mr. BRYANT. But I have to ask this
Mr. HYDE. Would the gentleman yield?
Mr. BRYANT. Yes, sir.
Mr. HYDE. The gentleman shared with me Mr. Bono's remarks and he's the first member I've heard in many years say he's underlobbied[Laughter.]
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Mr. HYDE [continuing]. And that was some signal. Back to you, Mr. Bryant.
Mr. BRYANT. Thank you. I'm sure we can fix that.
I have to ask. Yesterday there was a release from the Department of Justice, as it related to BellSouth in my region and its recommendationJustice's recommendationthat BellSouth not be allowed to go forward in South Carolina. Of course, they raised indications as they did back when we were legislating the bill, that there would be cherry-picking going on and people would go aftertheir competitors would go afterthe business end of the market, as opposed to the residential end and certainly, when I've got some residences that are out in the country, I'm concerned about that. Again, there are two or three sides to every issue. Can I get assurance, as you indicated in your press release, that you, as the Department of Justice, you all are willing to step forward and work with the regional Bells in trying to develop the competition that they need so that they can get into long distance and that the long distance folks can get into the local market that they need to, so that indeed this bill, this Telecommunications bill, can work? Can you do that in a fashion, can you commit to working with, particularly BellSouth in this instance, all around the country in making sure this bill does work for the consumer.
Mr. KLEIN. You can have my absolute assurance. Yesterday, Mr. Bryant, I called BellSouth and told them that personally. That I am here to work with them. That I don't think that they are ready yet. That they have made significant strides and if they want to put their shoulder to the wheel, we will stand right by them to get the job done.
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Mr. HYDE. Thank you. The gentleman from Massachusetts, Mr. Meehan.
Mr. MEEHAN. Thank you, Mr. Chairman. Chairman Pitofsky, just in reference to the comments made by Mr. Scott, relative to antitrust, and professional sports, many of us became interested in relocation issues, particularly regarding the NFL, when the Cleveland franchise moved out. And we established a task force. I know Senator Glenn is interested on the Senate side. Perhaps, in the future we can work on this issue. I don't think there's enough time now to deal with it. But I did want to commend you on the commission's excellent report on the proposed tobacco settlement's impact on tobacco prices and company profits that was prepared for the bipartisan congressional task force, which I co-chair with Jim Hansen.
I was hoping for a document that would cut through the rhetoric and shed some light on the real economic impact of the proposed settlement, and I have to say I wasn't disappointed. Indeed, despite all of the talk about steep penalties and substantial payments to the public sector, the FTC's report found that the reality of the settlement in its current form is increased profits for big tobacco, potentially to the tune, according to your report, of $56 billion in operating profits over 25 years, compared to what the tobacco companies would earn in the absence of a settlement. Furthermore, I think the real value of the settlement, according to your report, to the public sector is not the $368 billion as advertised, but instead, approximately $100 billion.
According to the FTC's report, the key to big tobacco's future profits is a vaguely worded antitrust exemption contained in the proposed settlement. Under this exemption the tobacco companies would increase their relative profits by coordinating their pricing decisions to a substantial and perhaps, unprecedented, extent. The companies, as you know, have insisted that they need this antitrust exemption to fulfill the goals of their settlement, but I really have to wonder whether coordinated action is really necessary for tobacco companies to pass through the annual payment amounts to consumers or to reduce sales to retailers who sell cigarettes to young people.
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In any event, Mr. Chairman, I think that it's important that this committee hear your insights about this proposed antitrust exemption for tobacco companies. This committee, undoubtedly, has a strong claim to jurisdiction should one become embodied in legislation. I was wondering for the benefit of members of the committee if you would elaborate on the FTC's recent economic analysis of that settlement?
Mr. PITOFSKY. Thank you, Mr. Meehan, and I must say that the opportunity that you and your colleagues gave us to work on this problem was one that was very welcome. I really think that my agency is there to do this kind of work. Traditionally, we were an arm of the Congress, looking at problems, doing studies, holding hearings and our report is in that tradition.
On the antitrust exemption, as the report said and as I've testified, the way it was written in the original settlement between the State AGs and the tobacco companies, is very to defend. I'm not sure that they really intended it to sweep so broadly, but the way they wrote it, the antitrust exemption applies to any agreement, regardless of the Sherman Act or the Clayton Act, which serves to advance the goals of the settlement. One of the goals of the settlement is to raise prices and, therefore, it's a fair interpretation that tobacco executives could sit down in a room by themselves and agree, regardless of the antitrust laws, as to what the prices and profits for cigarettes would be over the next 25 years. That can't be the right answer.
There might be some narrow focused exemption to the antitrust laws that's justified, because we do want toI do think personallya settlement, the right settlement in the public interest. I think some of the public health advantages in that settlement are wonderful things that ought to be introduced, but the antitrust exemption, as written, sweeps far too broadly and I think has simply got to be reconsidered by the Congress, when they consider legislation in this area.
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Mr. MEEHAN. I look forward to hearing more of your comments on that, very briefly, Mr. Chairman.
Mr. Klein, the Justice Department's action against Microsoft is based exclusively on an interpretation of the 1995 consent decree that terminated the Department's first investigation of Microsoft. Notably, the Department has not yet brought a conventional suit against Microsoft, using the anti-monopoly provisions of section 2, under the Sherman Act. Now, I recognize the fact that this is a case that's presently before the Justice Department, and that you may or may not be able to commentalthough given all of the press and the statements by the Attorney General and others that this case has generated, I'm wondering if Microsoft actions are such a threat to competition, why has the Department kind of shied away from filing a claim under section 2, thus far?
Mr. KLEIN. Well, the original action that you referenced back in 1995 was, of course, a section 2 action. Second, we then followed that up with a Clayton 7 action on the Microsoft-Intuit merger which they ultimately abandoned. While we proceeded on the consent decree theory, we did say at the time, that we have a wide-ranging investigation, looking at the full series of practices. As to that last piece, obviously, I am limited in what I can now say, but I want to assure you that this is a high-priority civil matter for the Department of Justice.
Mr. MEEHAN. Thank you, Mr. Klein. Thank you, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Meehan. The gentleman from Ohio, Mr. Chabot.
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Mr. CHABOT. Thank you, Mr. Chairman. Recent reports, including a recent study by the GAO, indicate that the airfares at the Greater Cincinnati Airport, which is actually in Kentucky, but in Mr. Bunning's district, but everybody from my district flies out of that particular facility. There some of the highest fares in the Nation and constituents have repeatedly brought that to my attention. I do understand that there's some indications that leisure fares are coming down somewhat, but it continues to be a problem in Cincinnati.
To give you an example, myself, last year the Republican convention was out in San Diego and my staff checked on it, you know, airfares, etcetera. It turned out, to fly out of Cincinnati to San Diego, it was $500 more roundtrip, than to go out of Indianapolis, which is basically the same distance and it seemed incomprehensible. Maybewe checked everydayand that's what it was, $500 more round trip. So, ultimately, what I did was to driveI had somebody drive me up to Indianapolisyou know you fly down on one of these 20-seater planes or something, carry your luggage, get on the plane in Cincinnati, fly out to San Diego, and then when you fly bag, carry your luggage so that you can get off in Cincinnati and not fly back up to San Diego and you don't want to leave your car up there or else you have to go back that route. So, it's just crazy that you've got to do that. People all the time are driving to Dayton, or having people drive to Dayton, or Louisville, or Lexington, or Indianapolis to fly other places and saving hundreds of dollars that way. Or another way to look at it, they're spending hundreds of dollars more than they ought to have to fly out of their own community.
Now, I do understand, and I've talked to Delta about this and I know that their contention is that, since it is a hub, I think second in size to Atlanta, that we do have, you know, Frankfurt and all kinds of other places you can fly direct and we have a lot of flights and that certainly there is an advantage to that and it's good for the economy and the community, but the rates are just a lot higher than I think they ought to be.
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In your opinion, either of you gentlemen feel happy to jump in, can you discuss why the fares are so high and what, if anything, Congress should do, consistent with free market principles, to try to have the fares reduced somewhat on the people of our community?
Mr. PITOFSKY. The Department has handled airline transactions for some time, but let me just say one word along this line. That sort of thing wouldn't happen in a vigorously competitive market and it only happens because there's less competition in airline transportation that I believe there should be. Why do we have less competition? Well, for one thing, 24 airline mergers went through in the 1980's, many opposed by the Department of Justice, but in those days the Department didn't have the last word. I attribute some of this discrimination, some of these radically different prices, to the absence of full competition and I think we pay a price for having let all those mergers go through 10, 15 years ago.
Mr. KLEIN. We are continuing to look at the barriers to entry, the problems of new competitors coming into the market. The Chairman raised some issues about slot constraints in the beginning of the hearing, which also have an impact on this, but I think that, basically, what Chairman Pitofsky says is right. We now have, in various hubs, some real ability of airlines to exercise some power.
Mr. CHABOT. OK. In the interest of time, I'm going to be real brief and you can just answer yes or not to it. Do each of you gentlemen agree that relative to the telecommunications bill that was passed last Congress, thatand there's controversy between the local Bells obviously and the long distance carriers and othersthat our paramount concern should be increasing competition so that ultimately we can lower the cost to the consumer?
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Mr. KLEIN. Absolutely.
Mr. PITOFSKY. I agree.
Mr. CHABOT. OK, thank you. I yield back the balance of my time.
Mr. HYDE. I thank the gentleman. The gentleman from Massachusetts, Mr. Delahunt.
Mr. DELAHUNT. Yes, thank you, Mr. Chairman. I'll just pick up where my friend from Ohio left off. I'm sure everybody on this panel could provide an anecdote that smacks of restraint of trade or the result of a merger. I think the point that you make, Mr. Chairman, is that 25 mergers did occur and now we find ourselves in the present scenario, but I presume the same can be said of other sectors in the economy; whether it's defense, whether it's health care, whether it's banking, whether it's financial services. My concern, and you both responded to it earlier, my concern is that you really don't have the resources and that you're out-gunned. Again, I don't want to get into specifics of the Microsoft case, but we have a defense doctrine about the ability to wage two regional wars simultaneously. Well, it's got to require a lot of resources to take on this particular civil action involving Microsoft.
You generateyou indicated you're a profit center of $255 million. What happens to that $255 million? Does it go back to the general treasury?
Page 101 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. KLEIN. It actually is, it's $205 million last year, but it goes back specifically for victim compensation. That's what Congress is
Mr. DELAHUNT. For victim compensation?
Mr. KLEIN. Yes.
Mr. DELAHUNT. I mean there has to be a response by Congress, if we're going to be serious to adequately fund both agencies to do what we expect you to do. Let me also say that I found the most interesting response, Mr. Klein, was your response in terms of a moratorium, because not only is it the volume that is now occurring, but the pace. It is happening so quickly that nobody knows what's happening. That's the reality. We don't know what's happening and I daresay that your suggestion about a moratorium indicates that you also have an unease. I'd like to hear you expand on the concept of a moratorium and I would really look forward if you could submit further thoughts to this committee on the issue of a moratorium.
Mr. KLEIN. I would be happy to engage it. It's a point that's come up before, Mr. Delahunt, and Chairman Pitofsky just referred to it. You go through a deregulatory process. You don't have a pre-existing competitive market and so what you're trying to do is make predictive judgment about future behavior on very limited information. I feel reasonably comfortable that section 7 is a good way to analyze extant markets, because you have competition that is taking place, or it isn't, but you know what's going on. In deregulation, you have less information going in.
Mr. DELAHUNT. Could you submit to us a recommendation as to how to achieve this? Would it require any action by Congress?
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Mr. KLEIN. Well, I think it certainly would require
Mr. DELAHUNT. I would appreciate it.
Mr. KLEIN. Sure, I'd be glad to
Mr. DELAHUNT. And also I just want to associate myself with the question that was posed by Mr. Frank earlier, because I really think he got to the heart of the matter. You know, we talk about efficiencies and I would justI think there's unease in the public mind that these efficiencies aren't necessarily getting to them in terms of consumer prices, or to workers in terms of increased salaries. What are these efficiencies doing to enhance the quality of life in this country? You're free to respond or see me afterward, because I certainly don't want to antagonize my friend, the Chairman, by overextending my stay.
Mr. PITOFSKY. Two quick points, Mr. Chairman.
Mr. HYDE. Surely.
Mr. PITOFSKY. The point you make about efficiencies is exactly why the Department and the FTC when they amended their guidelines said, we're not interested in free-floating efficiencies, we want to know about efficiencies that end up in the pockets of consumers.
Page 103 PREV PAGE TOP OF DOC Segment 1 Of 2 I don't want to let your opening remark go by, however, about the problem of fighting two wars at the same time. Let me put some specifics to that. The biggest court case we've taken on since I've been at the Commission involved our challenge to the proposed Staples-Office Depot merger. It was a trial, I'm glad to say we won it. The press indicates that the other side had 52 lawyers working on that case and spent something like $20 to $25 million in litigation costs on that case. We were able to put in the courtroom wonderful lawyers who did a tremendous job. Could we do two of those cases at the same time? I'm not sure we could.
Mr. DELAHUNT. I think that says it all.
Mr. PITOFSKY. I'm concerned that people in the private sector are aware of that fact and they're aware that we have 3,700 mergers to review and that we're stretched as thin as we are. So, I think your question is exactly on point.
Mr. HYDE. I thank the gentleman. The gentleman from Arkansas, Mr. Hutchinson.
Mr. HUTCHINSON. Thank you, Mr. Chairman. Mr. Klein, I submitted a letter to you prior to this hearing raising some questions and letting you know I was going to ask some questions with regard to the Microsoft action by your department, and I commend you for taking that step. In looking at recent news articles, you have received some criticism as to the department's delay, wondering when something was going to happen, if something was going to happen and I know it was difficult for you not to be able to respond to those. We were reading in the press about concerns in the industry about the accumulation of market power by Microsoft and their actions in regard to their consent decree. Can you say whether there was a particular reason for the delay by your Department other than the delays associated with a routine investigation?
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Mr. KLEIN. That is the only reason, I think. There will always be, especially in a high visibility industry, lots of cries by people in the press that we ought to be moving more quicklyor more slowly, for that matter. We did this based on the work that was before us and when we thought we had the evidence to go forward, we did.
Mr. HUTCHINSON. Well, technology changes rapidly and when we're dealing with this type of industry any delay means huge profits or huge losses for the parties that are involved. Does your Department have the resources in order to pursue this case and overcome any attempts to delay, because again, that coulddelaying in itselfdefeat the purpose that you're trying to achieve by your action?
Mr. KLEIN. Well, I think Chairman Pitofsky just made a very important point, and there's no question that additional resources would be appropriate for the overall enforcement effort.
Mr. HUTCHINSON. How many people are assigned to the Microsoft case?
Mr. KLEIN. Well, we've got a variety of Microsoft investigations. I think we have, in terms of numbers, the largest number of people working on any single matter in the division or committed to that matter and it is obviously a priority, an important one and we will put the resources we need to do the job right.
Mr. HUTCHINSON. How does the commitment to this case compare with the other commitments of the Department, historically and presently?
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Mr. KLEIN. I believe that this is, right now, certainly the single largest commitment in terms of our resources.
Mr. HUTCHINSON. And you
Mr. KLEIN. I wouldn't know exactly historically, but there have been other major cases, the AT&T case, and so forth, where there have been large-scale commitments.
Mr. HUTCHINSON. We've talked about staff. Did your budget request this year request increases in staff?
Mr. KLEIN. Yes, it did.
Mr. HUTCHINSON. And that was approved by the administration. How dramatic was the increase that you requested?
Mr. KLEIN. It was relatively modest. The administration's budget, I think, called for about a $4.5 million increase.
Mr. HUTCHINSON. Chairman Pitofsky, let me come back to you and I wanted to address a totally different issue and that is on the slotting fees that have been charged by retail grocery stores and other entities for the placement of new products on store shelves. There's been, I believe, complaints to the FTC regarding this practice. What action has the Commission taken to date on this?
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Mr. PITOFSKY. I thought I was going to get away without addressing slotting fees. It is a tough and a tricky issue. The reason it's tricky is because there are slotting fees that are really pro-consumer. These are sometimes very substantial payments by manufacturers to the retailers, paying them for shelf space, and those fees can be something in the nature of a discount. Well, we don't want to impair that kind of aggressive marketing. On the other hand, there are slotting fees
Mr. HUTCHINSON. What are you doing about it?
Mr. PITOFSKY. We are investigating in that area. If we found a slotting fee that prevents small business people from getting on the shelf of a supermarket and that was its principal effect, I believe the Commission would challenge that behavior.
Mr. HUTCHINSON. You don't believe that's the effect of slotting fees at the present time?
Mr. PITOFSKY. Some, yes and some, no, and that's why this is a tricky area.
Mr. HUTCHINSON. How do you distinguish the two?
Mr. PITOFSKY. Well, I think, the main problem would relate to those slotting fees that are offered on condition that the merchant give the payor exclusive control over the shelf space and those are the ones that we will be looking at most closely.
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Mr. HUTCHINSON. I thank you gentlemen, and I thank the Chair.
Mr. HYDE. Thank you, sir. The gentleman from Florida, Mr. Wexler.
Mr. WEXLER. Thanks, Mr. Chairman. For Mr. Klein, if I could. I have the privilege of representing Palm Beach and Broward Counties in south Florida, and when we're not playing golf and basking in the sun, oftentimes we're trying to call our relatives and friends in New York or New England or wherever else. That brings me to my concern and I'd be very interested in your response so I can guide my communication to the Florida public service commissions based on your guidance. BellSouth, as I understand it, was denied its application to provide long distance services in Florida, because the Florida public service commission has concluded it is still, or the plan is still in violation of the Telecommunications Act. I'd like to know from you if possible, what specifically does or do the local phone companies in Florida need to do to determine whether or not they can satisfy the Telecommunications Act and get into the long distance business?
Mr. KLEIN. Well, I'm glad you asked that question. My mother lives in your district, so
Mr. WEXLER. Everybody's mother lives in my district. [Laughter.]
Mr. KLEIN. I'm concerned about long distance calls and I wouldn't want the story coming out of this hearing
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Mr. WEXLER. Where does she live, if I may ask?
Mr. KLEIN. She lives in Boynton Beach.
Mr. WEXLER. OK.
Mr. KLEIN. I wouldn't want the story coming out of this hearing that I was not facilitating her ability to make long distance calls to Washington.
Mr. WEXLER. Right, right.
Mr. KLEIN. In that respect, we have a particular focus on that county.
The Florida PSC is actually in the process of reviewing BellSouth and I know they've raised concerns they have with respect to BellSouth.
We found, essentially, four issues in our evaluation in South Carolina. They would likely be in some respects different in Florida, because pricing is different in Florida, and I can't comment until I've seen it. The issue of operating support systems is where Florida, Georgia, Alabama, and we have all found some problems with respect to BellSouth. I would hope they remedy those problems. They're by no means insurmountable, and I think other RBOCs are making progress in that direction.
Page 109 PREV PAGE TOP OF DOC Segment 1 Of 2 I think the other issues that we raised in terms of our analysis are things that are correctable and remediable, and if BellSouth is willing to take those actions, then I think we should be able to move forward.
Mr. WEXLER. OK, thank you.
Mr. HYDE. The gentleman from Florida, Mr. McCollum.
Mr. MCCOLLUM. I'd just like to followup on one question. I came in late and I apologize for that, gentlemen, but I being from Florida, like Mr. Wexler, read a newspaper editorial very recently on this matter involving the Florida Public Service Commission ruling and the editorial seemed to imply the BellSouth folks do not have the technology to providein place to provideaccess to others to carry their services and that without that technology investment being made, that they'll never be able to comply. It isn't just a question of want or willingness, but a question of investment of capital. Is that anything you've observed with respect to these operating companies elsewhere? Is there a problem with putting in place sufficient technology to comply with the rules in order to allow other people to serviceuse their lines?
Mr. KLEIN. Different regional Bell companies, Mr. McCollum, have responded differently. Some of them really do have the technology in place and we've commented very favorably in those instances. There's a couple of technological problems with BellSouth. I don't think the amount of capital we're talking about is the kind of thing that would make it impossible for them to deal with the problem. I would expect that they will remedy the problem. Of course, they're going to make their arguments before the full Federal Communications Commission, but I would expect these are remediable.
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Mr. MCCOLLUM. OK, well I'm just curious. Thank you very much. I don't want to belabor the committee with other questions. Thank you, gentlemen.
Mr. HYDE. Thank you. The gentleman from New Jersey, Mr. Rothman.
Mr. ROTHMAN. Thank you, Mr. Chairman.
Chairman Pitofsky, I've got a question for you. It has just been announced that the Sony Corporation and Cineplex Odeon wish to merge their theater chains. This merger would create a new chain that would have 2,600 screens in 460 cities. Sony and Cineplex run 37 out of the 60 screens in my district.
We're concerned about a couple of things. Number one, unless it's a Sony picture, it will not be able to run on those screens. Number two, ticket prices which are now about double the national average in my district, at $9, may go up to $15. The movies are great for everybody and we all love them, but for working and middle class families who want to take their kids to an appropriate movie, it's an affordable or close to affordable form of entertainment. I'm concerned that a merger might affect ticket prices such that it might prevent working and middle class folks from having this outlet to provide good family entertainment. I'm wondering if you and the FCC have any similar concerns and how closely are you looking at this?
Mr. PITOFSKY. Actually, that matter has been cleared to the Department of Justice and they are going to be looking at it. Mr. Klein may therefore havebe more constrained in his response than I would be.
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Mr. ROTHMAN. Then I'm glad I asked you.
Mr. PITOFSKY. I think concentration in retailing and wholesaling, and in manufacturing, can be a very serious problem and I don't know the details of this because we did clear it to the Department of Justice, but if it is true that this is a kind of concentration that will lead to doubling of prices to consumers, it's exactly the sort of thing that we would look at very carefully. It's the sort of thing we have been looking at very carefully.
Mr. ROTHMAN. You know that I believe in the free market, but we have a historical obligation to protect against the excesses of the free market and we haven't done badly as an economy. It's a question of where you draw the line and my recommendation would be that we draw the line here. If there's any doubt, the benefit should go to the moviegoer, the working and middle class person. The benefit should go to the family member who wants to go to the movies and yet still be able to afford a box of popcorn and a soda with the movie ticket, and see a picture that's not within the very narrow choice that might be imposed upon the moviegoer. So I would urge rejecting the merger if there's any doubt at all in regard to price and limit of choice of movie.
I wonder if we canI'll ask Mr. Kleindo you feel that this proposed merger would violate section 7 of the Clayton Act, which prohibits mergers or acquisitions, the affect of which may be to substantially lessen competition or to create a monopoly?
Page 112 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. KLEIN. Well, as Chairman Pitofsky said, that is a matter currently pending before the Antitrust Division, and I would not be able to comment on it at this time, sir.
Mr. ROTHMAN. You did hear what I had to say though?
Mr. KLEIN. I heard your comments, yes, sir.
Mr. ROTHMAN. Thank you. One other question and you may very well be unable to answer this. Like Mr. Bryant, I don't want to tip my hand one way or the other. I'm not sure I know enough yet to form an intelligent opinion on the correctness of the charges made against Microsoft. But from the little I know, their view is that one can already download Netscape as a browser for free and any consumer who wants to therefore use Netscape can do so for free. I'm wondering why that's not sufficient to defend against the charge of this antitrust claim?
Mr. KLEIN. Just briefly, obviously the matter is in court, so we're litigating it. Essentially, our argument is straight under the antitrust decree. There are two products here: One is a browser, one is a Microsoft Windows 95 operating system. What Microsoft does is, if you are COMPAQ or if you are any other original equipment manufacturer, Microsoft says you've got to load our browser on there, even if the manufacturer doesn't want to load Microsoft. If the consumer wants to take it off the Web, or whatever, that's a different thing, but it's at the manufacturing process that this consent decree kicks in and says, Microsoft can't say as a condition of taking Windows 95, you must also take a second product. And we believe the browser is just that kind of thing.
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Mr. HYDE. The gentleman's time has expired.
Mr. ROTHMAN. Thank you, Mr. Chairman.
Mr. HYDE. I want to congratulate this panel for its longevity and its responsiveness. Thank you very much. We will have further questions for you that we'll send you letters on. Mr. Conyers especially asked me to mention that. So, we won't take anymore of your time and thank you very much.
To the next two panels. It is about 12:23 p.m., or 12:24 p.m. I propose we go ahead. The forces of attrition are working in our favor as far as members flaking off and so I propose we go ahead.
So, our second panel consists of five witnesses who will address the implementation of the Telecommunications Act of 1996.
First, we have Mr. Kelly Welsh, the executive vice president and general counsel of Ameritech. Mr. Welsh is a graduate of Harvard College and Harvard Law School. He also holds a Master's degree from Sussex University in England. After clerking for Judge Luther Swygert, Mr. Welsh practiced law at the Chicago firm of Mayer, Brown and Platt. He then served as the corporation counsel for the city of Chicago and joined Ameritech in 1993 and became general counsel in 1996.
Our next witness is Mr. John Hoffman, senior vice president for External Affairs of the Sprint Corporation. Mr. Hoffman is a graduate of Washburn University and the law school of the University of Missouri at Kansas City. He also studied at the University of Copenhagen in Denmark. He has been with Sprint for 27 years, holding a number of important posts and he took his current position in 1990.
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Our third witness is Mr. Mark Feidler, the president of Interconnection Services for BellSouth. Mr. Feidler is a graduate of Duke University and the Vanderbilt Law School. After law school, he practiced law with the Atlanta firm of King and Spalding and then went into the investment banking business for several years. In 1991, he joined BellSouth where he has held several important positions.
Our fourth witness is Ms. Riley Murphy, the general counsel and executive vice president of American Communications Services, Inc. Ms. Murphy is a graduate of the University of Colorado and the Catholic University Law School. She practiced telecommunications law before joining ACSI in 1994. ACSI is one of many companies seeking to become a competitor in the local telephone market. Ms. Murphy appears here today on behalf of the Association for Local Telecommunications Services.
Our final witness is Mr. Andrew Jay Schwartzman, the president of the Media Access Project. He is a graduate of the University of Pennsylvania and its law school. After law school, he worked with the United Church of Christ and the United States Department of Energy. He came to the Media Access Project in 1978, serving as its executive director until October 1996, when he became president. He has written and spoken extensively on telecommunication issues.
We are certainly glad to have you here, and apologize again for the imposition in time. We will try to minimize the questions here, in so far as I'm able to do so. So if you can sum up in 5 minutes, your full statement will be made a part of the record and so we'll start with Mr. Welsh.
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STATEMENT OF KELLY R. WELSH, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, AMERITECH
Mr. WELSH. Good morning, Mr. Chairman and members of the committee. My name is Kelly Welsh. I am executive vice president and general counsel of Ameritech. Thank you for the opportunity to meet with and testify on our experience in the Midwest. I want to begin with a note of optimism. The Telecommunications Act is a good law, drafted to ensure open, competitive markets in local and long distance. The question is why has this law led to regulatory roadblocks, delay and a lack of full competition? It wasn't supposed to be this way. Indeed, a key goal of the act was to break the logjam in the telecom industry after over a decade of being governed by the 1982 AT&T consent decree, the MFJ. By 1993, the MFJ had become a legal and regulatory straightjacket. Technological change was outpacing regulation, and more importantly, consumers were being denied the innovation and choices that full competition and a market-driven telecom industry could provide.
To break this logjam, in 1993, Ameritech proposed to the Department of Justice, our State commissions and the FCC, a novel test in a select number of Ameritech's markets; act quickly to let new competitors into local service and Ameritech into long distance. In short, create full competition. The Justice Department listened to our idea, called Customers First, and agreed to move forward with the experiment. Ameritech and the Justice Department worked diligently on Customers First, but the test never happened, overtaken by passage of the Telecom Act. Unfortunately, the same regulatory logjam that existed before is now back in force, but to break it requires nothing more than following the law you wrote. That means above everything else, sticking to the two basic principles you used when crafting the current law.
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Principle number one was to open all telecom markets to increased competition. That means local and long distance. At Ameritech, contrary to a lot of the doom and gloom rhetoric you've heard and will hear again today, we have opened our local market to competition.
This chart here tells the story. We have over 70 interconnection agreements, allowing competitors, such as AT&T, MCI and Sprint, to use our local network and more than 30 companies now offer local service. The number of customers served by competitors using Ameritech's local lines has grown from 41,000 to 460,000 in just ten months. We estimate the competitors use their own to directly serve several hundred thousand more customers in our region.
This competition is occurring throughout the Midwest. Our competitors serve local customers in over 80 percent of the communities we serve. In Illinois and Michigan, that number is virtually 100 percent. So whether you live in Ann Arbor, Michigan or St. Charles, Illinois, if you want someone else to provide local service, the choice can be yours.
The law you wrote included a simple equation. Once the local market was open to everyone, the long distance market should be open to everyone, including Ameritech. Unfortunately, only half the equation has happened. Ameritech's local market is open, but customers in the Midwest are denied a new choice in long distance.
To understand why brings us to the second principle you used to craft the Telecom Act. The principle that competitive market forces and reduced government regulation would best serve telecom consumers. This is where your good intentions are being second-guessed. To put it bluntly, instead of market forces and deregulation, we have delay and regulatory and legal red tape.
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An example of this tendency is seen at the Department of Justice. The Department has worked long and hard with us and I'm sure with other companies on telecom act issues and on our long distance application and we at Ameritech want to commend them for their efforts. But where they have departed from their area of expertiseantitrustand instead reverted to the ill-fitting role of technical regulator, the results have not been good.
Specifically, on top of the technical review provided by State commissions and the FCC, the Department has shown a tendency to apply a level of micro-regulatory perfection uncontemplated by the law you wrote and unnecessary to ensure competition. What is needed is the perspective to weigh the micro-benefits of marginal improvements in technical performance measures against the broader vision of the act you passed, to reduce regulation and bring full competition to all telecom markets.
Today, we'd like to propose that the Justice Department and the FCC provide the leadership necessary to end the regulatory gridlock we now have, to replace micro-regulation with a faith in the market. The act you wrote and passed is clear. It said when the local market was open, long distance should be open to new competition, as well; and that is what should happen.
The Department of Justice has an antitrust remedy, if needed. The law you wrote has a multitude of built-in protections and safeguards to ensure against competitive abuses. The FCC and State commissions can monitor events to ensure compliance and our competitors battalions of lawyers surely will subject our performance to a level of scrutiny and criticism like never before seen in the commercial world.
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We're halfway there in the Ameritech region. The local market is open. Now, what is required is the leadership to finish the job. We're ready. Consumers are waiting; and the wait is costing them $2 billion per year in our region alone. It's time to put them first.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Welsh follows:]
PREPARED STATEMENT OF KELLY R. WELSH, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, AMERITECH
My name is Kelly Welsh. I am Executive Vice President and General Counsel of Ameritech Corporation. Ameritech serves millions of customers in 50 states and 40 countries. Ameritech provides a full range of communications services, including local and long distance telephone, cellular, paging, security monitoring, cable TV, electronic commerce, on-line services and more. One of the world's 100 largest companies, Ameritech has 66,000 employees, 1 million shareowners and $24 billion in assets. Our operating companies provide local telephone service in Illinois, Indiana, Michigan, Ohio, and Wisconsin.
I am pleased to have the opportunity to testify on the present status of Congress's efforts to bring the benefits of competition to consumers of local and long distance telecommunications services and on the role of the Department of Justice in implementing the long distance application process of the Telecommunications Act of 1996.
Page 119 PREV PAGE TOP OF DOC Segment 1 Of 2 Mr. Chairman, the testimony I give today will, to some extent, be critical of the performance of the regulatorsincluding the DOJin implementing the 1996 Act. But I would like to begin on a positive note. It has been Ameritech's experience that the Department of Justice has devoted enormous time and resources to implementation of the 1996 Act. The DOJ has followed an open-door policywilling to discuss with all interested parties all issues relating to opening the long distance market to additional competition. We want to commend the DOJ for its good faith efforts to perform its responsibilities under the Act. At the same time, however, we have some basic disagreements with the DOJ regarding the appropriate means for achieving what we believe is a shared goalthe opening of all telecommunications markets to enhance competition.
Mr. Chairman, Ameritech thinks Congress passed a good statute that, if fully implemented, would achieve its procompetitive, deregulatory objectives. The problem is that the Act has been only half implemented. We re here today to say that it's time to implement the entire Act and bring the benefits of vigorous competition to consumers of all telecommunications services.
The 1996 Act had two primary objectives. First, Congress sought to open up the local telecommunications marketplace to competition by all carriers that want to compete. Second, Congress sought to expand and enhance competition in long distance by permitting the Bell operating companies (''BOCs'') to offer long distance services. These two objectives are, of course, designed to foster a single visiona seamless telecommunications marketplace defined by consumer demand rather than by artificial regulatory barriers.(see footnote 44)
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In Ameritech's region, Congress's first objective has become a reality. The local exchange is now open to any carrier that wishes to provide local telecommunications services. Ameritech has entered into more than 60 approved interconnection agreements with competing carriers that enable these carriers to provide local service and compete on nondiscriminatory terms and conditions. All the terms and conditions of these agreements have been approved by the public service commissions in Ameritech's region, and competitors are actively using them to provide local service and compete for customers. Indeed, more than 30 carriersincluding major long distance carriers like AT&T and MCIalready have come into the states in Ameritech's region, and they are today competing for local customers and serving them in increasing numbers.
Moreover, competing carriers are using all three statutory paths to enter the local exchange marketresale of Ameritech's services, purchase of unbundled network elements and interconnection of their facilities with Ameritech's network. Competing carriers are providing local service to their customers through more than 380,000 resold lines (not including more than 100,000 Centrex lines), and more than 60,000 unbundled loops.(see footnote 45) Thus, competing carriers are providing local service over more than 440,000 lines, not including self-provisioned lines, in Ameritech's region.(see footnote 46) We also estimate that competing providers are self-provisioning several hundred thousand loops to serve their customers, and connecting those facilities to Ameritech's network through the purchase of more than 84,000 end-office integration trunks from Ameritech. And each of those trunks is capable of handling 15 individual lines, giving competing carriers the interconnection capability to serve more than 1.2 million lines regionwide.(see footnote 47)
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There is plenty of additional evidence that the local exchanges in the region Ameritech serves are open to competition. According to information supplied by Ameritech's competitors themselves, they will have deployed 47 switches in the region by the end of 1997 and at least 97 switches by the end of 1998. Each of these switches will have the capacity to serve up to 80,000 lines. Thus, Ameritech's competitors will have the switching capability to serve approximately 3.75 million lines this year, and over 7.75 million lines by the end of next year.
What do all these statistics mean? They mean that the local market is open throughout our region.(see footnote 48) Carriers are today providing local service in more than 80% of the communities that Ameritech serves. And, in Michigan and Illinois, they are providing local service to customers in virtually every community we serve.(see footnote 49) They mean that other carriers can compete to provide telephone service to every customer in our regionif they choose to do so. And they mean that competing carriers in fact are taking advantage of this open market opportunity to capture local service customers and to position themselves to do so at an ever increasing rate in the future.
Unfortunately, a different story must be told about the status of Congress's second objectivethe BOCs' entry into long distance and the new products and services and invigorated long distance competition it is certain to bring. There has been no movement on this front. Ameritech, of course, stands ready to provide the benefits of additional competition to long distance customers in its region. Indeed, Ameritech began to prepare for this years ago, as the Department of Justice and FCC recognized when they endorsed our Customers First plan. Ameritech supported the 1996 Act because it provided a clear roadmap for dismantling the barriers to entry that hampered the full flowering of competition in all telecommunications markets. And we had every reason to believe that, by this time, Ameritech, which had an early start in opening its local markets to competition, would be bringing the benefits of vigorous competition to long distance customers in its region. Yet, more than a year and a half after passage of the Act, we remain on the sidelines.
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Frankly, we re frustrated. Congress passed a statute with this message: ''If you open up your local exchange markets to competition, you will have a right to compete in long distance.'' We've met our part of the bargain. We have opened our local exchanges to competition, expending enormous resources to comply with every statutory requirement and numerous additional nonstatutory requirements supported by the DOJ and imposed by the FCC after passage of the 1996 Act. As a result, competing carriers are free to compete for customers in our region and many are actively doing so. It is time to satisfy the second objective of the 1996 Act and permit us to bring more competitive prices, innovative services and products, and consumer choice to long distance customers in our region.
Mr. Chairman, passage of the 1996 Act represented Congress's understanding that competition for telecommunications services is a good thing. Such competition is developing rapidly in the local exchange market in Ameritech's region, limited only by the business, strategic and litigation decisions of competing carriers.(see footnote 50) It's time to open all markets to competition by permitting BOCs like Ameritech to compete in long distance. And, once we have the ability to compete for both local and long distance customers, the long distance companies will direct their enormous resources toward competing for local customers rather than keeping BOCs like Ameritech out of the long distance business. There is nothing to gainand a great deal to be lostby waiting. Let us compete in long distance, and the benefitsfor all consumers of telecommunications serviceswill be obvious.
The Local Exchange Is Open To Competition
The 1996 Act conditions BOC entry into long distance on the opening of the local exchange to entry by competing carriers. The local exchange in each of the states in Ameritech's region is open to competitionthe culmination of extensive efforts by Ameritech, Congress, state legislatures, and federal and state agencies. This did not occur overnightindeed, Ameritech's efforts to open its local markets began long before passage of the Telecommunications Act. Nor did it occur without the inevitable operational and technical problems that were to be expected in such a complex undertaking. But Ameritech devoted enormous resources to the resolution of those problemsas well as to the task of meeting numerous additional microregulatory preconditions to BOC entry into long distance that the FCC has adopted, with the support of the DOJ, following passage of the 1996 Act. And let me assure you that, as a result of these efforts, the local market is open in a manner that permits competitive entry, and such entry is taking place at an accelerating pace.
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As I noted, Ameritech began preparing for local competition well before passage of the 1996 Act. In its pioneering Customers First plan, announced in March 1993, Ameritech voluntarily implemented much of what the 1996 Act was later to require. Customers Firstdeveloped in consultation and cooperation with the DOJ and the FCCproposed a trial removal of all barriers to competition in the provision of both local and long distance services in the Chicago and Grand Rapids areas. As part of Customers First, Ameritech began unbundling its network and established a business unit focused exclusively on helping competing carriers process orders and establish service. For that reason, we were well positioned to move quickly after passage of the Act to further open up the local exchange to competition by all carriers.
State legislatures and public service commissions in Ameritech's region also foresaw and helped foster a competitive local exchange prior to the 1996 Act. For example, as early as 1986, the Illinois General Assembly revised the Illinois telecommunications laws to encourage local exchange competition.(see footnote 51) Recognizing such measures, the Senate Commerce Committee in 1994 highlighted Illinois as one of the states that had ''taken steps to open the local networks of telephone companies.''(see footnote 52) Subsequently, in 1995, the Illinois Commerce Commission approved Ameritech Illinois proposal to unbundle its network.(see footnote 53) Similarly, the Michigan legislature substantially revised that state's telecommunications laws in 1991 and again in 1995 to promote local competition in the provision of telecommunications services.(see footnote 54)
Page 124 PREV PAGE TOP OF DOC Segment 1 Of 2 Once the 1996 Act was passed, Ameritech redoubled its efforts to open up its territory to local competition. Among other things, it entered into more than 60 interconnection agreements with competing carriers; unbundled its local network, making its network elements, products, and services available to all takers on a nondiscriminatory basis, at competitive rates, and on terms and conditions consistent with the Act; and expanded its operations, hiring hundreds of personnel and developing new systems and software to process orders from competing carriers. Today those efforts are bearing fruit in the region Ameritech serves, particularly in Michigan and Illinois. As I noted earlier, there are more than 30 active competitors in Ameritech's region, including such telecommunications giants as AT&T and MCI, and these carriers are rapidly expanding their operations throughout the region.
Mr. Chairman, Ameritech recognizes that those who want to put off indefinitely the attainment of Congress's goal of opening all markets to additional competition will say that Ameritech's entry into long distance is still premature. After all, they will suggest, didn't the DOJ and the FCC recently conclude that there remain certain deficiencies in Ameritech's operations support systems and in the implementation of performance standards for competitor access to those systems? I have several responses to these defenders of a highly regulated telecommunications marketplace.
First, because of the FCC's rules, the DOJ and the Commission based their assessments on stale, not current, data, and failed to give appropriate deference to the Michigan Public Service Commission's finding that Ameritech had unconditionally satisfied 11 items of the 14-item competitive checklist prescribed by Congress and that Ameritech could satisfy the remaining requirements before the FCC made a final determination on Ameritech's application. Second, the DOJ and the FCC imposed requirements on Ameritech that the United States Court of Appeals for the Eighth Circuit has since held are inconsistent with the Act. Third, the FCC failed to make any finding with respect to Ameritech's compliance with most of the checklist requirements. Finally, if perfection in meeting the microregulatory ''wish list'' of the DOJ and the FCC were the test for BOC entry into long distance, the procompetitive goals of the 1996 Telecom Act would never be reached, because there will always be room for improvement in those areas.
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Mr. Chairman, Congress intended to eliminate the barriers to competition in all markets as soon as local markets were opened to competitors. And, if the DOJ and the FCC would simply step back and take a look, they would see that that time has arrived in Ameritech's region. Indeed, if the local markets were not open to competitive entry, how did more than 30 competing carriers (including the most vociferous advocates of the ''prematurity'' theory) get into Ameritech's markets and commence the provision of local telephone service?
Consumers are the Real Victims of Delay in Opening Long Distance Services to Additional Competition
The 1996 Act says that Ameritech may provide long distance services in any state in its region once the local exchange in that state is open to competition. Yet, despite the fact that Ameritech demonstrably has opened the local exchanges in its region to competition, Ameritech is still waiting for the opportunity to serve its first in-region wireline long distance customer. But before looking into why Congress's goals have been thwarted, we should keep in mind the real victim of legal barriers to long distance competitionthe American consumer.
The long distance market has long been dominated by a triumvirate of entrenched carriersAT&T, MCI, and Sprint. Congress recognized that a BOC like Ameritech, with its experience, resources, and technological know-how, is uniquely poised to provide vigorous new competition in the long distance market. Ameritech's entry will stimulate competitive pricing, new and innovative product options for consumers, and a race among carriers to provide superior customer service and convenience.(see footnote 55) Moreover, Ameritech will bring these benefits to a broader range of consumers than the big-volume, high-margin customers targeted by the long distance giants. As economist Marius Schwartz recently explained in his testimony on behalf of the Department of Justice, a BOC, such as Ameritech, ''is unusually well placed'' to provide ''more competition in long-distance services'' to ''residential and low-volume business customers.''(see footnote 56)
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Furthermore, Ameritech will enter the long distance market with a zero market share. Ameritech will have no choice but to adopt procompetitive strategiesoffering consumers one-stop shopping with more and better services at competitive pricesif it wishes to win customers away from the entrenched long distance carriers. This in turn will force the existing long distance carriers to adopt more pro-consumer strategies to protect their customer base. Whichever carriers prove to be most effective, the sure winners in this struggle will be consumers. Their enjoyment of the fruits of competition should not be further delayed by regulatory gridlock.
The Delay in Dismantling the Barriers to Competition In Long Distance: A Failure to Follow the Congressional Roadmap
Mr. Chairman, in February 1996,shortly after the 1996 Act went into effectthe FCC said this in connection with Ameritech's Customers First plan: ''Ameritech, in concert with the Illinois and Michigan commissions, has taken steps to remove the most significant barriers to competitive entry in exchange and access markets.'' The FCC continued: ''The evidence also indicates that competitive carriers with substantial capacity and a track record of successful competition in other markets have begun to interconnect with Ameritech's local network within the Chicago and Grand Rapids LATAs, and to offer competing exchange and access services.''(see footnote 57) And, as I indicated earlier, during the more than one and one-half years since the Act was passedand since the FCC made these statementsthe market-opening initiatives of Ameritech, as well as the local exchange services being offered by Ameritech's competitors, have dramatically increased. Under these circumstances, it simply defies common sense to suggest that Ameritech has failed to open the local exchange markets in its region to competition.
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Yet, as you know, several months ago the FCCwith the support of the DOJdenied the application of Ameritech Michigan to provide long distance services. It is true, of course, that both the Commission and the DOJ praised Ameritech's efforts to comply with the Act and open its local exchange to competition. As Chairman Hundt put it, ''I recognize and applaud the steps that Ameritech and the State of Michigan have taken to open the local market in Michigan to competition.''(see footnote 58) Similarly, the DOJ remarked that ''Ameritech has made significant and important progress toward meeting the preconditions for in-region interLATA entry under Section 271 in Michigan, and has satisfied many of the preconditions.''(see footnote 59)
But Ameritech is not seeking plaudits for its efforts. It is seeking the opportunityan opportunity to which it has devoted itself since long before passage of the 1996 Actto provide consumers in its region with the benefits of additional competition in both local and long distance services. And the critical question is whydespite Ameritech's intense, longstanding effortsconsumers in Ameritech's region continue to be deprived of those benefits.
Ameritech is convinced that the failure to achieve full and fair competition in all telecommunications services cannot be attributed to fundamental flaws in the 1996 Act. The root of the problem, we believe, is that the regulatory process has taken on a life of its own, and put a halt to the procompetitive forces unleashed by the Act.
It should come as no surprise, for example, that those who benefit from maintaining legal barriers to long distance entryand who would benefit from rules for local market entry that would give them radical resale discounts not provided for in the Acthave refused to accept the straightforward criteria that Congress established for determining the timing of BOC entry into long distance services. In concrete terms, when Ameritech Michigan filed its application to provide long distance services, the carriers that would benefit most from the status quo flooded the Commission with a host of objections that were irrelevant toindeed flatly inconsistent withthe roadmap for long distance entry prescribed by Congress.
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But Ameritech's competitors do not bear all of the responsibility for the regulatory gridlock that has prevented any new entry into the long distance business. For, while we commend the DOJ for its open-door policy with respect to all issues relating to long distance entry, and while we commend the FCC for its recent attempt to provide the BOCs with a roadmap to long distance entry, we believe that in assessing future long distance applications both the DOJ and the FCC must adhere more closely to the deregulatory purpose and structure of the long distance entry roadmap that Congress itself has established. Let me give a few examples.
Impermissible attempts to rewrite the rules of local entry prescribed by Congress: It bears repeating that Ameritech is entitled to bring the benefits of additional long distance competition to consumers in the states in the region that it serves once it has opened the local exchanges in those states to competition. And it is simply irrefutable that the local markets in Ameritech's region are open to competition. But the investment, marketing, and litigation decisions of other carriers are not within Ameritech's control. And it is clear that many of the major carriers, like AT&T and MCI, instead of focusing on the blocking and tackling of entering the local market, have been pursuing entry strategies that depend upon the success of their legal gambits to persuade the DOJ and the FCC that all BOC long distance applications should be denied until the long distance carriers are permitted to enter the local exchange market on terms and conditions that are contrary to those prescribed by Congress in the 1996 Act.
For example, the Act permits a competing carrier to obtain for resale the end-to-end service that Ameritech provides to its retail customers, but mandates that the competing carrier pay for that service at the discounted prices for resold services prescribed in the Act. The major long distance carriers, however, don't like this rule. They want what they call the ''UNE-platform''which is simply a combination of all the network elements that Ameritech itself uses to provide end-to-end service to its retail customers. In other words, the service that the long distance carriers want to acquire through their UNE-platform and the service that Ameritech makes available to those carriers for resale are identical. Then what is the dispute? It is simplethe major long distance carriers contend that, by substituting the phrase ''UNE-platform'' for ''resale,'' they can obtain end-to-end service for resale at a deeper discount than permitted by the Act. And they have threatened that they will not commence large-scale entry into the local service market until they obtain their UNE-platform by regulatory fiat.
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Thus, the major long distance carriers have been biding their time, hoping that their ''virtual resale'' UNE-platform gambit will succeed, allowing them to enter local exchange markets for a song, instead of at the competitive rates mandated by the Act. AT&T's John Zeglis made this clear in remarks to the investment community earlier this year, crowing that, in Pennsylvania, for example, the UNE-platform would enable AT&T to capture ''a $33.50 revenue stream for $16.03 cost of goods sold, a discount of 52%''more than double the wholesale discount for resale services authorized by the Act and the Pennsylvania state commission.(see footnote 60)
Moreover, AT&T's ''virtual resale'' theory, if accepted, would endanger the development of any form of competitive entry and discourage investment by anyone in this country's telecommunications networks. And this is not just a BOC talking. Time Warner, a facilities-based potential competitor of both Ameritech and AT&T, recently warned that the ''virtual resale'' strategy being pursued by the major long distance carriers would ''discourag[e] investment in alternative networks which, over the long-term, will be the most significant competition to ILECs [incumbent local exchange carriers].''(see footnote 61) And Time Warner cautioned that, ''[i]f the advocates of that position [i.e., virtual resale] prevail, then only the illusion of local competition will have been created,'' and, ''[u]ltimately, this would sacrifice the long-term goal of the 1996 Telecommunications Act, that of a true choice of competing local telecommunications network facilities to serve consumers.''(see footnote 62)
What is remarkable is that the major long distance carriers had been successful in persuading both the DOJ and the FCC to adopt their ''virtual resale'' UNE-platform theory as a pre-condition to BOC entry into long distance.(see footnote 63) However, on October 14, 1997, the three judge panel of the United States Court of Appeals for the Eighth Circuit unanimously rejected that theory, holding that the Act ''does not permit a new entrant to purchase the incumbent [local exchange carrier's] assembled platform(s) of combined network elements (or any lesser existing combination of two or more elements) in order to offer competitive telecommunications services.''(see footnote 64) Noting that the Act provides that '' '[a]n incumbent local exchange carrier shall provide such unbundled network elements in a manner that allows requesting carriers to combine such elements in order to provide such telecommunications service,' '' the court concluded that ''[t]his sentence unambiguously indicates that requesting carriers will combine the unbundled elements themselves.''(see footnote 65) And, according to the court, to allow requesting carriers to purchase ''already combined elements at cost-based rates for unbundled access would obliterate the careful distinctions Congress has drawn in subsections 271(c) (3) and (4) between access to unbundled network elements on the one hand and the purchase at wholesale rates of an incumbent's telecommunications retail services for resale on the other.''(see footnote 66)
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Ameritech, of course, had hoped that the Eighth Circuit's decision would put an end to efforts by the DOJ and the FCCunder pressure from the major long distance carriersto impose a virtual resale requirement on the BOCs. But, as I speak, several BOCsas well as non-BOC facilities-based competitors of both the BOCs and AT&Tare being forced to pursue an appeal from an FCC order that requires incumbent local exchange carriers like Ameritech to provide precisely the sort of combination of network elements forbidden by the Act and the Eighth Circuit's decision.
Ameritech can understand the desire of the DOJ and the FCC to increase the pace of competition in local exchange service. But yielding to long distance carrier pressure to pursue policies that have been held unlawful by a federal court of appeals is not an appropriate way to achieve that goal. Rather, the DOJ and the Commission can properly accelerate the efforts of AT&T, MCI and other long distance carriers to contend for Ameritech's local service customers by permitting Ameritech to contend for their long distance customers.
Impermissible ''metric'' tests: The most common refrain of competitors in response to Ameritech Michigan's long distance application was that Ameritech should be denied entry into the long distance business until local competition had reached some undefined level vaguely characterized as ''fully effective local competition.'' But Congress rejected proposals to incorporate such a ''metric'' test into the Act.(see footnote 67) As the Department of Justice has explained, ''[a]lthough Congress required that local markets be open to competition before BOC long distance entry,'' Congress made clear that BOC entry need not wait ''until local competition has become fully effective.''(see footnote 68) Rather, Congress specifically ''envisioned a transitional period after entry before local competition became fully effective.''(see footnote 69) As Congress properly recognized, imposing a ''metric'' test for BOC entry into long distance would place control over the timing of BOC entryand the benefits to consumers from additional competition from such entryin the hands of carriers seeking to limit the scope of competition. In short, under the Act, the key to BOC entry into long distance is not the amount of competition, but the opportunity to compete, in local exchange services. And, as I have demonstrated, competing carriers now have that opportunity, and are taking advantage of it daily to compete for customers in Ameritech's region.
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Undaunted by the 1996 Act, Ameritech's competitors have continued to press their pre-Act complaint that, absent a ''metric'' test, Ameritech might be tempted to engage in anti-competitive conduct that would somehow harm long distance providers like AT&T and MCI. To begin with, it is absurd to suggest that an entrant like Ameritech poses any threat to the entrenched long distance providers that still control more than three-quarters of the long distance market. In any event, Congress established a pervasive regulatory scheme, including a separate subsidiary requirement, to protect against any risk that Ameritech's entry into long distance could cause competitive harm during any transitional period before local competition became fully effective. As the Department of Justice has observed, the statutory safeguards (which have been augmented by elaborate FCC regulatory safeguards) ''would have been unnecessary if Congress had wished to require fully competitive local markets as a precondition to long distance entry.''(see footnote 70)
Ameritech is pleased that, to date, both the DOJ and the FCC appear to have resisted competitor attempts to revive a ''metric'' test that Congress specifically rejected.(see footnote 71) However, regulators are human, and competitor efforts to rewrite the Act are unceasing. Therefore, the DOJ and the Commission must continue to resist all of the metric test proposals, whether dressed up as ''market share'' benchmarks or ''effective competition'' standards, that underlie many of the objections to Ameritech's efforts to bring the benefits of additional competition in long distance services to consumers in its five-state region.
Impermissible encroachment on state jurisdiction: In establishing the roadmap for opening all telecommunications markets to additional competition, Congress sought a careful balance between state and federal interests. In connection with Ameritech Michigan's long distance application, however, both the DOJ and the FCC have ignored the jurisdictional lines drawn by Congress.
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For example, Congress authorized state commissions to determine in the first instance whether an interconnection agreement adopted following arbitration between competing carriers satisfies the requirements of the Act. Congress also provided that, if a party to the agreement disagrees with the state commission determination, that party may seek judicial review in federal district court. The FCC, however, has said that, in ruling on a BOC's long distance application, it is free to ignore this jurisdictional scheme, reserving to itself the right to reject a state commission's determination that the terms and conditions in an interconnection agreement between a BOC and its competitor, including performance standards adopted by a state commission in an arbitration decision, comply with the standards prescribed by Congress.(see footnote 72) Unfortunately, the DOJ appears to share this view.(see footnote 73)
This approach will not serve the goals of the Act. The 1996 Act was designed to accelerate the pace at which all markets, including the long distance market, would be open to additional competition. This goal can never be achieved if opponents of BOC entry into long distance are permitted to relitigate issues that state commissions have resolved pursuant to the authority vested in them by Congress.
Similarly, Congress gave the state commissions, not the FCC or the DOJ, jurisdiction to determine the prices that a BOC charges its competitors for access to local telephone facilities. And the United States Court of Appeals for the Eighth Circuit recently confirmed that Congress meant what it said, and vacated FCC rules in which the Commission asserted authority to determine the rates involved in the implementation of the local competition provisions of the Act. However, in denying Ameritech Michigan's long distance application, the FCC indicated that, even if a state commission sets prices that it finds comply with the cost-based standards in the Act, the Commission will nonetheless reject a BOC long distance application unless those prices satisfy the FCC's preferences regarding appropriate pricing standards. Similarly, in evaluating Ameritech's application, the DOJ suggested that it is entitled to make an independent assessment of a BOC's compliance with the cost-based standards in the Act.(see footnote 74) Again, the refusal by the FCC and the DOJ to accept the Congressional scheme places BOCs in an untenable Catch-22 between the state commissions and the federal agencies, and erects a completely unauthorized additional regulatory barrier to increased competition in long distance services.
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Excessive micro-management of the deregulatory scheme established by Congress: In evaluating Ameritech Michigan's long distance application, the DOJ concluded that Ameritech Michigan came up short with regard to certain operational and performance matters. And, in denying Ameritech's application, the FCC relied heavily on the DOJ's assessment of these technical issues. Due to the Commission's procedures, some of the conclusions reached by the DOJ and the FCC are attributable to their reliance on stale information. It should come as no surprise, however, that Ameritech disagrees with the DOJ's conclusionswhich were accepted in large part by the FCCwith respect to many other operational and performance issues. Perhaps more important, Ameritech has serious concerns about the microregulatory perspective that underlies those conclusions.
As you know, in its order denying Ameritech Michigan's long distance application, the FCC sought to provide Ameritech and the other BOCs with a ''roadmap'' of the agency's expectations with respect to future long distance applications. While Congress passed a simple set of rules for opening the long distance market to increased competitiona competitive checklist that fits on a pagethe Commission's ''roadmap'' for implementing that checklist is 200 pages long, drawing on prior decisions that total over 1,000 pages. The roadmap seeks to regulate in minute detail all aspects of the relationships between a BOC and its competitors in the local exchange markets as a pre-condition to FCC approval of BOC entry into the long distance market. And this roadmap is replete with detailed requirements that Congress never contemplated, much less adopted. At the same time, the ''roadmap'' did not even attempt to specify the statutory checklist items with which, in the Commission's view, Ameritech was in compliance.
Moreover, the FCC's roadmap was preceded byand based heavily onthe DOJ's roadmap for pervasive regulation of local exchange competition.(see footnote 75) In its evaluation of Ameritech Michigan's long distance application, the DOJ did not focus on what one would normally anticipate from an agency with antitrust expertisenamely, the potential competitive effects of Ameritech's entry on the long distance market. To the contrary, apart from urging the FCC to adopt the virtual resale theory that I discussed earlier, the DOJ focused primarily on its assessment of the quality of Ameritech's operations support systems, including its computer interfaces, and the adequacy of Ameritech's performance standards and measures, including the clarity of the definitions used in Ameritech's performance reports.
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The prominent role that these technical issues played in the DOJ's ''roadmap'' for long distance entry is highlighted by the fact that it filed a 32-page appendix devoted exclusively to the details of Ameritech's operations support systems and performance measures. A brief quotation from this appendix illustrates the extent to which the DOJ is stressing technical interconnection issues, rather than the impact of BOC entry on the long distance market, in performing its consultative role under the Telecom Act: ''BOCs will have to automate many of the interfaces between a BOC and its competitors through which information is exchanged regarding such services and elements. Application-to-application interfaces in particular allow competing carriers to build their own software for processing transactions with a BOC. In some instances, though, such application-to-application interfaces might be too expensive for smaller carriers who cannot afford such customized software development. In those instances, terminal emulation or graphical user interfaces (GUIs) may be appropriate.''(see footnote 76)
My purpose today is not to take issue with the specific conclusions of the DOJ or the FCC with respect to Ameritech Michigan's compliance with the detailed requirements in their regulatory roadmaps. Moreover, Ameritech wants to commend both the DOJ and the FCC for their attempt to provide Ameritech and other potential entrants into long distance with their regulatory perspective on the pre-conditions to long distance entry. And, given its intensive, longstanding efforts to open all markets to additional competition, Ameritech is confident that its efforts to enter the long distance business will soon be rewarded.
Nonetheless, microregulation of the process for opening the long distance market to additional competition, if not cabined, threatens to undermine the pro-competitive objectives of the Telecom Act. For that reason, let me elaborate a little on the problems created by such pervasive regulation.
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First, as any navigator knows, a map that is too crowded with detail is a confusing (if not misleading) guide, and too many potholes make a road impassable. And we want to say forcefully today that enough is enough. Once we comply with the current roadmap for long distance entry, we should not facethe next time we apply for long distance authorizationa new set of obstacles in a shifting regulatory maze. Basic fairness dictates that the BOCs are entitled to know what they are expected to establish to gain entry into the long distance market.
Second, the microregulatory approach to long distance applications that the DOJ has adopted is an unnecessary departure from its institutional role as an expert in antitrust matters. Ameritech, of course, understands that the DOJ was thrust into telecommunications matters by the unique role that it was obligated to play under the Modified Final Judgment. But the 1996 Act changed that. Under the Act, the day-to-day relationships between competitors in local exchange markets are to be hammered out in the negotiation or arbitration proceedings before state commissions, and any disputes over whether the results of these negotiations and arbitrations comply with the Act were to be resolved in federal district courts. In short, Congress, in its wisdom, freed the DOJ to focus on the traditional antitrust issues that it is institutionally suited to address in consulting with the FCC on long distance applications.
Third, given the number of regulatory hurdles that have already been added to the straightforward checklist requirements imposed by Congress, there inevitably will be some imperfections in performance and some disagreements between the BOC and their competitors arising out of the interconnection process. We acknowledge, for example, that there may be room for improvement in our operations support systemsthat they may not be perfect. But there will always be room for improvementno firm in any industry operates to perfection. And Congress intended the long distance application process to be a reasonable process, not a game of ''gotcha!'' by regulators, and Congress surely did not intend to delay long distance entry until the BOC obtained a seal of approval from their competitors. Therefore, if we are to achieve the goal of opening all markets to enhanced competition, the DOJ and the FCC must place no new regulatory hurdles on the road to long distance competition, and must apply the numerous existing regulatory requirements with common sense to new commercial relationships between the BOCs and their competitors in the ever evolving telecommunications marketplace.
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Finally, and most important, microregulation of the long distance application process causes those charged with implementing the process to lose sight of the straightforward statutory test for long distance entry. Congress did not say that Ameritech could enter the long distance business only upon deploying a ''GUI'' for a small competing carrier and an application-to-application interface for a larger carrier. Congress said we could enter the long distance business as soon as we opened our markets to competition. And it makes no sense to use perceived deficiencies in interface deployment to deny long distance relief to a BOC like Ameritech that is facing thirty actual competitors in its local markets.
The Solution: Let Ameritech In And Give Competition A Chance
So long as Ameritech is kept out of long distance, consumers of long distance services will be deprived of the benefits of enhanced competition. And the harm to consumers from the continuing embargo on competitive entry into long distance cannot be overstated. According to Paul MacAvoy of the Yale School of Management, the total consumer welfare loss in Ameritech's region alone is $2 billion per year. And Jerry Hausman of the Massachusetts Institute of Technology has concluded that delaying BOC entry into the long distance market costs residential consumers in the United States more than $7 billion per year. Beyond this, as the DOJ has noted, BOCs like Ameritech are poised to provide long distance services to consumer groups long neglected by the incumbent long distance carriers''residential and low volume business customers.''
But the consumer benefits from new entry into long distance are not confined to improve price competition. Many consumers want convenient ''one-stop shopping,'' and there can be no real competition to provide it until the regulatory barriers to competition in all telecommunications markets are eliminated. And, perhaps most important, permitting a company like Ameritech to compete for long distance services creates a powerful incentivemaybe the most effective incentivefor the major long distance carriers to speed their full entry into local market.
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Despite these unquestionable benefits, the long distance giants vigorously oppose BOC entry because they fear competition. They want to maintain their stranglehold over the provision of long distance services for as long as possible while their targeted entry strategies seek to skim the cream from the local market.
Mr. Chairman, we recognize that you are hearing today a variety of viewpoints on this subject. You may be wondering who is right: Will BOC entry into long distance, as Ameritech believes, accelerate competition in all telecommunications markets, bringing untold benefits to consumers? Or will it bring, as Ameritech's competitors and other naysayers contend, undefined disasters?
We think Congress clearly chose the first approach in passing the 1996 Act. And there is only one way to tell whether Congress got it right or wrongexperience, a method of dispute resolution that is inestimably more valuable than the quibbles of lawyers and bureaucratic regulators. We urge the DOJ and the FCC to let Ameritech demonstrate the impact of competition. Let's not foil the purpose of the 1996 Actaccelerated competition in all telecommunications marketsbefore it has had a decent chance to be realized.
Ameritech's competitors, of course, will complain that there is a risk that Ameritech may attempt to close its open markets after it is allowed into long distance. But I can assure you that Ameritech is committed to competition, and, in any event, Congress has already dealt with that risk by including safeguards in the 1996 Act that address it effectively. First, Ameritech cannot refuse to interconnect with competing carriers because the Act mandates that BOCs provide access and interconnection to all requesting carriers. Second, this access and interconnection cannot be inferior in quality to that which Ameritech enjoys because the Act requires that it be nondiscriminatory. Third, Ameritech cannot charge these carriers supracompetitive prices because the Act requires cost-based prices that must be approved by the state commissions. Fourth, Ameritech cannot play dirty tricks on its competitors because the Act provides for severe penalties if a BOC tries to do so. Moreover, these protections are shored up by overlapping safeguards in state telecommunications laws and regulations, effectively removing any ability that a BOC might have to engage in anticompetitive conduct.
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Moreover, these requirements are not abstractions. They are embodied in concrete contracts between Ameritech and its competitors, each of which provides for detailed performance measures and reports, as well as specific remedies for noncompliance. The state commissions have abundant authority to monitor and enforce Ameritech's compliance with these agreements. And, of course, the competing carriers themselves, armed with their battalions of lawyers, will monitor Ameritech like hawks, readily detecting any shortcomings and racing to the enforcing bodies with any grievances. There is simply no way that Ameritech, even if it so desired, could block or obstruct competition in the local exchange. To the contrary, the 1996 Act has cleared an unobstructed path for any carrier that wishes to compete.
Ameritech has been working for years for the opportunity to prove that freedom to compete will benefit, not harm, consumers. Congress, too, worked for years to develop a process by which that purpose could be achieved, and it passed a statute to facilitate it. We respect the efforts of both the DOJ and the FCC to carry out their responsibilities under the Act, but we think that in the course of doing so they may have lost sight of the Act's deregulatory purpose.
Enough ink has been spilled and enough attorney hours have been accumulated. It is time to clear away the fog and let the refreshing air of competition perform its curative role, as Congress intended by passing the 1996 Act. Local exchange competition is developing rapidly in Ameritech's region. All carriers wishing to compete are free to do so on the reasonable and nondiscriminatory terms that Congress incorporated in the 1996 Act. Local exchange competition can be pushed into still higher gear by letting Ameritech into long distance. Once we are actively competing for long distance customers, by offering attractive service packages and other consumer benefits, the long distance giants will rush into the local exchange marketplace. Ameritech's entry into long distance should not be held hostage to the business strategies of its competitors. Nor should customers be deprived of the competitive prices, innovative services, and creative packaging that Ameritech's entry will bring, simply because Ameritech's competitors are adept at manipulating the regulatory process. Ameritech's local exchange markets are open to competition, and the time for Ameritech's entry into long distance is now.
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Mr. Chairman, on behalf of Ameritech, I want to thank you and the members of this Committee for the opportunity to testify today. Ameritech applauds the measures that Congress has taken to propel competition forward in the telecommunications industry. And, despite our disagreements, Ameritech also commends the DOJ for its good faith efforts to carry out its responsibilities under the Act. Having said that, I believe that the procompetitive goals of the Telecom Act can be fully implemented only if the DOJ and the FCC (1) take a common sense deregulatory approach to all BOC long distance applications; (2) apply standards to those applications that will encourage more competition and more investment, which in turn will produce more jobs, more innovative services and more consumer choice; and (3) implement Congress's mandate that there be new competitive entry in both the local exchange and long distance markets.
INSERT OFFSET RING FOLIOS 1 TO 5 HERE
Mr. HYDE. I thank the gentleman. Mr. Hoffman.
STATEMENT OF JOHN R. HOFFMAN, SENIOR VICE PRESIDENT, EXTERNAL AFFAIRS, SPRINT CORPORATION
Mr. HOFFMAN. Thank you, Chairman Hyde.
In my prepared testimony, I tried to explain why Sprint believes in competition in all telecommunications market and accordingly supports the implementation of the Telecommunications Act of 1996. I certainly would be pleased during this hearing to elaborate on the reasons, but I thought I'd take this time to try to quickly respond to a number of assertions that are being made by some members of our industry who seem to be less enthusiastic about the prospect of genuine local telephone competition.
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To begin with, I'd like to point out to the Committee when the Act became law, 21 months ago, some of the Bell companies loudly proclaimed that the local markets were open to competition, that they satisfied the 14 element checklist contained in Section 271 of the Act, and that they would be entering the long distance market in region shortly. In the past the FCC has rightfully rejected all of the applications filed by the Bell companies, because none of those Bell companies provide the systems necessary for competitive entrants to operate at parody with the incumbent monopolies.
So, now it seems, some of the Bell companies are changing their tune. Some are now avoiding the issue of whether real competitive opportunities exist in local markets and instead are attempting to shift the blame for the lack of local competition, to long distance companies. Their somewhat strained logic goes like this: Long distance companies are purposefully not entering the local market and thereby preventing local competition from becoming a reality in order to prevent the Bell companies from obtaining the authority to enter the long distance market to compete with them. Therefore, again according to some Bell companies, the government should allow the Bell companies into the long distance market, regardless of the state of local competition, because competition in the long distance market will stimulate the long distance companies to enter local markets.
This argument requires one to ignore the economic underpinning of the 1982 Consent Decree, which was that the Bell companies, so long as they had local monopolies, had to be barred from the long distance market, because otherwise they'd have the means and opportunity to both harm long distance competition and prevent local competition.
Page 141 PREV PAGE TOP OF DOC Segment 1 Of 2 Moreover, this argument is completely at odds with reality. One does not even have to look closely at the third quarter financial results recently released by the long distance companies, such as Sprint and AT&T and MCI, to see that hundreds of millions of dollars are being spent to enter local telephone markets. More importantly for this Committee though, is that the Bell companies argument is obfuscation. It's designed to deflect your attention from the real question.
The question that you, the regulators and the courts ought to be asking, is why aren't the most logical local competitorsthe Bell companieswhy aren't they competing against each other? Think about it. The Bell companies are clearly better positioned, in terms of their size, their financial capabilities, their operating experience, their training, their employees, their industry expertise. They are obviously better positioned to provide local telephone service than anyone else on the horizon. Why then are they not aggressively entering each others markets? Why isn't Ameritech seeking to compete in Atlanta? Why isn't Southwestern Bell offering competitive local service in the District of Columbia. Why hasn't' BellSouth entered the Denver market, and so on.
Now, I don't have the answer to those questions, but I have very strong suspicions, based upon a recent nationwide advertising campaign being conducted by the United States Telephone Association, of which the Bell companies are the largest and most dominant members. The theme of that campaign is ''Call Them On It,'' and it features TV and print ads which question the integrity of new market entrants, because they have historically not been contributors to the local economies, civic or charitable causes, to their neighbors or to the community. The message, in other words, is trust the incumbent that you've come to know, not the newly arrived carpetbagger from out of town.
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Now, I object to the notion that new competitors, by definition, cannot be trusted, but the more insidious aspect of this Bell-backed advertising campaign is that it represents an apparent tacit agreement among Bell companies not to compete against one another. Why, otherwise, would they agree among themselves, to jointly spend tens of millions of dollars on ads that assert that incumbency is good and new market entrants are bad? Why would they do that if they haven't decided not to be entrants in each others markets?
Now, these are serious questions that I assert must be asked by the Department of Justice and need to be answered before we can understand why we have not gotten the amount of local competition that everyone expected when the Telecom Act was passed almost 2 years ago.
Now, there's also a number of other Bell company arguments, which I suspect we'll hear this morning against local competition. Things like the cozy ''oligopoly'' in the long distance market, which I think can be refuted by facts; the facts that there are over 500 different companies competing in the long distance market today. The so-called ''lockstep'' pricing by long distance companies which I suggest the facts show is exactly the opposite. In fact, my perception is most of our competitors are trying to match Sprint's dime-a-minute rate. The reality is that long distance rates continue to fall. Assistant Attorney General Klein mentioned the decline in the past 10 years. Look at rates even more recently. I mentioned earlier the third quarter financial statements of the three largest long distance companies. All three companies have consistently over the past several years, each quarter, while they report an increase in long distance revenues, report greater increases in long distance minutes. What that means is, that the average revenue per minute, which is precisely the price paid by customers; is going down and it's consistently gone down for the past several years.
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I'd like to conclude with the observation that I tried to emphasize in my written testimony that it is critically important for the FCC and the Justice Department to fully and faithfully carry out their respective roles under the Telecommunications Act to ensure that local telephone competition not only becomes a reality, but for the benefit of consumers, is actual, demonstrable, substantial, and sustainable. That's the only way, in our view, that consumers will benefit and that the promise of the new law will be realized.
[The prepared statement of Mr. Hoffman follows:]
PREPARED STATEMENT OF JOHN R. HOFFMAN, SENIOR VICE PRESIDENT, SPRINT CORPORATION
I'd like to take this opportunity to thank you, Mr. Chairman, and Congressman Conyers for giving Sprint the opportunity to share our views on the appropriate role of the Justice Department and the implementation of the Telecommunications Act of 1996.
I'd also like to thank Commerce Committee Chairman Bliley for his leadership in the development of a fair and balanced Act and his unswerving dedication to ensuring that the Act's pro-competitive principles are maintained throughout its implementation.
Sprint strongly supports the Act's objective of opening local telephone markets to competition. Our perspective is that competition has been highly beneficial to consumers of long distance telephone servicebringing lower prices, better values, enhanced technology, and greater choicesand we'd like to see those same benefits extended to local telephone markets.
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WHY HASN'T LOCAL TELEPHONE COMPETITION DEVELOPED?
Despite the clear intent of the Act, I think most observers agree that local telephone competition has not developed at the expected pace during the past twenty months. There are a number of reasons why, which I believe can be lumped into three broad categories.
First is that the provision of local telephone service is a difficult task, which is being made harder by some incumbent telephone companies. Although considerably less geography is involved when providing local rather than long distance service, entering the local market requires considerable capital and engineering and operations expertise. It's going to take time and resources for real alternatives to be developed. But, it's also going to require more cooperation with and by the incumbent.
Cooperation by incumbents has not, in Sprint's experience, been the hallmark of competition at the local level for some time. There are a host of examples, including cases where Sprint has found it necessary to file formal complaints with state (California & Florida) Public Service Commissions. Perhaps the longest standing example is access.
Access has been priced on average several times what the underlying economic cost would be in a competitive market. The FCC authorized access competition years ago and Competitive Access Providers (CAPs), spurred by the profit potential, exist in several local markets. Sprint utilizes CAPs to the maximum extent possibleto both lower our costs and improve the technologybut, even after years of competition, over 99% of access payments by Sprint go to incumbent local telephone companies.
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There are a couple important factors, we believe, that explain the lack of access competitionwhich also provide some insight into why local telephone competition has not developed as well. CAPs have to lease facilities from and interconnect with the incumbent telephone company. Incumbents have been able to use their monopoly market positions to charge excessively high prices for those facilities (including co-location in their central offices), thereby limiting the CAPs' opportunity to make a profit. Moreover, service provided jointly by the new market entrant and the incumbent (compared to single-sourced service) is notoriously poor. Unless coordination between the two is virtually seamless, the service provisioning process is complicated and delayed, and customers are negatively affected and discouraged. The transition to real competition, in other words, is critically important.
The second category of reasons why local telephone competition is developing slowly involves the incentives for incumbent monopolies to preserve market share. Indeed, I believe some of the Bell Companies view local competition as a zero-sum game. That is, they believe that they have a 100% market share and, therefore, local competition means that they must lose customers and their business will shrink. Thus, they are trying to forestall competition (and enjoy their monopoly profits) as long as possible. Some of the Bell Companies, in particular, are seeking to minimize or manage competitive inroads in their local markets until they are allowed to enter long distance markets, where they hope to make-up their losses. I believe this is a misguided approach.
A good example of why competition is not zero-sum, in my view, is AT&T. Market growth in long distance was single-digit until competition stimulated usage. As a result of greater market growth over the past 15-years, AT&T is a larger company today with only about half the market share it had then. In other words, a smaller piece of a bigger pie can be better than the whole of a smaller pie. The same can and surely will happen in local telephone markets, if some of the incumbents will stop resisting and instead embrace competition.
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The third category involves litigation. The Act was a massive piece of legislation that fundamentally changed federal telecommunications policy, and it was entirely reasonable to expect affected parties would exercise their legal right to test various interpretations of the new law in court. Thus, the fact that we're now embroiled in such litigation is not surprising or inappropriate, even though I believe the court has not yet understood what the Act intended or is needed to accomplish real local competition.
APPEAL OF THE FCC'S INTERCONNECTION REGULATIONS
You are aware that the Act directed the FCC to develop and implement regulations within 6-months (or by August 8, 1996) to provide for inter-connection between competitive and incumbent providers of local telephone service. The FCC, in my view, did a masterful job of writing those extremely complex regulations under almost impossible time constraints.
The substance of those regulations indicated that the FCC clearly learned from the lessons of long distance competition and appropriately provided for rates, terms and other conditions that would stimulate new market entrants. But, some Bell Companies (and some state regulators) didn't share my view and persuaded the Eighth Circuit Court of Appeals in St. Louis to first stay and then over-turn some of the FCC's rules, especially those pertaining to costing and pricing of local telephone interconnections.
I don't mean to argue the appeal of the Eighth Circuit's ruling here, but it doesn't make sense to believe that the U.S. Congress declared a new national competitive telecommunications policy, but intended for the FCC to be almost powerless to interpret and enforce it. In any event, the matter is now headed for the U.S. Supreme Court, and we can reasonably expect more litigation for a few more years.
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For everyone except the lawyers (of which I, admittedly, am one), that's unfortunate. I say that because I believe that history and economics shows us that, with or without regulatory oversight, the competitive market place will extract essentially the same results as would have the FCC rules. For instance, one of the most contentious of the FCC's rules was the requirement that incumbent telephone companies price interconnection services to competitors based on long-run incremental costs (specifically ''total element'' LRIC or, to use the FCC's acronym, TELRIC).
The FCC, in my view, adopted TELRIC because they understood (from what had happened 15-years earlier in the long distance market) that incumbent providers had to learn to price on forward-looking (not embedded) costs in order to be competitive. Incumbent telephone companies, as a result of decades of rate base rate-of-return regulation, have significant embedded costs. They built redundant, robust and expensive analog copper wire local networks, because they and the regulators determined it was in the public interest. They are magnificent networksamong the best in the worldbut, are they what consumers want and will pay for in a competitive environment?
I'd like to illustrate this point with my personally favorite anecdote. When Sprint announced in the early 1980s that we were going to build the nation's first all-digital fiber-optic network, AT&T laughed out-loud. AT&T proclaimed its copper wire network was not only sufficient to handle all possible traffic, but was the ''gold standard'' in telecommunications. Within 3-years after Sprint's network was on-line, though, AT&T had written-off billions of dollars of embedded investment in its analog network, in order to upgrade to digital technology in order to competeon both price and technologywith the likes of Sprint. The market, in other words, drove the incumbent to become more efficient.
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The FCC adopted TELRIC as the pricing methodology for interconnection and unbundled mutual elements so entrants could make economically rational lease versus build decisions. The FCC was also indirectly doing the incumbent local telephone companies a favor because TELRIC would encourage efficient entry and use of their existing telecommunications infrastructure. Some of the Bell Companies obviously do not share this view and have, as discussed above, appealed the FCC's rulings to the Eighth Circuit Court. The Court's rulings have, so far, caused some confusion over the jurisdictional reach of state and federal regulators. Until the Supreme Court clears-up that confusion, the industry is faced with the challenge, if not responsibility, of making some progress towards competition. How do we do that?
THE FCC CAN USE THE CARROTANDSTICK PROVIDED BY SECTION 271
My recommendation is to use the carrot-and-stick provided by the Telecommunications Act. The FCC Interconnection Rules, and the Court's ruling, were based on Section 251 of the Telecommunications Act. While the meaning and consequences of that provision are being litigated, I believe the FCC should focus on Section 271 of the Act, which provides that the Bell Companies can be authorized to provide in-region long distance service if and when they satisfy certain requirements (including a 14-point competitive checklist, the presence of a facilities-based competitor providing service to residential and business users, and a public interest test with a competitive evaluation by the U.S. Justice Department).
In particular, I believe the FCC can and should say to the Bell Companies that, regardless of the Eighth Circuit's ruling on Section 251, if you want the authority to provide competitive long distance service then you must satisfy certain requirements designed to genuinely open local telephone markets to real, meaningful and lasting competition. Those requirements would have to include TELRIC pricing, resale at discounts that provide an opportunity for resellers to achieve positive margins, parity in operating support systems, and others which have proven to be adequate to enable local competition to become an irreversible reality.
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I'm pleased to say that I believe that's precisely what the FCC did in its decision on Ameritech's application under Section 271 to provide in-region long distance service in Michigan, that was issued on August 19, 1997. That decision was heralded by many of the Bell Companiesespecially Ameritechas providing a needed ''road-map'' for them to follow as they attempted to comply with the Telecommunications Act. Their joy was apparently short-lived, though, since some Bell Companies have appealed the FCC's decision, and are publicly declaring that compliance with it would be too difficult and expensive.
I submit that the premise should simply be that if the Bell Companies really want to enter the competitive long distance market, then they should be willing to comply with national policy and permit local competition.
HOW MUCH LOCAL COMPETITION IS ENOUGH?
In that regard, how much local competition is enough to dissipate the local monopoly power of the Bell Companies so that they cannot harm competition when allowed into long distance markets is probably the most important question before the FCC and, especially, the DOJ, today. The answer is not one of customer metrics or market share. I don't believe there is a magic number that constitutes competition. Instead, I think the answer lies in the reality or prove-ability of the openness of the market to, or opportunity for, genuine local competition.
Sprint's concern with the Bell Companies getting into long distance is not that they are potential competitors. We face hundreds of real and potential competitors in the marketplace everyday. In some respects, we want some of the Bell Companies to get into long distance as soon as possible, because some have contracted to resell Sprint service.
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Our concern is that the Bell Companies, if they get into long distance while they still have local monopolies, could be unfair competitors. In particular, if the Bell Companies continue to fight local competition and maintain their local monopolies, then long distance carriers like Sprint will have to continue buying access to our residential and business customers from them. If the Bell Companies, then, chose for anti-competitive purposes to harm Sprint, they could readily do so by manipulating the cost, availability and/or quality of the access they provide.
It is critical, then, that the FCC and the Justice Department aggressively carry out their responsibilities under Section 271 of the Act. In that regard, we submit that the Bell Companies must satisfy certain minimum requirements, in addition to the public interest test, in order to be authorized to provide in-region long distance service, which include:
Competitive local service must be available to a meaningful portion of the business and residential marketplace.
Facilities-based wireline competition must exist with an irreversible foothold in the marketplace.
The Bell Company must demonstrate that it is in full compliance with all checklist items (from Section 271(c)(2)) and is capable of processing and provisioning resale and unbundled network elements (UNEs) in the quantities required by competitors and with quality at least in parity with itself.
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There must be no evidence of any anti-competitive acts or use of legal or regulatory processes to delay or impair competition.
Permanent, ProCompetitive Pricing for Resale and Lease of UNEs
All prices, including non-recurring charges (NRCs), must be at forward-looking costs. Such prices may not exceed those which the Bell Company imposes/allocates to itself or its subsidiaries for similar services.
Wholesale rates must exclude all costs that could reasonably be avoided.
Bell Companies must offer assembled full-service platforms combining UNEs at prices based on forward-looking costs.
Optional payment plans for NRCs must be offered.
Geographically deaveraged rates must be provided.
Only a ''reasonable allocation of forward-looking common costs'' and a reasonable profit may be included in setting prices.
There is no difference between the ultimate network costs of interconnection, UNEs and exchange access services; all prices must be set based on forward-looking costs.
Page 152 PREV PAGE TOP OF DOC Segment 1 Of 2 Costs of operational support system (OSS) development, local number portability (LNP), and similar services must be recovered on a competitively neutral basis. Costs imposed on a Bell Company as part of a competitively neutral process may not be passed along to the customers of long distance and local service competitors, e.g., subscriber line charge (SLC) revenues if unbundled loops are purchased, switched access revenues if unbundled switching is purchased.
Systems that Support, not Stifle
National standards for systems and all areas of the customer care process must exist and the systems to deliver these standards must be implemented and maintained at benchmarked levels.
The Local Competitor Users Group (LCUG) Service Quality Measurements (SQM) serve as the minimum service level categories to be benchmarked.
Bell Company systems handling competitive local service business must process all facets of competitive local orders at least at parity with the Bell Company's own systems and must provide end-to-end processing of any type of competitive local orders in parity with the Bell Company orders. UNE orders must be processed as quickly as resale orders.
Service Parityat Least
SQM must be established to ensure that service is provided at levels of parity to the Bell Company or at Commission-mandated levels, whichever is more beneficial to the customer.
Page 153 PREV PAGE TOP OF DOC Segment 1 Of 2 Bell Companies must willingly provide superior quality services if the local competitor is willing to pay for it.
Bell Companies must have systems in place to report any failure to provide service at benchmarked levels and must credit billings to local competitors for failure to comply with such benchmarked levels. Such penalties must be set and enforced by the respective state commissions.
Level Playing Field within the Market
There must be non-discriminatory treatment by Bell Companies and state and local governments with regard to rights-of-way, taxation, entitlements and other aspects of doing business.
Pricing for pole attachments and conduit is made publicly and generally available to ensure equal treatment to all parties.
All numbering and dialing plans must be non-discriminatory.
LNP must be available in a manner that does not pre-determine a local competitor's network configuration.
My conclusion, thus, is that we're now seeing many of the same things happen in the local telephone market that we experienced when long distance was opened to competition over a dozen years agothat is, recalcitrance by some incumbents, paternalism by some regulators, confusion by some courts, expectations by consumers, enthusiasm by competitors and relentless technological progress. And, I must add, I see the same pattern occurring in telecommunications markets around the world (evidenced by the commitments made by the 70 countries in the WTO Basic Telecommunications agreement).
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Whether or not all these developments are necessarily good (depending upon your perspective), I remain confident that the benefits of competition will ultimately prevail. The process can certainly be aided by Congressional oversight, and we believe it's critically important that the House Judiciary Committee continue to exercise close oversight, especially of the important antitrust issues involved in de-monopolizing the Bell Companies' local markets and preserving competition in long distance markets. We look forward to working with you in that effort.
Thank you very much.
INSERT OFFSET RING FOLIOS 6 TO 7 HERE
Mr. HYDE. Thank you, Mr. Hoffman.
STATEMENT OF MARK FEIDLER, PRESIDENT, INTERCONNECTION SERVICES, BELLSOUTH CORPORATION
Mr. FEIDLER. Thank you, Mr. Chairman.
I'm president of the Interconnection Services business unit of BellSouth and I want to thank you for the opportunity to testify today. Interconnection Services is the business unit within BellSouth which is focused on meeting the needs in the BellSouth region of carrier customers or CLECs.
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I want to communicate three points to the committee today. First, BellSouth views CLECs as customers. We are actively pursuing their business and trying to help make them successful in the provision of local telecommunication services. Second, BellSouth has the necessary items in place for CLECs to be successful in pursuing local customers. Third, existing regulation, particularly the requirement for non-discriminatory interconnection, makes it good business for BellSouth to focus on CLECs as customers in meeting their reasonable business needs.
The Telecommunications Act of 1996 imposed requirements on BellSouth in the form of a checklist of items that must be available to CLECs before BellSouth can apply to enter the long distance business. BellSouth, and in particular the Interconnection Services business unit, has been focused for the past 18 months on implementing local competition and meeting the regulatory requirements of the Telecommunications Act. BellSouth believes that we have met the regulatory requirements and now are going further to attract and retain CLEC business on our networks.
Of the 14 items on the checklist, 2 have received a great deal of commentresale of service and network unbundling. Regarding these two items, BellSouth has provisioned for CLEC's, over 155,000 resold lines and 30,000 unbundled network elements. While these numbers may seem small compared to BellSouth's overall business, they are growing in excess of 25 percent per month, a rate comparable to the growth rate of the Internet. Further, most of this has come from new entrants or relative unknowns in the field of telecommunications. When the established players enter more broadly, clearly this growth will increase.
Page 156 PREV PAGE TOP OF DOC Segment 1 Of 2 A less focused on aspect of the 14 point checklist, however, is the requirement for non-discriminatory interconnection. BellSouth has interconnected with over 20 facility-based providers of local service, including Sprint and ACSI represented here. I believe the requirement for non-discriminatory interconnection is the single most important requirement in opening the local market to competition.
Earlier in the history of the United States there was another time when competition in local telecoms was attempted and failed. At the turn of this century, multiple local telecom providers competed in the same markets. Because the dominant provider, often AT&T, refused to interconnect, smaller providers were unable to match the offering of the larger company and as a result, they failed or sold out. Today, however, because of this interconnection requirement, facility-based competitors can and are building local networks which will succeed. As a result, CLECs have a choice of leaving their business with BellSouth or moving their business elsewhere. This choice is what is driving BellSouth to meet the needs of CLEC customers in an attempt to keep their business. It is market forces that will ensure competitive prices from incumbent carriers.
In BellSouth's region, facility-based providers serve in excess of 55,000 customers entirely on their own networks. Fiber route miles comprising these networks have increased by 60 percent in just the last 6 months alone. To date, this facility-based competition has been focused on urban areas and exclusively on business customers. This is not surprising in that this the most profitable segment of the local telecoms business. It is surprising, however, that the CLECs have declined to serve any residential customers in this market, even ones that are only a stones throw from their existing facilities. I can't explain why they seem to be avoiding these potentially attractive customers, unless it's an attempt to keep BellSouth out of the long distance business.
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Let me turn for a moment to some of the examples of what we're doing beyond regulatory requirements, in order to earn and retain CLEC business in our region.
First, we've developed and conducted training classes for CLECs on how to do business with BellSouth. We've hosted over 600 attendees, from 110 companies in 4 sessions, and are now holding these sessions monthly. We've held numerous seminars on our OSS systems and on last Thursday and Friday had a session with over 30 CLEC representatives where we jointly discussed how our system should evolve to meet their business needs in our territories.
We're working with some CLEC's to design specific products to meet their individual needs as they enter our market and perhaps, most importantly, we announced in July that we're reorganizing our entire telephone operations into separate retail and wholesale organizations so we can better focus on the needs of these CLEC carrier customers in our region.
Lastly, there's been a lot of conversation today about the fact that the Department of Justice recommended that the FCC deny BellSouth's application to provide long distance in South Carolina. I'm happy to answer questions about that, but I would note, that the act itself envisioned a State by State entry into the long distance business and that it's our position that individual State commissions are in a better position to deal with the detailed determinations as to the adequacy of OSS systems, pricing and other matters of that sort and in South Carolina, which no one has mentioned up to this point, the Commission voted 7 to 0 that we had met the 14 point checklist and should be allowed into long distance.
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[The prepared statement of Mr. Feidler follows:]
PREPARED STATEMENT OF MARK FEIDLER, PRESIDENT, INTERCONNECTION SERVICES, BELLSOUTH CORPORATION
The Telecommunications Act of 1996 was designed to open all markets to all competitors. In the telephone area, local phone companies, like BellSouth, were required to interconnect with their competitors, open markets to the new entrants and provide them with the facilities, databases and services needed to be able to compete in all parts of the local market. In return, the regional Bell companies were to be able to enter the long distance business after completing a 14-point checklist to the satisfaction of state regulators. The FCC was given the final responsibility to determine the timing of entry and the Justice Department was permitted to provide advice on the decision.
Since soon after the Act was passed, BellSouth has been at work to fill its end of the bargain. As described in this testimony, BellSouth has put forth a good faith effort to carry out the requirements of the Act in a manner that would allow competitors access to all needed parts of its network, and in fact, dozens of competitors have entered the market. These new entrants, which range from small entrepreneurial companies to AT&T, have in fact begun to serve thousands of customers, mostly in the business area, that heretofore were served by BellSouth. In the local toll market, which was 100% the province of the local company at the time of divestiture, BellSouth has lost more than 1.5 million customers in just two states.
Yet virtually all these competitors, already competing in our markets, deny that our markets are open and oppose allowing the Bell companies to provide long distance. While it should be obvious to the Justice Department, as well as the FCC, that these competitors have every motivation to do everything they can to keep the Bell companies from entering markets they are already in, the Federal agencies have instead joined to erect new barriers to entry rather than follow the law as set forth by the Congress and this Committee.
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Instead of adhering to the Act, which gave most of the responsibility for dealing with local market issues to the state regulators, the FCC and the Justice Department have continually expanded their scope of authority and given little or no deference to the findings of state regulators. The FCC and the Department of Justice have sought to relitigate and second guess the judgments made by state authorities. The Department of Justice seems determined to establish its own regulatory agency and examine in minute detail virtually every facet of BellSouth's operationsall in an effort to prevent telephone companies from providing telephone service to their customers. In the ensuing paragraphs, BellSouth will discuss these issues, provide information on its markets and its new competitors and describe the hypocrisy of those who seek to prevent BellSouth from providing a full range of telecom services.
BELLSOUTH HAS OPENED ITS LOCAL MARKET TO COMPETITORS
The enactment of the Telecom Act in 1996 has caused a sea change in the local exchange market. This change is a direct result of the operation of Section 253, which eliminates all legal barriers to the provision of intrastate telecommunications services, together with Section 251, which provides new entrants with the ability to select from a menu of interconnection services offered by the local exchange companies to enter the local exchange market. This menu includes the resale of the incumbent LEC's retail services, as well as the purchase of unbundled network elements from the incumbent LEC. And of course, a new entrant is permitted to construct its own facilities and to interconnect such facilities with the incumbent local exchange company's network.
The Telecom Act ushered in an era of competition in the retail market, where the incumbent local exchange companies will compete with new entrants for the retail local exchange business of residential and business customers. In addition, the interconnection services available to Competitive Local Exchange Companies, or CLECs, under the Telecom Act has created a new competitive market for interconnection (or wholesale) services. CLECs entering BellSouth's market are choosing to construct their own networks and to use these networks to terminate their own traffic and to carry traffic for other CLECs.
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The Telecom Act provided the framework for the competition in the retail and wholesale markets. The FCC's Local Competition Order in August of 1996, together with the arbitration decisions rendered by the State public service commissions in late 1996 and early 1997, fleshed out the groundrules for the competition in these markets.
After analyzing these decisions, BellSouth's management concluded that it would lose a significant number of customers of the retail local exchange market to CLECs and the long distance companies over a period of time. These companies had capable management teams and access to capital. They also had a strong financial incentive to enter the local exchange business, together with the legal right to do so. In light of these factors, BellSouth's management concluded that it was inevitable that it would suffer significant loss of market share in its retail business.
BellSouth's management concluded that the financial effect of this loss of market share could be minimized by retaining much of this traffic on its network on a wholesale basis through serving CLEC customers. In order to induce the long distance carriers and CLECs to utilize its network to carry the traffic of their retail customers, in July of 1997, BellSouth announced that it was realigning its telephone operations.
One group, the Network and Carrier Services Group provides the network and marketing services to wholesale customers, such as CLECs and long distance companies. A second group serves the needs of BellSouth's retail customers in the residential market, as well as the retail customers in the small and large business markets. One of the purposes of effecting the realignment was to provide a focus and structure to BellSouth's efforts to retain the carrier services business of CLECs. This purpose was reinforced by BellSouth's commitment to comply with the requirements of the Telecom Act.
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BellSouth's business strategy with regard to CLECs is straightforward. It seeks to be the premier providerin terms of capability and qualityof network services in its region. BellSouth seeks to present a compelling value proposition to distributors so that they prefer to purchase network capability from BellSouth rather than buying it from any other company or building their own networks. Finally, BellSouth seeks to provide a level of network and related functionality so that all of its customers can compete effectively in the retail market. BellSouth is committed to do what it takes to meet and exceed the needs of its CLEC customers.
BellSouth acknowledges that CLECs have choices in how they design their networks. One choice is whether to construct their own facilities or to lease capacity from a facilities-based carrier. CLECs face a'' make or buy'' decision for their carrier services needs every day. CLECs that decide not to construct their own facilities face a second choicewhich company should they select to carry their traffic. CLECs have these choices today, and BellSouth believes that over time CLECs will have even more options available to them as more competitive fiber is deployed in the BellSouth region.
The choices available to CLECs reflect the state of competition in the carrier services or wholesale market. This competition drives BellSouth's Network Carrier Services group to become the best and most competitive source of carrier services for all CLECs. This competition exists today, and BellSouth expects that it will only intensify with the passage of time. As BellSouth competes for the business of CLECs, it will be driven to meet and exceed the needs of its CLEC customers. Its goal has been and will continue to be to win the business of CLEC customers based on the quality of carrier services that it provides to CLECs.
Page 162 PREV PAGE TOP OF DOC Segment 1 Of 2 Consistent with these goals, BellSouth has entered into approximately 225 interconnection agreements with carriers across its nine-state region, and established a single point of contact for all negotiations between BellSouth and CLECs to facilitate the process of negotiating interconnection agreements, thereby fulfilling the requirements of the Act. More than 300 CLECs are certified to provide service in BellSouth's region, and over 70 CLECs are in business today.
BellSouth assigns an account team to every CLEC, as well as a Customer Support Manager. Technical experts from the Network and Carrier Services Group are available to support these account teams. BellSouth has sent implementation teams to meet with CLEC customers to assist them in learning to access BellSouth's databases, as required by the Act, and in establishing their business relationships with BellSouth.
BellSouth has staffed the Network and Carrier Services Center with almost 30,000 employees. These employees are dedicated to providing interconnection services to any carrier that sends its traffic over the BellSouth network.
BellSouth has conducted training sessions for approximately 110 of its CLEC customers, representing approximately 600 CLEC representatives. BellSouth has polled the attendees at the end of each training session whether or not they found the sessions to be useful. On a scale of 1 to 5, with 5 being the highest rating, the attendees have given the training sessions an overall rating of 4.5 in terms of the quality of the content and the way in which it was presented.
BellSouth has established a Local Carrier Service Center (''LCSC'') and an Unbundled Network Element Center to serve distinct CLEC customer groups. The LCSC provides 24-hour, 7-day-a-week access and support for CLEC customers. Approximately 700 employees are dedicated to CLEC customer service.
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BellSouth has undertaken to ''productize'' its wholesale offerings so that it can market these services more effectively. This process involves defining its wholesale product offerings, to making product information available to CLEC customers, and developing end-to-end methods and procedures to provision and maintain these products in a wholesale environment.
By year end, BellSouth will have committed approximately $500 million to assure that its systems and processes are designed to allow competitors access to its local phone markets and to meet the requirements of the Act.
BellSouth's commitment to providing superior service to CLECs is confirmed by its compensation plans. The annual bonuses of the employees in the Interconnection Services Group are primarily based on the level of business and the level of CLEC satisfaction in the carrier services provided by BellSouth.
BellSouth has developed OSS systems to allow CLECs to have non-discriminatory access to BellSouth's databases, as required by the competitive checklist contained in the Telecom Act, and is continually improving these systems to meet CLEC needs. BellSouth provides non-discriminatory access to its operations support systems for pre-ordering, ordering, provisioning, maintenance and repair and billing. These are the same databases used by BellSouth's retail personnel to offer local telephone service. Electronic and manual interfaces for each function are fully operational, and are in actual use. These interfaces provide access to the required information and functions in substantially the same time and manner as BellSouth's access when serving its retail customers, as required by the Act.
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The Public Service Commissions in South Carolina and Louisiana have both witnessed live demonstrations of these systems and both reached the conclusion that these systems complied with the requirements of the Telecom Act.
LONG DISTANCE COMPANIES AND CLECS ARE SERVING BUSINESS CUSTOMERS
Competition is unfolding in BellSouth's region, primarily for BellSouth's business customers. BellSouth's competitors have been constructing facilities in its region for some time, and BellSouth believes that the pace of such construction has accelerated in the past year. BellSouth estimates that as of September 1997, there were more than 8,000 miles of fiber optic facilities and more than 70 CLEC switches deployed in the BellSouth region. This fiber serves nearly 2,300 buildings.
Although some of these networks have been constructed and are currently being utilized to offer access services to business customers, such networks can be utilized to provide, and in some cases are utilized to provide, local exchange service. As a general rule, a CLEC with a fiber ring and a switch can provide local exchange service to its access customers, provided that it established interconnection trunks with BellSouth. Such trunks are readily available today. In fact, BellSouth had provisioned approximately 58,000 interconnection trunks as of the end of September.
The extent of competition in the BellSouth region is illustrated by the following facts:
Page 165 PREV PAGE TOP OF DOC Segment 1 Of 2 CLEC's are reselling over 155,000 of BellSouth's access lines, and this number is increasing at a rate of 25% per month.
BellSouth has ported or transferred over 50,000 numbers to facilities-based CLECs.
BellSouth has installed over 58,000 interconnection trunks.
BellSouth's competitors have been competing vigorously against BellSouth in the market for high capacity point-to-point traffic. BellSouth's market share for this service in its largest markets has been steadily eroding for the last several years.
In Florida and Georgia, BellSouth has lost more than 1.5 million short-haul long distance retail customers, a market that was exclusively BellSouth's at divestiture.
The extent of the facilities that CLECs have constructed in BellSouth's region is further illustrated by a review of the competitive facilities located in downtown Atlanta, as described in an analysis by InContext, which is attached hereto. The analysis depicts the fiber rings owned by MCI and MFS/WorldCom in the business districts in Atlanta, Georgia. The maps included therein identify each of the buildings that are located along the fiber rings, as well as which buildings are served by the fiber ring. Fiber rings such as those shown in this study are located in most of BellSouth's major markets. In fact, BellSouth estimates that there are approximately 115 operational CLEC networks in operation in BellSouth's region. More than 30 of these networks have switching capacity. More than 30 additional CLEC networks are being developed.
Page 166 PREV PAGE TOP OF DOC Segment 1 Of 2 As stated above, the facilities based competition in BellSouth's region has been focused almost exclusively in the business market. Facilities-based competition for residential customers has not emerged in a meaningful way in the BellSouth region. The study conducted by InContext of the fiber rings owned by MCI and MFS/Worldcom in the Atlanta market illustrates the focus on business customers by CLECs. It demonstrates that many of the businesses located along the fiber ring are served by the CLECs, but that none of the residential multi-dwelling units that are immediately adjacent to the fiber routes are linked to the CLEC fiber networks.
There are at least two possible reasons why a CLEC might choose to pass up the opportunity to serve the local residential market, particularly when its network is immediately adjacent to its fiber ring. One thesis is that the broad-based provision of service to the residential market would assist the BOCs in their efforts to enter the long distance market, and it is in the business and regulatory interests of these competitors to delay a BOC's entry into the long distance market for as long as possible, as indicated above. Long distance companies and CLECs alike are fearful that they will lose customers to BOCs that are free to offer ''one-stop shopping'' for local and long distance services, just as Sprint, GTE and other companies do today. If the long distance companies or CLECS were to enter the residential local exchange market, it would eliminate one of the major hurdles in the BOCs path to long distance reliefthe requirement to satisfy either ''Track A'' or ''Track B'' of the Telecommunications Act.
The long distance companies and CLECs argue that a BOC may not even apply for interLATA relief until it can demonstrate the existence of facilities-based competition in the residential and business markets. These parties argue that a BOC may not apply under Track A unless it can demonstrate the existence of a facilities-based competitor serving residential customers. At the same time, they argue a BOC may not apply under Track B because one or more competitors had stated their intent to serve the residential market at some vague point in the future. Under this approach, a BOC is relegated to a Section 271 ''no man's land.'' This delays the onset of additional competition in the long distance market and benefits the long distance companies and CLECs and prevents the BOCs from providing a full array of telephone services.
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Other parties have offered an alternative rationale for the lack of competition in the residential marketthat it is not ''economic'' for CLECs to provide these services. These parties assert, in so many words, that it is not profitable to provide local service to residential customers. Essentially, these parties are arguing that the policy of universal service, where residential rates are subsidized by access charges and business rates, has resulted in below cost residential rates that discourage new entrants from entering this segment of the market.
CLECs are not making the ''economic'' argument about the business market. In fact, many CLECs have announced business plans that focus exclusively on business customers. For example, ASCI has announced a business strategy of becoming ''the full service alternative local phone company for businesses in markets served by its local networks.'' (emphasis added). ITC:DeltaCom, a CLEC with operations throughout the BellSouth region, recently described its goal to become ''a leading regional provider of integrated telecommunications services to mid-sized and major regional businesses in the southern United States'' in documents filed with the Securities and Exchange Commission. (emphasis added). Teligent, Inc., the CLEC that hired Alex Mandl away from AT&T, is another example. Its stated business plan is to be a premier facilities-based telecommunications provider to small and medium-sized businesses. It has announced that it intends to focus on customers with between 5 and 50 access lines. The strategy of focusing on business accounts was also demonstrated by the well publicized comments of the Vice Chairman of WorldCom, who was quoted in the Washington Post as saying ''Our religious focus is the business customer . . . It is a jihad.''
BellSouth is not in a position to know whether the behavior of its competitors is being driven by a desire to ''game the process'' or by economic forces. But it doesn't matter. The result is the samea lack of broad based competition for the local residential customer. If the long distance companies and CLECs do not intend to serve the residential market, no matter what the reason, then the Track B process intended for this situation by the Congress should be allowed to operate.
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The South Carolina PSC made an explicit finding in the South Carolina 271 proceeding that no company was taking reasonable steps to provide facilities-based service to business and residential customers in South Carolina. One of its reasons for supporting BellSouth's efforts to gain Section 271 relief was the belief that such relief would spur the long distance companies and CLECS to enter the residential market. The South Carolina PSC reasoned that if BellSouth's application were granted, BellSouth and CLECs would be forced to compete for customersbusiness and residentialby bundling local telephone, long distance, wireless and Internet services into increasingly customized packages that better suit the needs of individual users. BellSouth believes that when this competition is allowed to begin, the pace of new service innovation throughout the industry will accelerate and consumers will finally begin to see the competitive benefits that the framers of the Telecom Act had in mind and promised to the American public.
THE DEPARTMENT OF JUSTICE HAS STRAYED BEYOND ITS AREA OF EXPERTISE
In prescribing a role for the Department under Section 271, the Congress gave examples of the kinds of inquiries that the DOJ might appropriately pursue, such as whether a BOC's entry into the interLATA market would create a dangerous probability that it would successfully use market power to substantially impede competition in that market. A second example was whether there is a substantial possibility that the BOC could use its power in the local market to impede competition in the interLATA market. Both of these standards are based on antitrust principles that fall within the Department's antitrust expertise. Instead of adopting a standard of review based on antitrust principles, as suggested by the Congress, the Department has adopted a new standard, not based on any antitrust precedent, that calls for the local market to be ''irreversibly open to competition.''
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This standard is entirely subjective and provides little guidance to the BOCs in their efforts to enter the long distance market. In practice, the Department has applied the standard to second guess the state public service commissions on matters within their jurisdiction, such as checklist compliance. In providing a consultative role for the Department, the Congress sought to enable the Department to apply its antitrust expertise to the public interest inquiry of Section 271(d)(3). At the same time, the Congress instructed the FCC to consult with the relevant state public service commission ''in order to verify the compliance of the Bell Operating Company'' with the checklist and other local market requirements of Section 271(c). In the applications that it has evaluated to date, the DOJ has strayed beyond its antitrust expertise and has applied its own judgment to various checklist items and has become a third regulatory body.
This criticism is particularly applicable to the Department's focus on operating support systems that the BOCs use to allow CLECs to access their databases. This issue, which was not part of the debate during the legislative process, has become the primary obstacle to BOC entry into the long distance market. In the Department's comments on prior BOC applications, the Department's evaluations of the OSS issues have been very prominent, and the FCC has adopted many of the Department's recommendations. Yet the Department does not have the software or the technical expertise to evaluate these sophisticated software interfaces. Nor could Congress have intended that the Department would seek to apply the focus of its consultative role in an area so far removed from its core expertise, antitrust enforcement.
Under the antitrust laws, de novo, independent entry into concentrated markets is presumptively good. The Herfindahl-Hirschman Index for the long-distance business today is well within the range which is considered to be ''concentrated.'' Upon grant of relief under Section 271, a BOC will enter the long distance market with zero market share. Under standard antitrust principles, the additional competition offered by BOC entry should be welcome.
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Although the Department pays lip service to the benefits of such additional competition, the application of its ''irreversibly open'' standard to specific applications has not accorded enough weight to the value that such additional competition would bring to the interLATA market. Professor Jerry Hausman has quantified these benefits. He concludes, based on the experiences of the Southern New England Telephone Company and GTE, that entry by the BOCs into in-region long distance will very quickly lead to price reductions in the range of 1718 percent for consumers of residential long distance services. Nationally, these price reductions will yield direct consumer savings of approximately $6.2 billion per year (in 1996 dollars), as well as an additional benefit of about $450 million due to additional calls residential customers will make due to lower prices. Based on these total benefits of nearly $7 billion annually, residential customers pay a Section 271 ''tax'' of over $60 per household per year. They are about $10 billion worse off because interLATA relief has been delayed since the passage of the Telecom Act. For every month of additional delay in granting interLATA relief, consumers lose another $550 million.
There is virtually no other industry where the Government has decided to concentrate on blocking competition. Indeed, if the Bell companies were owned by foreign investors, the current procedures would probably run afoul of the new World Trade Organization agreement. The U.S. Government could not impose the sort of restrictions and endless process BellSouth is facing on foreign companies without creating many complaints.
THE DEPARTMENT OF JUSTICE AND THE FCC ARE USURPING THE ROLE OF THE STATE PUBLIC SERVICE COMMISSIONS
Page 171 PREV PAGE TOP OF DOC Segment 1 Of 2 One of the issues that has dominated the debate in the telecommunications policy arena for the past year is the issue of the FCC's jurisdiction over the pricing of intra-state services such as interconnection and unbundled network elements. This jurisdictional issue is front and center in BellSouth's South Carolina 271 application because certain parties are challenging the South Carolina PSC's determination setting BellSouth's interconnection rates. These parties assert that the FCC should assert jurisdiction over this local pricing issue, and second-guess the South Carolina PSC and the Department of Justice seems to agree.
In July of this year, the South Carolina PSC approved BellSouth Statement of Generally Available Terms and Conditions and, in so doing, expressly found that the rates contained therein were ''cost-based.'' The South Carolina reached this determination after conducting a lengthy hearing with live witnesses, cross examination and extensive pleadings by all parties. This finding by the South Carolina PSC should end the debate.
The 8th Circuit has ruled on at least two occasions that the Telecom Act preserved the traditional Federal-state jurisdictional approach that has been in place for many years, and that the states were empowered to establish the intra-state rates for interconnection, unbundled network elements and resale. Notwithstanding the 8th Circuit's decision, the FCC and the Department of Justice have continued their attempts to assert jurisdiction over these intra-state matters. In its decision rejecting Ameritech's Michigan application, the FCC advanced the theory that its authority to determine a BOC's checklist compliance under Section 271 includes the authority to make an independent determination of whether the rates charged by the BOC were ''cost-based.''
A group of more than thirty states have a filed motion with the 8th Circuit asking the Court to tell the FCC to comply with its earlier order. A group of LECs has filed a similar request. Earlier this month, the 8th Circuit issued an order that indicated that the request to enforce the mandate is under ''active consideration'' by the Court.
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The FCC has been determined and creative in its extensive efforts to exercise jurisdiction over local pricing matters. The FCC appealed the 8th Circuit's stay order to the Supreme Court on two separate occasions, and there are indications that it will appeal the most recent 8th Circuit decision to the Supreme Court. The FCC used its authority to approve transfers of control to impose conditions on the Bell Atlantic/NYNEX merger, and one of the conditions was a requirement for the combined company to adopt a particular pricing methodology. The FCC's Ameritech decision represents yet another effort by the FCC to expand its jurisdiction over state pricing matters.
The Department of Justice has supported the FCC's efforts to expand its jurisdiction over intra-State pricing matters. It makes no sense to have three separate fact-finding systems here. If everything that the State commissions decide is going to be relitigated by the FCC and Justice Department staffers, it would have made more sense for Congress to simply relieve the State commissions of any responsibilities here. Let the Washington bureaucracy try to run the entire telecommunications industry, if they want to. But that's not what Congress decided.
Congress intended to rely on state decisionmaking in this areawhich has also been done in health care, in welfare reform, and in energy regulationand the Federal agencies should be required to pay attention to what the States decide. Justice Sandra Day O'Connor once said that, under our Constitution, the State governments are not field offices of Washington. Congress should insist that the FCC and Justice Department apply the Act the way it was written.
Page 173 PREV PAGE TOP OF DOC Segment 1 Of 2 Ultimately, the courts will determine the scope of the FCC's jurisdiction. The irony of this situation is that the FCC's dogged determination to expand its jurisdiction in the face of the 8th Circuit's decision is the primary cause of such litigation, while some parties seek to blame the LEC industry for seeking judicial review. In this regard, the new chairman of the FCC, William Kennard, recently wrote that incumbent LECs have filed 73 challenges to state commission decisions, and that this litigation has caused uncertainty about the meaning of certain provisions of the Telecom Act. While his letter did not say so directly, it implied that that the LECs are the only parties that are challenging state PSC decisions in federal district court. BellSouth's experience does not bear this out. Of the twelve federal district court proceedings involving BellSouth arbitrations, eleven were initiated by AT&T or MCI. BellSouth has appealed only one PSC-approved arbitration agreement.
THE FCC'S POSITION ON SHAM UNBUNDLING HAS CREATED UNNECESSARY LITIGATION
Another industry-wide issue that is being debated in the context of BellSouth's South Carolina application concerns the obligations of the incumbent LECs to ''rebundle'' the network elements into a ''finished'' telecommunications service. Like the issue of Federal-State jurisdiction, this issue has been the subject of much litigation.
The Telecom Act requires incumbent LECs to offer a menu of interconnection options, and provides different pricing standards for each item on the menu. With respect to resale of basic local exchange service, the price is to be established by the states by reference to the retail rates charged by the incumbent LEC, as adjusted to reflect the costs that the incumbent LEC would avoid as a result of losing a retail customer. In contrast, the prices for unbundled network elements were to be based on cost plus a reasonable profit.
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The intent of the two pricing standards was to reward the facilities-based providers with a lower cost of accessing the incumbent LEC's network. Competitors that chose to resell the ILEC's retail services would pay the resale price, while competitors that invested in facilities and supplemented these facilities with unbundled network elements would receive the benefit of the lower-priced cost standard, as set forth by Congress.
In its Local Competition Order, the FCC ruled that competitors could order all of the unbundled elements that comprise a retail service, and that the incumbent LEC was required to combine these elements into a finished service, all to be priced at the lower cost-base pricing standard. The effect of this decision permitting ''sham unbundling'' was to eliminate the distinction between the wholesale pricing standard and the cost-based pricing standard.
This issue was appealed to the 8th Circuit, and in July of 1997, the 8th Circuit reversed the FCC's decision and held that the incumbent LECs were not required to recombine the network elements for CLECs. This decision reflected the Court's effort to preserve the distinction between the two pricing standards established by the Congress. Under the Court's ruling, a CLEC would be entitled to purchase all of the elements comprising a retail service, but it would have to ''earn'' the benefits of the cost-based pricing standard by doing the work necessary to combine the network elements into a telecommunications service. Otherwise, there would be no incentive to build any competing facilities at all!
In the FCC's Ameritech decision, the FCC held that an incumbent LEC is required to recombine the network elements into a telecommunications service at the request of a CLEC. The effect of this decision was to once again eliminate the distinction between the two pricing standards. Under the FCC's approach, a CLEC could resell an ILEC's retail services, at a discount of 2025%, or it could effectively do the same thing by ordering a ''platform'' of combined elements at a discount of 5060% of the LEC's retail business rates. Obviously, a long distance company or a CLEC would never resell the incumbent LECs services or build their own network when it could get a much steeper discount at no additional expense by ordering a ''platform'' of unbundled network elements.
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In October, the 8th Circuit issued an order clarifying its earlier holding. It held that an incumbent LEC was not required to deliver a platform of network elements to a CLEC. It further held that an incumbent LEC was not required by the Act to recombine unbundled network elements on behalf of CLECs. The effect of this decision was to reaffirm its earlier holding preserving the distinction between the two pricing standards. The Court stated that permitting ''such an acquisition of already combined elements at cost based rates for unbundled access would obliterate the careful distinctions Congress has drawn . . . between access to unbundled network elements on the one hand and the purchase at wholesale rates of an incumbent's telecommunications retail services for resale on the other.''
The 8th Circuit has now issued two separate opinions that seek to preserve the distinction between the two pricing standards. BellSouth fully expects its competitors to continue to pursue the benefits of the fictional ''platform,'' causing further delay in residential local competition.
When Congress passed the Telecom Act nearly two years ago, it reasonably expected that the benefits of competition would be flowing to the American public by this late date. And yet, not a single 271 application has been approved to date, denying the benefits of additional competition to the American public. By way of example, the South Carolina PSC found that BellSouth's entry into the long distance market in South Carolina would lead to price reductions of 25% in long distance rates. The PSC also found that BellSouth's entry would create an additional 13,000 jobs within the state. BellSouth respectfully requests this Committee to assert its oversight jurisdiction aggressively to ensure that Section 271 is applied in a straightforward and common sense fashion by the Department of Justice.
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INSERT OFFSET RING FOLIOS 8 TO 21 HERE
Next Hearing Segment(2)
(Footnote 1 return)
This written statement represents the views of the Federal Trade Commission. My oral presentation and response to questions are my own, and do not necessarily represent the views of the Commission or any other Commissioner.
(Footnote 2 return)
The enforcement statistics bear out this increased level of marketplace activity. During the three-year period from fiscal year 1995 through fiscal 1997, the Commission initiated an average of 80.7 ''competition actions'' per year, including both merger and non-merger cases, compared to an average of 46.7 during the preceding three-year period (from fiscal 1992 through fiscal 1994). ''Competition actions'' are actions that advance or resolve a case and include administrative complaints issued, consent agreements accepted, preliminary injunctions authorized, merger transactions withdrawn after the issuance of requests for additional information, initial decisions in cases litigated before an administrative law judge, final litigated orders issued by the Commission, civil penalty actions filed, and prior approval of divestiture proposals and acquisition requests.
(Footnote 3 return)
FTC v. Staples, Inc., Civ. No. 97701 (TFH) (D.D.C. June 30, 1997) (preliminary injunction granted and transaction abandoned).
(Footnote 4 return)
This estimate was calculated by FTC staff using company data. The estimate has two components: (1) an estimate of savings that consumers will realize as a result of continuing competition, based on Staples' projections of downward pressure on profit margins resulting from competition between itself and Office Depot in existing two-superstore markets, and additional competition in an increasing number of markets with three superstores, and (2) an estimate of savings from preventing an increase in prices that would have resulted from the elimination of competition from Office Depot, reducing the existing two-superstore markets to Staples-only markets, and reducing three-superstore markets to two-superstore markets. In other words, without the merger, prices are likely to decrease in markets where Staples faces superstore competition, whereas prices were likely to increase above existing levels if the merger took place and competition from Office Depot was eliminated. The difference between the without-merger and with-merger price levels is the total price difference. The estimates were calculated econometrically using company pricing data and holding all other factors constant.
(Footnote 5 return)
First Data Corp., Dkt. C3635 (consent order, Jan. 16, 1996). The consumer savings estimate is based on pricing patterns before and after MoneyGram entered the market to compete with Western Union, previously a monopolist. Before MoneyGram's entry, Western Union had imposed annual price increases of 5 to 8%; competition from MoneyGram forced Western Union to forgo those price increases. In addition, Western Union reduced its price from $29 to $22 for an average-sized transaction when MoneyGram entered; an increase back to $29 after the merger would have represented a 30% price increase. MoneyGram's fee for a transaction of the same size was around $10 to $13, which likely would have increased had the merger been permitted; an increase to Western Union's level would have represented more than a doubling of price. Commission staff used estimated percentage increases in the lower range of these possibilities to calculate a total dollar savings of $1530 million per year.
(Footnote 6 return)
Ciba-Geigy Ltd., Dkt. C3725 (consent order, Mar. 24, 1997) (Comm'r Azcuenaga concurring in part and dissenting in part).
(Footnote 7 return)
Rite Aid Corp., FTC File No. 961 0020 (preliminary injunction action authorized, Apr. 17, 1996; transaction abandoned Apr. 26, 1996). Ultimately, Revco was acquired by CVS, which preserved the competition that would have been lost from the earlier merger.
(Footnote 8 return)
Rite Aid's acquisition of Revco would have given it control of almost 5,000 retail drug stores located in New York and various Midwestern and Mid-Atlantic states.
(Footnote 9 return)
FTC v. MEDIQ, Inc., Civ. No. 971916 (SS) (D.D.C.) (complaint filed, Aug. 22, 1997). The parties abandoned the transaction prior to a hearing on the Commission's motion for a preliminary injunction.
(Footnote 10 return)
Johnson & Johnson, Dkt. C3645 (consent order, Mar. 19, 1996).
(Footnote 11 return)
E.g., Tenet Healthcare Corp., Dkt. C3743 (consent order, May 20, 1997); Columbia/HCA Healthcare Corp., Dkt. C3627 (consent order, Nov. 24, 1995); Columbia/HCA Healthcare Corp., Dkt. C3619 (consent order, Oct. 3, 1995) (acquisition of Healthtrust); Local Health System, Inc., Dkt. C3613 (consent order, Oct. 3, 1995) (Port Huron Hospital and Mercy Health Services).
(Footnote 12 return)
FTC v. Freeman Hospital, 911 F. Supp. 1213 (W.D. Mo.), aff'd, 69 F.3d 260 (8th Cir. 1995); FTC v. Butterworth Health Corp., 946 F. Supp. 1285 (W.D. Mich. 1996), aff'd, No. 962440 (6th Cir. July 8, 1997).
(Footnote 13 return)
Time Warner, Inc., Dkt. C3709 (consent order, Feb. 3, 1997) (Comm'rs Azcuenaga and Starek dissenting).
(Footnote 14 return)
Cadence Design Systems, Inc., Dkt. C3761 (consent order, Aug. 7, 1997) (Comm'r Azcuenaga concurring in part and dissenting in part; Comm'r Starek dissenting).
(Footnote 15 return)
The Commission's consent order permitted the acquisition but requires Cadence to provide continued non-discriminatory access to its software development programs so that independent software developers can continue to develop software that will interface with Cadence products. This resolution preserves any efficiencies from the merger while protecting access opportunities.
(Footnote 16 return)
FTC v. Questar Corp., No. 2:95CV 1137S (D. Utah 1995) (transaction abandoned).
(Footnote 17 return)
The Boeing Co., Dkt. C3723 (consent order, Mar. 5, 1997) (acquisition of Rockwell's Aerospace and Defense business).
(Footnote 18 return)
Lockheed Martin Corp., Dkt. C3685 (consent order, Sept. 18, 1996) (acquisition of Loral Corp.; the transaction also involved air traffic control systems and commercial satellites).
(Footnote 19 return)
Raytheon Co., Dkt. C3681 (consent order, Sept. 3, 1996) (acquisition of Chrysler Technologies Holding).
(Footnote 20 return)
Hughes Danbury Optical Systems, Dkt. C3652 (consent order, Apr. 30, 1996).
(Footnote 21 return)
Litton Industries, Inc., Dkt. C3656 (consent order, May 7, 1996).
(Footnote 22 return)
Boeing/McDonnell Douglas, FTC File No. 971 0051. The commercial aircraft part of the merger is discussed later in this testimony.
(Footnote 23 return)
94 F.T.C. 701 (1979), enforced as modified, 638 F.2d 443 (2d Cir. 1980), aff'd per curiam by an equally divided Court, 455 U.S. 676 (1982).
(Footnote 24 return)
476 U.S. 447 (1986).
(Footnote 25 return)
Toys ''R'' Us, Dkt. 9278 (complaint issued, May 16, 1997) (Comm'rs Azcuenaga and Starek dissenting).
(Footnote 26 return)
Toys ''R'' Us, Inc., Dkt. 9278 (Initial Decision, Sept. 25, 1997).
(Footnote 27 return)
FTC v. College of Physicians-Surgeons of Puerto Rico, Civ. No. 972466HL (D.P.R. 1997) (stipulated final judgment for permanent injunction).
(Footnote 28 return)
Montana Associated Physicians, Inc., Dkt. C3704 (consent order, Jan. 13, 1997).
(Footnote 29 return)
Other cases involving medical practitioners in recent years include Physicians Group, Inc., Dkt. C3610 (consent order, Aug. 11, 1995); Puerto Rican Physiatrists, Dkt. C3583 (consent order, June 2, 1995). Another important case involved the use of ''most favored nation'' clauses by RxCare of Tennessee, the leading provider of pharmacy network services in that state, in contracts with pharmacies. RxCare of Tennessee, Inc., Dkt. C3664 (consent order, June 10, 1996). These clauses required that, if a pharmacy in the network agreed to accept a lower reimbursement rate for providing prescription drugs to any other plan's subscribers, the pharmacy had to give RxCare the lower rate as well. Ordinarily, one might think that the subscribers to pharmacy benefit plans served by RxCare would benefit from the most favored nation clause, since they would benefit from lower reimbursement rates offered to competing plans. In this case, however, RxCare's network had such a large market share that member pharmacies had more to lose than to gain from seeking additional business through lower reimbursement rates for other plans. In effect, the most favored nation clause established a price floor and prevented lower-priced networks from being able to enter the market.
(Footnote 30 return)
California Dental Ass'n v. FTC, No. 9670409 (9th Cir. Oct. 22, 1997), affirming California Dental Ass'n, Dkt. 9259 (final order, Mar. 24, 1996) (Comm'r Azcuenaga dissenting; Comm'r Starek concurring in part and dissenting in part). The Court of Appeals affirmed the finding of illegality of price-related advertising restraints based on a ''quick look'' rule of reason analysis rather than the per se analysis applied by the Commission.
(Footnote 31 return)
American Medical Ass'n, 94 F.T.C. 701 (1979), supra n.23.
(Footnote 32 return)
New Balance Athletic Shoe, Inc., Dkt. C3683 (Sept. 10, 1996) (Comm'r Starek dissenting); Reebok Internat'l, Ltd., Dkt. C3592 (July 18, 1995) (Comm'r Starek dissenting).
(Footnote 33 return)
American Cyanamid, Dkt. C3739 (consent order, May 12, 1997) (Comm'r Starek dissenting). In part, the consent order prohibits American Cyanamid from conditioning the payment of rebates or other incentives on the resale prices its dealers charge for American Cyanamid products.
(Footnote 34 return)
For example, in the American Cyanamid matter, a multi-state task force consisting of all 50 states, the District of Columbia and the Commonwealth of Puerto Rico obtained a settlement valued at $7.3 million in a companion case.
(Footnote 35 return)
Brief for the United States and the Federal Trade Commission as Amici Curiae Supporting Reversal, State Oil Co. v. Khan, No. 96871. The agencies amicus brief observed that maximum resale price agreements may serve the important and procompetitive purpose of limiting a dealer's ability to exploit market power.
(Footnote 36 return)
Dell Computers, Inc., Dkt. C3658 (consent order, May 20, 1996) (Comm'r Azcuenaga dissenting).
(Footnote 37 return)
FTC File No. 971 0051.
(Footnote 38 return)
Commissioner Azcuenaga expressed a dissenting view.
(Footnote 39 return)
FTC v. Schnuck Markets, Inc., Civ. No. 4:97CV01830CEJ (E.D. Mo. 1997) (consent judgment).
(Footnote 40 return)
In fiscal 1997, the Commission negotiated civil penalty settlements in two cases, resulting in a total of $5.75 million in civil penalties. The bigger settlement involved a transaction between two engine parts manufacturers, Mahle GmbH and Metal Leve S.A. They agreed to pay $5.6 million in civil penalties, the largest penalty to date for a failure to file under HSR. In fiscal 1996, there were four civil penalty actions, resulting in settlements totaling $7.65 million in civil penalties.
(Footnote 41 return)
''Competition and the Financial Impact of the Proposed Tobacco Industry Settlement,'' Report prepared by the staff of the Bureaus of Economics, Competition and Consumer Protection of the Federal Trade Commission at the request of the Congressional Task Force on Tobacco and Health, September 1997.
(Footnote 42 return)
61 Fed. Reg. 13,666 (Mar. 18, 1996).
(Footnote 43 return)
The agreement was published in the Federal Register for public comment and is awaiting final action.
(Footnote 44 return)
As the Conference Report put it, the purpose of the 1996 Act was ''to provide for a procompetitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition.'' H.R. Conf. Rep. No. 104458, 104th Cong., 2d Sess. 113 (1996) (emphasis added).
(Footnote 45 return)
See Attachments A and B.
(Footnote 46 return)
See Attachment C.
(Footnote 47 return)
See Attachment D.
(Footnote 48 return)
As both the DOJ and the FCC acknowledge, the Act rejects any ''metric'' test for BOC entry into long distance. In other words, the Act does not require any specific level of local competition as a pre-condition to BOC entry. See DOJ Ameritech Evaluation, pp. 2931; Ameritech Section 271 Order 391. Rather, the test is whether the local market is open to competitive entry, and the fact that more than 30 competitors have enteredand are providing service inthe local markets in Ameritech's region is compelling evidence that those markets are open to competition.
(Footnote 49 return)
See Attachment E.
(Footnote 50 return)
Proof of this openness may be found on Wall Street, where the market is racing to fund the growth of new local competitors. A recent Bear Stearns report reveals that over $9.4 billion of the $11.7 billion invested in selected competitors since 1992 has poured in over the last year and a half. This rocketing investment speaks volumes about the market's perception of the ability of new entrants to compete.
(Footnote 51 return)
See 220 ILCS 5/13103(b).
(Footnote 52 return)
Senate Commerce, Science and Transportation Committee Report on S. 1822, ''Communications Act of 1994,'' 103d Cong., 2d Sess. 5 (Sept. 14, 1994).
(Footnote 53 return)
Illinois Bell Telephone Company: Proposed introduction of a trial of Ameritech's Customers First Plan in Illinois, No. 940096, and related Nos. 940117, 940146, 940301, Order, at 47 (Ill. Commerce Comm'n April 7, 1995).
(Footnote 54 return)
See Mich. Comp. Laws §484.2101 to 484.2605.
(Footnote 55 return)
See pp. 2728 below.
(Footnote 56 return)
DOJ Evaluation, Application of SBC to Provide In-Region, InterLATA Services in Oklahoma (''DOJ SBC Evaluation''), 61.
(Footnote 57 return)
In the matter of Ameritech Operating Companies, FCC 9658, 11 F.C.C.R. 14028 (Feb. 15, 1996).
(Footnote 58 return)
In the Matter of Application of Ameritech Michigan Pursuant to Section 271 of the Communications Act of 1934, as amended, To Provide In-Region, InterLATA Services in Michigan, CC Docket No. 97137, FCC 97298, Memorandum Opinion and Order (''Ameritech Section 271 Order''), p. 201 (Aug. 19, 1997) (Statement of Chairman Hundt).
(Footnote 59 return)
DOJ Evaluation, Application of Ameritech to Provide In-Region, InterLATA Services in Oklahoma (''DOJ Ameritech Evaluation''), p. iv.
(Footnote 60 return)
AT&T Investment Community Meeting Transcript at 4 (March 3, 1997).
(Footnote 61 return)
Comments of the Ohio Cable Telecommunications Association and Time Warner Communications of Ohio, L.P., Pub. Util. Comm'n of Ohio, Case No. 96922TPUNC, at 4, 6 (Aug. 25, 1997).
(Footnote 62 return)
Time Warner Memorandum in Support of Petitions for Rehearing, Iowa Utilities Board v. FCC, Nos. 963321, et al. (Oct. 1, 1997), p. 8.
(Footnote 63 return)
DOJ Ameritech Evaluation, pp. 1215; Ameritech Section 271 Order, 298318.
(Footnote 64 return)
Iowa Utilities Board v. FCC, Nos. 963321, et al., Order on Petitions For Rehearing (Oct. 14, 1997) (''Rehearing Order''), 2 (emphasis added).
(Footnote 65 return)
(Footnote 66 return)
(Footnote 67 return)
See, e.g., 141 Cong. Rec.'s 832122 (daily ed. June 14, 1995); 141 Cong. Rec. H8454 (daily ed. Aug. 4, 1995).
(Footnote 68 return)
DOJ SBC Evaluation, p. 44 & n.53.
(Footnote 69 return)
DOJ SBC Evaluation, p. 44 & n.53.
(Footnote 70 return)
DOJ SBC Evaluation, p. 44 & n.53.
(Footnote 71 return)
In the Matter of Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, CC Docket No. 96149, FCC 97222, Second Order on Reconsideration (rel. June 24, 1997) 5 (''Congress recognized that section 271(d)(3) approval might be granted in a particular state before the local exchange market in that state became fully competitive and, Congress chose 'to respond to the concerns about anticompetitive discrimination and cost-shifting that arise when a BOC enters the interLATA services market in an in-region state in which the local exchange market is not yet fully competitive * * * through the structural requirement of a separate affiliate' ''); DOJ Ameritech Evaluation, p. 30 (there is no requirement of ''any specific level of local competition'').
(Footnote 72 return)
Ameritech Section 271 Order, 142.
(Footnote 73 return)
See DOJ Ameritech Evaluation, pp. 3940.
(Footnote 74 return)
See DOJ Ameritech Evaluation, pp. 4143.
(Footnote 75 return)
See DOJ SBC Evaluation; DOJ Ameritech Evaluation.
(Footnote 76 return)
DOJ Ameritech Evaluation, Appendix A, p. A2.