The Status of Local Competition in SBC’s Region

Written Statement of James D. Ellis

Senior Executive Vice President and General Counsel

SBC Communications Inc.

Implementation of the 1996 Act and Impact on Competition

Before the

Subcommittee on Antitrust

of the

Committee of the Judiciary

United States Senate

May 2, 2001

I. Introduction

Good Morning. My name is James D. Ellis. I am of Senior Executive Vice-President and General Counsel of SBC Communications Inc. I am pleased to be here this morning to discuss the Telecommunications Act of 1996 and the impact it has had on competition in the local exchange markets throughout SBC’s thirteen-state region. Although the fundamental goal of the 1996 Act – to open all telecommunications markets to competition and to do so in a deregulatory, market-based, competitive manner – is still to be achieved, there is simply no question that the impact of the 1996 Act on local competition has been enormous.

II. SBC Has Opened Its Local Markets

Empirical evidence demonstrates conclusively that SBC has opened its local markets to competition. Simply put, SBC has done an outstanding job fulfilling its obligations under the 1996 Act to open local markets to competition. The FCC has already granted SBC long-distance authority in Texas, Kansas, and Oklahoma. By approving SBC’s applications for these states – the most for any Bell company – the FCC found that SBC has taken the statutorily required steps to open its local exchange markets to competition. SBC has instituted the same market-opening systems and processes throughout its region.

SBC has spent more than three billion dollars in developing systems and processes to make it possible for competitive local exchange carriers (“CLECs”) to enter and compete in the market for local telecommunications services. It has devoted enormous staff and technical resources in order to satisfy each of the 14-point checklist obligations that Congress identified in section 271 as a prerequisite for granting long-distance relief. The facts demonstrate that SBC has made each of the 14 point checklist items available to CLECs and that CLECs have taken advantage of all of those checklist items.

For example, as of the end of March 2001, the SBC operating companies have signed more than 1,860 interconnection agreements with CLECs and those CLECs have captured more than 10 million lines throughout the SBC region. As of April 2, 2001, SBC has provided more than 2.9 million interconnection trunks to CLECs for the transmission and routing of telephone exchange service and exchange access. SBC has provided CLECs with 10,496 physical collocation arrangements (and over 600 virtual collocation arrangements), and there are CLECs collocated in 1,346 of its wire centers. Since the beginning of 1998, SBC has processed more than 18.9 million CLEC orders for unbundled network elements. And while SBC has provisioned more than 1.2 million stand-alone loops and more than 7,780 stand-alone switch ports, it has provided more than 1.3 million UNE-Platform loop/port combinations.

As of the end of March 2001, there were more than 3.45 million business listings in SBC’s E911 database and more than 886,000 residential listings.[1] The total number of CLEC end-user white pages listings now totals over 4.2 million entries. Over 3.6 million telephone numbers have been converted (i.e., ported) from SBC to facilities-based CLECs. And CLECs are reselling over 1.69 million SBC access lines. Since January 1997, excluding ISP traffic, SBC and CLECs have exchanged over 210 billion local minutes of use.[2]

Figures provided by AT&T to the FCC also demonstrate that CLECs are aggressively competing in the telecommunications market. According to its own estimates, AT&T paid approximately $106 million to CLECs in access charges between January and December 2000.[3] The FCC has determined that AT&T paid a weighted average of 4.33 cents per access minute,[4] meaning that CLECs originated and terminated last year over 2.4 billion long-distance minutes for AT&T alone.

Because the FCC and state regulators have made it far more profitable for CLECs to serve business customers than residential customers, CLECs in SBC’s region have concentrated their efforts by competing in the higher profit business market. Historically, of course, residential rates have been kept artificially low in order to guarantee universal service. By contrast, business rates have been kept higher in order to subsidize the lower residential rates. That CLECs have chosen to concentrate on serving business customers – where the potential profit is much greater – is entirely rational, and nearly 80% of the CLEC access lines in SBC’s region are in the business market.

III. Local Competition and the Granting of Long-Distance Authority

There is simply no question that local competition is directly related to long-distance relief – the closer that SBC has come to providing a bundled package of local and long-distance services, the more intense has been the commitment of traditional long-distance providers to enter the local market. SBC can now provide customers in Texas, Kansas, and Oklahoma with a single source for local and long-distance service, and this has put significant pressure on the competition to provide lower prices, enhanced services, and greater quality.[5]

SBC filed its Texas 271 Application with the FCC in January 2000. Approval was granted at the end of June, and SBC began offering long distance service to subscribers in Texas on July 10, 2000. As Table 1 illustrates, the growth in local competition in Texas since SBC filed its application has been phenomenal:

Table 1

Growth in Competitive Indicators for Texas 271 Application

January 2000 to March 2001

Competition Indicators	Texas
Lines Captured by Facilities Based CLECs	1,243,000 / 2,732,000 (% growth = 119%)
Total Lines Captured (Including Resale)	1,590,000 / 3,063,300 (% growth = 92%)
Interconnection Trunks	398,000 / 591,800 (% growth = 48%)
Operational Physical Collocations	1,012 / 2,373 (% growth = 134%)
Unbundled Stand-Alone Loops	49,000 / 117,650 (% growth = 140%)
Orders Processed Per Month (Both Electronic and Manual)	171,000/584,421 (% growth = 242%)
UNE Platform Loop/Port Combinations	148,000 / 983,400 (% growth = 564%)
E911 Listings	368,327 / 508,600 (% growth = 38%)

AT&T offers its Local One Rate® promotional service only to customers in Texas and New York, the only states where the incumbent Bell Operating Company is in a position to compete seriously for long-distance market share. The Local One Rate® plan bundles local and long distance into one package offering, and AT&T promoted it through direct mail and telemarketing in Austin, Dallas, Houston, San Antonio and South Texas, offering 60 minutes of free long distance to consumers as an incentive to choose AT&T Local One Rate® for local and long distance service. Most importantly, the AT&T Consumer Sales & Services Contacts for AT&T Local Service list only two geographical options for this service: New York – AT&T Local One Rate; and Texas – AT&T Local One Rate. No other states are apparently given these promotional alternatives.^[6]

In July 2000, coincident with SBC’s entry into the Texas long distance market, AT&T also reduced its long distance rates in Texas (offered through the Texas One Rate Plan) by greater than 50% - from 15¢ a minute to 7¢ a minute. In addition, a Wall Street Journal article on November 30, 2000[7] described AT&T’s plan to launch a separate promotion involving local cable telephony:

AT&T to Offer Free Cable Telephony In Campaign to Hit Subscriber Goals

AT&T Corp., scrambling to meet a year-end promise to Wall Street to sign up thousands of new cable-telephony customers, plans to offer as many as five months of free local and long-distance service to people who subscribe.

The new marketing campaign, which is expected to begin in a number of big cities on Friday, is aimed at boosting the number of AT&T consumers for “cable telephony,” industry parlance for phone service over cable-TV lines. The campaign offers free installation and as many as five months of free local and long-distance phone service.⁹

Recently, the cable company Cox Communications, Inc. announced that, in the first quarter of 2001, it had “experienced vigorous growth in residential telephone service, adding about 4,000 customers per week by the end of March, achieving 11% penetration of telephone ready homes.”[8] In SBC’s region, Cox offers telephony service in San Diego and Orange County, California; Oklahoma City, Oklahoma; in West Texas; and in various towns in Connecticut.

On March 5, 2001, two days before Southwestern Bell’s scheduled launch of long-distance service in Kansas and Oklahoma, AT&T announced a special deal exclusively for its long-distance customers in Kansas and Oklahoma. AT&T customers in these two states automatically received a special AT&T customer service greeting while placing a call and thirty free minutes of long-distance calling. The promotion in Oklahoma and Kansas by AT&T “is part of the first broader application of this innovative technology.”[9] And last week, Birch Telecom Inc. announced plans to re-enter the residential markets in both Kansas and Oklahoma, offering a bundled package of local and long-distance services.[10]

Not to be outdone, WorldCom responded to SWBT’s Texas 271 approval with the introduction of three new rate plans: MCI WorldCom 7¢ Anytime; 9¢ Anytime and WorldCom Weekends. Effective September 7, 2000 WorldCom also began offering Texas consumers different options (the One Company Advantage 200 and One Company Advantage 7 plans) for bundling local, local toll and long distance calling, as well as discounts on calling features.

The benefits of granting long-distance relief to the BOCs are clearly not limited to enhanced long-distance competition. Indeed, the granting of section 271 relief has led all competitors to increase substantially their commitment to local competition. SBC and Verizon, together with their local competitors, have begun to invest even greater sums in advanced services and in upgrading the local infrastructure in those states where section 271 authorization has been granted. Verizon has invested approximately $1.5 billion in Western New York during the past year, including 150,000 miles of fiber optic cable, more than 90 switching centers, and more than 800,000 access lines.[11] Last year in Texas, SBC invested more than $1 billion to upgrade its central offices, expand Advanced Intelligent Network capacity, and install 2,600 miles of fiber-optic cable.[12] In addition, through SBC’s $6 billion broadband initiative – Project Pronto – SBC’s DSL service was made available to an additional 900,000 Texas residences and businesses, bringing broadband service at the start of 2001 to a total of 46 cities in Texas.[13] To upgrade its networks and central offices, and lay new fiber-optic cable, SBC last year invested over $230 million and $135 million in Kansas and Oklahoma, respectively – this includes 300 miles of new fiber optics in each state.[14]

Along with discounts on local/long-distance bundles and reduced intrastate rates, the incumbent interexchange carriers are also leveraging advanced technologies. According to former FCC Chairman Kennard, “We have witnessed a dynamic market for broadband services develop as a result of the opening of local markets in Texas and New York.”[15] AT&T recently announced major improvements to its networks serving several Texas cities, including upgrading its fiber network to OC-192 (ten gigabits per second).[16] And AT&T is using Texas as one of its test grounds for cable telephone service.[17] All three of the major interexchange carriers are implementing fixed wireless networks to provide broadband access and residential telephone services. In parts of Texas, AT&T uses a fixed wireless system to offer customers a local/long-distance package.[18] In Dallas, MCI WorldCom offers a new alternative to wireline voice and Internet service with Multichannel Multipoint Distribution Service technology.[19] And Sprint has developed a wireless Internet service, using line-of-sight technology, that debuted this past summer and is already available in Houston.[20]

IV. Conclusion

Local competition has taken hold in the states within SBC’s region, and SBC is committed to ensuring that it continues to flourish. As the evidence from Texas, Kansas and Oklahoma makes clear, however, the key to greater local competition is in permitting all carriers to compete equally in all markets, giving everyone the incentives necessary to invest in telecommunications facilities and to compete for all customers.

[1] This number substantially understates the actual number of facilities-based lines served by CLECs in SBC’s region. For example, E911 listings only represent those customer lines from which outbound calls can be made. As a result, business customers such as call centers, reservationists, telemarketing centers, and Internet providers will have few of their access lines represented in the E911 database. In addition, when a number is ported from SBC to the new serving CLEC, the number would continue to appear as SBC’s line in the E911 database. Finally, CLECs themselves may make errors in entering E911 listings, and SBC does not ‘police’ those entries to ensure that they are accurate and complete. For all these reasons, the listings in the E911 database provide a very conservative estimate for the number of business and residential listings served by facilities-based CLECs. The true number of CLEC facilities-based access lines throughout SBC’s region can only be estimated, but it probably falls between 4.2 million and 9.3 million lines.

² Three years ago, an analyst recognized that competitive local exchange carriers (“CLECs”) had signed up more new customers in that quarter than the incumbent local exchange carriers had – something that took MCI and Sprint more than ten years to accomplish in the long-distance market. See J. Grubman, et al., Salomon Smith Barney, CLECs Surpass Bells in Net Business Line Additions for First Time, May 6, 1998.

3 Seventh Report and Order and Further Notice of Proposed Rulemaking, Access Charge Reform; Reform of Access Charges Imposed by Competitive Local Exchange Carriers, CC Docket No. 96-262, ¶ 22 (FCC Apr. 27, 2001).

4 Id. ¶ 48, Table 1.

5 “We need only review the state of competition in New York and Texas to know the Act is working.” William E. Kennard, Chairman, FCC, Statement Before the Committee on the Judiciary United States House of Representatives on H.R. 1686 – the “Internet Freedom Act” and H.R. 1685 – the “Internet Growth and Development Act” (July 18, 2000), at http://www.house.gov/judiciary/kenn0718.htm (“Kennard Testimony”).

6 Three webpages may be consulted for this information: AT&T, For Home:Customer Service Numbers, AT&T Residential Service, http://www.att.com/help/callus/home/; AT&T, As Advertised: AT&T Local One Rate^sm New York, http://www.att.com/local_service/ny/; and AT&T, As Advertised: AT&T Local Service in Texas, http://www.att.com/local_service/tx/. Interestingly, the AT&T Local One Rate promotion began in New York shortly before the FCC granted Bell Atlantic permission to offer long distance in New York. As of February 5, 2001, this promotional offering was not available in any other state.

7 D. Solomon, AT&T to Offer Free Cable Telephony in Campaign to Hit Subscriber Goals, Wall Street Journal at A3 (Aug. 30, 2000).

8 Press Release, Cox Communications Announces First Quarter Financial Results for 2001: Solid Growth in New Services Fuels Healthy Financial Results (Apr. 26, 2001), at http:// biz.yahoo.com/bw/010426/2084.html.

9 See AT&T Press Release, AT&T Long Distance Customers in Kansas Get the Message: Thanks for Your Loyalty, Mar. 5, 2001, at http://www.att.com/press/item/ 0,1354,3701,00.html; AT&T Press Release, AT&T Long Distance Customers in Oklahoma Get the Message: Thanks for Your Loyalty, Mar. 5, 2001 at http://www.att.com/press/item/ 0,1354,3702,00.html.

10See Birch to Enter Residential Market Again, Kansas City Star, Apr. 24, 2001; Birch Telecom Offers Long-Distance Service, Tulsa World, Apr. 24, 2001.

11 Verizon Fiber Network Wires Buffalo Market, American City Bus. J., Jan. 15, 2001, at 11 (“Competition is driving this investment with more and more companies vying for service.”).

12 See SWBT Press Release, Southwestern Bell Invests $1 Billion in Network Enhancements, High Tech Product Offerings to Ensure State-of-the-Art Communications for Texans in 2001, Feb. 8, 2001, at http://www.swbell.com/About/NewsCenter/ShowRelease/ 0,1018,20010208-01,00.html?NID=.

13 See id.

14 See SWBT Press Release, Southwestern Bell Invests Millions in Network Enhancements, High Tech Product Offerings to Ensure State-of-the-Art Communications for Kansans in 2001, Mar. 2, 2001, at http://www.swbell.com/About/NewsCenter/ShowRelease/ 0,1018,20010302-01,00.html?NID=; SWBT Press Release, Southwestern Bell Invests Millions in Network Enhancements, High Tech Product Offerings to Ensure State-of-the-Art Communications for Oklahomans in 2001, Feb. 20, 2001, at http://www.swbell.com/About/ NewsCenter/ShowRelease/0,1018,20010220-01,00.html?NID=.

15 Kennard Testimony, supra n.5.

16 See AT&T Press Release, AT&T Offers Austin Business Customers Local Service Choice, Dec. 5, 2000 (“In a move to enhance the suite of local voice and data services it offers business customers, AT&T has completed a $10 million enhancement of its high-speed local network serving the Austin area.”), at http://www.att.com/press/item/0,1354,3527,00.html; AT&T Press Release, AT&T Offers San Antonio Business Customers Local Service Choice, Dec. 5, 2000 (“AT&T has completed an $11 million enhancement of its high-speed local network serving the San Antonio area. The company is aggressively targeting the lucrative $110 billion-plus local services marketplace nationwide with promotional offers.”), at http://www.att.com/press/item/0,1354,3526,00.html; AT&T Press Release, AT&T Offers Houston Business Customers Local Service Choice, Nov. 29, 2000 (“AT&T has completed a $100 million enhancement of its high-speed local network serving the Houston area”), at http://www.att.com/press/item/0,1354,3501,00.html; AT&T Press Release, AT&T Offers Dallas/Fort Worth Business Customers Local Service Choice, Oct. 19, 2000 (“AT&T is completing a $28 million enhancement of its high-speed local network serving the Dallas and Fort Worth metroplex”), at http://www.att.com/press/item/0,1354,3408,00.html.

17 AT&T Broadband spokeswoman Sarah Duisik commented on how AT&T has spent nearly $200 million in Dallas to upgrade cable networks to offer two-way transmission. See Jim Landers, Faster, Faster: Americans Clamor for High-Speed Net; FCC to Release Data on Spread of Broadband Services, Dallas Morning News, Aug. 3, 2000, at 22A.

18Technology Briefs, Dallas Morning News, Feb. 28, 2001, at 2D (“AT&T Corp. changed the name Tuesday of its fixed wireless service in North Texas to AT&T Wireless Digital Broadband. The service will cost $29.35 a month for unlimited local and long-distance calls within Texas.”).

19 See MCI WorldCom Press Release, MCI WorldCom Adds Dallas to “Fixed Wireless” Service Trials, Apr. 5, 2000 (“MCI WorldCom today announced Dallas as the fifth market for test cutting-edge wireless technology which soon will offer customers a new, competitive alternative for high-speed, broadband service. The Dallas trial is the latest step in MCI WorldCom’s overall strategic efforts to offer high-speed, broadband services using radio spectrum designated for an advanced technology known as Multichannel Multipoint Distribution Service (MMDS).”) at http://www.worldcom.com/about_the_company/press_releases/ display.phtml?cr/20000405.

20 See Tom Fowler, Sprint Has Wireless Net Access, Houston Chronicle, Oct. 3, 2000; Sprint Press Release, Sprint Introduces New Broadband Wireless Service to Fresno’s Residential and Small Business Customers, Jan. 23, 2001, at http://144.226.116.29/PR/CDA/PR_CDA_ Press_Releases_Detail/1,1579,2198,00.html.

[2] Three years ago, an analyst recognized that competitive local exchange carriers (“CLECs”) had signed up more new customers in that quarter than the incumbent local exchange carriers had – something that took MCI and Sprint more than ten years to accomplish in the long-distance market. See J. Grubman, et al., Salomon Smith Barney, CLECs Surpass Bells in Net Business Line Additions for First Time, May 6, 1998.

[3] Seventh Report and Order and Further Notice of Proposed Rulemaking, Access Charge Reform; Reform of Access Charges Imposed by Competitive Local Exchange Carriers, CC Docket No. 96-262, ¶ 22 (FCC Apr. 27, 2001).

[4] Id. ¶ 48, Table 1.

[5] “We need only review the state of competition in New York and Texas to know the Act is working.” William E. Kennard, Chairman, FCC, Statement Before the Committee on the Judiciary United States House of Representatives on H.R. 1686 – the “Internet Freedom Act” and H.R. 1685 – the “Internet Growth and Development Act” (July 18, 2000), at http://www.house.gov/judiciary/kenn0718.htm (“Kennard Testimony”).

[6] Three webpages may be consulted for this information: AT&T, For Home:Customer Service Numbers, AT&T Residential Service, http://www.att.com/help/callus/home/; AT&T, As Advertised: AT&T Local One Rate^sm New York, http://www.att.com/local_service/ny/; and AT&T, As Advertised: AT&T Local Service in Texas, http://www.att.com/local_service/tx/. Interestingly, the AT&T Local One Rate promotion began in New York shortly before the FCC granted Bell Atlantic permission to offer long distance in New York. As of February 5, 2001, this promotional offering was not available in any other state.

[7] D. Solomon, AT&T to Offer Free Cable Telephony in Campaign to Hit Subscriber Goals, Wall Street Journal at A3 (Aug. 30, 2000).

[8] Press Release, Cox Communications Announces First Quarter Financial Results for 2001: Solid Growth in New Services Fuels Healthy Financial Results (Apr. 26, 2001), at http:// biz.yahoo.com/bw/010426/2084.html.

[9] See AT&T Press Release, AT&T Long Distance Customers in Kansas Get the Message: Thanks for Your Loyalty, Mar. 5, 2001, at http://www.att.com/press/item/ 0,1354,3701,00.html; AT&T Press Release, AT&T Long Distance Customers in Oklahoma Get the Message: Thanks for Your Loyalty, Mar. 5, 2001 at http://www.att.com/press/item/ 0,1354,3702,00.html.

[10] See Birch to Enter Residential Market Again, Kansas City Star, Apr. 24, 2001; Birch Telecom Offers Long-Distance Service, Tulsa World, Apr. 24, 2001.

[11] Verizon Fiber Network Wires Buffalo Market, American City Bus. J., Jan. 15, 2001, at 11 (“Competition is driving this investment with more and more companies vying for service.”).

[12] See SWBT Press Release, Southwestern Bell Invests $1 Billion in Network Enhancements, High Tech Product Offerings to Ensure State-of-the-Art Communications for Texans in 2001, Feb. 8, 2001, at http://www.swbell.com/About/NewsCenter/ShowRelease/ 0,1018,20010208-01,00.html?NID=.

[13] See id.

[14] See SWBT Press Release, Southwestern Bell Invests Millions in Network Enhancements, High Tech Product Offerings to Ensure State-of-the-Art Communications for Kansans in 2001, Mar. 2, 2001, at http://www.swbell.com/About/NewsCenter/ShowRelease/ 0,1018,20010302-01,00.html?NID=; SWBT Press Release, Southwestern Bell Invests Millions in Network Enhancements, High Tech Product Offerings to Ensure State-of-the-Art Communications for Oklahomans in 2001, Feb. 20, 2001, at http://www.swbell.com/About/ NewsCenter/ShowRelease/0,1018,20010220-01,00.html?NID=.

[15] Kennard Testimony, supra n.5.

[16] See AT&T Press Release, AT&T Offers Austin Business Customers Local Service Choice, Dec. 5, 2000 (“In a move to enhance the suite of local voice and data services it offers business customers, AT&T has completed a $10 million enhancement of its high-speed local network serving the Austin area.”), at http://www.att.com/press/item/0,1354,3527,00.html; AT&T Press Release, AT&T Offers San Antonio Business Customers Local Service Choice, Dec. 5, 2000 (“AT&T has completed an $11 million enhancement of its high-speed local network serving the San Antonio area. The company is aggressively targeting the lucrative $110 billion-plus local services marketplace nationwide with promotional offers.”), at http://www.att.com/press/item/0,1354,3526,00.html; AT&T Press Release, AT&T Offers Houston Business Customers Local Service Choice, Nov. 29, 2000 (“AT&T has completed a $100 million enhancement of its high-speed local network serving the Houston area”), at http://www.att.com/press/item/0,1354,3501,00.html; AT&T Press Release, AT&T Offers Dallas/Fort Worth Business Customers Local Service Choice, Oct. 19, 2000 (“AT&T is completing a $28 million enhancement of its high-speed local network serving the Dallas and Fort Worth metroplex”), at http://www.att.com/press/item/0,1354,3408,00.html.

[17] AT&T Broadband spokeswoman Sarah Duisik commented on how AT&T has spent nearly $200 million in Dallas to upgrade cable networks to offer two-way transmission. See Jim Landers, Faster, Faster: Americans Clamor for High-Speed Net; FCC to Release Data on Spread of Broadband Services, Dallas Morning News, Aug. 3, 2000, at 22A.

[18] Technology Briefs, Dallas Morning News, Feb. 28, 2001, at 2D (“AT&T Corp. changed the name Tuesday of its fixed wireless service in North Texas to AT&T Wireless Digital Broadband. The service will cost $29.35 a month for unlimited local and long-distance calls within Texas.”).

[19] See MCI WorldCom Press Release, MCI WorldCom Adds Dallas to “Fixed Wireless” Service Trials, Apr. 5, 2000 (“MCI WorldCom today announced Dallas as the fifth market for test cutting-edge wireless technology which soon will offer customers a new, competitive alternative for high-speed, broadband service. The Dallas trial is the latest step in MCI WorldCom’s overall strategic efforts to offer high-speed, broadband services using radio spectrum designated for an advanced technology known as Multichannel Multipoint Distribution Service (MMDS).”) at http://www.worldcom.com/about_the_company/press_releases/ display.phtml?cr/20000405.

[20] See Tom Fowler, Sprint Has Wireless Net Access, Houston Chronicle, Oct. 3, 2000; Sprint Press Release, Sprint Introduces New Broadband Wireless Service to Fresno’s Residential and Small Business Customers, Jan. 23, 2001, at http://144.226.116.29/PR/CDA/PR_CDA_ Press_Releases_Detail/1,1579,2198,00.html.