Before the

DEPARTMENT OF COMMERCE

NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION

Washington, D.C.20230

In the Matter of)

)

Request for Comments )Docket No. 011109273-1273-01

Deployment of Broadband Networks)

and Advanced Telecommunications)

COMMENTS OF AT&T CORP.

AT&T Corp. (“AT&T”), by its attorneys, respectfully submits these comments in response to NTIA’s request for comment on broadband deployment in the United States. [1] NTIA has posed a number of questions regarding broadband deployment.AT&T’s answers to these questions follow.

DISCUSSION

A. Primary Broadband Policy Considerations

AT&T strongly supports the adoption of federal telecommunications policies that will foster deployment of broadband facilities and enhance consumer acceptance and promote competition in the provision of broadband services.Broadband has the potential to promote economic recovery by spurring growth in the telecommunications and related industries, such as the manufacture of switching and routing equipment, and by increasing the efficiency and productivity of all sectors of the economy.Broadband services are not just faster versions of today’s telecommunications offerings.As the Administration itself is well aware, “the opportunities and innovation offered by high-speed networks are crucial to promoting America’s productivity and our people’s welfare.” [2]/

No one appears to dispute the importance of promoting broadband deployment, but there

are a wide variety of opinions on the role the federal government should play in spurring

that deployment.  AT&T believes that the best way for the federal government to

promote broadband deployment is to increase demand for broadband services while promoting

competition among companies to provide those services.  Such an approach will allow

a strong and healthy market for broadband services to develop, which in turn will decrease

the need for government regulation in the future.  There are four integral components

to this approach.

First, the federal government should take targeted steps to complete nationwide broadband deployment. [3]/While broadband services have been widely deployed, there is some evidence that deployment may be lagging in some areas, possibly as a result of technological and economic factors.In areas where a careful analysis in fact evidences that market forces may not be adequate to promote broadband deployment, AT&T would support targeted government action to address this limited problem, such as tax incentives to bring broadband to unserved communities.NTIA can and should take other targeted actions to encourage deployment and ensure that it continues to be robust, for example working with federal land agencies, states, and localities to enhance access to federal lands and other rights-of-way by broadband providers.

Second, the federal government should adopt policies that spur demand for broadband services.[4]/With broadband available to 80 percent of Americans, government efforts should focus on helping to build demand for broadband services.One way to do this is by providing tax credits to employers based on the number of employees who work from home.These teleworkers are seen as a prime source of potential demand because of their need to have broadband access from home.In addition, the government should lead by example by using broadband applications to conduct business and by moving government business online where possible.Broadband applications can be an integral part of achieving the goals outlined by the Administration in education, healthcare, and economic growth in rural areas.Providing more and better online applications in all these areas would not only increase government agencies’ demand for broadband facilities, but also would encourage more citizens to seek broadband connections in order to improve their ability to interact with the government online.

Third, the government should endorse competitive pricing and provisioning of essential network elements to increase investment in local broadband services.[5]/The current abundant supply of broadband services and facilities is a direct result of the entry of new competitors in response to the market-opening provisions of the Telecommunications Act of 1996 (the “1996 Act”).Under the spur of competition, the Bell companies also invested in broadband facilities and services.Competition encourages both new entrants and incumbents to lower their prices, provide innovative services, and broadly deploy broadband facilities in order to win new customers and retain old ones.In response to the passage of the Act, AT&T and dozens of other companies invested billions of dollars in new telecommunications facilities and services.In addition to spending over $95 billion to acquire and upgrade cable facilities to provide telephone competition, AT&T purchased Teleport for $11 billion to serve business customers and paid $135 million to acquire the DSL assets of the now-defunct NorthPoint Communications.Clearly, vibrant facilities-based competition is a goal that AT&T supports wholeheartedly, but resale and access to ILEC network elements are necessary to achieve that goal because they allow new entrants to enter the marketplace and gain customers while they are building their networks.Long distance competition developed because MCI and Sprint were able to resell AT&T’s service, and the ILECs themselves are entering the long distance business today as resellers of long distance carrier services.

The Organization for Economic Cooperation and Development (“OECD”) recently reported that, “[i]nitiatives to open the local loop are viewed by most OECD governments as being fundamental to promoting a fast rollout of broadband services….[T]here are huge investments being made by new entrants in local access markets, where unbundled elements are available, to provide broadband services.”[6]/The OECD report also concludes that unbundling does not deter incumbents from investing in upgrading networks or new entrants from investing in their own infrastructure.[7]/Experience in the United States following passage of the 1996 Act substantiates this finding.

But while the 1996 Act promised to end almost a century of monopoly control over the local telecommunications market and bring the benefits of competition to consumers, the incumbent local exchange carriers’ (“ILECs’”) strategy of resistance, delay, and litigation has enabled them to maintain their dominance of the local telephone market and expand that dominance into broadband, while their competitors scale back service plans or even go out of business entirely.

To promote broadband deployment, therefore, the federal government must demonstrate a renewed commitment to the principles of the Act and support for the interconnection, unbundling, and resale requirements designed to end monopoly control over the local telephone market.Part and parcel of this commitment is a pricing standard for network elements that fairly compensates incumbents but does not saddle competitors with inefficient and excessive costs that are a legacy of one hundred years of monopoly control.A fair pricing standard already exists, and it has been advocated by incumbent LECs, adopted by state and federal regulators, and upheld by the courts:it is the Federal Communications Commission’s total element long run incremental cost (“TELRIC”) methodology.There is no need for the NTIA to reopen consideration of TELRIC, however.Litigation over TELRIC twice has risen all the way to the United States Supreme Court, and the Court is on the verge of issuing a decision addressing the lawfulness of TELRIC for what is hoped will be the last time.Any action on the part of the Administration to enter the debate currently before the Justices will only create further disarray and uncertainty in a telecommunications industry that is already reeling, discouraging investment and making overall economic recovery and growth that much more difficult.

Finally, it should be NTIA policy to decrease regulation and rely on market forces where markets are competitive.Currently, however, given the lack of competition in the local exchange market, there remains a continuing need for effective government oversight and enforcement.That lack of competition is relevant to the present inquiry.As Nancy Victory, the Administrator of NTIA, has explained, “broadband does not exist in a vacuum. . . .[T]he competitive framework that we have established for traditional voice services both impacts, and is impacted by, broadband services and the challenges broadband presents.”[8]/

There are not two separate sets of network elements -- one for “broadband services” and one for traditional voice services -- and an “old wires/new wires” distinction is neither a sound nor meaningful foundation for broadband policy.To the contrary, the incumbents are upgrading their networks to provide both voice and advanced services with increased efficiency.These investments are incremental, added to the existing network architecture.A policy that seeks to impose different rules on different network elements would frustrate competition in voice and data.

Broadband policy must also recognize that differences in market power justify different regulatory treatment.[9]/While initially compelling in its simplicity, the concept of “regulatory parity” ignores important market distinctions between ILECs, on one hand, and CLECs and cable companies on the other.These distinctions are embodied in the structure of the 1996 Act, which limits unbundling and interconnection requirements to ILECs, distinguishing in law between incumbents and competitors. [10] /There are good reasons why cable companies and ILECs are regulated differently, starting with the fact that cable companies face substantial competition in their core video business.In any event, it is a myth that cable companies operate on an unregulated basis.To the contrary, cable companies are subject to significant regulatory obligations, such as local franchising requirements and the payment of local franchise fees, that do not apply to ILECs.

Incorporating these overarching principles in any federal broadband policy will ensure that Americans receive the benefits that robust competition can bring to broadband deployment -- lower prices, more choices, technical innovation, and increased productivity.The telecommunications and technology industries have driven the American economy in the past and can do so again in the future, under a federal broadband regime that promotes competitive deployment and consumer adoption of this promising technology.

B. Definitions

NTIA asks how broadband services should be defined.[11]/An appropriate definition of broadband is critical to the inquiry that NTIA has undertaken because it establishes the scope and goals of that inquiry and the policies that flow from it.The federal government must avoid an overinclusive definition that would promote the use of conventional technology offering no real improvement to consumers, as well as an underinclusive definition that excludes technologies representing a clear advance over conventional telecommunications.In particular, an underinclusive definition could lead NTIA to underestimate the extent of broadband deployment and incorrectly conclude that some sort of drastic federal intervention is necessary.In order to avoid such a result, NTIA’s definition of broadband services should include any services that, as a result of the enhanced download transmission speeds they offer, clearly represent an advance over conventional telecommunications facilities.

The FCC has properly defined “high-speed” services to include all services with over 200 kilobits per second (“kbps”) capability in at least one direction,[12]/ including cable modem services, satellite Internet access services that use telephone return paths, and certain DSL services that do not deliver upstream capacity of 200 kbps, but provide the public with the faster download speeds that are generally thought of as “broadband.”By contrast, the FCC has defined “advanced telecommunications capability” as “supporting, in both the provider-to-consumer (downstream) and the consumer-to-provider (upstream) directions, a speed (in technical terms, ‘bandwidth’) in excess of 200 kilobits per second (kbps) in the last mile.”[13]/

An asymmetrical definition of broadband services that includes two-way services that offer at least 200 kbps downstream transmission, but does not require upstream speeds greater than those provided by existing dial up services, would be consistent with the predominant uses of the Internet today and for the foreseeable future.Consumers, particularly residential consumers, spend most of their time on the Internet downloading information, while their upstream transmissions consist mainly of mouseclicks or keystrokes.For example, a recent survey revealed that nearly 48 million Americans primarily use the Internet for sending and receiving email, while thirty-three percent said they use the Internet largely for research.[14]/Other popular activities include participating in chat rooms, engaging in financial transactions and downloading MP3 music files.[15]/These applications do not require fast upstream transmission, but they benefit from improved downstream capacity.Likewise, most residential consumers do not operate servers or other equipment that require substantial upstream capacity; even Web pages created by a subscriber can be uploaded from a conventional PC.[16]/

A definition of “broadband” that requires upstream as well as downstream capability of more than 200 kbps would exclude numerous services that provide consumers with the fast downstream speeds they crave.For example, a two-way satellite Internet service offered by Hughes and Intellicom will allow download speeds ranging from 400 kbps to 30 megabytes per second (“mbps”) and upload speeds of 128 to 500 kbps.[17]/Services that combine high-speed satellite downloads with a telephone return path also meet consumer needs for broadband services, and likewise should not be excluded.Hughes’ DirecPC service, for example, offers Internet access at a speed of 400 kbps downstream (via satellite), but provides slower upstream speeds (via telephone lines).[18]/Similarly, the most common cable modems,[19]/ and ADSL services,[20]/ provide faster downstream than upstream data rates.

A definition of broadband services that focuses on downstream speed would capture the range of services that represent an advance over conventional telecommunications facilities today.Of course, what is considered “broadband” will evolve over time -- after all, direct dialed long distance calls using rotary telephones were once considered to be advanced.As two-way broadband facilities are more widely deployed and consumers embrace applications that require greater upstream speed, NTIA may determine that its definition should be revised.Marketplace developments should guide this process of review and revision, so that conventional technology is not mistaken for a broadband offering and “broadband” services are not defined so broadly as to exceed reasonably foreseeable consumer demand.

NTIA also asks how the “broadband product market” should be defined.[21]/AT&T agrees that before NTIA can understand the true market position of the various providers of broadband services, it is first necessary to correctly define the product market that includes broadband services.Like the definition of broadband itself, the definition of the product market should be guided by marketplace reality and consumer expectations, and therefore should include Internet access services available to consumers over both broadband and narrowband facilities.Once the product market is properly defined, it is clear that cable operators and CLECs are new entrants in an Internet market dominated by the ILECs and AOL.

Regardless of whether they utilize broadband or narrowband facilities, these firms compete with each other to provide the combination of price, service, speed, and convenience best suited for each consumer.Broadband and narrowband services are priced competitively, each costing about fifty dollars per month when a second phone line for dial-up access is factored in.[22]/Currently, the main advantage that broadband facilities have over narrowband facilities is the faster speeds they provide.However, the array of applications tailored to the broadband environment is currently limited, and consumers who use Internet services primarily for email and “chat” functions may have no need for faster download speeds.Indeed, many market observers believe that the current slow take-rate for broadband Internet access is attributable at least in part to the fact that consumers do not find “high-speed” in and of itself to be a compelling reason to leave narrowband.[23]/In the current economic downturn, many consumers have cancelled high-speed connections and returned to dialup Internet access services, further confirming that the two services are within the same product market.[24]/

Once the “broadband” product market is defined correctly, the true market position of existing providers of Internet access services become clear.While the ILECs have repeatedly tried to portray themselves as “new entrants” in a “broadband” market dominated by cable operators, it is in fact cable operators that are new entrants in an Internet market dominated by the AOL and others.[25]/There are approximately 5.8 million cable Internet subscribers nationwide today, while AOL has 31 million subscribers and added over seven million new subscribers over the last year.[26]/While cable Internet services have grown steadily, the vast bulk of consumers continue to use narrowband telephone lines for online services.Moreover, prior to 1996, the ILECs were the primary source of broadband services, offering T-1 products to business customers.Digital subscriber line (“DSL”) service was developed in the late 1980s and Bell companies conducted limited trials with the service in the early 1990s.It is therefore clear that the Bells are not “new entrants” where broadband service is concerned.Any policy initiatives to promote competition in the Internet access market should take these marketplace realities into consideration.

C. Deployment of Broadband Services

NTIA seeks information on the current status of both the supply of and the demand for broadband services in the United States.[27]/While it has been suggested that both supply and demand pose obstacles to broadband deployment, the recent consensus appears to be that there is no problem with supply.[28]/There are actions NTIA can and should take, however, to encourage deployment and ensure that it continues to be robust -- for example working with federal land agencies, states, and localities to enhance access to federal lands and other rights-of-way by broadband providers.NTIA also can work with other arms of the Executive Branch to spur demand by supporting e-government, e-education, and telework initiatives and addressing far-reaching broadband content issues such as privacy and intellectual property.

All available evidence demonstrates that the deployment of broadband networks has been remarkable.[29]/Broadband facilities have been deployed at staggering rates in recent years, and these positive investment trends are continuing, despite the recent economic downturn.As the Administration has observed, “[b]roadband is on a faster penetration path than cable television, VCRs, CD players, and cell phones.”[30]/Over eighty percent of Americans have access to cable modem or DSL service.[31]/And virtually every home can access broadband satellite services.[32]/While the growth of fixed wireless has lagged compared to that of other broadband technologies, industry analysts believe that it has the potential to “bridge the broadband gap” and compete with other more established broadband competitors.[33]/Future developments will improve these existing technologies and also provide new means of delivering broadband services to all Americans in ways that cannot even be envisioned today.

AT&T, using multiple technologies, is among those at the forefront of deploying broadband facilities.AT&T is currently upgrading its cable plant in order to provide its subscribers with a seamless offering that includes high-speed connectivity, Internet access, and content.AT&T estimates that approximately 14 million homes passed by its cable system have been upgraded and are capable of receiving high-speed services like cable modem service.As of the end of third quarter 2001, there were approximately 1.39 million subscribers to AT&T’s high-speed cable service, nearly twice as many as at the same point in 2000.AT&T added approximately 111,000 new subscribers during third quarter 2001.AT&T Broadband plans to spend $3.6 billion on capital expenditures in 2001, with the majority focused on providing advanced services and plant upgrades.Since 1996, AT&T estimates that investments to upgrade its cable networks have exceeded $4 billion.In the third quarter of 2001 alone, AT&T spent $689 million on improvements to its cable network.

AT&T also continues to invest in DSL technology to expand its broadband facilities beyond its cable footprint.Earlier this year, AT&T paid $135 million in cash to acquire the DSL assets of the now-defunct NorthPoint Communications.These assets will be integrated with AT&T’s existing network and will allow AT&T to reach more of its customers with a broad mix of services, including broadband, local, and long distance.AT&T currently is offering an integrated voice/DSL offer in New York, and plans to extend the offer to a number of additional states next year.

Currently, however, the supply of broadband services vastly exceeds demand.According to recent reports, only ten percent of people actually subscribe when broadband becomes available.[34]/While the take rate for broadband services is rising slowly,[35]/ many industry leaders and policy makers are beginning to recognize the need to rapidly spur demand for broadband services through the development of compelling broadband applications or “killer apps.”[36]/Potential candidates include Napster’s new subscription-based model, telecommuting, and movies on demand.[37]/

While developing applications to stimulate demand is a task for which the government is particularly unsuited, there are, however, issues the Administration can address that will make it easier for industry to develop these killer apps, including privacy, security, intellectual property protection, and pricing.With regard to pricing, recent surveys show that price is a significant issue for many consumers.According to the ITAA, “32 percent of respondents with dialup Internet connections called the upgrade to faster service too expensive.”[38]/A Strategis Group survey, as reported by ITAA, found that just over one-third of online consumers would be willing to pay $25 per month for the service, but only twelve percent would be willing to pay $40 or more per month.[39]/This data demonstrates that to maximize demand for broadband services, the prices must come down and their perceived value to consumers must improve.The best way for the current administration to ensure that prices are reasonable is to promote competition in the broadband market through enforcement of the 1996 Act.

In addition to supporting industry efforts to develop broadband applications, there are other actions the federal government can take to spur broadband deployment directly.First, the government should ensure that its own procurement practices are “broadband friendly.”[40]/The government also should lead by example, using broadband applications to conduct its business and moving that business online where possible.Especially since the attacks of September 11, Internet users have come to rely upon Government websites for official information and online services.[41]/Providing more and better services online would not only increase government agencies’ demand for broadband facilities, but also would encourage more citizens to seek broadband connections in order to improve their ability to interact with the government online.This is particularly true for small businesses, who are the focus of many Commerce Department initiatives.While T-1 lines were not economically feasible for most small businesses, newer broadband services like cable modem service and DSL are clearly within their reach.Such “E-government” initiatives will provide additional benefits beyond broadband deployment, including accelerating and streamlining delivery of services to citizens, reducing paperwork burdens for businesses, and improving the management and responsiveness of joint federal-state-local programs.[42]/

The government also should promote telework initiatives that will spur demand for broadband services and facilities.For example, in order to encourage more widespread participation in telework arrangements, the government should provide employers with an annual telework tax credit based on the number of employees who telework, and employers and employees with an annual telework equipment tax credit.Similar tax incentives are included in H.R. 2597, the Broadband Deployment and Telework Incentive Act of 2001, introduced by Representatives McInnis (R-CO) and Tanner (D-TN) on July 23, 2001.NTIA should support the Broadband Deployment and Telework Incentive Act of 2001, and similar proposals that provide demand, as well as supply, incentives.

E-education initiatives provide flexible learning environments for non-traditional students and homework help to traditional ones.E-education also has the potential to rapidly increase demand for broadband services and facilities, while advancing the President’s education reform priorities.For example, the AT&T Learning Network Broadband Academy is a centralized resource of online, educational content that leverages the power of high-speed Internet access and allows teachers to take full advantage of the rich potential of broadband capabilities.[43]/Market analysts estimate that spending on e-education initiatives by companies and universities could reach $23 billion by 2004.[44]/Moreover, e-education, or “distance learning,” would help produce a national pool of graduates prepared to participate in the digital economy, provide teacher training necessary for the attainment of national standards, and provide access to enhanced educational opportunities to students nationwide, including those in rural areas.

D. Access to Broadband for All Americans

NTIA asks whether the government should adopt as a goal “access for all” to broadband services.[45]/AT&T believes that all Americans, wherever they reside and whatever their situation, should have a reasonable opportunity to access broadband services.The most effective way to achieve this goal is to remove obstacles to the deployment of broadband facilities and promote competition in the provision of broadband services by opening monopoly markets.Competition will encourage both new entrants and incumbents to broadly deploy broadband facilities in order to win new customers and retain old ones.

Although it would be premature to identify underserved areas at this time, given the immaturity of the broadband market, there are actions the federal government can take to encourage broadband deployment in areas where market forces alone might be insufficient to ensure that all Americans receive timely access to broadband services.Such actions include providing shorter depreciation lives for broadband specific equipment, targeted tax incentives, and low interest loans.For example, on November 29, 2001, President Bush signed the Agriculture Appropriations Act for 2002 into law, which includes low-interest loans designed to spur rural broadband deployment, including $80 million in direct loans for establishing more high-speed broadband Internet access in rural areas and $22.5 million set aside in a distance learning and telemedicine program specifically for low-cost loans aimed at bringing broadband and dial-up Internet access to underserved rural regions.[46]/In addition, NTIA manages several grant programs that could be targeted to address the specific needs of underserved areas.Of course, any such actions must be technology-and provider-neutral, and targeted at the companies that need them, not ILECs with a century of government-protected, subsidized, rate of return-guaranteed monopoly power.

E. Interconnection, Unbundling, and Resale Requirements of the 1996 Act

NTIA seeks comment on whether the interconnection, unbundling, and resale requirements of the 1996 Act reduce the ILECs’ incentives to invest in broadband facilities and services.[47]/There is no evidence that these pro-competitive statutory requirements discourage ILEC investment in broadband facilities and services.[48]/To the contrary, in the past five years the ILECs have made extraordinary investments in broadband facilities and services in response to competition, and today they provide more than 90 percent of residential DSL services.Verizon can currently provide high-speed service to more than half of its access lines,[49]/ SBC can bring broadband capabilities to 58 percent of its wireline customer locations,[50]/ and BellSouth plans to have over fifteen million lines capable of delivering advanced services to 70 percent of its customers by year-end.[51]/In fact, the evidence demonstrates that, after sitting on DSL technology for ten years because it would cannibalize their second line and T1 profits,[52]/ ILECs finally deployed it only in response to competitive offerings of CLECs and cable companies,[53]/ many of which would not have been possible without the market-opening provisions of the 1996 Act.

In contrast to the unsubstantiated claims of the ILECs that the interconnection, unbundling, and resale obligations discourage broadband investment, the facts demonstrate that CLECs have made “huge investments” where unbundled elements are available.[54]/AT&T alone has risked over a hundred billion dollars in local telecommunications and cable networks in reliance upon the promise of the 1996 Act.The biggest impediment to the efficient, economic deployment of broadband services is the ILECs’ monopoly control over essential facilities, and the best way to spur broadband deployment therefore is to provide access to those facilities to competitors.[55]/Only competition will provide lower prices, greater innovation, and broader deployment of advanced services.

To spur broadband deployment, therefore, the federal government should demonstrate its support for the existing interconnection, unbundling, and resale requirements.Part of this support should be ensuring that the FCC has the ability to enforce those requirements and impose the highest possible penalties for violations, efforts that would be greatly strengthened if the Bell companies were required to separate their wholesale and retail operations into different units.Genuine structural separation of a Bell company’s wholesale and retail businesses would make discrimination harder to achieve and easier to detect, thereby reducing the need for costly monitoring and oversight by regulators.A structural separation requirement would also improve the Bell companies’ incentives to act as neutral wholesalers of services and facilities, and would put all local service providers on an equal footing with respect to access to network elements, so that the success or failure of their business plans would be determined in the marketplace rather than through affiliation with the incumbent.[56]/

While NTIA expresses its concern about the “added network costs” ILECs incur if they lease network elements to competitors,[57]/ the ILECs’ own statements about the cost savings and improved profitability of broadband networks should address such concerns.SBC has boasted to investors that “[t]he network efficiency improvements alone pay for this [Project Pronto] initiative, leaving SBC with a data network that will be second to none.”[58]/Beyond those savings, of course, SBC and the other ILECs will earn substantial revenues from the new services made possible by the deployment of advanced facilities.And when ILECs make advanced facilities available to competitors as unbundled network elements, they earn yet another revenue stream from competitors who must pay the costs of these elements plus a reasonable profit.Finally, CLECs are accessing less than three percent of ILEC lines as unbundled elements,[59]/ and this number will only decrease if additional CLECs declare bankruptcy or shut down operations.The “added network costs” of unbundling are therefore vastly overstated.

The FCC’s TELRIC methodology most effectively furthers the pro-competitive goals of the 1996 Act while ensuring efficient compensation to incumbent LECs.[60]/Consistent with the directive of that Act for a pricing standard for unbundled network elements that permits ILECs to recover their “costs” plus a “reasonable profit,”[61]/ TELRIC reflects competitive market pricing by allowing ILECs to recover their full economic costs of providing network elements, including an appropriate risk-adjusted cost of capital, on a forward looking basis.[62]/In adopting TELRIC, the FCC correctly determined that an element’s forward-looking cost should reflect the cost of any efficient alternatives currently available on the market, not just alternatives that are physically identical to the facilities currently in place.As the FCC explained, such a methodology emulates rational economic behavior in a competitive market where firms consider forward-looking costs, not historical costs, in making decisions about entry, expansion and price.[63]/The vast majority of state public utility commissions voluntarily adopted the basic elements of the FCC’s TELRIC methodology as part of their implementation of the 1996 Act.[64]/

Economists across the political spectrum have endorsed TELRIC as the mostappropriate basis for determining whether rates charged to new entrants by the incumbent carriers in local markets are fair, reasonable, and efficient.[65]/As these economists, all former chief economists of the Antitrust Division of the U.S. Department of Justice, have explained, prices based on forward looking costs give the right signals to both producers and consumers to ensure the efficient use of resources.Such rates will promote cost based competitive prices for telecommunications end user services as well as competitive vitality, innovation and efficient investments in the network.And regardless of whether forward looking costs exceed historical costs (as they do for some unbundled elements) or fall short of historical costs (as they do for other elements), TELRIC-based pricing preserves the incumbent’s proper incentives to invest and innovate.

Permitting ILECs to price above TELRIC, by contrast, will deter competition and damage consumer welfare by forcing competitors to pay more than a competitive price for necessary inputs and, as a result, requiring consumers to pay elevated prices.Indeed setting unbundled element prices above TELRIC simply replicates monopoly pricing structures that choke off consumer demand, and thereby restrict investment and supply.

Despite their newfound concerns about long run incremental wholesale pricing, the ILECs themselves have consistently pressed for such a standard to govern their end user rates.The Bell companies in particular were successful in persuading regulators and courts that retail rates were reasonable as long as they exceeded “long run incremental cost” calculated under a Bell methodology, even if such rates were not sufficient to cover historic costs and the costs of outdated facilities.[66]/In situations where competitors were authorized to provide local toll and other services that depended on access to the ILECs’ monopoly facilities, ILECs urged, and regulators adopted, similar forms of this long run incremental cost method to set the pricing “floor” for the LECs’ retail services.[67]/Against this history, the ILECs cannot now be heard to argue that incremental cost prices are not compensatory.

The ILECs’ current complaints about TELRIC, in addition to being inconsistent with their earlier endorsement of long run incremental cost pricing, are completely without merit.As Professor William Baumol explains in his separate submission in response to the Notice, incremental cost is the appropriate basis for establishing rates for unbundled elements because such a standard most closely replicates the prices that would prevail in competitive markets.Properly calculated under TELRIC, these costs cover the investments required to serve the needs of buyers and the risk that anticipated demands will not materialize.

Moreover, as Professor Baumol explains, it is entirely appropriate to base TELRIC calculations on efficient costs rather than actual costs.Such a calculation simply reflects the reality that market forces dependably and invariably revalue any investment costs to the costs of available efficient counterparts of those investments, e.g., the value of a machine purchased for $1 million will fall to the price of a newer machine with the same capability.Those actual costs are the efficient costs, and any attempt to redefine “actual costs” to cover the inefficiency of some component has no relation to competitive reality. Basing network element prices on historic costs, by contrast, would perpetuate past investment inefficiencies and pass those inefficiencies on to competitors.In competitive markets, efficient decisions about market entry, exit, expansion, and contraction are made by comparing the anticipated revenue with the anticipated efficient incremental costs of the contemplated change in output.Historical expenditures, and amounts reflected on accounting books, are irrelevant to this calculus and are not appropriate to include in calculations of network element prices.

Given TELRIC’s widespread support and the utter absence of any theoretical or empirical evidence that it has deterred ILEC investment, another debate about the FCC’s decision to use it to establish UNE pricing would be unnecessary and counterproductive.Disagreements over the appropriateness of TELRIC as a competitive, efficient pricing standard have been the subject of a full airing at the FCC and at state commissions that has lasted more than five years – and these regulatory bodies have overwhelming approved its choice.Disputes over TELRIC have also been the subject of two hearings before the U.S. Supreme Court, and the Court is now on the verge of issuing a decision addressing the lawfulness of TELRIC for what is hoped will be the last time.Providing a new forum for ILEC complaints about TELRIC will only create uncertainty in the telecommunications sector, discouraging investment and making overall economic recovery and growth that much more difficult.

F. The Myth of “New” Networks

NTIA notes that some parties have suggested a “regulatory dividing line” between legacy “non-broadband” facilities and services and new broadband facilities and services, and questions whether this approach is feasible.[68]/The premise underlying such proposals is fundamentally flawed:there are not two separate sets of network elements.To the contrary, the incumbents are upgrading their networks to provide both voice and advanced services with increased efficiency.Incumbents’ investments in fiber are incremental, added to the existing network architecture.Exempting “new” facilities from the market-opening requirements of the 1996 Act would essentially put the entire ratepayer-funded network off limits to competitors, frustrating competition in voice and data.And trying to police different rules for different elements of the same network would be a regulatory nightmare.

NTIA also asks whether CLECs can continue to use “displaced” copper plant after ILECs have replaced it with broadband facilities for their own use, and if so, whether using such displaced copper plant will give CLECs a viable opportunity to offer alternative services.[69]/ILECs are aggressively replacing copper with fiber between the central office and their new remote terminals because copper plant alone is inadequate to deliver broadband services beyond a relatively limited range from a central office.Giving CLECs access solely to old copper plant would simply saddle competitors with these technological limitations and deprive them of any meaningful opportunity to offer consumers a choice.The only alternative would be for CLECs to build all of their own fiber facilities.As described below, many competitors have invested substantially in their own networks, but it is unrealistic to think that CLECs would be able to duplicate completely the ILECs’ fiber facilities in a timeframe or at the scope and scale necessary to remain competitive with the incumbents.Such a requirement would be the equivalent of a death sentence for competition.

G. CLEC Deployment of Transport, Switching, and Loops

NTIA asks to what extent competitive firms have deployed their own transport, switching, and loop facilities, and whether those investments are limited to particular geographic areas or portions of communities.[70]/The short answer is that competitive deployment has been extensive.Soon after the enactment of the 1996 Act, for instance, AT&T realized that it could not rely solely on the ILECs for the network facilities it needed to offer service.As a result, AT&T began to acquire and construct its own local networks.In 1998, AT&T purchased Teleport Communications Group for $11 billion to serve business customers.Then, in 1999 and 2000, AT&T spent nearly $90 billion to buy the cable companies TCI and MediaOne in order to have a line into the homes of residential customers.AT&T has spent billions more each year to upgrade those networks, lay fiber, and create data centers.Today AT&T has 1 million residential cable telephony customers and local business customers in 71 major markets around the country.On the wireline front, AT&T has deployed 118 local switches in 80 cities across the country to provide local service.It also has deployed over 16,000 route miles of fiber nationwide to support its provision of local service.

Even with these multi-billion dollar investments in new facilities, however, AT&T’s facilities are not ubiquitous.Its cable systems, for instance, reach less than 20 percent of all U.S. households.Consequently, AT&T needs meaningful resale and unbundled access to the ILECs’ network elements in order to provide competitive services nationwide.Allowing competitors to resell ILEC services and lease unbundled network elements to provide competitive services will ensure that all consumers enjoy the genuine benefits of competition in the “near term” by allowing new entrants to enter the marketplace and gain customers while they are building their networks.As the FCC has explained, “Congress expressly recognized that construction of redundant networks would be very costly and time-consuming, and therefore provided requesting carriers with the right to obtain non-discriminatory access to unbundled network
elements. . . .”