Before I do so, let me provide the Subcommittee with some background about Allegiance. Since its founding in 1997, Allegiance has expanded its operations to serve 31 markets across the country with almost 4,000 employees. We had revenues of $285 million in 2000, an increase of 188% over the prior year. Allegiance has designed our networks using a "smart" build approach. We use a combination of our own network facilities, unbundled network elements leased from the incumbent telephone companies and, where it is available, fiber leased from third parties to provide service to small and medium sized businesses. To date we have installed more than 730,000 lines, approximately 90% of which are "on switch." We have collocated in 636 incumbent local exchange carrier central offices across the nation, and when we add five more markets this year to complete execution of our current fully-funded 36 market business plan, we will be addressing 57% of the total addressable U.S. business communications market.

Prior to co-founding Allegiance, I was President and co-founder of MFS Communications Co., one of the pioneers in the competitive local telephone industry even before the passage of the Telecommunications Act of 1996. MFS grew from a privately held start-up operation to one of the Nasdaq 100 Index companies serving 52 markets in North America, Europe and Asia, with annual revenue of about $1 billion. MFS was purchased by WorldCom in 1996.

The Telecommunications Act of 1996 was landmark legislation that offered consumers the promise of a choice of local telephone service providers for the first time in any of our lifetimes. No one expected that competitors would find it easy trying to break the monopoly strongholds controlled by the Regional Bell Operating Companies (RBOCs) and GTE. Nonetheless, five years after you so astutely determined that developments in technology and the public interest demanded that the government sanctioned protection for local telephone monopolies should be lifted, competitors have been able to capture a mere 8% of local telephone lines. At the same time, the RBOCs and GTE have joined forces to increase their size and domination of the nation's local telephone market, with the former Bell Atlantic acquiring New York Telephone, New England Telephone and GTE to become the behemoth Verizon and Southwestern Bell acquiring Pacific Telephone, Nevada Telephone and Ameritech. While Congress concluded that it would only be fair to open the long distance market to the RBOCs once they had opened their local markets to competitors and for that reason overrode the MFJ and Judge Harold Greene's oversight of the RBOCs, an unfortunate by-product of life without the MFJ and Judge Greene has been the concentration of control of the nation's local telephone market in the hands of 4 megamonopolies, rather than the 8 that dominated the market in 1996. What this means for CLECs is that the Goliaths they must battle for both customers and network access have grown bigger, more powerful and more cocky about using their market power to keep their competitors at bay.

Take Verizon as an example. According to its Year 2000 Annual Report, the Verizon companies are the largest providers of wireline communications in the United States with nearly 109 million access lines in 67 of the top 100 US markets and 9 of the top 10. Verizon serves one-third of the nation's households, more than one-third of Fortune 500 company headquarters and the Federal Government. Verizon has proudly trumpeted to Wall Street that it lost 29% fewer lines to competitors in the second half of 2000 than it did in the first half of the year. Statistics like these demonstrate that further deregulation of the RBOCs is not appropriate, and indeed would be extremely detrimental to the struggling competitive industry, at this time. The increase in concentration of control of the nation's local access lines since the passage of the 1996 Act means that more, not less, regulatory enforcement is needed if the pro-competitive goals of the Act are to be realized.

In order to provide service to customers, CLECs need access to the networks and facilities of the incumbents, especially to the unbundled loops connecting customers to the network (also known as the last mile) and colocation space in the incumbents' central offices. In passing the Act, Congress recognized that competitors could not duplicate the ubiquitous facilities of the incumbents overnight and indeed that in most instances, the last mile could never be duplicated for the SME and residential mass markets. Sections 251 and 252 provide CLECs with access to the interconnection, unbundled network elements, colocation and wholesale pricing that we need to get into the local telephone market, but the rights afforded by the Act are ephemeral unless they can be expeditiously enforced without expensive and drawn out litigation. Although CLECs are big customers of the RBOCs as purchasers of interconnection trunks, colocation and UNEs, CLECs use those tools to compete for the same end users as the RBOCs. This inherent conflict between their roles as suppliers and competitors significantly diminishes the incentive the RBOCs have to open their markets. Even the carrot of Section 271 has not proven sufficient to compel strict compliance with the market opening provisions of the Act as evidenced by the fact that the RBOCs have filed for Section 271 relief in so few states.

To help ensure that local telephone competition becomes a reality for all American consumers, Congress must give the FCC the resources to implement a regulatory scheme that has certainty and an enforcement program that has teeth. I appreciate this opportunity to make some suggestions about improving enforcement of the Act.

A shortcoming of lax enforcement has been a perception by some of the ILECs that compliance with Section 251 of the Act is somehow voluntary and only to be achieved in order to receive Section 271 authority to enter the inter-LATA market. Congress should make clear that the FCC has authority pursuant to Section 251 of the Act to resolve inter-carrier disputes and enforce interconnection agreements, statements of generally available terms and state tariff provisions that codify the RBOCs' obligations to provide interconnection, UNEs and colocation. While many state commissions have been vigilant in resolving interconnection disputes, the decisions have no precedential value outside of the state where the dispute was brought and the RBOCs often take the position that the decisions are applicable only to the parties to the dispute. For example, over the past several years, the Texas PUC has issued several decisions directing SBC to pay reciprocal compensation to CLECs. Despite these decisions, Verizon continued to resist its obligation to pay reciprocal compensation arguing that the PUC's rulings applied only to SBC. Even after the PUC issued a decision last fall specifically holding that Verizon was subject to the same reciprocal compensation obligations as SBC, Verizon has continued to withhold full payment of amounts owed to Allegiance on the grounds that the decision applies only to the CLEC that brought the action.

Reinforcing the FCC's authority to enforce compliance with section 251 and to decide interconnection disputes would allow for the development of precedent that has nationwide applicability and would relieve CLECs of the financial burden of bringing multiple complaints against every RBOC in every state in which they operate. The substantial financial resources that are currently being diverted to litigating interconnection rights on a state by state basis could be far better spent by the CLECs on developing and expanding their networks.

 

PROVIDE THE FCC WITH ADDITIONAL RESOURCES TO ADJUDICATE COMPLAINTS

The FCC has devoted enormous time and energy to promulgating rules to implement the market opening provisions of the Act. The FCC needs additional resources, however, to fund the staffing necessary to enforce those rules. The threat of enforcement must be constant enough and the penalties for noncompliance must be high enough to effectively deter anticompetitive behavior. Congress should appropriate sufficient funds to enable the FCC to double the size of the Market Disputes Resolution Division of the Enforcement Bureau and to hire 25 special masters with relevant legal and industry experience to hear and adjudicate complaints between incumbents and competing carriers.

PROVIDE THE FCC WITH AUTHORITY TO REQUIRE PAYMENT PENDING THE RESOLUTION OF BILLING DISPUTES AND TO AWARD PUNITIVE DAMAGES

One very effective method RBOCs have employed to harm their competitors is to withhold or delay payments of amounts owed and to resist or delay providing credit for amounts overcharged under interconnection agreements or tariffs. Allegiance has faced this situation time and time again with Verizon. For example:

Allegiance has been attempting for months to resolve a billing dispute with Verizon East relating to the jurisdiction of local and intra-LATA toll calls and to secure the payment to which it is entitled. Allegiance has complied with Verizon's every request to provide call detail records and other information and has repeatedly requested meetings to respond to any questions Verizon may have about the manner in which Allegiance jurisdictionalizes minutes. Last week, Verizon informed Allegiance that it disagreed with the methodology Allegiance used to jurisdictionalize 287 out of the 124,000 minutes of use being analyzed (i.e., less than 0.25%) and for this reason would not make any payment pending further study.

Since 1999, Verizon Texas has withheld payment of close to $4.5 million in reciprocal compensation owed to Allegiance. Allegiance has provided full call detail records to Verizon to support its bills, but Verizon continues to withhold payment. Verizon's most recent contention is that it cannot complete its analysis until Allegiance supplies the street addresses of all of its end users.

Last year, Allegiance discovered that Verizon New York was overcharging us approximately $38,000 per month for a tariffed billing platform service. After months of discussion, Verizon finally acknowledged its error and made partial reimbursement in December. To this day, however, Verizon still has not corrected its billing systems and continues to overcharge Allegiance for the billing platform service.

A recent audit of the colocation bills Allegiance receives from Verizon revealed that Verizon has overcharged us over $3 million for DC power that we did not order. Despite escalation of this issue to senior management, Verizon has made no commitment to reimburse or credit Allegiance for the overcharges.

CLECs do not have the luxury of withholding payment as an offset to amounts owed or delaying payment to the RBOCs because the consequence of doing so is being cut off and denied access to the essential facilities we need to provide service to our customers.

It is not only the RBOCs that have resorted to self-help to withhold payment to CLECs. CLECs all across the country have been forced to bring lawsuits against AT&T to collect payment of access charges for the use of their networks to originate and terminate the long distance calls of AT&T's customers. AT&T complained for years about the ILECs' access rates, but never withheld payment as it has done with the CLECs. The FCC repeatedly has ruled that carriers are not entitled to engage in self-help to withhold payment, but instead must pay amounts billed pursuant to tariff under protest and then bring an action to challenge the billings. Unfortunately, AT&T has ignored these rulings and continues to use the CLECs' networks to complete their customers' calls without payment, benefiting as it does from the delays involved as the complaint cases wend their way through the courts and the public utility commissions.

If the CLEC industry is to survive, CLECs must have access to a forum that can resolve payment disputes on an accelerated basis and that can provide relief while the actions are pending. Congress should give the FCC authority to hear complaints arising under interconnection agreements or tariffs on an expedited basis and provide relief in the nature of a "Deadbeat Dad" remedies. If one party to the dispute has failed to pay charges billed by the other party, the FCC should be given authority to require payment of the full amount billed within 30 days of the filing of the complaint unless the nonpaying party can show by clear and convincing evidence that the billing is fraudulent or otherwise invalid on its face. Such immediate relief is necessary to remove the benefits the RBOCs and AT&T currently realize by delaying payment and depriving CLECs of the revenues necessary to fund their operations.

The Commission should also be given authority to process all such complaints under the Accelerated Docket rules set forth in 47 C.F.R. Part 1 Subpart E. The FCC should be required to resolve disputes on the merits within 60 days of the filing of the complaints and should have the authority to grant all relief necessary to remedy violations of the agreement or tariff, including, but not limited to, injunctive relief, compensatory damages and punitive damages.

The FCC should be directed to adopt a comprehensive set of self-enforcing performance standards governing the provision of interconnection and unbundled network elements. While the carrot of entry into the long distance market provides some incentive for the RBOCs to provision interconnection and unbundled network elements at an acceptable level of performance in the months immediately prior to the filing of their Section 271 applications with the FCC, the performance standards that they are required to meet vary state by state. In addition, the RBOCs have shown a proclivity to backslide once 271 relief has been granted and the carrot has been eaten. For example, in March 2000, just 3 months after it was granted authority to enter the long distance market in New York, the FCC found that Verizon had failed to meet its obligations under the Act to process orders from CLECs during the 2 months immediately following its 271 approval. Verizon had lost or mishandled orders submitted electronically by CLECs during January and February 2000, which seriously delayed the ability of CLECs to initiate service to their customers. In December 2000 and January 2001, Verizon was forced to pay a total of $7.3 million in penalties for failure to provide CLECs with the minimum level of service required by the New York Commission. Although $7.3 million seems like a lot of money, RBOCs often view such penalties simply as a cost of doing business. The penalties currently being assessed against incumbents have not proven sufficient in size to deter discriminatory and anticompetitive behavior as Allegiance can attest.

Verizon recently prevented Allegiance from processing orders for customers served by our New Rochelle, New York colocation facility for almost one month. We turned up the colocation in December of last year. On February 14, Verizon rejected Allegiance's orders for service that designated DSO pairs that Allegiance had installed in the New Rochelle colocation facility. Upon investigation, we learned that Verizon had moved 2600 Allegiance DSO pairs without warning or notification to alleviate congestion on its main distribution frame. Because Verizon had not updated its databases, its technicians were unable to find the new location of Allegiance's DSO pairs and claimed that they could not process our customer orders for that reason. On February 15, Verizon informed us that it had a frame to frame connectivity problem that prevented Allegiance's DSO pairs from being loaded into its databases. On February 20, Verizon informed us that our DSO pairs had been moved again - this time to an area of the central office where there was an ongoing union dispute prohibiting technicians from doing the wiring necessary to process Allegiance's customer orders. It was not until March 12, after daily calls and escalation of the issue to Verizon management, that Verizon finally moved the pairs to another location and rebuilt its databases so that Allegiance's orders could be filled. In the meantime, Allegiance was unable to initiate service to its customers.

Allegiance currently has 80 orders for unbundled loops pending with Verizon in New York and Massachusetts for which it has been unable to obtain firm order commitment or installation dates from Verizon. Some of the orders for these loops were submitted as long ago as February and March. Verizon's delays in providing access to Allegiance mean that Allegiance cannot provide service to its customers on a timely basis. It is worth emphasizing again that New York and Massachusetts are the two states in which Verizon has been granted Section 271 authority to offer long distance service.

CLECs cannot succeed in the marketplace unless they can offer their customers a level of service comparable to what those customers can get from the RBOCs. National self-enforcing performance standards would create an invaluable tool for monitoring RBOC compliance with their obligations under the Act and detecting incidences of discriminatory behavior. The FCC should be directed to adopt minimum performance benchmarks which RBOCs must meet in providing service to their CLEC customers with automatic monetary penalties to be paid to CLECs when the RBOCs' performance falls below the benchmarks. To monitor compliance, the FCC should require the RBOCs to publish monthly performance statistics on a state-by-state basis for installation and maintenance of interconnection trunks, UNEs and any other services CLECS purchase. The performance reports should compare the intervals within which the RBOCs actually install and repair similar facilities for themselves, their retail customers and their affiliates and the intervals within which they provide such services for CLECs. The reports should also compare the frequency and duration of service outages suffered by the RBOCs' retail customers and those suffered by CLECs. If, over a 12 month period, the reports reveal a deterioration in service quality in any state in which they operate, the RBOCs should be required to show cause why their rates for interconnection and UNEs should not be reduced on a going forward basis by an amount proportionate to the deterioration in service quality.

In addition, the FCC should be directed to adopt rules that require RBOCs to provide automatic discounts on interconnection trunks, UNEs and special access services in any state where the actual installation and repair services they provide to CLECs are inferior to the services they provide to their retail customers and themselves. A sliding scale of discounts should be established based on frequency and extent of delays. For delays in installation of new services, the discounts would be applied to non-recurring charges. The RBOCs should not be permitted to assess any non-recurring charges for installation if service is not installed within the retail installation interval. For delays in repairing services, the discounts would apply to monthly recurring charges for the affected facilities. Self-enforcing penalties are imperative both because they will provide the right incentive for RBOCs to improve their performance and because CLECs receiving poor performance should not be required to pay full price.

The FCC should also be directed to adopt rules to implement the enforcement authority granted in Section 271(d) and to deter backsliding from compliance with the competitive checklist once the RBOCs are allowed into the long distance market. Such regulations should incorporate a range of penalties for violations of 271 and should include mandated rate reductions for wholesale services and network elements, suspension of 271 authority, the imposition of material fines and revocation of 271 authority.

We appreciate Chairman Powell's recognition that CLECs have often "been stymied by practices of incumbent local exchange carriers that appear designed to slow the development of local competition" and applaud his request for increased forfeiture authority. 1 But more is necessary. H.R. 1765's cap of $10 million dollars should be removed altogether or increased significantly to the point where the fine would significantly impact the quarterly financial results of an RBOC or AT&T. The FCC should also be authorized to require that all or a portion of a forfeiture assessed for violations of the Act or the FCC's rules be paid to the carriers injured by the violations, rather than to the Treasury, in an amount sufficient to compensate them for the damages caused by the violations.

I also understand that H.R. 1765 contains a Cease and Desist provision, but I believe that provision is duplicative of the FCC 's existing authority. The FCC has previously exercised its Cease and Desist authority in various slamming cases, in cases where cell towers violate height restrictions and also in the context of Qwest's illegal marketing of long distance services in-region.

We have had additional experiences that we believe warrant Cease and Desist action as well. The RBOCs have the ability to thwart CLECs' efforts to attract and retain customers in a myriad of ways other than poor provisioning of the facilities needed to provide service. It has come to Allegiance's attention that Verizon appears to be engaged in a systematic attempt to thwart Allegiance's sales efforts by, among other things, calling our prospective customers after we submit orders to Verizon to switch the customer's service to Allegiance and offering the customers a better deal if they cancel their orders with Allegiance. This is an example of where the FCC should exercise its existing Cease and Desist authority to prevent Verizon or any other RBOC from engaging in this predatory practice.

A few current examples will illustrate what I mean:

We recently learned from a customer who cancelled his order with Allegiance before his service had been switched from Verizon that a Verizon representative called him shortly after he signed on with Allegiance and offered to match Allegiance's rates. Section 222(b) of the Act prohibits carriers that receive proprietary information from another carrier from using such information for their own marketing purposes. The only way Verizon could have learned of the customer's impending cancellation of service was through the order Allegiance submitted to Verizon to convert the customer's service. This was not an isolated incident. During the fourth quarter of 2000 and the first quarter of this year, more than 10% of the customers who had signed up for Allegiance service in New York and Massachusetts cancelled their orders before their service was converted from Verizon.

We learned from another customer who called Verizon to lift his PIC freeze so that he could switch his service to Allegiance that the Verizon representative responded, "Are you sure you know what you are asking me to do? Let me fax you over a list of the problems Allegiance has caused and then you decide if you still want me to remove the freeze." The FCC has specifically determined that Section 222(b) prohibits a carrier executing a customer's request to change carriers from using such information to convince the customer not to make the switch. This has not stopped Verizon.

Competition is clearly harmed where an RBOC such as Verizon exploits the advance notice of a customer's impending cancellation of service that it receives in its position as the underlying network facilities provider to market its own services and win the customer back. Such conduct is clearly prohibited by the Act and I believe if the Enforcement Bureau would take a serious look at this situation, they would find it ripe for a Cease and Desist action. It is also not clear that carriers injured by such conduct have a private right of action for damages. To the extent that the FCC finds a carrier guilty of the misuse of carrier to carrier proprietary information and assesses a fine, it should be authorized to share a portion of that fine with the carrier injured by the violations.

Under the FCC's new slamming rules, carriers that receive allegations from customers that they have been slammed are required to notify the unauthorized carrier of the customers' allegations. All carriers are required to file a report with the FCC twice a year stating the number of slamming allegations made against them and whether the allegations were valid, as well as the number of slamming allegations they received against other carriers and the identity of those carriers. Since the notification rules have become effective, Allegiance has received a disproportionate number of slamming notifications from Verizon New York and Verizon New Jersey. For example, during the week of April 23-27, 2001, 66% of the slamming notifications Allegiance received were generated by Verizon New York and Verizon New Jersey. Almost every notification we have received from Verizon bears the fax line of the Verizon General Business Services Win Back Group. The Win Back Group apparently takes a very liberal approach to the definition of a slam as we have learned when we contact the customers to investigate the slamming allegations and discover that a substantial majority are unfounded. Verizon's Win Back Group seems to categorize any instance where a customer decides to return to Verizon as a slam no matter what the circumstances. We have received slamming notifications on customers who have reported to us that they never told Verizon they were slammed. We received one slamming notification from Verizon on a former customer who had called Verizon to complain about its Verizon bill.

Allegiance takes slamming very seriously and immediately terminates any employee found to have engaged in slamming. Allegiance does not believe, however, that the FCC intended for carriers to classify any instance where a customer elects to go back to its former carrier as a slam. Verizon's apparent abuse of the FCC's slamming notification rules has caused Allegiance to devote considerable staff time and resources to investigating allegations that have no basis. We have no means to recoup these resources. Again, to the extent that the Commission could assess substantial fines against carriers for such abuses, and share a portion of those fines with the victimized CLECs, CLECs could be compensated for the damages they incur.

The state arbitration provision of H.R. 1765 does not go far enough. It requires states to arbitrate interconnection disputes within 60 days. It may be helpful in some states to have a 60 day limit on decisions but in Texas, there are some proceedings that are dealt within a week. This is authority that states probably already have the discretion to exercise on their own. The language is also unclear as to whether the state decision is final and enforceable in state or federal court and sets no penalties for violating interconnection agreements. Further, the parties should be allowed to waive the deadline if it is mutually agreed upon.

The final section is a savings clause for service quality enforcement, but it appears to be undermined if H.R. 1542, the Tauzin-Dingell bill, were to become law. H.R. 1542 would strip away the service quality reports and with the defeat of the amendment offered by Congresswoman Eshoo these reports would disappear. It also appears this savings clause is limited to Section 252. Other provisions of H.R. 1542 limit the state's authority to enforce the interconnection agreements, by taking away the states' rights to regulate high-speed services. Since these provisions are in section 292, not section 252, they are unaffected by this savings clause.

As I noted above, the RBOCs have the ability and the incentive to deny their competitors full, fair and nondiscriminatory access to their networks. If the increased penalties do not sufficiently alter their behavior then I would suggest the only plausible solution at the end of the day would be for Congress to require structural, or at least functional, separation of the RBOCs' retail and wholesale operations. If the retail side of an RBOC's company was forced to purchase service for their customers under the same terms and conditions that CLECs are, the wholesale division would have significantly stronger incentives to improve provisioning and performance standards.

The robust competition envisioned by the Telecommunications Act of 1996 has been painstakingly slow to develop on a broad scale in the SME and residential mass markets. I believe that this is due primarily to the following three reasons:

Instead of invading each other's monopoly service territories and competing for each other's customers, the RBOCs have focused on combining their forces to form even larger monopolies and have devoted scant effort to complying with Sections 251 and 252 of the Act. The RBOCs have abused their dominant market power in many ways, including illegally withholding payments for exchange of traffic with CLECs.

AT&T, which was expected to become a significant competitor to the RBOCs, has focused primarily on acquiring its own cable TV monopoly, and has eschewed significant deployment of local facilities except in the large corporate enterprise market. AT&T has also used its dominant position in the long distance market to favor the ILECs over new entrants in terms of paying its access bills, thereby causing significant financial harm to a number of CLECs.

Despite good intentions, the FCC's enforcement authority, enforcement resources and cumbersome and bureaucratic processes are not geared to a dynamic competitive environment, and have facilitated the constant delays and violations of the Act by the RBOCs and AT&T.

The bottom line five years after passage of the Act is that (1) competitive choices are available to you if you are a large corporation; (2) far more often than not you remain at the whim of the local monopolist if you a small or medium-sized business; and (3) most residential subscribers are still stuck with the same monopoly providers they had in 1996 for local phone and cable TV service. There is nothing that Congress can do to make the reluctant monopolists (the RBOCs and AT&T) compete with each other. However, Congress can significantly improve the opportunity for competition to develop in the SME and residential mass markets by arming the FCC with greatly increased enforcement powers. I urge you to strengthen the FCC's enforcement powers to help ensure that as the RBOCs and AT&T get bigger, the strides made by CLECs in providing consumers with competitive choices are not reversed. It is imperative that Congress make the penalties for noncompliance with the Act steep enough to serve as a deterrent as opposed to just a cost of doing business for the monopoly providers.