Executive Director

826 Broadway, Suite 900

New York, New York, 10003

212-777-5418

and

Jerry Michalski, Sociate.com

David S. Isenberg, Principal Prosultant(sm), isen.com, inc.

LJ Davis, author

Peter Brennan, Director of Development, TPI Group

Joe Plotkin, President, BroadbandNow

Alexis Rosen, President, Panix

Ian Stevelman, President, Bwaynet

Bruce Fancher, President, Mindvox

J. Henry Priebe Jr., President, Blue Moon

Daniel Berninger, Founder, CEO, TelecomComputers.com

Dated: December 9th, 1999

Implications and Impacts

Next Steps

Presentation of Material

Part One: Analysis of the FCC’s Advanced Network Report

1) The NNI Data — Info-Scandal: The Bell Companies used the promises of advanced network deployment to remove pro-consumer state and federal regulations.2) The FCC concedes that it lacks substantial evidence and needs to examine hundreds of state documents, filings, research reports, etc.

3) Bell expenditures for advanced networks were never made, and the Bell expenditure for network facilities are lower than previous years.

4) In their IRS filings the Bell Companies may have deducted the cost of the copper network even though it was never replaced.

5) The FCC definition of advanced networks is “dumbing down” the definition of “broadband”— “The Imagination Bottleneck”

6) Given their demonstrable bad faith, The FCC should not accept promisesmade by the Bell operating companies.

7) The FCC needs to examine anti-competitive action by Bell operating companies against advanced network competitors and Internet providers.

8) The FCC and Congress need to determine whether the state public service commissions are able to assess and enforce advanced network plans and deployment.

9) The FCC should examine the related customer cost and fraud issues

Conclusion

(THE ATTACHMENTS CAN BE FOUND AT http://www.newnetworks.com

Attachment One: The Bells’ Broadband Failures

Attachment Two: Opportunity New Jersey: An I-Way Failure

Part 2: “The Real Truth In Billing” (To be Filed January, 2000)

(THE APPENDIX CAN BE FOUND AT http://www.newnetworks.com

APPENDIX 1: NNI’s Advanced Network Comments, (CC Docket 98-146)

APPENDIX 2: Case Study: Complaint Against Bell Atlantic Massachusetts

APPENDIX 3: The Case of Improper Bell Network Write-offs.

APPENDIX 4: Case Study of US West’s Assets and Failed Bell Deployment.

Introduction and Summary

New Networks Institute (“NNI”) was founded in 1992. Its mission is to explore, on a totally independent basis, the impact of the break-up of AT&T and the creation of the Regional Bells Operating Companies (“RBOCs”) on telephone subscribers in general and on the deployment of new and advanced telecommunications networks. Since that time, the NNI has conducted extensive research on these topics. Titled “The Future of the Information Age,” this seven-year analysis consists of over 1,900 pages in 14 volumes, with over 910 exhibits, two computer databases, and data from more than 2,000 consumer interviews, (conducted independently through Fairfield Research). The report series publishers include Phillips Business Information and Probe Research. We have recently updated this research in the form of a book, “The Unauthorized Biography of the Baby Bells & Info-Scandal,” published in March 1999.

NNI’s research was privately funded and intended for distribution through the sales of the reports, books and databases. Nonetheless, it has direct bearing on some of the issues raised in the present inquiry. NNI is pleased to make the results of its research available in the context of this critical discussion.

New Networks Institute in being joined in the Petition by a host of leading technologists, companies and concerned citizens, who are lending their support as co-signer of this document with the hopes that the FCC will take the appropriate actions to protect the Public Interest.

On January 28th, 1999, the FCC released a much awaited report “Report on the Deployment of Advanced Telecommunications Capability to All Americans”, (No CC 99-1, CC Docket No. 98-146) that was undertaken to fulfill the requirements of Section 706(b) of the Telecommunications Act of 1996 (the “1996 Act”). Section 706(b) directs the Commission to “initiate a notice of inquiry concerning the availability of advanced telecommunications capability to all Americans.” If “advanced telecommunications capability” is not being deployed “in a reasonable and timely fashion,” the Commission is directed to “take immediate action to accelerate deployment of such capability.” Its actions in this regard are to take two forms: the “remove[al] of barriers to infrastructure investment,” and the “promot[ion of] competition in the telecommunications market.”

The Report summarized this inquiry and found that advanced networks were being delivered on a “timely and reasonable” basis.

“The Commission concluded that the consumer broadband market is in the early stages of development, and that, while it is too early to reach definitive conclusions, aggregate data suggests that broadband is being deployed in a reasonable and timely fashion. The Commission based its conclusion, in part, on the actual deployment of advanced telecommunications capability in this nascent market”

In its comments filed in the Section 706 inquiry, (CC: Docket number 98-146, 98-147) NNI documented the fact that advanced networks were not being deployed in a timely and reasonable fashion. NNI’s findings clearly demonstrated that the Bell companies had failed to deploy advanced networks as promised under state laws. To make matters worse, it appears that the Bell companies used the promises of advanced network deployment, to convince regulators to change state laws, replacing the older “rate-of-return” regulation, which protected customers from excess profits, with “alternate regulation or also known as “incentive regulations” that gave the Bell companies much higher profits. These profits were to be used for new construction.

Sadly, by the year 2000 almost half of America was supposedly to be wired with fiber-optic networks, replacing the older copper wiring. These fiber optic lines were capable of delivering up to 800 channels of digital services, at lightning-fast speeds. However, NO Bell company has deployed their network as promised.

NNI and others have documented that the excessive profits went into the Bell company coffers, and we estimate that telephone subscribers paid over $50 billion dollars in excess charges for networks they have never had access to. This bait-and-switch tactic: promise customers a network, paid for by changes in regulation that provide more income, then never fulfill the plans— have resulted in a major financial bonus for the Bell companies, whose current profits are 200% higher than most companies in America.

Furthermore, it is important to stress that the fiber-optic network that was promised is not the current ADSL (Asymmetric Digital Subscriber Line) product that some of the Bell companies currently offer and call “advanced network service.” ADSL uses the same copper plant, is mostly asymmetric and so customer speed is only one way, and is about one hundred times slower than what was originally promised and paid for by telephone subscribers..

NNI is encouraged by our recent meeting with Chairman Kennard as part of the USISPA (United States Internet Service Provider Association). The FCC’s creation of a much needed enforcement bureau is very positive. Also, the recent order by the FCC establishing a working relationship with state public service commissions might have prevented the abuses we found if it had been in effect years ago. We understand that the FCC is now starting to prepare a new advanced network study, and we are hopeful that this time our findings will be included and considered.

We offer this document and its related Complaint “The Real Truth in Billing” (to be filed in January, 1999) as a roadmap to lead the FCC and Congress to make choices that assure the roll-out of advanced services happens in a reasonable and timely basis. Clearly, such deployment is of greater public interest than further support, perhaps unintentional, of the kind of corporate avarice evidenced by massive financial incentives without any accountability whatsoever.

In addition to disputing the overall conclusion of the FCC report, that advanced networks are being deployed in a timely fashion, we respectfully request that the FCC revise its advanced network report for the following reasons:

* The current Report gives regulators and the public a misleading and totally distorted picture of what has happened in America with the deployment of advanced networks.* The FCC declines to investigate hundreds of pre-existing, contrary documents, that amply demonstrate that advanced networks have not been deployed in a timely or reasonable fashion.

* The Report declined to examine important customer cost issues — documentary evidence clearly demonstrates a pattern by Bell companies in many states where promises of new networks were made in exchange for rate relief. In essence, subscribers have already been charged for network construction, including the wiring of schools and libraries.

“…low income and residential customers have paid for fiber-optic wiring every month but have not yet benefited” [New Jersey Ratepayer Advocate, NY Times, 4/18/97].

We ask—how much money have telephone subscribers paid for new networks that were never built, and how much money was already collected to fund Internet services in schools and libraries?

* The FCC should have examined the massive network write-offs and related network issues. In 1998, New Networks Institute filed a $21 billion dollar complaint against the Bells with the Criminal Justice Division of the IRS. We found that the Bell companies never replaced the copper network with the fiber optic network but took tax deductions totaling approximately $3 billion per Bell holding company. In December1999, NNI re-filed this complaint with more documentation. Furthermore, the FCC’s own audit of the Bell companies found $5-19 billion dollars in missing or unaccounted for equipment, throughout the various Bell systems. These gross irregularities were not addressed in the FCC report.

* The Report dumbs-down the definition of “Broadband” that is essential to future discussion, as it glosses over major technology problems. For example, ADSL can only travel comfortably about two miles from the wire center yet is positioned as a universal solution. This directly impacts all rural and suburban subscribers.

* The FCC’s Report should have examined the anti-competitive behavior of the Bell companies toward providers of advanced network services and the Internet service provider industry.

* The FCC Reports needs to examine the state public service commissions’ ability and willingness to properly regulate and enforce laws that protect the public interest, especially in the areas of advanced networks services.

It is difficult to over-estimate the negative impact of the Bell company behavior we have outlined herein. By failing to keep their commitments to build and make available the new network, and by abusing their position as the uniquely-qualified entity to provide such an infrastructure, the Bell companies have held the country’s digital future hostage in the following ways:

* America’s role in the global economy has been stifled. Had the Bell companies provided services as they promised, the United States would be in a position to maintain itself as the leader of the global digital revolution. The increased benefit to the US economy would have been substantial, the lost opportunity, immeasurable.* US consumers paid for a network that was never delivered. The public trust and confidence in the telecommunications industry and those responsible for its regulation risks severe damage unless the FCC and Congress take action now to make US consumers whole.

* US consumers have been denied the benefits of competition in the cable television market, as they were promised. The cable lower rates have never materialized and enhanced services have never been offered.

* Competitive local exchange carriers and Internet service providers complain of unfair treatment by the Bells. Unless the FCC and Congress can effectively monitor and assure a level playing field for all local carriers, some will go out of business and US consumers will be denied the widest array of choices

* Though all most US subscribers have paid for, but not received, fiber optic wiring the burden has been unevenly born by seniors and low-income subscribers—those with the least ability to pay.

* Widening the Digital Divide: there are some broadband alternatives being offered by a limited number of providers to select areas of the country. The Bells made it clear that they would be wiring all communities, including public schools and libraries, without regard to demographics. Their failure to do has widened the gap between the digital have and have-nots.

Finally, changes in both state and federal laws are being contemplated based on inaccurate, incomplete and misleading information. NNI’s documentation and numerous other independent sources clearly show that the Bell companies already received massive financial incentives to deploy advanced networks including the wiring of schools and libraries. To grant the Bells even more concessions is wholly inappropriate.

Next Steps:

To protect the Public Interest:

· The FCC should redo its advanced network report, making sure to include ALL available documentation, both state and federal· The FCC should immediately review the Bell companies’ failed deployment plans commencing in 1992 to the present, including, but not limited to, the failure to deploy ISDN and substitution of ADSL services.

· The FCC should calculate the amount collected by the states from telephone subscribers under various alternate regulation plans as well as specialized funds for the wiring or schools and libraries. The FCC should also take this opportunity to examine whether the advanced network plans made by the Bell Companies during their previous mergers (SBC and Pacific Telesis, Bell Atlantic and NYNEX) were ever fulfilled.

· The FCC should investigate whether fraudulent or misleading statements and assurances on the part of the Bell companies, their consultants, accountants, lawyers and lobbyists to change state and federal regulation is actionable, and what policies might be put in place to prevent such conduct in the future.

· The FCC should immediately investigate all significant allegations of mistreatment by the Bell companies of all competitive advanced network suppliers, including Internet service providers and CLECs.

· The FCC and the Internal Revenue Service should investigate whether the Bell Companies took inappropriate deductions on their state and federal tax returns.

· The FCC should work with the state commissions to determine if refunds, rebates, and lower prices should be imposed to make ratepayers whole.

· The FCC should issue a Notice of Inquiry to assess the ability of the state public service commissions to properly regulate and enforce advanced network deployment on a timely and reasonable fashion.

Presentation of the Material

In order to give a more accurate picture of NNI’s assessment of the advanced network deployment, and the specific problems with the FCC’s Report, we have created a series of linked documents.

Part One: Analysis of the FCC’s Advanced Network Report.

This part summarizes our specific problems with the FCC Report as published.

ALL OF THE ATTACHMENTS CAN BE FOUND AT:http://www.newnetworks.com

Attachment One: The Bell’s Broadband Failures This attachment supplies numerous statements made by the Bells companies pertaining to their advanced network deployments.

Attachment Two: Opportunity New Jersey: An I-Way Failure This attachment details how Bell Atlantic failed to deliver on advanced network promises in the state of New Jersey, while they increased their profits.

Part Two: Advanced Network Cost Issues and Bell Profits: “The REAL Truth in Billing” (this Complaint will Be filed in January 2000.)

A separate complaint titled “The Real Truth in Billing” has been filed to outline our contention that the Bell companies overcharged more than $50 billion for a network they never built. It includes a request that the FCC and the states be required to institute a “Total Bill Analysis” that examines ALL Bell company profits from customers. (DRAFT AVAILABLE)

ALL OF THE APPENDIXES CAN BE FOUND AT: http://www.newnetworks.com

APPENDIX 1: NNI’s Advanced Network Comments This outlines our contention that the Bell companies used the promises of advanced networks to secure incentive regulations.

APPENDIX 2: Case Study: Complaint Against Bell Atlantic-Massachusetts Filed as a Complaint against Bell Atlantic Massachusetts, this document outlines the case against Bell Atlantic for presenting misleading and deceptive information to remove pro consumer regulation in that state.

APPENDIX 3: The Case of Improper Bell Network Write-offs. This part highlights NNI’s Complaint with the Criminal Justice Division of the Internal Revenue Service against the Bell Companies for their improper networks write-offs.

APPENDIX 4 : Case Study of US West Assets and Failed Deployments Filed as a separate complaint with L.J. Davis, this complaint requests that the Bell’s total revenues and profits from affiliate transactions, including Cellular and Wireless licenses, Directory charges and even Executive Compensation be included in the analysis of costs to customers.

——————————————————————————————-

Part One: Analysis of the FCC’s Advanced Network Report

{Much of this discussion has been highlighted in other NNI materials. In 1998, NNI filed five separate filings with the FCC pertaining to advanced networks, and access fees, among other topics. (They can be found at http://www.newnetworks.com.)

Our data has been derived from a variety of public sources including Bell company annual reports, press releases, state and federal investigative reports and findings, orders, and Bell company regulatory filings. Further material can be found in The Unauthorized Bio of the Baby Bells & Info-Scandal, by Bruce A. Kushnick, published by New Networks Institute}.

* For a more detailed list of promises, we’ve compiled “The Bells’ Broadband Failures”, Attachment 1.* NNI’s advanced network Comments are contained in Appendix 1.

1) The NNI Data — Info-Scandal: The Bell Companies Used The Promises Of Advanced Network Deployment To Remove Pro-Consumer State And Federal Regulations.

Since the mid-1980’s, every Regional Bell Operating Company promised massive deployment of advanced interactive networks. Widespread availability of ISDN was promised but never delivered. By the early 1990s, the Bell companies had promised to spend billions of dollars to deploy a vast fiber optic network, replacing the older copper wire that is still in use today). By now, approximately 45 million households were to have access to wonderful new services including interactive two-way video, fast connections to the Internet and more, all being transmitted via the new network. This plan was a Bell company plan-it was not foisted on them by the regulators. The Bell companies made broad and ambitious promises to regulators and consumers in exchange for relief from important pro-consumer regulation. And the documentation– Bell Annual Reports and state filings.

Bell Atlantic, for example, was to spend $11 billion dollars, starting in 1993 (Source: Bell Atlantic 1993 Annual Report)

“First, we announced our intention to lead the country in the deployment of the information highway… We will spend $11 billion over the next five years to rapidly build full-service networks capable of providing these (“interactive, multi-media communications, entertainment and information”) services within the Bell Atlantic region.””We expect Bell Atlantic’s enhanced network will be ready to serve 8.75 million homes by the end of the year 2000. By the end of 1998, we plan to wire the top 20 markets. These investments will help establish Bell Atlantic as a world leader in what is clearly the high growth opportunity for the 1990’s and beyond.”

Meanwhile, Pacific Telesis stated they would out-do Bell Atlantic with $16 billion. (Pacific Telesis 1994 Annual Report)

“In November 1993, Pacific Bell announced a capital investment plan totaling $16 billion over the next seven years to upgrade core network infrastructure and to begin building California’s “Communications superhighway”. This will be an integrated telecommunications, information and entertainment network providing advanced voice, data and video services. Using a combination of fiber optics and coaxial cable, Pacific Bell expects to provide broadband services to more than 1.5 million homes by the end of 1996, 5 million homes by the end of the decade.”

Other Bell companies promised technology by describing the number of households that would benefit from the new technologies. The Ameritech Investor Fact Book (March 1994):

“We’re building an interactive video network that will extend to six million customers within six years”.

NYNEX stated: (NYNEX 1993 Annual Report)

“We’re prepared to install between 1.5 and 2 million fiber-optic lines through 1996 to begin building our portion of the Information Superhighway.”

Bell Atlantic, Pennsylvania Bell stated in 1998:

“The Pennsylvania Plan requires deployment of a universal broadband network, which must be completed in phases: 20% by 1998… Deployment must be reasonably balanced among urban, suburban and rural areas.” (Bell Atlantic Annual Report 1998)

And by this time, some states’ were promised the total wiring of the state’s schools, libraries… even prisons and state and federal buildings. Ohio’s Alternate Regulation for Ohio Bell, Ameritech stated: (Ohio Alternate Regulation plan “Advantage Ohio” DATED: September 20, 1994.

INFRASTRUCTURE COMMITMENTS”The Company’s infrastructure commitment in this Plan shall consist of the commitment to deploy, within five years of the effective date of the Plan and within the Company’s existing service territory, broadband two-way fully interactive high quality distance learning capabilities to all state chartered high schools including vocational, technical schools, colleges and universities; deploy broadband facilities to all hospitals, libraries, county jails and state, county and federal court buildings;

This was not the world wide web or the Internet as we know it today. The promised information superhighway was to employ broadband, fiber-optic, two-way technology capable of supplying hundreds of times more information for enhanced interactive services than is generally accessible today. Today’s Internet is narrow-band, based on available phone wiring. As we will discuss later, it’s the difference between a Ferrari and a skateboard.

In exchange for delivering on their promises to build these networks, the Bell companies received significant financial incentives. The New Jersey Ratepayer Advocate stated:

“… low income and residential customers paid for fiber-optic lines but have not yet benefited.” (4/18/97).

The conclusion of the NJ Advocate:

“Bell Atlantic-New Jersey (BA-NJ) has over-earned, underspent and inequitably deployed advanced telecommunications technology to business customers, while largely neglecting schools and libraries, low-income and residential ratepayers and consumers in Urban Enterprise Zones as well as urban and rural areas.” (3/21/97)

This pattern of promises made then ignored, regulatory relief granted and soaring Bell company profits are the subject of several economic reports and serious analyses published by multiple sources. Economics and Technology, Inc. published two research documents on the Opportunity New Jersey and Opportunity Pennsylvania plans. For Pennsylvania Bell, they state that the company promised to have 20% of the state would be wired with broadband by 1998, but instead simply garnered more profits. (From “Broken Promises: A Review Of Bell Atlantic’s Performance Under Chapter 30, 1998”)

“In 1993, the Pennsylvania legislature added Chapter 30 to the Public Utility Code with the specific goal of assuring that all areas of the state will be provided with a modern, state-of-the-art broadband telecommunications infrastructure. Basically, Chapter 30 offered Pennsylvania’s incumbent local exchange carriers (ILECs) a quid pro quo: In exchange for a firm commitment to provide broadband service capability throughout its entire network by the year 2015, each participating ILEC would become subject to an alternative form of regulation providing substantially greater pricing and earnings flexibility than the traditional rate of return form of regulation under which the ILEC’s prices and earnings had been set.”Having made its commitment and been granted its alternative regulation reward, Pennsylvania’s largest local telephone company Bell Atlantic-Pennsylvania (BA-PA) has paid more attention to escaping from, rather than fulfilling, the terms of its promised upgrade. This study demonstrates that, despite strong financial performance and earnings growth in Pennsylvania, as well as a generous and flexible regulatory framework, BA-PA has failed to increase investment in the state’s telecommunications network and, in fact, has actually extracted capital out of Pennsylvania for use elsewhere. At the same time, BA-PA has been extremely successful in protecting its monopoly from competitive encroachment. Without the discipline of actual, effective competition, the incumbent has been permitted to charge excessive prices and earn excessive profits, while confronting no business incentive to undertake new investment in Pennsylvania. As we approach the end of 1998 a point by which BA-PA is supposed to have broadband available throughout 20% of its rural, urban and suburban areas there is no sign of any broadband service being offered to Pennsylvania’s residential customers.

“BA-PA persuaded the Pennsylvania Public Utility Commission that the Company needed increased price and earnings flexibility to encourage its investment in a broadband-capable network.

“The Public Utility Commission’s (PUC) decision on the structure and the pricing and earnings aspects of the BA-PA alternative regulation plan clearly resulted from the belief that the Company would need to increase its ability to attract capital in order to comply with a network modernization plan. The PUC’s decision stated that … we expect that one anticipated byproduct of our elimination of earnings sharing would be an increased commitment to universal deployment of a broadband network in areas that might not, in the absence of the elimination of earnings sharing, initially warrant deployment due to their market contour or the need to allocate a smaller pool of investment resources such as would exist if earnings sharing were adopted.

“The four years since the PUC’s initiative have witnessed precisely the opposite outcome: Rather than being encouraged by the prospect of higher earnings to invest in broadband facilities, Bell Atlantic instead used its new flexible regulatory environment to amass large profits on its conventional services. Bell Atlantic has apparently extracted these profits from its Pennsylvania subsidiary, and from the state. From the outset, events moved in a direction contrary to the Chapter 30 vision. In mid-1995, BA-PA announced that it would abandon its plans to deploy a hybrid fiber coax infrastructure to upgrade its network for broadband capabilities. This action, and the lack of a commitment to any replacement technology in the years since, reduced to virtually zero the likelihood that BA-PA would honor infrastructure-related obligations that it had expressly accepted in return for alternative regulation.”

“Despite BA-PA’s strong earnings and financial performance, the Company has failed to keep its promises for infrastructure development in Pennsylvania. BA-PA, and Bell Atlantic in general, have performed extremely well financially, particularly during the period following adoption of alternative regulation. Pennsylvania ratepayers, however, have yet to see the benefits of such strong financial performance in the form of additional investment in the state’s infrastructure. In fact, the Company has extracted capital out of the state and consequently has not changed its investment patterns significantly since the adoption of the Alternative Regulation Plan in 1994. As a result, and contrary to the PUC’s expectations, Bell Atlantic’s shareholders have been the real beneficiaries of the Alternative Regulation Plan.”

NNI estimates that over $50 billion has been paid by consumers in the form of increased prices for services such as call waiting and second lines to the home, services that probably would not have been necessary if the advanced network promises had been kept (For more details about state filings and investigations see the Attachment Two, about Opportunity New Jersey, from The Unauthorized Bio of the Baby Bells)

Failed deployments are nothing new. Take the case of ISDN, the poster-child of broken advanced network promises. Southwestern Bell’s 1986 Annual Report stated:

“At the forefront of new technology is ISDN. Scheduled for commercial availability in 1988, ISDN will revolutionize day-to-day communications by allowing simultaneous transmission of voice, data and images over a single telephone line.”

These promises made by all the Bell companies about their advanced network promises are legendary. Many involved the wiring of schools and libraries. For example, Pac Bell’s Education First program was to have all of California’s schools wired with ISDN by 1996. (Pac Bell’s “Education First” program, 1st. Quarter report, 3/31/94)

“Pacific Bell Helps Bring Schools On-line. As part of a continuing commitment to education in California, Pacific Bell has launched “Education First”, a $100 million program to connect the state’s schools to the communications superhighway. By the end of 1996, all of the nearly 7,400 public K-12 schools, libraries, and community colleges in Pacific Bell territory will have access to the company’s Integrated Services Digital Network (ISDN), which enables simultaneous transmission of voice, data and video signals over a signals telephone line.”

In the case of ISDN, the Bell companies advertised a product they knew they could not deliver .In its 1993 annual report NYNEX puts forward a vision of telecommunications service “when business wants it, as much as it wants.” (as described below). To demonstrate the disparity, another quotes gives us the user perspective, highlighted by an article in The New York Times titled “The Information Future Out of Control: Hello, Anybody Home?” written by a NYNEX user, James Gleick, who helped start the online service called Pipeline. Here the reality vs. the company’s myth collides when customers actually try getting the advertised technology.

NYNEX 1993 Annual Report:

“Private-line service as quick as a click: bandwidth where a business wants it, when a business wants it, as much as it wants, for as long as it wants. That’s the value of NYNEX Enterprise Services, a set of new networking tools that bring unprecedented flexibility to private-line voice data and video systems”

From: The New York Times article by James Gleick

“I have visited the advanced telecommunication research laboratories and have seen what technology can bring, ISDN, which promises to turn ordinary phone lines into high-bandwidth carriers of pictures and videos. I’ve also visited the local telephone company and seen what technology can’t bring. I’ve tried to order this very service. I have a 14-page, four-color brochure! “NYNEX ISDN Primary Service. For more efficient voice, data, image and video… “The Pipeline’s [author’s company] order has been floating about for months. Our sales representative says he wrote it up three times, and each time the system bounced it back. I have a phone number for an ISDN specialist inside NYNEX, but he doesn’t seem to have voice mail. The Pipeline is not alone. The large, private on-line services, too, rely on more or less the same graying telephone technology, not ISDN.”

These quotes give a glaring example of how “unreasonable and how untimely” the deployment of advanced networks has been and continues to be today.

2) The FCC Concedes That It Lacks Substantial Evidence And Needs To Examine Hundreds Of State Documents, Filings, Research Reports, Etc.

The current FCC Report concedes that it has a lack of direct evidence to base their claims. Commissioner Tristani:

“While I appreciate the effort in the Report to compensate for the lack of direct evidence in the record, I write separately to underscore my belief that the lack of such evidence makes drawing any conclusions about the state of deployment a tentative and inexact undertaking.””I am especially concerned about the lack of hard evidence when it comes to our obligation to determine that advanced telecommunications services are being deployed, and are available, to all Americans.”

The Report is full of caveats that demonstrate its lack of data. Quotes directly taken from the source demonstrate this.

“At this stage in the deployment of advanced services to rural communities, our data is anecdotal and we can in no way conclude that all Americans have, or are about to have, access to these services.”

Or:

“We lack information on the deployment and availability of advanced telecommunications capability in disadvantaged urban neighborhoods. Therefore, we are unable to determine whether broadband is being deployed to those areas in a reasonable and timely fashion.”

Even the exact amount of construction expenditures is missing.

“…precise dollar figures and construction plans for broadband are not generally available…”

Multiple, billion dollar decisions hang in the balance of this Report. We have found that the data does, in fact, exist and much of it directly contradicts the FCC’s conclusions.

3) Bell Expenditures For Advanced Networks Were Never Made, And The Bell Expenditure For Network Facilities Are Lower Than Most Previous Years.

NNI’s research indicates that there never was an extra $11 billion dollars spent by Bell Atlantic, or $16 billion dollars by Pac Bell, or even a significant increase in any Bell construction.

However, the FCC Report states that “Incumbent LECs, mainly the Bell Operating Companies (BOCs) and GTE, are also investing billions of dollars in broadband technologies”. For example, the FCC’s author claims that Ameritech is spending $3 billion in capital in 1999 for “all its communications networks (wireline, wireless, and cable television” and uses this as an example that these sums are “large even by the standards of America’s communications business”.

The truth is that Ameritech made almost $18 billion dollars revenues in 1998 so these charges are simply 17% of the total they bring in. In fact, Ameritech spent more money eight to ten years ago, prior to various “incentives.” As a percentage of the total revenues…the Bell companies construction spending has declined over the decade.

To put it more into perspective, in 1998, Ameritech spent $3.7 billion investing in foreign companies, including $3.1 billion in Tele-Denmark, the phone company for Denmark, a country with a population of about 5 million. By comparison, the Chicago, Illinois Metropolitan Area, (an Ameritech state) has over 8 million. (Source: 1997 World Almanac)

The state findings are even more glaring. In our Massachusetts complaint we quote Bell Atlantic stating that it was preparing to spend and additional $500 million dollars for the rollout of 300,000 lines… by 1995. However, in a review of New England Telephone’s Annual reports, none of this money ever appeared and their was no major increases in construction. (see Appendix 2)

In the case of Bell Atlantic New Jersey, the situation was equally as troubling.. Bell Atlantic promised to spend $1.5 billion dollars. According to the New Jersey Ratepayer Advocate:

“The ONJ (Opportunity New Jersey) Plan replaced traditional rate-base/rate of return regulation with an incentive ratemaking system in exchange for a commitment from BA-NJ to greatly accelerate deployment of advanced technologies in its communications network to the entire State by the year 2010 at an estimated additional capital expenditure of approximately $1.5 billion above “business as usual” from 1992 through 1999. Through the incentive of alternative regulation under the ONJ Plan, BA-NJ was given the financial flexibility to operate in the new competitive telecommunications market in exchange for commitments to upgrade the network in order to realize “positive benefits” to the New Jersey economy.”

In fact, according to the Advocate, the Bell Atlantic only spent $79 million dollars, not the $1.5 billion promised.

“Although BA-NJ projected that it would expend approximately $1.5 billion in network investment above “business as usual” by the end of 1999…However, the Ratepayer Advocate has calculated that BA-NJ has spent a total of $79 million above “business as usual” over these years.”(1992-1995) 

4) In Their IRS Filings The Bell Companies May Have Deducted The Cost Of The Copper Network Even Though It Was Never Replaced.

In 1998, NNI filed a complaint against the Bell companies with the Criminal Justice Division of the IRS for $21 billion dollars. The Bell companies attributed massive write-offs of the copper plant from 1993 to 1995, each claiming that they were going to replace it with fiber optics— all in the name of advanced networks. However, these networks were never replaced and in fact, ADSL utilizes the older copper wiring.

The implications are two fold –

1) If these deductions were made improperly then the Bell companies may owe about $7 billion in Federal taxes, not including interest and penalties.2) If these deductions were not made improperly, then the prices of all services should have dropped because the copper wire’s value was slashed and everything over it should have had major price reductions, including all business and residential services. (In December 1999, NNI re-filed this complaint. Appendix 3)

5) The FCC Definition Of Advanced Networks Is “Dumbing Down” The Definition Of “Broadband”— “The Imagination Bottleneck”

The FCC states that advanced network broadband is a two way service with speeds of over 200Kps, which is about four times the speed of current 56K modems. (NOTE: A “Kilobyte” is a unit of the speed as in “kilobytes-per second”, KPS-In English: The more Ks, the faster the Internet runs and the more you can do with it.)

“For purposes of this Report, we define “broadband” as having the capability of 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. This rate is approximately four times faster than the Internet access received through a standard phone line at 56 kbps. We have initially chosen 200 kbps because it is enough to provide the most popular forms of broadband — to change web pages as fast as one can flip through the pages of a book and to transmit full-motion video.”

By using this definition, the FCC is dramatically watering-down the standard of what was promised and, in many cases, already paid for. Broadband, by its very name, (and as the previous Bell company annual reports, state and federal filings describe), was not supposed to have speeds in the Kilobyte range but in the Megabyte range (1000K equals 1 Megabyte). — and capable of handling interactive “Full Motion video” (Full-motion video is the ability to have a picture that looks like it’s a TV show or a rented movie). According to most experts, full motion video requires 45 megabytes without compression and over 1.5 megabits with current compression. Less than that will sacrifice quality: the picture will be jerky or the color or image not as clear.

Pacific Telesis’s 1994 Fact Book clearly states that it was rolling out speeds the equivalent of 50-750 MPS, (Megabytes-per-second) to the customer and 5 to 40 MPS from the customer’s premises.

Did America’s telephone subscribers spend billions of dollars to end up with moderate web speed over the same copper wire?

The Imagination Bottleneck

Instead of providing the fiber-based, high-speed network American consumers were promised, the incumbent LECs have substituted low speed services using existing infrastructure. Overnight, it seems that ADSL and cable modem services have been positioned as “advanced network,” and this slight of hand appears to have been accomplished with the overt knowledge and approval of the Commission. The goal of making the Internet faster is commendable, but by settling for substandard services the telephone companies and the Commission have mortgaged the American digital future. We are now relegated to a low bandwidth, not quite two way world, in those cases where service is available at all. We will have jerky, blurry video images, provided via the same old copper plant, even though we paid for a truly advanced network.

We are not suggesting that more money needs to be spent for its own sake, although as a matter of simple fairness, if American telephone subscribers are not to enjoy the benefits of the new network we paid for we ought to be made whole. The unfortunate reality is that by settling for only what can be made available on the substandard network, the Commission has lowered the bar. Joe Plotkin, President of BroadbandNow coined the term “Imagination Bottleneck” to refer to that dynamic whereby innovation is stifled because technologies pace is slowed, or the latest technology is unavailable. It is impossible to measure, the cost of flagging vision and lost opportunity in real terms, but the effects are obvious.

By allowing the Bell companies off the hook, by not requiring them to deploy the wiring as they promised to, the Commission risks thwarting the development of new services that could greatly enhance the ways we educated, edify and entertain ourselves.

6) Given Their Demonstrable Bad Faith, The FCC Should Not Accept Promises Made By The Bell Operating Companies.

Incredibly, it would seem, the FCC quotes the Bell Company deployment plans to build the case that all is well with the advanced network deployments. For example:

“In Bell Atlantic’s service area, ADSL is available now to some customers in the Washington, D.C., area and in Pittsburgh, with plans to add Philadelphia and the Hudson waterfront of New Jersey next year. Bell Atlantic has formed a marketing alliance with America Online, Inc., in which Bell Atlantic hopes, by the end of 1999, to make ADSL available to seven million subscribers. Its goal is to offer ADSL to fourteen million customers by the end of 2000.” (FCC Report)

Notwithstanding scant evidence of any actual deployment of even the substandard network, the Commission seems unable to separate actual deployment from the hype put forward by the Bell companies. Promises of service to customers are not the same as actual deployment of service to a customer. Envisioning a product, even talking about offering that product is not the same as actually being able to deliver it. Furthermore, given their dismal record and lack of past performance one wonders how the Commission could accept any representation by the Bell Companies on its face. Remember, if Bell Atlantic (including NYNEX) had met their past deployment plans over 11 million households would enjoy five hundred channels of interactive services by now.

Moreover, Bell Atlantic’s lower cost ADSL Infospeed products that offer 640K and 1.6 MK, are both essentially one way services. The return path from the customer’s household to the network operates at only 90K, a full 110K lower than the FCC’s own definition of broadband, yet the Commission seems willing to settle for a slower service.

There are numerous other caveats to the Bell company offerings. For example, the Bell Atlantic product literature states the company is offering “best efforts.” As they put it “There is no guarantee of data throughput.”. That’s like selling a car and saying “The car gets fifty miles to the gallon, sometimes” Furthermore, the higher speed services only work if you live “8000 feet from the loop” eliminating the practicality for rural and suburban deployments.

The report notes that Ameritech states that it cannot deliver XDSL to 45% of its customers over the current phone networks, but does not address other relevant options or timetables. What is the true number of customers that can be served in a state, counting these numerous problems?

7) The FCC Needs To Examine Anti-Competitive Action By Bell Operating Companies Against Advanced Network Competitors And Internet Service Providers.

The Internet Service Providers (ISP) and the smaller Competitive Local Exchange Companies (CLEC) are significant innovators of America’ technological future. The success of the Internet as we know it was not made possible by the local Bell companies alone, but rather by the efforts of those thousands of entrepreneurs who dedicated both time and expertise and capital to building a fragile industry for the Information Age.

Most of these entrepreneurs must deal with the Bell companies for service and have found themselves at a significant competitive disadvantage. NNI is currently conducting a survey of CLECs and ISPs related to service issues with the USISPA. In NNI’s pilot study, we found that more than 50% of ISPs report that they receive very poor customer service including: lines dropping in and out of service; failure on the part of the RBOC to keep scheduled appointments for installation and service calls; the RBOCs’ inability to deliver on advertised products such as ISDN and Digital Centrex; and significant billing errors. One CLEC, Covad Communications that offers advanced network DSL services, testified before the New York Public Service Commission in a “271” hearing August 31, 1999 that Bell Atlantic’s service was “dismal to date” and stated that half of all lines were not being provided on time.

“Bell Atlantic’s record, particularly as it concerns broadband services, clearly shows that it has not yet met the standard of parity access set forth in the Telecom Act. Our records show that more than 50% of our loops are not being provided on time, making it clear to us that this filing is premature. Expanding access to broadband services is a national priority that should not be overlooked as there is a need for these vital services.”

The network problems that the CLEC experiences exacerbates those encountered by the Internet providers who depend on Covad’s connectivity. Ian Stevelman of Bwaynet, an Internet service provider dependent on Covad, stated:

“It’s a chain reaction— Covad can’t get Bell Atlantic to deliver the basic circuit to the customer, and then it makes us look bad. And it’s happening on virtually every other order we place. The New York Public Service Commission should have stepped in and fined Bell Atlantic for its incompetence— or more sinister reasons.” (Interview 9/1/99)

This is not a localized problem, but widespread enough to indicate significant shortcomings in each of the Bell territories, seriously delaying and impeding competition. At a recently-convened Congressional hearing “CEO Summit on Rural Telecommunications: Closing the Digital Divide” members and staff heard how US West’s treatment of its competitors was stifling independent Internet providers and CLECs.

Dan Languth, CEO, Black Hills Corporation, a primarily rural energy company that entered the telecom market with a new fiber-based 10 megabit service, stated that his company built an entire new network, but it can’t finish it because US West hasn’t delivered appropriate service-in over one year:

“So let’s talk about some of the problems that we’ve seen. We’ve put in a whole new fiber optic service, with a sonet ring extending for over 200 miles, in one year, yet we still can’t get the basic trunking requirements from US West.”It seems a little ironic that we can build a brand new system, with procedures, policies and times and US West can deliver on just, just trunking.

“If we can deliver a whole new system and US West can’t even do the trunking, we have a serious problem.”

Susan Ashdown, CEO of Xmission, a small Utah ISP stated US West was even slamming her customers:

“In many regions where competition doesn’t exist, we must rely on the monopoly provider, which in our service territory is US West. And because of this lack of choice, we have faced a much greater difficulty to offer high speed Internet services.”In Utah DSL was rolled out very unfairly. It’s a bottleneck situation where our customers have to go to US West and they are discouraged at that point to use an independent service provider or they are outright slammed.

“In the long term, US West will get the lion’s share of the market through no better marketing, for just being the incumbent monopoly provider`

These issues are widespread throughout the US West territories and neither the FCC nor the states have demonstrated a willingness to enforce the basic tenets of the Telecom Act of 1996, which protects competitors from this abuse. We hope that the FCC will soon remedy this as it implements its new enforcement bureau.

Probably the most telling statements about the sub-standard customer services being supplied to competitors comes directly from the Department of Justice recent decision, (November 1st, 1999), to deny Bell Atlantic entry into long distance in New York. The DOJ found that Bell Atlantic had not met its requirements for opening its networks for competitors, and it recommended that Bell Atlantic not be allowed to offer long distance. However, the report also found that Bell Atlantic was delivering sub-standard customer services to competitors.

The DOJ report found that 30 to 40% of all order confirmations to the CLEC were inaccurate while over 80% of all orders required some form of manual processing.

“…when Bell Atlantic does return order confirmations, a substantial portion of those confirmations are inaccurate. Bell Atlantic has acknowledged in NYPSC proceedings that as many as 30 to 40 percent of confirmations are inaccurate,(30) and CLECs have alleged that levels of inaccurate confirmations are in that range or even greater.(31) Moreover, it appears that as Bell Atlantic struggles to improve its performance in returning manually processed order confirmations and rejections more quickly, its accuracy suffers significantly. In September, Bell Atlantic improved its combined UNE-P/UNE-L on-time performance for confirmations and rejections,(32) but only 42 percent of manually processed orders were correctly submitted by Bell Atlantic personnel to Bell Atlantic’s provisioning systems (significantly down from only 64 percent for August).(33)”These problems with late and inaccurate order confirmations appear to be the result of a high degree of manual processing of hot-cut orders at the ordering stage.(34) In August, more than 83 percent of unbundled loop orders required manual processing of some kind by Bell Atlantic employees, and the problems with late or inaccurate confirmations and rejections appear to arise almost exclusively in connection with these manually processed orders”

And this costs the CLEC (and ISPs) money and time.

“The high level of slow and inaccurate manual order processing imposes significant costs on CLECs, which must devote time, effort and expense to identifying and rectifying problems in order to ensure that orders ultimately are processed correctly.” 

8) The FCC And Congress Need To Determine Whether The State Public Service Commissions Are Able To Assess And Enforce Advanced Network Plans And Deployment.

In various other filings, research reports and books, we documented our findings that the public service commissions are, at best, hopelessly underfunded or, at worst, have abdicated their responsibility to be the driving force in regulation and enforcement. Certainly each commission must be considered on its own merits, but overall the commissions have failed to make the deployment of advanced networks a reality, just as they been unable or unwilling to control the Bell company profits, which have reached all-time highs.

While much could be speculated as to the reasons, the simple fact is that the documentation presented clearly indicates that public utility commissions have not been able to manage the process of new service deployment and promotion of competition effectively and, at a minimum, an investigation by the Commission and perhaps the Congress is warranted. We believe, given the nature and scope of the problems and the risks to the marketplace if such practices are allowed to continue, that a national solution is called for.

Also, based on the NNI pilot survey of Internet service providers, most companies do not feel that their current state commissions are effectively enforcing the current laws, and therefore are stifling their ability to innovate and deliver new advanced network services. We are hopeful that the FCC and Congress will have the tenacity necessary to examine this issue clearly, and take much-needed remedial action.

9) The FCC Should Examine The Related Customer Cost And Fraud Issues.

Finally, the FCC should always be concentrating on the consumers financial interest. Are customers being overcharged? When considering the status of advanced networks, there is also the larger issue: How much money did customers pay for services they never received?

In our related Complaint, “The Real Truth In Billing” we examine the monetary impact of the Bell’s business practices, focusing on the advanced network promises. NNI believes that over $50 billion has been garnered through a series of promises made and failed network deployments. The pattern of these practices have been so widespread and comprehensive that we believe it constitutes a shameful “bait and switch” scheme perpetrated on the American telephone subscribers, and we hope the FCC will pursue this investigation and then require restitution the form of consumer rebates and lower prices.

Also, since many of the Bell companies already received money for the wiring of schools and libraries, then should the FCC’s E-rate be adjusted, or even removed? If the Bell companies’ overall profits were taken into account, shouldn’t FCC related charges, including FCC Subscriber Line Charges, Access fees, and even Universal service costs be recalibrated or even dropped?

Therefore, in order to protect that public interest, we respectfully request:

· The FCC should immediately start to compile for every state, the Bell companies’ failed deployment plans, not just the current ADSL rollouts. As we show, many of the plans though starting in 1994 or 1995 are still costing customers today. This examination should include the Bells failure to deliver ISDN.· The FCC should calculate all of the monies collected by the Bell companies in various states from customers, including that resulting from all alternate regulation plans, as well as state specialized funds for the wiring or schools and libraries. The FCC should also take this opportunity to examine if the advanced network plans made by the Bell companies during their previous mergers (SBC and Pac Bell, Bell Atlantic and NYNEX) that were ever fulfilled. A plan should be devised to make consumers whole.

· The FCC and FTC should investigate whether fraudulent and misleading statements and behavior was engaged in by the Bell companies, their consultants, accountants, lawyers and lobbyists to change state and federal law, and suggest appropriate remedies.

· The FCC should immediately investigate ongoing Bell company mis-treatment of all competitive advanced network suppliers, including Internet service providers and CLECs.

· The FCC and the IRS should investigate whether the Bell companies took improper deductions on their state and federal returns.

· The FCC should work with the state utility commissions to determine if refunds, rebates, and lower prices should be imposed.

· The FCC should create an NOI regarding the ability of the state public utility commissions to properly regulate and enforce advanced network deployment on a timely and reasonable fashion.

Filed: 12/9/99

Bruce Kushnick, Executive Director, New Networks Institute

For:

Jerry Michalski, Sociate.com

David S. Isenberg, Principal Prosultant(sm), isen.com, inc.

LJ Davis, author

Peter Brennan, Director of Business Development, Tele-Publishing

Joe Plotkin, President, BroadbandNow

Alexis Rosen, President, Panix

Ian Stevelman, President, Bwaynet

J. Henry Priebe Jr. Blue Moon President & Network Administrator

Daniel Berninger, Founder, CEO, TelecomComputers.com

Bruce Fancher, President, Mindvox