7979 OLD GEORGETOWN ROAD SUITE 700 BETHESDA, MARYLAND 20814-2429 301-718-0111 FAX 301-215-4033

EMAIL spri-info@spri.com WEBSITE www.spri.com

Mr. Chairman, Members of the Subcommittee. My name is John Haring. I am a principal in the economics and public policy consultancy Strategic Policy Research, Inc. (SPR). In a previous life, I served as Chief Economist of the Federal Communications Commission and as Chief of the Commission’s Office of Plans and Policy. Before that I taught economics at the University of Virginia and served consecutively on the staffs of the Federal Trade Commission, the Antitrust Division of the U.S. Department of Justice and at the Civil Aeronautics Board under Alfred Kahn.

I am appearing today in lieu of my partner Chip Shooshan, who was originally planning to present our testimony, but had a conflict after the Hearing was rescheduled. As many of you know, Chip served for several years as Chief Counsel and Staff Director of what is now the House Telecommunications Subcommittee. Chip was also an adjunct professor at the Georgetown University Law Center for sixteen years where he taught communications law and regulation. I know how much he, as a Hill veteran, regrets his inability to be here today.

The detailed results of our study and the conclusions we reached are contained in a filing made by the Alliance last year with the Federal Communications Commission. I have provided copies of that study for the Subcommittee’s consideration.

I would like to summarize for you today what we found.

Generally speaking, as a matter of economic principles, the free market is best suited to determine entry, pricing and investment—in short, the most efficient allocation of resources. Government intervention should be limited to instances where there is a market failure; that is, instances where it is clear that competitive forces must be supplemented—and I emphasize, even then, supplemented, not replaced—by regulation. Government intervention in an efficient market actually tends to reduce—not enhance—the economic efficiency of the market, by, for example, encouraging inefficient entry and investment.

So a good place to start an economic analysis of forced access is to assess how well the markets are working.

The commercial real estate industry is competitively structured. There are over 712,000 commercial office buildings in the United States, accounting for over 10.5 billion square feet. The industry is characterized by very low levels of concentration. In the business sector, the fifty largest firms account for only 22% of revenues. On the residential side, they account for less than 10% of revenues. There are no barriers to entry and exit. And there are savvy customers who are perfectly capable of exploiting the alternative sources of supply.

And you don’t have to take my word for it. In 1996, the Federal Trade Commission exempted transactions involving business and residential rental properties from pre-merger notification requirements under the Hart-Scott-Rodino Act because they are not "likely to violate anti-trust laws."

Regulatory intervention in the form of forced access is, therefore, not only unwarranted, but also could be counterproductive by "chilling" innovation and stifling the very creative arrangements currently being negotiated in the competitive marketplace. As building owners compete with each other for tenants, telecommunications capabilities—including unique arrangements—take on an even greater importance. More and more "smart" buildings are coming on the market all the time in an effort to attract high-technology and "e-commerce" businesses.

We see pretty much the same picture when we examine the market for local telecommunications services. CLECs, including fixed wireless providers such as Winstar and Teligent (who have been among the leading advocates of imposing forced access), are growing rapidly and about as fast as they can add customers. I have attached a chart to my written testimony that shows the average number of buildings in each market served by some of the larger CLECs. On average, these eight firms have obtained access to nearly 230 buildings in each market in which they operate a local network.

But again, don’t take my word for it. Here is what Teligent had to say in a press release it issued on December 20, 1999:

Forty markets. Seven thousand buildings. Ten thousand customers. In 14 months…Teligent has…signed lease or option agreements…with hundreds of individual landlords and more than 35 major real estate concerns [and] has secured access to more than 700 million square feet of office space throughout the United States… "No other local communications company has launched as many markets in as short a time," said Teligent Chairman and CEO Alex J. Mandl.

 

Those strides have not gone unnoticed. Not only does Teligent count AT&T as a major shareholder, but it also recently attracted a large investment from Microsoft.

Microsoft is also an investor in Teligent’s chief wireless competitor, Winstar. On January 7, 2000 Winstar announced that it had added 1,500 buildings in the fourth quarter of 1999 alone, bringing its total to 8,000 buildings.

And it is not just the big name players that are growing. Last year, we reviewed the market capitalization of 20 publicly traded CLECs. Their market capitalization at that time amounted to $92 billion. More recently we identified 34 publicly traded CLECs with a collective market capitalization of $176 billion.

So, if the real estate industry is competitive and CLECs are thriving, what is the problem that forced access is intended to solve?

The record at the FCC—such as it is—is largely anecdotal and contains few specific examples of unreasonable conduct on the part of building owners. In our view, it is hardly an adequate basis to justify a regulatory taking that my colleague Steven Rosenthal has estimated could expose the government to a liability of more than $10 billion.

As I see it, the complaints of those CLECs that are leading the forced access fight arise from three circumstances. First, there may well be building owners and managers who, for whatever reason, are denying access to multiple telecommunications providers or who are setting a high price for that access. In my view, although those owners and managers have that right, in the highly competitive real estate market, they may be shooting themselves in the foot by making their properties less attractive.

Second, newer entrants (and there are hundreds of CLECs nationally) may find that their competitors got to a building first. Where a building already has several providers in place, the owner may quite appropriately decide not to permit additional access; indeed, it may be physically difficult, if not impossible to do so, if all riser space is occupied. There are 14 CLECs certificated in the District of Columbia. Is the intent to ensure that each one of them has access to every building in DC?

Finally, the CLECs argue that they should have access because the incumbent local telephone company (for example, Bell Atlantic here in Washington) has access. Why shouldn’t government "level the playing field" if it wants to promote local competition? There are two fundamental problems with this superficially appealing argument. First, as I noted earlier and as our study demonstrates, local competition is alive and well. The CLEC industry as a whole is flourishing. Our national telecommunications policy is to promote competition, not to ensure that every competitor succeeds. Second, the CLECs want the benefits of forced access without the responsibility of providing universal service. Incumbents, such as Bell Atlantic, are under a legal obligation to serve every business and residence customer. New entrants bear no such burden; indeed, they are free to pick and choose among locations they want to serve.

With regard to the value of the potential takings were the federal government to impose a forced access policy, we have reviewed the discussion of potential damage claims presented by Steven Rosenthal in his testimony. The number of commercial office square feet in the U.S. in 1995 was $10.5 billion. The telecommunications revenues per rentable square foot were about $0.12 in 1997. Thus, telecommunications revenues were about $1 billion per year in 1997 for commercial office space alone — i.e., this estimate does not consider residential rental property. This amount has been growing and can be expected to continue to grow rapidly as businesses intensify their use of communications capabilities and there is growth in the total amount of space. Telecommunications is obviously assuming an ever increasing importance in the way people do business. Tenants increasingly demand more telecommunications services. Forced access can therefore be expected to reduce the anticipated revenue stream significantly. Taking these growth factors into account, a multiplier significantly greater than 10 is required to convert the stream of lost revenues into a discounted present value. We thus conclude that Rosenthal’s illustrative reference to the value of lost revenues is not only reasonable, but, if anything, likely to understate actual "takings."

In conclusion, I urge this Subcommittee to consider not only the compelling Constitutional arguments against forced access, but also the overwhelming evidence that the marketplace is working. In my opinion, government intervention is unwarranted and is likely to be counterproductive.