phasize as an association the benefits that could result from research and development if they were targeted toward local telephone customer needs.

Those benefits would include improvements in overall efficiency and technical quality and, in general, we believe a more robust network.

The opportunity for the Bell operating companies to enter manufacturing and information services markets, we believe, would push others to develop more products and applications faster.

We think a change would lead to benefits if the Bell companies were allowed into those businesses because there would be greater economies of scope and scale that would justify product development for all of us.

The number and size of many of our non-Bell telephone companies is simply not great enough to permit a manufacturer to invest the large sums needed to develop products for our limited markets.

USTA also has emphasized that the non-Bell local companies must have continued access to established avenues of supply and to new or advanced network applications when manufacturing and information service barriers are finally removed.

As recently as this April, our USTA board of directors restated its commitment to those objectives and found that those objectives would be achieved if the AT&T consent decree restrictions on manufacturing and information services are removed in favor of specific policy conditions. We have set down some conditions for eliminating the information services restriction. Our board, for example, emphasized the need for coordination and for standards for local telephone networks to benefit all customers and all companies for nationwide services.

Our board also emphasized the need for coordinated service and network development to meet individual market needs and to help all companies make information services broadly available as they develop.

In the manufacturing area, our board emphasized that all local telephone companies must have available to them the equipment and software that may be developed by the Bell companies for the public telecommunications network without discrimination or self preference as to price or terms and conditions.

Let me turn now quickly to a personal view of these issues as CEO of a medium sized non-Bell company. My company is an independent telecommunications company, unaffiliated with any regional Bell holding company, therefore, it is not subject directly to the modified final judgment. We operate 565,000 access lines in New York, Pennsylvania, Michigan and Indiana. We are in the long distance business through a company known as RCI and we design and install and maintain integrated business communications equipment and systems through Rotelcom Network Systems. I'd like to comment from my Rochester Tel perspective about the MFJ's manufacturing restriction and how it affects central office switching. As Peter Huber pointed out in his 1987 report to the Department of Justice, "Buyers are comparatively fragmented; no single one controls much more than 10 percent of the installed switching base and in any year, no single one is likely to account

for much more than 20 percent of the lines purchased. The two largest sellers by contrast, each account for close to 40 percent of the digital lines, either installed or sold each year."

Once a decision to buy an essential office switch has been made, the local exchange carrier is essentially in a monopoly environment with respect to the purchase of additional hardware and software for that switch or system of switches. Software upgrades incur frequently over the life of a switch.

I am making these observations in no way to imply any wrongdoing or impropriety on the part of any manufacturer, but rather to describe the market and the resulting outcome under the MFJ manufacturing restriction.

A major outcome is one that is problematic to me as a telephone manager because my company is dependent on manufacturers totally for the services offered to the Telco's customers, to our customers. That is because those services are provided through the operating software which are inherent in the switch and over which the telephone company has no control.

The manufacturers of essential office switches control the software and the introduction and timing of the services. While in theory my company could fund development of those services, in practice, we simply are too small to carry that kind of financial burden.

There is an alternative and I want to quickly talk about that alternative. It is part of a desirable evolution which we refer to in the industry as the intelligent network architecture. That architecture is easy to understand in concept. In the intelligent network, the switch no longer will contain all the logic necessary to provide services. Rather, the local exchange carrier could utilize high level programming language to create new services through adjunct processors which are separate from the switch.

The process of creating and providing those services is best carried out, I believe, by those who directly serve their customers, in this case, the local exchange carriers acting alone or jointly with other producers.

Because a company my size does not have the resources, financial or human, to create that software, we have to look elsewhere. When I look elsewhere, I see the regional Bell companies who have the incentives and resources to create those software products.

My companies and their customers could be beneficiaries of those products, but as long as there is an MFJ manufacturing restriction, that won't happen.

I thank you very much for the opportunity to appear here and I look forward to your questions. Thank you.

Mr. BROOKS. Thank you.

[Mr. Hasselwander's prepared statement follows:]

STATEMENT OF ALAN C. HASSELWANDER

CHAIRMAN OF THE

UNITED STATES TELEPHONE ASSOCIATION

AND

PRESIDENT OF ROCHESTER TELEPHONE CORPORATION

Good morning. My name is Alan Hasselwander. I am appearing before the Committee on behalf of the United States Telephone Association, as its current chairman. I am here also as President of Rochester Telephone Corporation, a telecommunications company based in Rochester, New York.

The United States Telephone Association, or USTA, is the primary trade association of the local telephone industry. There are 1,359 local telephone companies in the United States, of whom more than 1,050 are members of USTA. USTA's membership includes each of the largest 33 local telephone organizations, and all but two of the largest 50. Each of the Bell Operating Companies divested by AT&T became a member of USTA at divestiture. The membership of USTA includes nearly 1,000 quite small telephone companies, each of which serves less than 20,000 local access lines. USTA itself has roots that stretch back to 1897.

The Ball Operating Companies serve approximately 78% of the local telephone access lines in the United States, but only 41% of the geographic area. Thus, the non-Bell local telephone companies, still called "independents", play a very large role in the delivery of local and long distance service in the United States. In Texas, for example, there are about 60 local telephone companies. Of these, only Southwestern Bell Telephone and U.S. West Communications (in El Paso) are subject to the AT&T Consent Decree restrictions. The rest vary widely in size from subsidiaries of our largest non-Ball member, GTE, down to small companies with under 100 lines.

Many of the USTA member companies who have not been directly constrained because of AT&T's divestiture decision have elected to diversify into long distance, manufacturing, information services and other areas. The entry of these local telephone organizations has contributed to the diversity and competitiveness of these markets, and has been achieved without disrupting their nature. My own company is involved in a number of diversified activities.

USTA participated in the proceedings which led up to divestiture, and in the many proceedings which have taken place since then. For example, USTA participated in the triennial review proceedings of the U.S. District Court in 1987, and has filed a brief in the appeal which has followed.

USTA consistently has emphasized the importance of encouraging continued development of the advanced technologies that can benefit local telephone customers, and the importance of promoting prompt and unhindered introduction of such technologies into local telephone networks. We believe it is important for those who depend on local telephone networks in their businesses and home life to have access to new services as they emerge. We believe it is equally important that the evolution of this nation's local communications infra

structure not be retarded by barriers that are overbroad.

USTA strives to work by consensus, and at times the development of a common view can be painstakingly slow. But in the end, we at USTA realize that the promise of universal service, and the evolving vision of our communications future, depends upon our moving forward together. Local telephone networks are interconnected by law, and the optimum deployment of communications services, particularly those that are national in scope, demands that all local telephone companies ultimately adhere to many of the same rules and standards, so that all citizens can have access to emerging technologies and services.

In the triennial review, USTA took the position that the AT&T Consent Decree's bans on information services and on manufacturing should be removed in favor of more targeted safeguards. USTA emphasized the benefits that could result from research and development that could be more targeted toward local telephone customer needs. Such benefits would include improvements in overall efficiency and technical quality, and a generally more "robust" network. The opportunity for the Bell Operating Companies to enter manufacturing and information services markets would itself push others to develop more products and applications, faster.

A change was seen as leading to benefits for the non-Bell companies because there would be greater economies of scope and scale available to justify product development for all. The number and size of the non-Bell