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(1) (a) (i) 1) a)%8=(%  H*%Ftq head1 #u'd#2p}wC@ #"i~'^:DTddDDDd4D48ddddddddddDDd||||DXp||dp||ppL8LTdDddXdX8dd88X8ddddLL8dXXXLP8PlD4lTDDD4DDDDDDdDd8|d|d|d|d|dX|X|X|X|XD8D8D8D8dddddddddpX|ddddpXd|d|d|d|dXXlXx|X|X|X|XdddldldD8DdDDDddllXp8pHpDp@p8dtdddd|L|L|LdLdLdLllpHp8pTddddddplpLpLpLdpDddLpDpdx4ddC,CWddddddddddddddddddddddddddddddddddddddddNHxxHhdLdddddd8@d<@d<DDppdDDxddzHxxHkddDpd<"dxtldxxd2ρKwzK|K wX"i~'^:LpddDDDdp4D48ddddddddddDDpppdLd||p|||D8DpdDddXdXDdp88d8pdddLL8pXdXLD,DpD4ppDDD4DDDDDDdDd8dddddXXXXXL8L8L8L8pddddpppp|Xdddd|Xd|ddddXXpXXXXXdddpdppL8LdLDLdpppd|8|h|D|L|8pppddLLLpLpLpLpp|l|8|ppppppp|p|L|L|Ld|DppL|D|d4ddC8CWddddddddddddddddddddddddddddddddddddddddNHxxHddLdddddd4d<d<CCoodCCddCoCddzzzzzzzzzzCCCCozdddddddYYYYY8888dddddddndddddYd \=yND,%by*f9 xr G;X@ND,4  pG;v ~uPhPhyjj0bG ;FP5^&G jvS&_ j2ۛ@@[@"5@^;N_uuµ*NNu;N;AuuuuuuuuuuAAgשN[ЩܩNANnuNgugugNuuAAuAuuuuN[Auuuugp/p~;NN'NN]`NuugggggМgggggNANANANAuuuuuuuuuuguuuuuuugggggggguuuuuu]uNuNNNu[uA`uuuЩN`[[NR;juNguuuuu@HuFuFNNgguNNuuNgNFtN捍:]@suuCzsffz;N_uuµ*NNu;N;AuuuuuuuuuuAAgשN[ЩܩNANnuNgugugNuuAAuAuuuuN[Auuuugp/p~NuguuNNеNNggRuN[N;Nuuuu/uN@uNu]FFNj;NFHugМNNNNugggggggggggAAAAuuuuuuuuuuuuuu"5@^;NuuANNu;N;AuuuuuuuuuuNNu٩[uܩ驩NANuNuggNuANA‚ug[Nuuug\4\y;NN'NN]`Nuuuuuu驩ggggg[A[A[A[Auuuuuuuuuuuuugggggguuuu][[N[uA`u驩gg[[NR;~uNuuuuuuFMuFuFNNuuuNNuuNuNFtN捍:]@suuCzsffz;NuuANNu;N;AuuuuuuuuuuNNu٩[uܩ驩NANuNuggNuANA‚ug[Nuuug\4\yNuuuuNN鵵NNuuRuN[N;Nuuuu4uNFuNu]FFN~;NFMuu驜[[[[uuuuuugggggAAAAuuuuuuuu"5@^;Nbuuµ2NNu;N;AuuuuuuuuuuNNu׎NgœuŽ[A[buNuugugAuuAAgAuuuu[[Auggg[]@]~;NN'NN]`NuuuuuuuМgggggNANANANAuuuuuuuuuguuuuguuuuugggggguuuuuu]uNuNNNuggA`uuuܜ[`u[u[NR;zu[uuuuuu@HuFuFNNuNNuuNNFtN捍:]@suuCzsffz;Nbuuµ2NNu;N;AuuuuuuuuuuNNu׎NgœuŽ[A[buNuugugAuuAAgAuuuu[[Auggg[]@]~NuuuNuNܵNNRuN[N;[uuuu@uN@uNu]FFNz;NFHuuМNNNNuuuuuuugggggAAAAuuuuuuuuuuuugu2Z @gRC7PC2X DXP\  P6QXPD5PC2XEXP*f9 xQXXE?^N;XJ^\  P6QP.F?cN;X5Uc4  pQG=^N;X^*f9 xQX.7UC2X5xXU4  pQXdC7dqCdPn<dYzzzzCCCCqodYYYYYYYYYYY8888dddddddnd"5@^2Coddȧ8CCdr2C28ddddddddddCCrrrdzNdzoȐC8CtdCdoYoYCdo8Co8odooYNCodddYO,Oh2CC!CCPRCdodddddȐYYYYYN8N8N8N8oddddooooddoddddzodddYYYYYYddddooPoNoNCNodo8RoodȐYYoNoNNF2ldCdddddd&0*(($"ԌxUnder the Act, Congress required the FCC to articulate broad, procompetition  X-principles necessary to implement the Act. The states are then required to implement these principles by mediating, arbitrating and approving local interconnection agreements. Indeed, states will end up doing the lions' share of the work and will be tailoring the general principles to their specific situations. xThe direct issue in the 8th Circuit stay is the role of the FCC in setting the rates for interconnection. But nowhere in our rules did the FCC set a specific price we left that role specifically to the states. Instead, we adopted a pricing methodology that we believe is mandated by the Act for local interconnection. xTo understand why the forwardlooking pricing methodology is so important, we must first understand the process that Congress established.  X - Competition is a Process xIntroducing "competition" to the local exchange is more than waving a magic wand  X{-and chanting a spell. Competition itself is a process a process that occurs in an environment where rival firms duke it out to provide goods and services to customers. xAdam Smith described competition as the "independent striving for patronage by the various sellers in a market." In a rivalrous market, sellers are keenly aware of the presence of their rivals. George Stigler called this type of competition "rivalry in a race" which is a fitting vision because it implies that individual suppliers and purchasers may be winners and losers in any individual transaction.  X-xCompetitive rivalry is inherently dynamic, not stationary, and results in tremendous economic change. Rivalry may tend to reduce price to marginal cost, but more importantly it also encourages the development of newer and better products. Schumpeter called it the process of "creative destruction." Entire firms and industries can get blown over by the galeforce winds of competitive rivalry. Firms not on the cutting edge of technological development and marketing will one day find themselves out of business. xBut this process does not exist in a vacuum. Among other things, it exists in the environment of public policy. What's important to note is that public policy has a great deal of impact on how the competitive process works in an industry. That is, whether a competitive process is healthy in an industry depends not only on technology and consumer preferences, but also on the rights and duties of firms which are derived, for better or worse, from what the government does. xFor instance, if a government gives an exclusive franchise to a cable operator, then  XU%-monopoly will ensue. Well, if only one firm is allowed to enter, any investment by a new entrant is socially inefficient because he will not be allowed by government to recruit customers. Is that a "natural monopoly"? A "monopoly", yes, but certainly not "natural."")'0*((%"ԌxThere are more theoretical examples as well. For instance, governmental guarantees of property rights are fundamental to free market competition in almost all sectors. xThe influence of public policy upon the competitive process is particularly true in the telecom industry, where entry was outlawed for many years. It is as if you had a vacant lot where for sixty years you continually destroyed every instance where a plant tried to grow. If you then wanted to restore that plot to a tallgrass prairie, you would have to do more than just walk away and come back in six months to see how it is going. It will require affirmative and extraordinary steps on your part. xAnd the transition from a public policy environment where monopolies were sanctioned and protected to one in which competition reigns will be, by definition, an uncertain and traumatic process. Just ask the citizens of the former Soviet Union. xTo have a robust competitive process in local telecom markets, government has to establish an environment in which the competitive process will work. And I believe that the Telecom Act process properly implemented provides such a policy environment.  Xb- The Process of Local Competition Adopted by the Act xThe first thing that strikes me about local telecom competition is that we are faced with more than simply deconcentrating a market dominated by incumbent monopolies. This is not an industry like retail in which an incumbent's 100% market share in a town can be swiftly reduced simply by building a store across the street. If that is all it took to deliver competition to the local exchange, I am sure we would have done it long ago. xThere are really two things that give the incumbent monopolist an overwhelming advantage in local telecom markets, absent public policy intervention. Economists call them "network externalities" and "economies of density and scope." Any attempt to have a competitive process in local telecom markets must deal with these externalities and efficiencies because they make up the incumbent's advantage in this market. x"Network externalities" is a fancy way of stating that the value of a network to its users is directly related to its size. If I wanted to start a new telephone company but the only people my subscribers could call were my other subscribers how would I even recruit my first subscriber? My business plan is dead before I even begin. As a simple result of incumbency, and not as a result of any superior skill, foresight, or industry, is that the incumbent has essentially all the customers. xThis means that before an entrant can even begin to offer service, it must negotiate interconnection with the incumbent monopolist. And the incumbent has nothing to gain and everything to lose by negotiating interconnection with the entrant. If the incumbent were to drag out negotiations on termination charges, or make unreasonable demands on termination":&0*(($" prices, or on other terms as a condition of being reasonable on termination prices, it would be sitting pretty while the wouldbe entrant was effectively kept out of the business. xSections 251, 252 and 253 of the Telecom Act deal with this issue by establishing what I like to term a "Competitive Carrier Bill of Rights." In essence, these provisions set forward a list of default conditions available nationwide to new entrants who commence negotiations with incumbent local exchange carriers. These governmentallydefined and enforced rights can help entrants cope with the great disparity in negotiating power in these interconnection negotiations. xSection 251 mandates interconnection between incumbent and rival local carriers at  X -reasonable rates. This prevents the incumbent network form taking exclusive advantage of the current network externality in the incumbent network. Thus, calls originating on a rival network can terminate on the incumbent network at reasonable cost. A policy of mandatory interconnection requires that the rival entrant be allowed to share the existent economies inherent in the incumbent network. xSection 251 also requires incumbent local telephone companies to provide "unbundled network elements" to entrants at reasonable rates. The Act also states that incumbents must offer their retail services to entrants at wholesale rates so the entrant can resell those services. These provisions are efforts to deal with the inherent economies of density and scope that incumbents have and that entrants do not. xProvisions for unbundled elements and resale can affect the overall process of competition because they permit new entrants to achieve economies of density and scope similar to the incumbent. One reason these tools are important is that they allow an entrant to engage in massmarket advertising in a region even if its network is only in a small portion of the region at that time. Remember, this is how MCI and Sprint began. For a number of years, MCI and Sprint were the largest resellers of interexchange services and that was before they had their own national networks up and running. These tools can be used by entrants to fill in a service area and to let the entrants market broadly before they have their own facilities to support that broad reach. xIt is also important to remember that the incumbents generally often enjoy these efficiencies of density and scope solely because government affirmatively prevented competition. The incumbent's network is ubiquitous throughout a region because the government said it would be unrivaled and ubiquitous. I think it is entirely reasonable for government now to say that the incumbent must share those governmentgranted efficiencies of density and scope with the new entrants. xThe general idea behind the Competitive Carrier Bill of Rights is that the incumbent  XS%-monopolist is to share the inherent advantages of incumbency network externalities and efficiencies of density and scope with the entrant. The Act effectively provides the entrant a list of rights that both it and the incumbent know the entrant will be able to obtain in the"''0*((%" context of an interconnection negotiation. Knowing this in advance of interconnection will speed the interconnection process and hopefully will swiftly deconcentrate the market. xBut merely stating that entrants "have" these rights is not sufficient. Because you know and I know that the "devil is in the details" rights that are too expensive to exercise or that are impossible to enforce are not worth the paper on which they are written. xAnd that is why the 8th Circuit stay can be catastrophic. Because as a result of the stay, it is very possible that the price entrants must pay for interconnection, unbundled elements, and resale will be anticompetitive.  X - A ForwardLooking Cost Methodology is Proper xThe largest issue in the 8th Circuit litigation is the pricing of these rights. The FCC interconnection order ruled that these prices must be based upon a forwardlooking or economic cost methodology. Several incumbent local carriers believe that these rates should be based upon the "historic" cost of their networks. xThe reason incumbent carriers want to recover their "historic cost" is simple under most circumstances, the historic cost of the network, as reflected in current book value, is much higher than the forwardlooking value of those networks. If this is true, this is clearly a failure of past regulatory depreciation policies. That is, the incumbents were not allowed to "writedown" the value of their network assets as fast as they perhaps should have been. In a competitive environment, my accountant, my securities lawyer and Wall Street in general would be very uneasy if my firm had a "book value" for an asset significantly higher than the current economic value of that asset. xI believe that it is critical that the price of interconnection and unbundled elements be based on forwardlooking, economic cost because that is how businessmen in a competitive environment view their assets in making business decisions. In the important antitrust  XN-decision in the MCI/AT&T case in 1983, the 7th Circuit discussed this point and stated: Xx[I]t is current and anticipated cost, rather than historical cost, that is relevant to business decisions to enter markets and price products. The business manager makes a decision to enter a new market by comparing anticipated revenues (at a particular price) with anticipated additional costs. . . . The historical costs associated with the plant already in place are essentially irrelevant to this decision since those costs are "sunk" and unavoidable and are unaffected by the  X"-new production decision. (708 F.2d at 1116-17, as modified).  That statement unquestionably supports the FCC's interconnection pricing methodology. xThe underlying philosophy of the Competitive Carrier Bill of Rights that the incumbent must share its inherent advantage due to network externalities and economies of"'' 0*((%" density and scope also necessarily leads us to the forwardlooking price structure set out in the FCC's interconnection order. I do not see how it can be applied in any other way. xTake the cost of interconnection in essence, the cost of terminating calls on the incumbent's network. The cost of terminating calls must be at current economic cost not some fictitious function of past investment. Because if customers of competitors can call everyone, but they or their carrier has to pay above economic cost to terminate the call on the incumbent network, the network externality is not being shared. xWith regard to the pricing of unbundled network elements, remember that the reason network elements are to be available to entrants is so the entrant can share the economies of density that result from the incumbent's ubiquity. The cost of these elements must be based on forwardlooking cost, because when the incumbent contemplates using or expanding or rebuilding or selling its network, it is forwardlooking cost that it considers. As a result, only forwardlooking cost gives the entrant the same opportunities from the density and ubiquity of the existing network that the incumbent gets. To share the benefit of lower economic costs clearly involves pricing at economic cost. Any other price does not meet the goal. xUnfortunately, the 8th Circuit stay jeopardizes the swift adoption of forwardlooking cost methodologies for pricing interconnection and unbundled elements. However, I hope that when states actually sit down and examine the language and context of the Act, they will also conclude that forwardlooking cost is proper and will adopt such methodologies. In the wake of the 8th Circuit stay, I call on all states voluntarily to adopt this pricing methodology and to say so expressly. Any other approach will at a minimum delay, and at a maximum frustrate, Congress' intent that local competition be established.  X- Enforcement xGetting the pricing right is critical for the Telecom Act process of local competition to work. Another critical factor is enforcement of those rights. xMuch as I described earlier, competition is a process, and the enforcement of the implementing statutes and regulations are a critical part of the environment in which that process takes place. As I described above, entrants may be entitled in law to the most wonderful terms and conditions for interconnection or unbundled elements, but if these rights cannot be adequately enforced, they are not worth the paper they are written on. For local competition to take hold, enforcement of the Competitive Carrier Bill of Rights must be swift and certain. xAnd if there is one thing that is clear from the Telecom Act, it is that Congress wanted the FCC and the states to create as soon as possible an environment in which local competition could develop. The statutory deadlines in the Act make this clear the FCC was directed to issue local interconnection rules in 6 months and the states are to resolve interconnection negotiation arbitrations within 9 months of the commencement of negotiations. "#' 0*((%" Congress also changed the FCC's complaint procedure to require us to resolve complaints within 5 months. xTo deal with this new environment, the FCC must improve upon our traditional enforcement procedures. We are faced with the possibility of having to confront hundreds, if not thousands, of instances where the Commission may be petitioned to "do something." Not only will resources have to be directed at these issues, but both the states and the FCC need to think about how our procedures should be established so that we can provide the swift and certain enforcement responsibility that is needed. x We are investigating various formal and informal techniques to help establish an environment in which the entrant's rights are enforceable in a swift and certain manner. This process involves a critical assessment of our traditional means of enforcement most notably, complaints filed under Section 208 of the Act and requests for declaratory rulings. xIn addition to those traditional means, we are exploring some additional tools that Congress provided the FCC in the Telecom Act. Section 253 of the Act says that state and local governments can no longer prevent "any entity" from providing "any telecom" service and requires the Commission to "preempt the enforcement" of state and local actions that have the effect of erecting a barrier to entry. Section 271(d)(6) provides an expedited mechanism for the Commission to resolve issues of BOC continuing compliance with the "competitive checklist" once they are in the long distance market. xOther tools to consider are informal ones similar to those the Commission has used successfully in several recent matters where broad guidance was necessary. One idea that has been presented to us is a process in which the Commission would issue letter rulings or advisory opinions on particular topics upon request. This approach was used very successfully in the PCS auctions and I am sure were very useful in clearing up unnecessary confusion. Informal actions like this may help speed up and make more certain formal enforcement processes such as 208 complaints and court processes. xIf any of you have any additional thoughts about how the Commission can better fulfill its obligation, I would certainly appreciate your insight.  X -  Y!~   X- Y!~ Conclusion xI would like to wrap up my comments today by taking you back to 1844 in this old and historic city. In that year, Samuel Morse made the first telegraph message from Baltimore to Washington. It was the beginning of the modern communications revolution.  Xh$-xAnd, I would note the telegraph was actually the first digital service! "S% 0*(( $"ԌxThe first words that were transmitted in realtime between two people outside of shouting distance still resonate today. Those first words asked a haunting question: "What Hath God Wrought?" xIt was an eloquent and rather prescient statement on the unpredictability of technological change and regulatory development. Essentially, we as a society have been trying to answer that question ever since. xIt took another technological advance the telephone and a statesanctioned monopoly the Bell System to remove the teeth from the Western Union monopoly. Now, if we do our job correctly, the local telephone monopoly is in its last stages. xWill we see the development of rivalrous, interconnected broadband networks, consisting of a myriad of technologies, all vying for customers? Perhaps. xOr will we see data communications completely migrate from the telephone network in favor of parallel broadband networks in which case, the telephone network would look a lot like Western Union today? Perhaps. xMost importantly, what decisions will be in the forefront of telecommunications consumers ten years from now? xI confess that I don't have the foggiest idea. But I am convinced that the services available through existing and new information conduits to the home and office will be of a nature that will amaze us when we view the present retrospectively. The computer industry has undergone rapid waves of transformation that have virtually turned the industry upside down. The power of IBM's mainframes was swamped by networks of networked PCs. Now even that structure is being encompassed by the Internet. If rivalrous competition flourishes in the telecommunications industry, I do not think that we can even begin to estimate the pace or direction of change.  X7-xThe one thing I can tell you is that competition is not always a pretty process. To wit,  X-z (dramatically show transparency here for maximum comic effect)ă xAnd I can also say that the end result will be cheaper, higher quality and more innovative telecommunications products and services offered to consumers by vastly more efficient companies. xThank you for your kind attention. I would be happy to take your questions.