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#g2PQP#Where It Stands: An Overview of the Ramifications of the FCC  W -&Regulation T  `<h #^\  P6QJP#Strategic Interconnection and Competitive Reselling in the Telecommunications ;fIndustry T R  ^F<!James W. Olson Chief, Competition Division Office of General Counsel, Federal Communication Division  `d <T M25 September 1996  `x <+hDallas, Texas #g2PQP#  R -T#XX2PQaXP#  Yk-TP#g2PQP# " Xu- x"#XP\  P6Q DXP#Thank you, Mr. Chapman, for that introduction. I also want to thank our hosts for my invitation. I am very pleased to be with you today here in Dallas.  xNWhat you are about to hear are my views alone, not those of the FCC nor of the General  xCounsel's Office. As most of you probably know, the FCC will be defending its interconnection  xorder of August 8 against a variety of legal challenges. Given my position as the lawyer heading  X- xthe Competition Division within the General Counsel's office, I have been advised by my lawyers  x.to limit my comments on any subject reasonably within the scope of litigation. I hope this will not rob my presentation of meaningful content.  X- xI would like to begin by asking you to think how you would answer this question: What is your  X|-first recollection of consumer choice in telecommunications?  xKMy reason for asking is pretty simple. There has been considerable corporate focus, some would  X9- xsay "hype", on what the consumer wants in recent years. So, rather than view you as corporate  x.representatives, I invite you to think of yourselves as consumers of telecommunications. The  X -question again: What is your first recollection of consumer choice in telecommunications? For better or worse, our mental answers invariably date us. But let me share mine with you.  xMy first recollection of consumer choice was the ability of my parents to rent an AT&T Princess  x Phone in one of several different colors. Those of you a bit older than I may recall that the  xstandard black desktop phone was offered earlier in different colors. But the recollections of those of you considerably younger will be much more varied.  xBNow, let's "fast forward". This time, I would like to ask you to reflect on what  xjtelecommunications choices are currently of concern to you. [Pause] Your answers will span a")'0*((aa3'" considerable range, but let me suggest that the following themes predominate: "&0*((aa%"Ԍ X.'- ` 2XxX` ` Am I reasonably certain that my long distance plan, if not the best, is not costing".'0*((aa3'" me considerably more than an alternative?(#`  X$- ` $XxX` ` Does it make sense for me to substitute (or augment) my cable TV with one of  ` othose small dish satellite systems? And if I do that, how do I get local weather and news?(#` "p'0*((aa&"ԌXxX` ` How do I get faster Internet connections? Do I simply replace my 14.4 modem  ` with a 28.8? Or, do I investigate ISDN, or wait until I can get a cable modem? Or what?(#`  X- ` pXxX` ` What are PCS companies really offering? Will it be cheaper than cellular? And, does their service area go where I go? `  X_- ` pXxX` ` My answering phone needs replacing. Should I get a new one, buy some computer hardware, or take service from my local phone company? `  xNow, let's reflect on what underlies the differences between our two sets of responses,  xZrecognizing that concerns about long distance plans and cable TV programming are shared pretty  xmuch by all Americans, while internet connection concerns are shared by a rapidly increasing number.  xHere is the point as I see it: Not only has the number of information conduits into our homes  xincreased, the way we think about them, and what we can get through them has changed as well.  xIt is this "access market" how we as consumers access telecommunications services and facilities that I want to address today.  xZI suspect that very few of you thought of anything to do with television when I asked about your  x<first recollection of consumer choice in telecommunications. But today, a consumer has a choice  xof television conduits: broadcast (through one portion of the frequency spectrum), cable (through  xcoaxial cable and wireless delivery), and satellite (through several different portions of the  xfrequency spectrum). Moreover, many internet users, let alone industry participants, are aware  x<that someone, somewhere, is planning to offer very fast internet connections over the same cable that provides cable TV.  xOur concept of the video conduits continues to change, and may change even more with the  xfuture introduction of digital television. We are beginning to include internet access, including  xinternet phone functionality, in our mental construct of what cable and satellite TV are all about.  x"The convergence of television and the computer" some would say. Well, perhaps. But, let me  xalso point out that what is going on is an increasing ability for the consumer to get similar  x\functionality from very different information conduits that have developed in very different traditions and regulatory regimes.  xWe have already identified some of the different conduits for television. Other consumer  xconduits include: the different frequency spectrum bands that provide cellular telephony and data, personal communications services, satellite mobility and fixed services . But we are here to discuss an older consumer information conduit the twisted copper pair. ":&0*''JJ$"Ԍ xWhile the Commission's local telephone interconnection rules remake the potential functionality  x=afforded consumers over twisted copper pair, they will also have ripple effects on the services available in the future over other information conduits. This is what competition in the current technological environment is all about.  xkI invite you to view interconnection issues from a consumer perspective and not from the  xZnormal perspective of more potential choices but as the latest step on a continuum of consumer  xcontrol. In the "princess phone era" we could plug into the wall only one or two phones that  xAT&T owned. Over the years, with a number of regulatory decisions, consumers could exercise more control over what they could plug into their phone jacks.  x Moving progressively toward the end office switch, we are all aware that to a considerable  x=degree, most of us are responsible for our inhouse wiring to the box that delineates where the local phone company assumes responsibility for the physical facility the twisted copper pair.  xOne way to conceptualize the philosophy underlying the interconnection rules is to view the  xyconsumer as now being able to exercise control over this information conduit all the way to the  x<end office switch. We, as consumers, now exercise increasing discretion regarding who provides  xLus what over the copper pair physically identified with our residences. This is "unbundling of  xythe local loop" from the perspective of the end user. What is important in this view is who the consumer chooses to give access to his home.  xKI believe that future telecommunications historians are likely to view the Telecommunications Act of 1996, as THE critical turning point in our development as an information society.  x0Even the Modified Final Judgment, as important as it was, did not entirely repudiate the  xintellectual construct that telecommunications was a natural monopoly it only reduced the scope of the natural monopoly to that of the local exchange.  xIn contrast, the Conference Report to the Telecommunications Act describes Congress's intent  xto establish a "procompetitive national policy framework" for the telecommunications industry.  xThat is a profound statement, describing profound legislative provisions. Taken collectively, we  xhave a broadly based national policy determination that the consumer choice made possible by  xcompetition should replace government regulation as the philosophic basis for electronic information and communication.  xThe FCC staff labored long and hard on the interconnection order released on August 8th. Just  x=how long and hard can be illustrated by the following: within the space of six months, over 17  xithousand pages of comments were received and analyzed. This was accompanied by a seemingly helterskelter cacophony of lobbyist presentations and press comments.  xThe outcome was a good faith effort to implement the provisions of the Telecommunications Act as Congress intended.":&0*''JJ$"Ԍ xԙMerrill Lynch said that by the August order, "the FCC has smoothed the way for ... local market  xcompetition." Morgan Stanley called it "evenhanded". CS First Boston said that "the FCC order hits the mark," and that "the FCC is set on the right course."  xAs you are aware, the praise was somewhat less than universal. To date, the National  xAssociation of Regulatory Utility Commissions, four states, all the Bell companies, GTE and SNET will be appearing opposite us in the 8th Circuit Court of Appeals.  xRelying more on my background in antitrust law than in communications, let me make the following observation.  xThe quantity of professional assets that have been expended, are being expended, and will be  x.expended, with regard to the interconnection order will probably run into the millions of hours  xof attorney time. Ultimately, consumers will bear that expense. The Telecommunications Act  xcontains the implicit assumption that the benefits will justify the costs. After all, the Congress  xand the FCC are changing the fundamental rules of the game. We are transitioning from a  xysystem where wouldbe competitors fight first with the government over who can offer what to  xthe consumer, and only secondarily in the market place of consumer choice. In that old system,  xMthe overhead costs of regulatory delay and legal and lobbying expenses probably were not  xijustified in terms of the benefits they conferred on consumers. These insidious costs flowed from  X4- xa regime predicated on outcomeoriented regulation. We anticipate they will be considerably reduced in the future.  V-[Now, let me show you my one and only slide.]  xWe are in an anomalous period: The FCC must regulate today in order to deregulate tomorrow.  x And the form that regulation today takes is one designed to avoid the nasty consequences of the earliest nonregulated era.  xDuring the early days of the US. telephone industry when the Bell System was only one of  x6,000 telephone exchange companies the lack of interconnection among rival telephone  xcompanies inflicted a considerable burden on consumers. In the extreme, multiple conduits  xtwo hard wires connected to separate instruments were necessary so that a consumer could speak to two independent sets of neighbors. What an inconvenience! Not to mention expense!  xWe now have a term to encapsulate this condition and its consequences. What we now call  x"network effects" is industry shorthand for the proposition that the value of a communications  xnetwork increases with its size. Simply put, the value of a network to me is very different  xdepending on whether I can contact 250 people or 250 million people. This construct is now  xapplied to the number of nodes on the internet as well as to the interconnection problems of  XQ%- xtelephone pioneers. Metcalfe's law states that the value of a network increases exponentially with the number of nodes."<&0*''JJ$"Ԍ xԙI have to admit that it is unclear to me whether the noninterconnection problems of the bad old  x]days stemmed from technical limitations, misguided corporate strategies, a failure of the  xgovernment to intervene, or a combination of all three. However, in the environment of the time,  xit is not difficult to see the appeal of the natural monopoly model of telecommunications that was, only recently, overthrown by Congress and the American people.  xWhile the implementing technologies have changed dramatically, both the Telecom Act and the  xCommission's implementing Local Competition Order have to deal with the business realities  x/associated with network effects. The operator of a large network simply has little business  xincentive to interconnect with a smaller network. Inevitably, he will feel himself comparatively  xdisadvantaged because the value of his large network to the new entrant is considerably greater  xthan the value of the small network of the entrant is to him. Consequently, all other things being equal, a dominant facilities provider has considerable incentive to frustrate interconnection offers.  xThe order of 8 August deals with this issue by establishing what might be termed "a Competitive  xCarrier Bill of Rights" a list of default conditions, available countrywide, to new entrants who  xcommence negotiations with the incumbent monopoly facilities provider. This was done to cope with the reality of great disparities in negotiating power.  x>For example, the Telecom Act mandates interconnection between incumbent and rival local  X4- xNcarriers at reasonable rates. This prevents the incumbent network from taking exclusive  X- xiadvantage of the current network economies of scale and scope. Thus, calls originating on a rival  xnetwork perhaps a wireless network or a CATV network configured for telephony can  X- xterminate on the incumbent network at a reasonable cost. Mandatory interconnection, perhaps  xcoupled with unbundling, requires a rival entrant be allowed to share the existent economies inherent in the network that evolved during our "natural monopoly period".  x]On a larger scale, Congress recognized the fact that competitive rivals have little to offer  xincumbent carriers, and the incumbent carriers because of network effects have everything  xito offer competitors. The Act injects a number of incentives and requirements into the bargaining  xprocess; and the Commission Order delineates several proxies that may be used by states to speed resolution of disputes between incumbents and entrants.  xI do not want to summarize the order provisions here. However, keeping in mind our point of  x<view as consumers looking at how our information conduits might be used in the future, consider that under the interconnection order:  X!- ` XxX` ` Local exchange carriers cannot charge different interconnection rates for wired and wireless providers.(#`  Xj$- ` pXxX` ` Local exchange carriers can no longer charge providers for the traffic the local exchange carrier originates. ` "<&0*''JJ$"Ԍ X- ` XxX` ` Local exchange carriers must pay mutual compensation for interconnection, and the rates should generally be symmetrical.(#`  X- ` pXxX` ` New entrants without interconnection agreements can pay default proxy rates while negotiating agreements. `  Xv- ` }XxX` ` Most favored party clauses are read into all interconnection agreements, ensuring  ` 3that all interconnecting carriers can be certain that they are always getting the lowest available rates.(#`  x{We have already considered how the unbundling of local loops can be viewed as giving  xindividual customers a measure of control over the twisted pair information conduit into their  xhomes by permitting them to connect those wires to different telecommunications networks.  xWhat is dramatic about interconnection is the breadth of the set of possible interconnectors.  X - xInterconnection rights are broadly directed at the development of facilitiesbased competition in  X - xxall conceivable forms. Among these rights are the right to exchange traffic through transport and  xtermination arrangements (also known as reciprocal compensation), the right to lease unbundled  x/elements of incumbent LEC networks for providing services, and the right to obtain access services at any feasible point in a LEC's network.  xThe information conduit provided by spectrum used by cellular and PCS providers just became  xmore valuable. Viewed from our perspective as consumers we can anticipate that services  xoffered to us over this conduit will be increasingly substitutable for those offered over our twisted  xpair. Not only does this mean more choice, it means lower priced choices at a given quality of service.  xIn a similar manner, by providing an interconnection baseline, the Telecommunications Act and  xjthe interconnection implementing order have modified the risk analysis of Cable TV companies  xconsidering whether to offer traditional dialup telephony over their existing coaxial cable to the  xhome. Now, don't misunderstand, I am not predicting that this service will necessarily come into  xbeing. The changes that have been wrought are so fundamental that we should expect to be surprised.  x>I can't predict where all the new entrants will come from, but I would like to take a minute to  xdiscuss a new set of potential providers public utility holding companies. Section 103 of the  x Telecom act allows them to diversify into telecommunications industries without prior SEC  xLapproval by acquiring or maintaining an interest in "an exempt telecommunications company."  xKCongress clearly believed that these holding companies are well situated to provide rival facilities  x.for the provision of competitive telecommunications and information services. One portion of the Senate Report states:  `  ` ` Allowing ... holding companies to become vigorous competitors in">&0*''JJ$"  ` the telecommunications industry is in the public interest.  ` eConsumers are likely to benefit when more well capitalized and  ` texperienced providers of telecommunications services actively  ` Gcompete. Competition to offer the same services may result in  ` lower prices to consumers. Moreover, numerous competitors may offer consumers a wider choice of services and options.  ` `  More specifically:  X1- ` ~XxX` ` Many utilities already have sophisticated communications systems for internal  ` dispatch purposes. This represents a source of wireless expertise and well sited antenna facilities.(#`  X - ` XxX` ` Utilities can use their easements to bring newly configured fiber capacity on line and use their neighborhood poles as wireless platforms.(#`  X- ` CXxX` ` Utilities could use their demandside management facilities to deliver video programming as an alternative to existing cable service.(#`  XK- ` oXxX` ` Finally, and perhaps most significantly, utilities can make effective partners for  ` new entrants by providing sufficient capital and facilities to compete for local telephony.(#`  x[In short, Public Utility Holding Companies have the potential, alone or with others, not only to  xprovide a new information conduit into our homes, but to provide needed platforms and facilities  xnecessary to augment and expand the existing wireless conduits. Within the last two weeks, the  X- xCommission adopted the final rules necessary to implement provisions of the Act relating to  xholding company entry some five months ahead of the statutory requirement. Fifteen out of sixteen applications have already been granted.  xAlthough utilities are likely considering, by and large, how best to leverage their existing  xyinfrastructure, many other potential new entrants are infrastructure poor. Fortunately for them,  xCongress enumerated three paths of entry into the local telephone market. In addition to  xfacilitiesbased entry, and the purchase of unbundled network elements from the incumbent local exchange carrier, the Act and implementing order require resale of the incumbent's retail services.  xMAll incumbent LECs are required to offer for resale any telecommunications service that the  x[carrier provides at retail to subscribers who are not telecommunications carriers. We anticipate  x.resale will be an important entry strategy both in the short term for many new entrants as they  xbuild out their own facilities and for small businesses that cannot afford to compete in the local exchange market by purchasing unbundled elements or by building their own network.  xKExperience in the long distance service market suggests that performing an arbitrage function can  xcontinue to be profitable for resellers. Some 500 long distance companies provide service today":&0*''JJ$"  x{over facilities owned by only a handful of facility providers. By buying capacity in bulk,  xsufficiently close to cost, they can exist profitably by reselling it to consumers. We consumers  x[are benefited by increased choice, and by the fact that the pricing of competitive resellers puts  X- xdownward pressure on the price the facilities owner charges for comparable retail service.  xStatutory and regulatory change allow for the possibility that this arbitrage function will appear in the provision of services in the local loop as well.  xResale has often been viewed as either a peripheral business, or as a transitional, startup phase  x-where the reseller would eventually "graduate" to owning and operating the underlying facilities.  xIn fact, telecommunications resale may begin to take on characteristics of other markets. For  x[example, automobile manufacturers rely on local dealerships to distribute product. These local resellers provide value both to the manufacturers and to the purchaser of a new car.  xyIn an analogous fashion, we can envision a decision by a facilitiesbased carrier to concentrate  xon its core business and to rely on resellers to add value to the facility in a way that is  xmeaningful to particular classes of customers. The current move towards "bundling" and "one xystop shopping" may fortify the process. If a provider wants to be many things to many people  xkin many markets, the most cost efficient way to do so may involve the assembly of different "building blocks" of services, some of which may be provided and tailored by resellers.  xThe mixture of resale, facilitiesbased competition, and use of unbundled network elements is  xzimpossible for the Commission to predict. In all probability, new entrants will adopt various combinations as time and circumstances change.  xjThis is one of the joys of being a "regulator", and I use the term advisedly, in the new era. We  xare not wedded to a particular facilities or services outcome. We believe strongly that at this  xxstage of facilities development and at this stage of computer and communications technology, the  xypublic interest, represented by summing the varied interests of all consumers, will be enhanced  xyby the fair engineering of competitive markets. This is the message that my organization the  xcompetition division of the Office of the General Counsel brings to the staff of the FCC  x!daily. It is also, quite fortunately for us, the message that Congress has heralded in the Telecommunications Act.  X - xjOne last question for you to ponder: What decisions will be in the forefront of your mind as a  V-telecommunications consumer ten years from today?  xI confess that I don't have the foggiest idea. But, I am convinced that the services available  xthrough existing and new information conduits to the home will be of a nature that will amaze  xus when we view the present retrospectively. I also suspect we will not be talking about colors of Princess phones. Thank you for your kind attention. I would be happy to take a your questions. "<&0*''JJ$"Ԍ  #XP\  P6Q DXP#