This is the first state regional oversight committee meeting I have attended. I welcome the opportunity to be with you to learn first-hand what is on your mind. The presentations and panel discussions have been informative and stimulating.

Today, I want to talk about the Telecommunications Act of 1996 and what it means to the relationship between federal and state regulatory authorities.

A New Partnership

I believe we share a common vision:

• We are united in our commitment to real, enduring, local competition that will provide lower prices, innovative services, and greater choice for consumers.

• We are united in our commitment to a system in which everyone has access to the telephone network at affordable rates.

• We are united in our resolve to be fair to all parties; and

• We are united in our desire to let free market forces govern outcomes whenever possible in a competitive marketplace.

This is truly landmark legislation. It's the first sweeping change in the communications laws in over 60 years. It's the product of 20 years of congressional debate.

The statute creates a new partnership between federal and state authorities.

Communications has always involved state and federal regulation. Over the years, we have worked together on a variety of matters (for example, developing separations rules, conducting joint audits), but our responsibilities and jurisdictions were more neatly defined. Now, under the Act, interconnection, universal service, access reform, and other issues establish a common interest -- and a shared responsibility.

 Interconnection

I want to talk first about our interconnection rulemaking.

By far the most significant consequence of this statute will be the transformation of local telephone service from monopoly to competition.

In the order we issued on August 8, we adopted strong national rules, but relied heavily on the states -- as Congress intended -- to shoulder many tasks of implementation. We concluded that Congress wanted our regulations to ensure that competition occurs in all 50 states, but with minimal disruption of the procompetitive progress already underway in some states.

To that end, we provided the guidance we believed was necessary regarding the respective obligations of carriers, LECs, and incumbent LECs. In particular, we established pricing principles needed to ensure that incumbent LECs offer unbundled network elements, resale, and transport and termination in a manner that promotes efficient entry and fair competition.

The tasks of approving voluntarily negotiated agreements between CLECs and ILECs, mediating and arbitrating disputes between CLECs and ILECs, conducting forward-looking cost studies, and setting specific prices are your responsibilities.

We appreciate the tremendous challenge you face as you begin the arbitration process. If you have ideas about ways in which we can be helpful, I hope you'll let us know.

No one can honestly say that we took a "one size fits all" approach in our ruling. To paraphrase Sol Trujillo, if you attempt to implement the FCC order without tailoring it to the specific characteristics and needs of your own state, you have not implemented the FCC order.

We want and need to continue to work cooperatively with the states as the local competition rules develop. For example, we welcome your help as we develop cost models to replace the interim proxies we established and as we assess issues that may arise in petitions for reconsideration. I want you to know that we have just released a sua sponte reconsideration order that clarifies our intention not to permit Section 251(c)(3) to be used to avoid access charges in cases where the incumbent LEC retains the customer. We also added a proxy of $1-2 for the line port. The latter decision, like other proxies we adopted earlier, was based on state decisions applying forward-looking pricing principles.

In fact, the decision we issued on August 8 drew heavily on the experience and guidance you shared with us. It's important that we keep the channels of communications open.

We are proud of our order, which we believe is fully consistent with the letter and spirit of the statute.

We understand the reasons why some states have found it necessary to appeal. We believe, however, that the services and facilities provided under Section 251 and 252 are neither intrastate nor interstate and that they are a matter of shared responsibility. Despite the temporary stay issued on Friday, we remain confident of our success on appeal.

Universal Service

After interconnection, our next big assignment involves universal service. To summarize the state of play:

• Congress recognized that competition alone won't take care of everyone. It reaffirmed and strengthened the nation's commitment to universal service.

• The current system has literally billions of dollars in implicit subsidies. This is not sustainable in a competitive market.

• Congress now wants explicit, targeted measures to address rural, insular, and high- cost areas, as well as low-income consumers.

• Congress also ordered special measures to promote connection of schools and libraries, as well as dealing with rural health care.

• Congress expanded the class of carriers eligible to receive universal service support. The funding base was likewise broadened.

We have compiled a massive record, which we are now digesting. We have held four en banc hearings in the past four months. The FCC has until May 8 to issue a final decision, but we hope we can get this resolved somewhat sooner.

My mind is still open on the structure of the new universal service regime, and I look forward to active discussions with you and other state regulators over the next few weeks. My preliminary thoughts include the following observations:

• We can expect new competitors to target the higher-margin services -- such as business lines, vertical services, and exchange access -- that are today the main sources of "contribution." That's why we cannot delay formulating new approaches that provide the necessary subsidies.

• It is vital that the rules we develop send correct economic signals. We should not distort entry or exit decisions by incumbents or new entrants. The universal service regime should reward efficiency, not inefficiency.

• We also must not forget that the funds for universal service have to come from somewhere. At the end of the day, consumers will foot the bill. So we must "spend wisely."

• Insofar as possible, we should strive to formulate rules that are technology-neutral. Wireless services, for example, can offer a cost-effective means of providing local telephone services in some areas.

• New entrants should not be burdened by cost accounting rules developed for a monopoly era. Instead, where feasible, regulatory burdens on incumbent carriers should be eased.

• We need to pay more attention to service quality. Competition can spur incumbents to higher levels of performance, but in the short run it can also create a greater strain on the telco's plant and workforce. Where competition is absent, we need to ensure that changes in universal service support mechanisms do not lead to deterioration in the quality of service.

• The Telecommunications Act of 1996 was intended to bring about prices for telecommunications services that are lower, not higher. Raising the residential SLC is not on my "to do" list.

• The value of connecting school classrooms and libraries is great; our society cannot rely entirely on ad hoc, voluntary efforts to get the job done. While we should not discourage such efforts, a strong national plan is essential to ensure that access to Information Age services is ubiquitously available to American students and communities. Section 254, however, should not be stretched to attempt to encompass areas that are clearly beyond our purview, such as teacher training and classroom computers.

• Reforming universal service is an evolutionary process. The state role in the Joint Board does not end on November 8 but continues up until the day of final decision.

• Different rules may be appropriate for different markets -- those with the potential to become competitive in the near term versus those where competition is a more distant prospect. Washington State Commissioner Sharon Nelson proposed a bifurcated approach at the most recent Joint Board meeting. I think it makes a lot of sense.

• Transitional measures may be appropriate to avoid some disruption to industry players. But in my view it was not the intention of this legislation to guarantee that incumbent LECs continue to receive 100 percent of the revenues and profits they had in the monopoly environment.

Access Reform

Closely related to interconnection and universal service is the subject of access reform.

Both interstate and intrastate access are likely to have to change considerably. Today's high access rates have got to come down. It's economically irrational to recover non-traffic- sensitive costs through a per-minute burden on access.

We hope we'll have your help in formulating a workable approach for interstate access. We need to bring this decision home at about the same time as universal service. All 3 pieces of the puzzle (plus whatever changes in separations are needed) must fit together.

Collectively, the changes that are underway will be momentous

Reaching the desired goal will take time. As Vice President Gore said, our goal is real competition, not the assertion of competition, the illusion of competition, or the distant prospect of competition. Ultimately, I foresee the changes that are now underway bringing enormous benefits to economy and to consumers.

Our Partnership

The FCC and the states must work together. The issue is not whether the statute assigns a particular responsibility to the FCC, states, or joint board. The question is whether we both have relevant concerns and expertise. Our relationship is symbiotic.

And we need to remember: at the end of the day, we are not going to be judged on the basis of whether certain subjects were within the federal or the state jurisdiction but on whether competition developed or not, whether prices are lower or higher, whether new services are available, and whether consumers enjoy choices. We sink or swim together.

The world is different, and we need to change old thinking and old ways of doing business. The FCC is committed to a new partnership, as demonstrated by the unprecedented federal- state forums on long distance entry, universal service and access, and enforcement. We need to keep the channels of communication open. That's why I'm here today.

And now, I'll be happy to answer your questions.