Commissioner Gloria Tristani
Federal Communications Commission
Keynote Address at Expo Comm Argentina '99
Buenos Aires, Argentina
September 28, 1999
Good afternoon! Thank you for having me here today. It is a great honor to be back in Argentina, just a year and a half after my visit to Bariloche. In April of 1998, I represented the United States government at a conference of Latin American regulators. There, we spent a great deal of time discussing implementation of our World Trade Organization (WTO) commitments and the transition to cost-based accounting rates.
I owe my presence here today to one of Argentina's most effective representatives, whom I also had the good fortune to meet in Bariloche. I know I speak on behalf of the entire Federal Communications Commission (FCC) in thanking Hector Carril for his outstanding leadership of the CITEL Working Group on Universal Service. Hector has done a tremendous job gathering and disseminating information about how the countries in the Americas are approaching problems of universal access and universal service. Hector's leadership demonstrates that we all have a great deal to gain in learning from, and helping, each other as we tackle our common problems. So it is a pleasure to return to Argentina today at Hector's gracious invitation.
I also am delighted to be here at such an auspicious time in Argentina's history. You stand at the cusp of exciting change. With early liberalization, a year ahead of schedule, your country is on a steady, inevitable course toward full competition. With competition come new investment, infrastructure buildout and choice - all things that will benefit Argentine consumers.
Five years ago, United States Vice-President Al Gore came here to Buenos Aires to call upon all nations to join in the creation of a Global Information Infrastucture (GII). This network of networks, as he foresaw it, would allow all of us, the world's citizens, "to transmit messages and images with the speed of light from the largest city to the smallest village." The Vice President understood that we were in the midst of a revolution - a revolution that would transform nearly every aspect of daily life, from how we work and conduct business, to how we learn, to how we receive medical care. He knew that the new technologies and networks at the heart of the GII would enable us to transcend old barriers of distance and time, and connect the people, cultures and ideas of all our communities. And he predicted that this information infrastructure would be the key to the future growth of our national and international economies.
He was remarkably prescient. In the five years since his visit, the Vice President's vision has taken firm hold in many parts of the world. In others, however, it remains more hope than reality. There are still parts of the world where teledensity remains at 1-2% of the population. Throughout Africa, Asia and Latin America, many have yet to experience any benefit from the telecommunications revolution. Half the world's population has yet to make a phone call. How, then, are we to bring the benefits of a digital economy, of distance learning and telemedicine, to these people?
Certainly, our national governments cannot do it on their own. The World Bank has calculated that over the next five years, $60 billion per year in capital investment is needed to help build this worldwide information infrastructure. Governments alone cannot support this scale of investment. In most of the U.S., we have had a private communications sector from the outset. It is not a coincidence that our telephone penetration stands at 94%. More and more countries in the last decade have followed the path to privatization, as Argentina did in 1990. After selling their state-owned telephone companies, for example, our neighbors in Mexico, Venezuela and Chile have reaped the benefits of private sector incentives: increased innovation, efficiency, investment, and responsiveness to market demands.
In the U.S., the last state-owned telco was recently privatized in my birthplace, Puerto Rico. When the Puerto Rican Telephone Company was sold, I can assure you we reviewed the transaction carefully to assure that the public interest would be served. I fully expect that my family and friends will reap the benefits of privatization and competition.
Of course, privatization is not enough. Monopolies, even if privatized, lack the incentives toward efficiency and innovation that competitors have. And they certainly lack the incentive to lower their prices. Ultimately, all consumers lose as higher prices depress demand and usage. This means that there are fewer resources to dedicate to network buildout and universal access.
When countries face the critical decision to transition from monopoly to competition, it is understandable that they question whether telecommunications is a natural monopoly. They voice concerns that competitors will undercut the incumbent and divert resources from the network, leaving consumers worse off. They also wonder how to promote universal service in a competitive environment. On these points, I believe that history is the best teacher. When Chile privatized its telephone company in 1988, only 5 of every 100 Chileans had a telephone. Within ten years of privatization, that figure increased over 300%. And after the introduction of competition in 1994, Chileans have enjoyed international calling rate reductions of more than 50%. Bear in mind, however, that these reductions in rates do not signify reductions in revenue. Rather, the lower prices borne of competition stimulate higher demands and usage, supporting increased revenue overall. Continuing with the example of Chile, lower prices increased traffic by 260% from 1994 to 1997. All of this means that consumers are better off.
In each nation, policymakers face similar challenges guiding the transition from monopoly to competition. The challenges are tough, as I will tell you. But there are a few stalwart principles to bear in mind, to keep the transition on course. And in the end, all of us, regulators, manufacturers and service providers alike, know that these are challenges we cannot afford not to face. The telecommunications revolution promises great benefit for our national economies and our citizens, so long as we seize the opportunity.
I've been asked to focus my remarks on the U.S. experience - I hope that this recounting will provide you with both useful information and a sense of excitement for what the future holds. Of course, the United States is but one model - we don't purport to have all the answers. But in the United States, we have seen a dramatic increase in consumer benefits with the advent of competition - demand and usage are up, rates are down, and economic growth and job expansion continue unabated. I am confident that this, too, will be Argentina's experience as it moves forward on its own path toward competition.
I mentioned before that there are some basic principles to keep in mind. They are of universal merit and applicability. They are the principles that Vice President Gore outlined as preconditions to a GII, and they are at the core of my country's 1996 Telecommunications Act. What are they? Briefly…
Focusing now on the U.S. experience, I can tell you that the Telecommunications Act of 1996 was a tremendous paradigm shift for our regulatory regime and our industry. At its most basic, the Act sets forth the policies for movement from monopoly to competition. It gave my colleagues and me the mandate, and the tools, to pry open the local phone markets.
Three and a half years after its passage, how have we fared? I would say that we're not yet at our destination, but we're well along the way.
By every indicator, consumers are better off, and industry is thriving.
Since the Act's passage, the communications sector of the U.S. economy has grown by over $140 billion. Our information technology sector is growing at a rate twice that of our overall economy. As noted recently in Business Week magazine, "[t]hese are the fast-growth, falling price industries, and as they become a bigger share of output and employment, it means the U.S. can sustain a higher growth rate without inflation." In other words, falling prices in the information technology industries actually brought down overall inflation by 0.7 percentage points, helping to control inflation and interest rates in a period of high employment and growth. So you can see the critical role that telecommunications can play for Argentina, not only as the backbone supporting other industries, but also as a source of economic expansion and stability.
Along with investment, hundreds of new companies have entered the competitive fray. The number of publicly held telecommunications companies has doubled in the last 5 years. We have approximately 300 mobile phone companies nationwide, and new facilities-based competitive local providers in every state in the nation. These new companies and new services have brought with them new jobs.
Of course, all of this has benefited the American consumer even more directly - in the pocketbook. In the last 3 years, wireless phone bills have dropped more than 40% as a third, fourth or fifth service provider has sprung up in most metropolitan markets. With these falling prices, subscribership has skyrocketed to 77 million, indicating that mobile phones have become a valuable tool to our middle class. And just this month we've seen a real price war for long distance services. Three years ago consumers paid 20 to 25 cents a minute for long distance. Now the major carriers are offering plans for as little as 5 cents a minute, any hour of any day.
As I indicated before, getting here has not been easy. We've hit a few bumps in the road, but we've always been able to right our course. Doing so has required strict adherence to that second key principle, eliminating barriers to entry and taking affirmative steps to promote competition.
Under the local competition provisions of the 1996 Act, we've sought to ensure that three paths - facilities-based competition, unbundled network elements, and resale - are fully open to new entrants. This means knocking down legal or regulatory barriers to entry, as well as eliminating bottleneck control and anti-competitive incentives of the incumbent monopoly provider.
I'd like to take a few minutes to describe these methods of entry and share some of the lessons we've learned. Facilities-based competition is the easiest to understand, as the new entrant simply constructs a network and uses its own facilities to reach its customers. Of course, regulatory action is still necessary because facilities-based competitors must have the ability to interconnect with other networks and providers. Otherwise, the incumbent could use its bottleneck facilities to thwart competitive entry.
Full facilities-based competition may not always be feasible for a new entrant, as it entails building an entire network at once. For example, though a new entrant may construct its own switching and long distance facilities, it may be cost-prohibitive to duplicate the last mile of facilities - what we call the "local loop" - connecting the network to the customer's premises. Impediments may be based in either economies of scale or difficulties obtaining access to rights of way. So a critical, second means of competitive entry promoted by our law is one in which the new entrant constructs portions of a network and then purchases access to the remaining essential facilities of the incumbent's network, such as the local loop. We refer to this in shorthand as "unbundled network elements." In addition to minimizing barriers to entry, this encourages innovation in the delivery of service, such as when a new entrant purchases network elements to mix with new technologies like packet switching based on Internet Protocol (IP).
Part of the FCC's role has been to establish basic rules of the road between incumbents who don't want to relinquish their local monopoly and new entrants who wish to enter the market precisely by means of the incumbent's network. So, for example, we require incumbents to provide non-discriminatory access at rates, terms and conditions that are just and reasonable.
Recall that earlier I alluded to a few bumps in the road. Well, unbundled access has been one of the largest, and it has been litigated all the way to our Supreme Court. Naturally, incumbents would prefer to keep competitors off their networks. Earlier this year, the Court upheld the FCC's decision to require incumbent carriers to offer combinations of network elements to competitors. The Court asked us to provide additional support for our decision regarding what constitutes an "essential" element that must be made available under the Statute, and we completed that work just two weeks ago.
Resale is the third method of entry contemplated by our law. Resale can be an effective entry vehicle for new competitors who initially lack the resources to build their own networks. This is how MCI got its start as a long distance carrier in the United States. It also has significant benefits for consumers: as a form of arbitrage, a reseller purchases large numbers of minutes at a discount and resells them at prices otherwise unavailable to the end-user. Lower prices stimulate demand and thus encourage the facilities-based carrier to bring its prices closer to actual cost. Again, regulatory intervention may be necessary in order foster resale: our law, for example, requires incumbents to make their telecommunications services available for resale at wholesale prices. Many nations have agreed to resale as part of their market-opening commitments under the World Trade Organization (WTO) Basic Telecommunications Agreement. I urge Argentina to implement the right to resale.
Of course, open entry gets you nowhere without the ability to interconnect with and terminate traffic on other networks. So, a second key piece of our local competition policy under the 1996 Act has been to require carriers to provide any reasonable means of interconnection, including physical collocation. In addition, to limit the incumbent's incentive to limit interconnection, transport and termination charges are reciprocal and based on the long-run incremental cost (or forward looking cost) of providing service on the incumbent's network.
Litigation over several aspects of our local competition provisions has been unfortunate, and the uncertainty it engendered certainly had some chilling effect on the development of local competition in our country. Now that our rules have been upheld in the courts, we are delighted to see the progress new entrants are making. A recent study shows that although new entrants still have a tiny portion of local revenues - approximately 4% last year - they are growing at a tremendous pace. Competitive local exchange carrier revenue doubled in 1997 and again in 1998. The number of resold lines has also doubled in the last year. Perhaps most telling is the financial market's confidence in the prospects of local competition: the top 20 publicly traded competitive carriers have total market capitalization of $33 billion, compared to 6 such companies with only $1.3 billion capitalization before the Act was passed.
So I think you'll agree - we still have many miles to travel. But we know the promise of competition, as we have experienced in our wireless and long distance markets. And we are beginning to see our local competition policies bear fruit. So there is much to celebrate, and much to anticipate.
Earlier I described the 1996 Act as giving us both the mandate and the tools to promote local competition. Some of those tools are the means of entry I've just described. Another essential tool in our kit has been the FCC's structure as an independent agency. In order to ensure that a competitive market benefits consumers, it is essential that the regulator be independent of the incumbent operators and shielded from political pressure. My colleagues and I are appointed by the President and confirmed by the Senate for five-year terms, and we cannot be removed at will. Our accountability goes to the public, with an obligation to fulfill our statutory duties in the public interest. In this regard, it is important that we have a fair, transparent, and predictable regulatory process that is subject to judicial review. With Argentina's commitment to the principles in the WTO Reference Paper, your entire industry will benefit from a clear, fair, and stable regulatory environment.
Regulatory flexibility has also been important as our market structure has changed. We have already begun to consider how our functions must change in a competitive environment. In some areas, competition may mean that regulation is unnecessary to protect the public interest. In others, it may lead to the opposite result. For instance, with increased competitive pressures, we have seen some unfair business practices, such as consumers being switched to a new carrier without their consent. We call this "slamming", and we have recently adopted strong rules to make this practice economically unattractive to the unscrupulous provider. I hope this is one problem we've faced that Argentina will be able to avoid from the outset.
I began my talk today by emphasizing the tremendous revolution that telecommunications has brought into all of our lives. I've focused on the benefits of competition - how competition will better serve your industry, your economy and your consumers. Fortunately, our law is founded on the premise that, most often, competition will serve the public interest. But there are times when competition, alone, may not be enough. And so, dating back 65 years to the creation of the Federal Communications Commission, Congress directed us to ensure that a national - indeed global - telecommunications system is available to all Americans, "without discrimination on the basis of race, color, religion, national origin or sex." It has been a critical role of the FCC to make quality, affordable service available to those who otherwise would not have access - such as low income Americans and Americans living in high cost or rural areas.
As a Latina, as a woman, as a citizen of a rural state, I have devoted myself to these issues because I know how vital access is in promoting equality and opportunity.
In general, our teledenisty of 94% suggests that we've done a pretty good job. But that figure masks disparities of race and income. 95.7% of White households have a telephone. But for Blacks, that figure drops to 87.8% and for Native Americans on some tribal lands, that figure is as low as 20%.
In the past, our goal of universal service was pursued somewhat haphazardly, through a system of implicit subsidies to the local monopoly carrier. These subsidies shifted costs from rural to urban customers, residential to business customers, and local to long distance customers. Such a system of hidden subsidies could not survive a competitive market, and so Congress directed us to re-work our cost-support in several fundamental ways.
There are many effective means of providing universal service support - and I know Hector and his group at CITEL have worked to publish a report on "best practices" covering many of these alternatives. Let me simply describe to you what we have done in the U.S. Most importantly, we have embraced the principles of non-discrimination and competitive neutrality. All telecommunications carriers pay into a universal service support fund, based upon their interstate revenues. Correspondingly, all carriers who pay into the fund are eligible to draw out of the fund if certified to provide the supported services. This competitive and technological neutrality benefits us in spurring competition in the delivery of these services. One example is that wireless carriers are seeking to provide basic service over fixed wireless systems. In many rural areas, this can be an extremely efficient alternative.
I know your Secretariat a few months ago announced a "Regalmento General del Servicio Universal" that is based on a uniform contribution by all carriers. This is a wonderful development for your country, and I am eager to see how the fund will be administered.
Beyond access to basic telephony, I have a great concern about the growing "digital divide" in our country between the information "haves" and "have nots." Black and Hispanic households are only 2/5 as likely as White households to have access to the Internet at home. And, controlling for income, those in rural areas are only half as likely as those in urban areas to have access. To address some of these disparities, we have provided discounts for schools and libraries across the nation to purchase telecommunications services, internal connections, and Internet access. The discounts are based upon need, with the poorest schools receiving up to a 90% discount. This program has been a huge success since the first funding commitments were made, and our hope is that all schools will be wired by 2000.
The Internet is a great equalizer. A growing, evolving, unstoppable source of information and knowledge, it has the potential to eliminate old barriers of geography and wealth. It transcends such distinctions, and has the potential to further democratize our societies. It can bring the resources of the Library of Congress in Washington - the repository of every publication in the U.S. - to the fingertips of a schoolchild in a remote village in my rural home state of New Mexico. For that matter, it can bring those resources to your children, here in Argentina, and it can bring the pictures of the Museo Nacional de Bellas Artes to my son Jorge, back in Washington.
This sharing among nations is what Vice President Gore envisaged those five years ago. Ensuring access to the benefits of this revolution is why I took this position, and I suspect it has something to do with the reason you, too, have chosen to work in this industry. We are all privileged to be where we are, to know the potential the telecommunications revolution holds for our countries. With that privilege, comes responsibility. A recent report by the U.S. Commerce Department described the challenges we face this way:
For developing nations, the productivity potential of the digital economy offers both hope and worry: with sufficient investment, it can provide the means to accelerated development, but without the needed investment, developing nations may find themselves falling even further behind in an increasingly wired world.
I am so pleased that you have invited me here to speak at this point in your history. I hope there are some pieces of our experience that you can draw from. A Global Information Infrastructure cannot exist without a vibrant Latin American Infrastructure. Argentina, with its impending liberalization and new universal service regulations, is certainly helping to lead the way.