Remarks of Commissioner Rachelle B. Chong Before the United States Telephone Association National Issues Conference January 30, 1996 Washington, D.C. "A Roadmap to More Competition and Less Regulation" Introduction Good morning. Congratulations on being in Washington during such an interesting week. As you probably are aware, the place is abuzz with hourly rumors about whether the telecom reform bill is or isn't going to be passed this week. It's nearly impossible to get a fix on what's true and what's not. But today, I have come to share a secret with you. If you promise not to tell anyone, I know how to predict when the telecom bill will pass! You see, according to popular legend in my hometown of Stockton, the groundhog emerges from his hole after a long winter's sleep to look for his shadow on Groundhog Day. Now, if the day is sunny and he sees his shadow (or she sees her shadow -- you see, in California, female groundhogs have broken the glass ceiling in this business!), the groundhog takes it as a bad omen and returns to its nice toasty warm burrow to sleep through yet another six weeks of telecom reform bill deliberations. But if the day is cloudy and hence shadowless, it signals an early passage of the telecom reform bill, in which case our trusty groundhog cavorts about, positively exhilarated! Now, in the interests of full disclosure, humbug scientific types insist that convincing statistical evidence does NOT support the Groundhog Day tradition. But for those of us who choose to believe in this time-honored tradition, just as many of us still believe in Santa Claus and the Tooth Fairy, it provides a few answers to the mysteries of life with which this industry is currently faced. A Three Stage Roadmap to Competition Now, on to a topic that the groundhog has declined to shed any light on: how to bring more competition and less government regulation to the world of telecommunications. You see, the way I view it, there's a revolution going on right now in Washington, and it's about the role of government in our lives. At its core, the current budget debate raging in Washington is about the proper scope of the federal government in our society. It's a watershed moment in time. And I think this revolution has important ramifications for telecommunications policy. In this revolution, there seems to be general agreement that there will be less need for regulatory oversight as competition takes hold in communications markets. But people don't always agree on what we mean by less regulation and how we accomplish this. This morning, I would like to present my personal vision of how we transition to a more competitive communications marketplace with less regulatory oversight. I would like to propose a three stage roadmap that will lead us to that destination:  Stage One: Government tears down existing barriers to entry, and reduces inherent advantages for incumbents. This will provide the foundation for a new age of competition in communications.  Stage Two: Government measures how competition is faring, and tailors regulation as needed to boost competition.  Stage Three: Government steps back and lets the market work, only stepping in as a referee or umpire when necessary. As a fundamental matter, I start from the assumption that competition generally should trump regulation. Not in all cases, but in most cases. In Stage One, for example, there is an important role for government to help tear down current entry barriers and to jumpstart competition in all telecom markets. But as competition increases and gains hold in Stages Two and Three, I would like to see the government's role shrink like the incredible shrinking man. As I take you on this journey to more competition and less regulation, I will discuss where I think we are today, and define where I would like us to be in the future. Then I will address the three stage roadmap in a little more detail. Where We Are Today -- The Challenge Our main challenge today is that we are constrained both by outdated law and by our own thinking. First, the law. The FCC derives its authority from a statute that was largely written in the time of Franklin D. Roosevelt. I speak, of course, of the Communications Act of 1934. Simply put, the statute is outmoded. Here we are, in 1996, more than sixty years after the Act was passed. The telecommunications world has changed dramatically. We have seen amazing technological advances in these sixty years. We have also seen significant changes in competitive circumstances. And yet, many of the core common carrier provisions of the statute still date back to 1934, and even before that to the Interstate Commerce Act. Some days, particularly those days when I am dealing with convergence issues such as video dialtone, I struggle with the current law. I often feel like I am trying to force a square peg through a round hole. Anybody recognize this little fellow? This is Gumby. He's green, his head slopes to one side, and he's very flexible. He's so flexible, so supple in fact, that he's able to radically change shape and walk through walls! Like Gumby, the Communications Act has been called a "supple instrument" that gives the FCC wide latitude to respond to rapid changes in technology and market conditions. Now, I know Gumby. I've spent time with Gumby. You might even say that Gumby is a friend of mine. And I'm here to tell you, the Communications Act is no Gumby -- when stretched and pulled too far, it can tear! Virtually everyone involved in the communications field agrees that we need to reform the Communications Act. Congress is reaching closure on a new telecom reform bill even as we speak. And, as I mentioned at the start of my speech, the groundhogs and the FCC are all anxious to see if they achieve this urgently needed reform. I applaud Congress' progress to date. Every time I speak with a member of Congress, I emphasize that the FCC desperately needs an updated law to deal with contemporary issues. Congress could help us achieve the goal of more competition and less regulation much faster through legislation. I urge you to work constructively to help Congress achieve consensus and pass a new law. If you visit your senators and representatives in the next several days, I hope you will let them know that passage of legislation is very important to your individual companies and to the local exchange industry, as well. However, there's another problem besides the law. I call it "regulator mindthink." You see, we have traditionally regulated various industries in different ways and with different levels of regulation. Now, this worked reasonably well in a world where monopolies prevailed, and each industry generally stayed in its core business. But today, of course, everybody is a busybody -- everybody wants to get into everybody else's business! For example, local exchange carriers like yourselves want to get into the video transmission and video programming markets, and compete against cable companies. You also want to enter the interexchange market and compete against the likes of AT&T, Sprint, and MCI. You have been fenced off from these markets for years. Yet, the revenues that these new services could produce in the future are important to your longterm business strategies. Many predict that companies destined to emerge triumphant in the future will offer a wide array of communications services. As you know all too well, your competitors have similar strategies to enter your markets. Traditional cable companies want to provide local telephone service in direct competition with you. Wireless and long distance providers want to take on the local loop, as well. Competitive access providers are making inroads in metropolitan areas, threatening your revenue base. Even broadcasters want to get into common carrier services like paging and data services. Now, I am a passionate advocate for robust competition. And so I support efforts by all these market players, including local exchange carriers, to evolve beyond their current roles. I would like to see your companies, and your competitors, grow into more well-rounded, full service providers offering consumers a package of communications services. What does all this convergence mean for regulators? It means we must take a broader view toward competition. It means we must aggressively question current practices that are based on outdated industry structures. If you ask the FCC's staff, many will tell you that I am constantly challenging them to forget how we usually do things, and to "think outside of the box" -- to think boldly and creatively about our issues without regard to precedent or old mindsets. So, this is where we are today. We are dealing with a statute that needs to be updated, and with traditional notions of regulation that need to be revamped. And technology and convergence won't wait on us. To stay competitive in the world economy, we've got to push forward and help our American companies stay world leaders in communications. Where We Want to Be Our next task is to figure out where we want to go. What is it that we are trying to achieve? I would like to see a world where consumers have choices galore for their communications needs. In this world, every home and business has access to multiple communication providers. The paths that deliver these communications services may be wired, wireless, or both. The hallmark of this new world will be consumer choice and vigorous competition. Providers will not fit neatly into traditional categories such as local exchange carriers, cable, cellular, or long distance companies. Instead, they will evolve into full service communications companies. In this new competitive world, we can and should take a different approach to regulation. We should stop regulating these providers in isolation and stop relying on old labels for how we regulate them. Just as they will view themselves as full service providers, regulators also should view them as competing communications service providers. Hopefully, when competition among these providers reaches a significant level, regulators can get out of the business of price regulation. Market forces will determine fair pricing levels. And if regulators no longer need to regulate prices, we won't need to worry about allocating costs among various services -- the Achilles heel of regulation. This is where I would like to be in the future -- increased consumer choice, fierce competition, and, eventually, if we do our jobs right, no price regulation. Stage One: Tear Down Current Barriers to Entry and Reduce Inherent Advantages of Incumbents So how do we get from here to there? Recall the two challenges I mentioned earlier -- the outmoded statute and our own thinking. I envision a three-stage process. Why three stages, you might ask? Because two clearly are not enough, and four are too many to remember! Stage One. In the first stage, legislators and regulators must tear down current barriers to entry and reduce the inherent advantages of incumbents. I see this as a period of intense activity for Congress, the FCC, state regulators, and service providers. Here is the long term benefit for you: If we do our job right during this stage, the need for regulatory intervention and oversight in the future will be significantly diminished. Of course, some of the barriers to entry are beyond the power of the FCC to address. To their credit, many states have taken significant steps to remove existing barriers to entry and to create an environment that will enable competition to grow. Like the states, the FCC is moving forward with a procompetitive agenda. We are not waiting for the legislation to pass. Legislation is not one of those certain things in life, like death, or taxes, or the over hyped nature of the Superbowl. So, the Commission is pushing ahead to address issues that are currently within our authority. While we do this, we are trying to structure our initiatives and proposals consistent with the general approaches taken in the pending legislation. That way, if and when the statute passes, we will have a running start. We may have to tweak things a bit depending on the shape of the final law, but at least we will not be starting from scratch. The industry "groupthink" that has occurred during the legislative process has brought the Commission many insights and approaches that are helpful no matter what happens. The proceedings that we have initiated -- or will soon initiate -- are designed to advance the goals for Stage One that I mentioned before: tearing down barriers to entry and reducing the advantages of incumbents. But remember that the ultimate goal is to increase competition and shrink regulation for all competitors in the market. Here are five key areas that the Commission intends to work on: (1) interconnection, (2) access charges, (3) universal service, (4) pricing, and (5) numbering issues. First, interconnection. This is a hot topic at the FCC right now. Interconnection is critical to the development of new communications services and the evolution of competitive markets. There are many benefits to ensuring that our communications networks interconnect freely with each other. We don't want individual users isolated because interconnection is not available. To the contrary, we want users to be able to reach customers on any network, no matter where they are or who their service provider is. I believe that we must move quickly to develop a sensible, efficient and fair interconnection policy that will advance competition. New entrants and existing competitors must be able to secure timely and reasonably-priced interconnection in order for us to realize the full benefits of a seamless "network of networks." As you may know, the Commission issued a notice of proposed rulemaking on wireline-to-wireless interconnection on January 11th. I think it is fair to characterize the notice as a strong statement by the FCC in favor of competition. As a number of state commissions have done, the FCC proposed to adopt a so-called "bill-and-keep" interconnection regime on an interim basis, while it considered the costs and benefits of other approaches for the long term. Because I believe timely, reasonably-priced interconnection is the lifeblood of competition, I supported the tentative conclusion in the notice in favor of interim bill- and-keep rules. In my view, our existing interconnection policy may not adequately serve our pro-competitive goals. So I felt that we should not leave the existing policy intact while we look for a better long range approach to interconnection. I would guess that some of you may have concerns about the Commission's tentative conclusion. You may believe that there are problems with a bill-and-keep approach, even on an interim basis. If so, I want to hear from you, either through written comments in the docket or through conversations with my staff and me. I am open to creative suggestions on interconnection that will advance competition. We need the active participation of your industry to build a record that will enable us to reach a sound public interest result. In developing our rules, both for an interim period and for the longer term, we should strive to build in flexibility and minimize administrative delay. If it is possible, I would like to avoid an approach that requires carriers to file tariffs requiring voluminous cost support data. It may be that a less regulatory option, such as employing a reasonable proxy for cost-based pricing, would better serve the public interest. If so, tell me why this is better and I'll listen. And as we transition to a more competitive market, we should look for ways to reduce the government's role in the interconnection area. Second, interexchange access charges. The Commission's Part 69 access charge rules spell out the rate structure and cost recovery regime for one type of interconnection -- how long distance telephone providers interconnect with local telephone companies. The rules were primarily designed to ensure nondiscriminatory treatment of long distance providers so that competition would develop in the interexchange market in the wake of divestiture. It has been clear for some time now that our existing access charge rules are being tested as the access market begins to move in the direction of competition. The reason is simple. These access charge rules were developed in a monopoly world, and they assume that the local exchange carrier is a monopolist. As competition begins to take hold in local exchange and access markets, I believe our access charge rules may become counterproductive. To the extent that regulation pushes access rates well above the relevant costs of providing access service, bad things begin to happen. For example, regulation creates artificial incentives for new competitors to enter the market and for existing customers to move traffic off the LEC's network. This upsets the existing balance of subsidies built into Part 69 designed to advance universal service goals. And the key point is that regulation, not market forces, is driving these results. The FCC is beginning to address the problem. We are doing so on a case-by- case basis through waivers of our access charge rules in areas such as New York, where access competition is advancing more rapidly than in other locations. But this is not a satisfactory or efficient approach to the underlying problem. We need comprehensive access charge reform, where everything is on the table and subject to debate. The Commission plans to address access charge reform in the near future. This will be a major challenge. We will need your creative ideas in this area, as well. Third, universal service. Like access charges, our current high cost assistance rules were developed in a monopoly environment. We have a pending rulemaking to reexamine and retarget our high cost assistance policy. While our commitment to universal service should not waver, we should try to be smarter as to how we achieve our goals. For example, we should target assistance to those who truly need it. And as competition begins to develop in the local exchange, we need to ask whether a broader group of communications providers should contribute to the Universal Service Fund. We should also ask whether a broader class of competitors should be eligible to take from the fund. My initial belief is that the answer to both questions should be yes. Another interesting idea being discussed is whether high cost payments or credits should go directly to subscribers, rather than the service providers. On the broader topic of universal service reform on a going forward basis, I think we need to have a thorough debate about what universal service should mean in a world of converging technologies. Shouldn't the definition of universal service be expanded beyond "plain old telephone service" to include new services? In short, we have to decide what we are willing to strive for as a nation. The FCC intends to initiate a separate proceeding on this issue shortly. I am interested in how local exchange carriers think universal service should be defined in today's world. I invite you to come in and talk to me on this topic. However the definitional debate comes out, I believe that we should move away from hidden or internal subsidies and make them explicit. Consumers should know they are being asked to pay a subsidy, how much it will cost, what it will be used for, and who will receive the subsidy. Fourth, pricing. The Commission has been and will continue to be very active in reforming its price regulation schemes. For example, the FCC recently declared AT&T to be a "non-dominant" carrier for domestic purposes, thereby effectively mooting price caps for the interexchange industry for most domestic services. So, in the long distance market, we believe that competition has developed to the point that we generally can rely on market forces to ensure reasonable rates. We will continue to examine our generic policies regarding the interchange market in an upcoming "all carrier" proceeding. As for local exchange carriers and access charge pricing levels, the Commission has much work to do. We currently have an interim price cap regime in place. First, we must develop more durable price caps rules, and we have a pending rulemaking notice on this issue. But more importantly, we must strive to tailor our price caps rules so that they acknowledge and accommodate competition. Our rules should be flexible and adaptive. We should attempt to define various levels of competition, and craft rules that grant appropriate pricing flexibility and other relief as competition evolves. We also have a pending rulemaking notice on this critical issue. Let me share with you my goals for price regulation at the FCC. Initially, I would like to see us develop workable rules that implement so-called "pure" price caps and move away from rate-of-return regulation. I am pleased that the interim rules do not require sharing for carriers that choose the most challenging productivity factor. In fact, a number of your companies saw your way clear to elect the highest productivity factor for the current period. I applaud those companies. And I am pleased that the Commission has established a long-term goal of eliminating sharing entirely from price cap regulation. But that is just a first step. As competition develops in specific areas or services to a significant degree, price regulation can and should cease. I would like to see the day when competition develops to the point that the Commission can safely step away from price regulation altogether. Our experience with AT&T price regulation may provide some guidance for the LEC industry as we move forward. I am hopeful that as competition becomes robust and market forces determine fair prices, cost allocation will become much less important. And one day, perhaps, with a little help from Congress, the Commission will no longer need to prescribe depreciation rates for carriers. Fifth, numbering issues. I think we need to develop an efficient and fair system to govern the all-important numbering resource. In the past, incumbent local exchange carriers have dominated numbering administration. This must change. New entrants must have prompt and ready access to numbers in order to compete effectively, so it is important to put in place a framework run by a neutral third party to deal with numbering administration. The Commission is in the process of getting the North American Numbering Council up and running to address this issue. Similarly, for consumers to easily subscribe to services provided by new entrants, they should be able to take their telephone number with them when they switch providers. Otherwise, the inconvenience of changing their telephone number will dissuade the switch. We have a pending rulemaking notice on portability, and we hope to adopt rules later this year. So, these are the five major, interrelated areas that the Commission will be addressing in the months ahead: interconnection, access charges, universal service, pricing, and numbering issues. The pending legislation addresses many of these and other issues, of course. But whether the legislation passes or not, the Commission will move forward to move the industry towards competition. One suggestion from me: As we begin work on all these dockets, let's make sure we don't get so bogged down in the details that we lose sight of our broader goals. While we grapple with individual issues, we have to remember to keep an eye on the big picture to keep our procompetitive perspective. If we don't, we will lose an important opportunity to increase competition and reduce regulation. As we work through these issues, I urge interested parties to file comments that help the Commission take a "big picture" approach even in individual proceedings. Enough on Stage One. That should keep us all busy and out of mischief for a while. Stage Two: Measure Competition and Tailor Regulations as Needed Stage Two is very simple. I see the Commission measuring how competition is faring as a result of our Stage One efforts, and tailoring our regulations as needed to give competition a boost. This may involve tightening some rules in places, and hopefully relaxing or removing others. No doubt there will be unexpected developments that will have to be addressed. How much fine tuning we have to do really depends on how successful we are in Stage One in adopting sensible procompetitive rules that can be administered efficiently. But in contrast to the intense work in Stage One, Stage Two should be a cakewalk. At this point, we should all be able to see the destination clearly and the benefits will become apparent. Stage Three: Step Back and Let the Market Work; The FCC as an Umpire or Referee At Stage Three, competition should be vigorous and thriving. When it does, the FCC should step back, get out of the way, and let the market work. Market forces will take the place of most regulatory "solutions." Government involvement and oversight should be limited to a light regulatory touch, with cost allocation, depreciation prescriptions and price regulation relegated to the history books. In Stage Three, I forecast a reduced role for the FCC -- sort of a referee or umpire. But unlike some critics of the agency, I believe that there will still be a need for an independent expert agency. The need will be different in some ways, no doubt, and our mission will need to be adjusted to the new realities of a competitive world. One role that I think will always exist for the FCC is that of a referee or umpire. A good example of this is the recent problem with 800 number exhaust. In the past year or so, we have seen an unprecedented explosion of demand for 800 numbers from service providers. Industry efforts to solve this problem were unsuccessful. There seemed to be too many competing interests to reach consensus. The industry turned to the FCC for help, and the Common Carrier Bureau acted swiftly to slow the depletion of 800 numbers and accelerate deployment of the new Triple 8 toll-free numbers. This an example of the constructive referee role the FCC can play in an increasingly competitive environment. I envision our role as a limited one in the future. The mark of a good referee at a football game is when the fans leave the stadium talking about the brilliant plays and the players, not flamboyant referees or controversial calls. Likewise, in areas such as protecting against interference, adjudicating complaints among competitors, or addressing consumer protection issues, the FCC should help resolve the issues and make the calls quietly, fairly and efficiently. We should step in only when necessary, and not intrude on the competitors. That's my three stage roadmap for the FCC's challenging journey. It won't be easy, but it'll take us to the right place for vibrant communications companies to thrive and grow without unnecessary government intervention. Conclusion In closing, I would like you all to think about this vibrant competitive world that I have been talking about for a moment. I would like you to envision your future communications customers. They will be sophisticated users of all types of communications technology -- tiny wireless phones, videophones, wrist watch pagers, and broadband applications that will deliver telephony, on demand video or information services, and two way interactive services. These future customers are now today's school children. As my closing thought this morning, I suggest that communications companies may want to reach out to your future customers now, and make sure they are comfortable with technology and primed for a future in an Information Age world. Take one example -- NetDay96, a purely voluntary initiative whose goal is to give every school child in California the ability to surf the 'Net. On March 9th, hundreds of volunteers from high tech and communications companies, businesses, unions, universities, and parent-teacher groups will come together to connect schools in California with the Internet. Among those companies providing company resources to perform this work are AT&T, Bell Atlantic, MCI, News Corp., Pacific Telesis Group, Sprint, and TCI. I commend all of the companies involved in this effort and the work of every volunteer in making such an ambitious project a reality. These voluntary efforts give so much back to your community. I hope other companies will reach out to their communities in similar ways to get kids excited about technology. Thank you very much for inviting me.