Comments of Harold Furchtgott-Roth

Before the Committee on Telecommunications

National Association of Regulatory Utility Commissioners

Los Angeles, California

July 25, 2000

It is great pleasure to be in Los Angeles and a great honor to speak before NARUC. Today, I would like to discuss competition and regulation. Typically, when we as regulators speak of competition, we speak of competition in a regulated market: competition for telecommunications, competition for electricity, or competition for water. But there is another type of competition—competition among regulators.

What does it mean to compete as a regulator? I believe there are least five areas that help explain what it means to be a competitive regulator:

• Thinking competitively
• Playing by the rules
• Appealing controversial decisions
• Playing smarter
• Noticing opponents’ attacks

What does it mean to think competitively? Consider your favorite sport. Now imagine your favorite athlete or team. How would you react if your favorite athlete went up to a competing athlete on another team and said: "Let’s be friends;" or "Let’s agree to do things only by consensus;" or "Let’s not challenge each other;" or "Let’s promise never to get cross with each other," or perhaps "Let’s collaborate and decide to do things the same way."

How would you react? You would probably think that there was something profoundly wrong. Athletes strive to do better than their competitors, not to engage them in conversations that lead to agreements not to compete. It is time that State regulators began to think more like competitive athletes.

Why do we have States? There are many reasons. You are not merely an anachronism perpetuated by the Constitution. The role of State governments is neither simply to pay homage to the federal government, nor to collaborate with one another to reach consensus.

In our federal system, each State has a voice. It is a voice that should be independent, reflecting the views of the State, not coerced into either silence or agreement by either the federal government or a majority of States.

It is popular in Washington, DC for government officials of all stripes to extol the virtues of competition.

Competition in technology? That’s great!

Competition in the provision of telecommunications services? Could not be better!

Competition in ideas about regulation? Hold on. Let’s not get carried away. Haven’t you heard the logic? It goes as follows: "All of the brightest people are in Washington, are they not? Consequently, Washington has all of the best ideas about regulation, don’t you agree? When it comes to ideas about regulation, we don’t need competition. We need a monopoly of ideas established by the brightest minds and implemented from Washington."

For those of us in Washington, we don’t really want competition for regulatory ideas. We don’t really want to be challenged, in court or out of court. We don’t really want to compete. We simply want to do what all monopolies want to do: be left alone and to use the power of government to protect us from competition. Let’s not have any competition from the States.

The hallmark of a truly competitive enterprise is to seek out competition. The hallmark of a failing enterprise is to fight against being exposed to competition.

The sign of a competitive enterprise is to take on all comers, to defeat many, and to learn from those that have bested it. The sign of a failing enterprise is to avoid competition and to hide from it.

A competitive enterprise is not afraid to lose. It competes every day at every opportunities. Sometimes it wins; sometimes it loses, but it learns from those losses. A failing enterprise never competes, and therefore it never wins nor loses. If it competed, it would only lose, and the only lesson it would learn from the loss would be to avoid future competition.

State regulators must not fall prey to those who do not want to see competition in the ideas of regulation. I urge you to compete with one another and with the FCC in the battle for the best ideas on regulation.

Please note: I am a federal regulator. I seek to compete with you and with others. I am not here to be your friend. I am not here collaborate or to conspire to avoid competition. I seek competition in ideas: your competition with your ideas.

Don’t be afraid to be alone. Don’t be afraid to be different, from your colleagues at your commission, from other States, from the FCC.

Be wary of efforts to force you to surrender your competitive independence. It is the hallmark of a failing enterprise to get others not to compete, to co-opt you into silence, into inaction. To threaten you: "you don’t count, you don’t matter." Or to seduce you into silence: "Let’s work together, not against each other." Or "Join our collaborative process, and let’s reach a consensus."

Collaboration can be competitive. In the world of academics, where countless individuals and teams engage in a race for scientific discovery, and in which combined the talents of two or more researchers may be greater than their individual efforts, collaboration may be beneficial and competitive. In science, there is glory, not only in getting the right answer, but in being first. There is little glory in being second to replicate the work of others. There is a winner, and there are others.

Collaboration in the world of government has a different meaning. There is a finite number of governments. And the result of governmental efforts has glory in being right, but rarely in being first, or second, or 50^th in a sequence.

Government collaboration today all too often reminds me of the most famous of government collaboration: Vichy, France. In that collaboration, there was a horrible winner, and an ignoble loser. In that instance, "collaboration" was merely a euphemism for having given up, having lost the will to compete no matter the odds, and preferring the concession of acknowledged defeat to the challenge of competition.

The next time someone asks you as a government official to collaborate, or to surrender your independence, I hope that you will at least pause to ask why. Is it worthwhile? It is, of course, often easier to take the path of least resistance, to go along with the crowd, to minimize your efforts, to look the other way, to conform, to be agreeable. That’s why we are in government, isn’t it?

The role of the States in not necessarily to be united on any issue, much less all issues. There may possibly be one view among States, or two views, or 50 or more views. If you have a view, don’t let another State bully you into changing it. It does not matter if one or 50 States hold a particular view; if your State or your personal view is different, so be it.

In my view, the proper role of NARUC is not to insist on a united front among States, nor even to present a united front, but rather to serve as a forum for views from States that may diverge. Then NARUC can trumpet to the world: "Here is the range of views held by our Members."

Why are there States? I believe that States are profoundly important, not anachronistic ornaments of constitutional federalism. You have a voice, no more and no less than other States or than the federal government. In the world of the FCC, States are competitors—worthy competitors. Our job is not to collaborate, or to cooperate, or to conspire together. Our job is to compete--respectfully, aggressively-- in public forums, for public opinion.

Relative to State Commissions, the FCC has an easy job. We are bound by one law, federal law. We follow primarily the Communications Act and a handful of other federal statutes. In contrast, State Commissions must follow bother federal and State law, and each State law is slightly different.

State Commissions have important and unique roles under federal law. In particular, sections 214, 252, 254, and 271 of the Communications Act and Section 706 of the Telecommunications Act of 1996, among others, provide for specific responsibilities for State Commissions. State interpretations of these provisions need not be identical; indeed, independent interpretations have value.

Each of us as Commissioners, in performing our official functions, must be responsive to the laws that govern our agencies. We can interpret these laws with various degrees of expansiveness or narrowness. I personally prefer narrow interpretations; others prefer expansive interpretations. Expansive interpretations of vague or ambiguous laws can lead to unintended consequences. Laws have meaning only to the extent they establish boundaries on behavior or other action; laws have no meaning if they can be interpreted to vest in a government agency limitless and self-determined powers. Similarly, rules that derived from interpretations of law make sense only when they are based on clear and unambiguous authority, not when they are based on assertions of broad discretion derived from vague statutory authority. Let me describe three examples that have recently been before the Commission that affect State authority.

In many States during the early Section 252 contracts between ILECs and CLECs, reciprocal compensation terms were agreed that provided for payments for termination of traffic. After the implementation of these contracts, many ILECs discovered substantial imbalances in reciprocal compensation payments, quite possibly related to Internet traffic originating on ILEC facilities and terminating on CLEC facilities.

Several ILECs petitioned the Commission for relief. Yet, to the extent there was problem, it was a problem under State-negotiated or arbitrated contracts, not with federal law or federal rules. In early 1999, the Commission granted the ILECs partial relief by asserting that Internet and packet-switched traffic was indistinguishably based on one-call and interstate traffic. This decision was a departure from Commission arguments to preserve the enhanced-service-provider exemption based on a two-call theory. Despite asserting federal jurisdiction over practically all telecommunications plant and equipment around the world, the FCC left intact existing State contracts, a logical inconsistency.

A few months ago, the D.C. Circuit vacated and remanded the FCC’s reciprocal compensation rules. The court seemed unpersuaded by much that was in the Commission order.

Some observers see this issue as a fight between ILECs and CLECs. Others see it as a fight between old technology and new technology. In a larger sense, it is also a dispute about whether local networks are under state jurisdiction or whether the FCC can unilaterally assert federal jurisdiction indirectly through the reciprocal compensation rules. Make no mistake: if all packet-switched networks are purely interstate in nature, there is little future left in State regulation. Some may see that as a good outcome; others would disagree. In either case, I believe that it is an outcome that can be reached only statute, not by the unilateral action of the FCC to expand its jurisdiction based on an aggressive and expansive reading of existing statutes.

The recently announced FCC-FTC guidelines on advertising for common carriers is another example of aggressive statutory interpretation. The FTC is prohibited by statute from regulating such advertising. The FCC has no plausible statutory authority to regulate such advertising.

What to do? Rather than issue regulations that would not withstand judicial review, the agencies cleverly invented some "guidelines." Of course these are not binding rules, but they certainly have the look and feel of rules. For the FCC, an agency the regulated common carriers daily, the mere presence of such guidelines certainly has a chilling effect on behavior outside of the guidelines. The Commission issued the guidelines based only on assertions of broad and vague authority.

These federal guidelines are, of course, entirely unnecessary. Consumers have ample remedies available under State consumer protection laws. Indeed, the federal guidelines undermine State authority by suggesting there is a substantial federal remedy, where one is actually not present.

In the past year, the Commission has completed proceedings in which the final orders contained language largely negotiated in private with selected parties, and which may also have included secret side agreements. The license transfer for SBC and Ameritech and the recently concluded CALLS procedure are the most egregious examples. Some of the side deals, such as on depreciation schedules, may have undermined State authority.

All of this, of course, violates both the letter and the spirit of the Administrative Procedures Act. But who is to know? When challenged, the Commission rests its authority to negotiate these provisions in private based on broad authority, not specific statutory mandates.

Being competitive in the arena of regulatory ideas means being willing to challenge and to appeal regulatory decisions that you believe are erroneous. One of the great strengths of our legal system is the right of individuals to seek relief in court to resolve disputes concerning the government’s interpretation or enforcement of the law. This principle extends to individual States seeking relief to resolve disputes with the federal government.

As a federal official, I must and will side with federal authority, but I view resolution of these disputes in courts as a healthy rather than an unhealthy matter. The Supreme Court in Iowa Utilities has resolved some, but by no means all, issues of controversy between the FCC and the States on jurisdictional matters.

To hold that the FCC has encroached on State authority is not position that a State should eschew, nor is it a position that a State should hesitate to advocate in court either individually or collectively. Yet challenges to FCC authority from States are rare. Earlier in my remarks, I mentioned three areas where Commission decisions may well have affected State authority. There are many more examples.

Being competitive in the realm regulatory ideas ultimately means being smarter, having better ideas about regulation than anyone else. Some people believe all the smart people are in Washington. I don’t. Indeed, at times it seems as if it would be impossible to develop worse ideas than those developed in Washington.

A case in point is the FCC’s universals service cost model that is applied to large companies to distribute high-cost support. How bad is it? To begin with, it takes 180 hours to run. Those are hours--not minutes, not seconds, not milliseconds. In the year 2000, when computers can do just about anything in a fraction of a second, the FCC has trained computers to come up with precisely the wrong answer, and the computers have rebelled by refusing to provide an answer in less than the stone-age time of one week. I simply call it "The Model That Doesn’t Work." I can only assume that an approximately right answer for universal service would take only a fraction of a second to calculate.

It is difficult to interpret the results of the model. They change depending on the vintage. One of the few consistent results is that most States receive no high-cost support. Paradoxically, the Joint Board on Universal Service recently recommended an interpretation of holding States harmless that was based on phasing out existing support mechanisms and then relying on "The Model That Doesn’t Work." Rather than being held harmless, many States would be twice harmed: both losing current support mechanisms and then having to rely on "The Model That Doesn’t Work."

"The Model That Doesn’t Work" is based on TELRIC pricing. I am not sure how the recent Eight Circuit decision holding TELRIC inconsistent with the ’96 Act will affect the model. I am sure, however, that I would not recommend that States adopt this model for internal State purposes, such as a State universal service. In a world in which being smarter matters, it would be hard to do much worse than adopting "The Model That Doesn’t Work."

In many areas of telecommunications regulation, the clever answer is often elusive. Much fine work at both the federal and State level has been invested in recent years in developing clever ways of to review Section 271 applications, to provide funding for universal service programs, and to calculate access charges. Yet, in each of these areas, I am not convinced that we have reached the best and final answers. As I have indicated in my separate statements in each of these matters, I think there is yet substantial room for improvement. Please don’t be lulled into simply imitating what has succeeded in the past. Imitation may be the sincerest form of flattery, but it is not a good method of innovation.

Finally, being competitive in the realm of regulation requires some awareness of attacks from the outside. Let me give a recent example of an attack on State regulatory authority generally to which there has been relatively little State response. It involves Western Wireless’s efforts to receive Eligible Telecommunications Carrier (ETC) designation in South Dakota. Western Wireless is a great company, and I very much admire the company, John Stanton their CEO, and their service offerings. I wish Western Wireless well in all of their endeavors.

Western Wireless’s application for ETC status in South Dakota was rejected by the State PUC, under Sections 214 and 254, in part on the basis that Western Wireless was not actually offering the service for which ETC status was sought. The State Commission’s decision was vacated and is being appealed through the State courts. Thus, there is no current South Dakota decision. All of this process within the State is fine.

Recently, the FCC has issued an "advisory opinion," ostensibly under Section 253, suggesting that the FCC would preempt any State efforts to limit ETC eligibility. Please read my dissenting statement to see my many technical concerns with the item. Among these are that ILECs in most areas of South Dakota receive no federal universal service support, so it is difficult to see how failure to receive ETC status is a barrier to entry. Let me highlight two that I believe should be of particular concern to States.

First, the use of advisory opinions under Section 253 is a dangerous precedent. The language of Section 253 describes responses to specific and actual State actions, not hypothetical ones. When the FCC begins issuing advisory opinions under Section 253, it has the effect of foreclosing, without a fact record, State consideration of laws and regulations that might well be consistent with the Communications Act.

Second, in this particular instance, the FCC advisory opinion has the effect of rendering meaningless any State review of applications for ETC status and render Section 214(e) hollow. Under the advisory opinion, a State would be precluded from denying ETC status to anyone who remotely contemplates offering service at any distant date in the future. And yet, designating a carrier that is not actually offering service as an ETC, a State would be effectively precluded from compelling the ETC to offer service tomorrow as a carrier-of-last-resort.

Thank you for permitting me to share a few thoughts with you today. I hope that each of you will seek to be more competitive in the arena of regulatory ideas. I hope that you enjoy the rest of your convention here in Los Angeles.