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JULY 17, 1998

I. Consumer Demand

I would like to thank the International Telecard Association for inviting me here today. It is an honor for me to have the opportunity to meet with you and hear your concerns.

I always enjoy speaking. Many engagements are with industries defined by laws and regulations. The last time I checked, you don't have a separate bureau at FCC. Or Division. You went to the American people, not regulators, and said "what do you want?" I salute you.

A mere generation ago, the technology your industry supports was unimaginable to most Americans. Make a call away from home? Well, if it were a local call, you would take a dime to phone a phone booth. A long-distance call? Away from home or the office? Well, you simply would not do that. It would cost too much money. You would send a letter instead. Or perhaps a telegraph.

A long-distance call a mere generation ago involved an operator. Direct long-distance dialing was an amazing innovation in the 1960s.

But direct long distance dialing was not easily accomplished away from home. You probably had to go through an operator for that. And a lot of time. And a lot of money.

I remember my first extended journey away from home. It was a summer in Ithaca New York. The year was 1973. Once a week, I would go to the phone booth in the dormitory, the one phone in the entire building. I would call the operator to call home and reverse the charges. To me, it seems miraculous that I could call home at all. As it turns out, the calls were very expensive.

Ten years later on my honeymoon in Italy, technology had advanced, but making a long-distance phone call was still complicated. In Italy, to make any call, you had to go to a post office. If I recall correctly, one would purchase tokens to enter into the payphones. Of course, the post office was only open certain hours during the day. I spoke not a word of Italian. Fortunately, my new bride did. Of course, one did not merely purchase tokens, one always had to ask for student discounts.

Then, of course, one had to find a phone, not a simple matter. More difficult was finding one that appeared to work. More difficult yet, one that actually worked. They would eat tokens at incessant rates and cut off service. Not a good situation if the post office were closed for the rest of the weekend. Or for a national holiday. Or if you did not speak Italian.

Making phone calls in Italy in the early 1980s was not easy. It was then a country where getting a phone line took months, and getting one repaired -- who knows.

I vividly recall my first 800 phone card from MCI. The year was 1985 or 1986. While spending weeks on end at Fort Hunter-Liggett California, practically in the middle of nowhere, I could find this one phone booth. And from that one phone booth, I could call my wife directly. I thought that it was an amazing service.

Times have changed. In America and around the world. Direct dialing is the norm rather than the exception. For making calls from pay phones, cards are increasingly the norm, and coins are now the exception. In countries where tired national monopolies once ruled with legendary inefficiencies, new wireless competitors offer discipline and new social norms of telephone conversations.

All of these changes are, of course, of enormous value to consumers. Making a phone call was once a luxury service, a special occasion, and enormous event that involved detailed planning and timing. Today, a phone call to anywhere in the world is a commonplace event devoid of novelty or specialness.

And largely devoid of headaches as well.

II. Importance of Innovation

Nowhere has innovation in the telephone industry been more pronounced than in the ease of telephone service away from home or office. AT the hind end of the scale, wireless services leave us untethered to the wires in our home or office. We can literally take handsets around the world.

If one does not want to take a handset along, credit cards make calls away from home or office a simple matter. Inexpensive calls, simple billing, and one does not need a sack of coins or tokens.

Recent innovations such as prepaid calling cards are a great boon to many segments of the market. A sixteen year-old in Ithaca, New York would no longer have to "reverse charges," or even take the parents credit card. At an expensive rate, a teenager could call home or to friends anywhere in the world.

I don't have to tell you of the great value of the services your companies provide. People gladly purchase services from your company. You must be doing a good job.

III. Importance of Entrepreneurship

How did long-distance phone cards get started? Not by government or regulatory edict. The 800 phone cards were the invention of some clever business people.

How did the prepaid calling cards get started? Not by government or regulatory edict. The prepaid calling cards were the invention of some clever business people.

While telephone service today is less regulated than in the past, it still is heavily regulated. Much too regulated in my opinion. But the laws and regulations of today are ones that we must live with.

IV. Importance of Regulatory Clarity and Simplicity

To the extent we have regulations, they should be clear, simple, predictable, and clearly within the law. You should not need an army of lawyers to interpret, a Ouji board to predict them, or a used car salesman to explain why the regulations really are within the law.

We are making some progress at the Commission. Slow but steady progress. I wish I could tell you to fire all of your lawyers, put the Ouji board in the attic, and send the salesmen back to the car lots. I wish -- but I cannot really tell you that.

V. Telecommunications Act of 1996

The Telecommunications Act of 1996 was a landmark law. It set forth that competition rather than monopoly regulation was the future of telecommunications in America.

Regulation and old habits are slow to change. But change they are.

Your industry is one of the beneficiaries of deregulation and competition.

VI. Regulation, Particularly Price Regulation, and Competition are at Odds

Some people believe that the way to get to more competition is through more regulation. A little regulation here, a dash over there, and ta-da, presto comes competition.

I am not a big believer that good things come from a little extra regulation.

I am particularly skeptical of price regulation. There is an old saying in economics. You can regulate price, you can regulate quantity, or you can regulate quality of service. If you regulate one of these, the other two are likely to change substantially for the worse. If you regulate two of these, the remaining characteristic is certainly going to suffer. It is physically impossible to regulate all three at once. At times, it seems as if the Commission tries.

VII. Dial Around Compensation

One of the more difficult issues before the Commission is dial-around compensation. It is obscure to most of the world, but not this group. To the International Telecard Foundation, dial-around compensation is a central issue.

In the old world of regulation, prices and cost never had to catch up. Pay phones could provide "free" 800 access, and its costs could be recovered elsewhere.

Many industries developed in the old world of "free" 800 access. Long-distance phone cards and the paging industry are but two. I don't believe that these or any industry are entirely dependent on free 800 access. But I also don't believe these or any other industry can long prosper in a world of enormous regulatory uncertainty.

In a competitive market, with free entry and exit, it is very difficult to mandate the provision of "free" services. Perhaps the only thing more difficult than mandating "free service" is mandating a regulated price for the service.

In a truly competitive world, markets, not governments, set prices. In a truly competitive world, businesses serve their customers, not regulators. In a truly competitive world, consumers look to competition, not regulation, for protection.

There are many payphone providers in America, there are many payphone consumers, and there are many services that depend on payphones. Sadly though, or so the story goes, we do not have truly competitive payphone services at any particular location. Or at least that is the theory behind regulating payphone rates.

The FCC has attempted mightily to comply with the 96 Act on dialaround compensation. If efforts alone could be rewarded. the FCC would be well rewarded in this as in other areas.

In the real world, effort alone is not enough. The Commission first tried 35 cents; that was assumed to be the average payphone coin rate. The Court said "no." The regulated could not be defended for dial around compensation.

Then we tried 28.4 cents; that was assumed to be the 35-cent payphone coin rate less avoided costs. Again, the Court said "no." The regulated could not be defended because it started with the 35 cent rate again.

I have yet to participate directly in one of these proceedings, and I can't say that I particularly am looking forward to it. It seems a little like a ping pong game. Pick a number, and the Court will slam it back in your face.

The next go round, we at the Commission will have to be particularly careful to justify whatever number we develop. I suppose as an economist, and as a point of pride, I will take a little more than passing interest in seeing that we at the Commission get it right this time. As a point of pride, I don't want the Court to slam the number back in my face.

I don't know the number or numbers the Commission will devine next time. Higher or lower? Who knows! But some certainty in the market would be valuable to everyone: payphone providers, telecard providers, other service providers, and, of course, consumers.

VIII. Universal Service

Another area of great concern to your industry is universal service. Or at least the taxes that you have to pay for universal service. Or at least the excessive taxes as a result of the Commission misinterpreting the Universal Service section of the 1996 Act.

During the debate that led up to the l996 Act, many people extolled the virtues of competition, particularly local telephone competition.

Most people thought local phone competition would be great. But not everyone.

Some in Congress believed that rural, high-cost areas of America received benefits and subsidies from higher rates in urban and rural America. Moreover, some of these Members believed that competition would first, and perhaps only, come to urban and rural America, attracted by lower costs and by artificially high rates to form subsidies for rural America. Subsidies that would dry up as a result of competition.

There were some members of Congress who believed that competition would never come to rural America.

Finally, there were some members of Congress who believed that regulation, rather than competition, had been better for rural America in many industries such as airlines, rail, and trucking.

It was these Members who wrote and who championed the section on Universal Service. Make no mistake: Section 254 was of, by, and for rural America.

I, for one, do not agree with all of the premises of Section 254. I, for one, believe that competition is good for all of America, both rural and urban. I, for one, believe that competition in telecommunication services can and will come to rural America.

But as an FCC Commissioner, it is not my job to write laws; it is my job to follow them. Congress has spoken, and I intend to follow all telecommunications laws, including Section 254. I intend to follow the intent of Congress under Section 254, and I will be sensitive to the interests and rights of rural America under Section 254.

A funny thing happened to Section 254 on the way to the FCC. It does not seem to have arrived yet. The FCC looked at Section 254, and first it saw, not rural America, but schools and libraries. This is part of Section 254, and the Commission must enforce the schools and libraries provisions.

But it is very difficult -- I dare say impossible -- to find the Commission's schools and libraries program in the Act. It simply is not there.

Education in America is important. As a parent, I would be delighted if the federal government came in to my children's schools and subsidized all sorts of services and equipment. My, wouldn't that be wonderful. As a parent with six children, I would benefit more than most Americans.

Education is important. But the rule of law is more important. Indeed, the rule of law is perhaps the most important form of education we in government can give our children. Individuals can and do try to get around the law here and there. But you can always count on the government to be punctilious about following the law. Government agencies should follow the law is it is written, not reinvent it.

Over the past several months, in a series of dissents, I have described how the Commission's interpretation of Universal Service is outside of the law. The Commission has had good intentions, but bad results. We have ignored the letter of the law. We have ignored the spirit of the law.

There is an old expression: The pathway to hell is paved with good intentions. It is an apt description of the FCC's approach to Universal Service.

We now have a tax without statutory authority. We are collecting money, and do not know how to control it. We have received more than 30,000 applications for money which we have no authority to grant, and for which the applications and the entire process have little auditing oversight. It's a disgrace.

And the American consumer is being asked to pay for all of this.

There are those cynical who say that we cannot spend enough money on anything labeled "education" There are those cynical enough to say that America can accept fraudulent and illegal activity as long as it is done in the name of education.

I don't believe the cynics. I believe the American people will see through this. I believe the American people want the rule of law. I believe the American people will not want the rule of law trashed and discarded for any purpose, even for education.

I have a great deal of faith in the American people. It is to meet their demand that clever entrepreneurs have offered new telecard services. It is to meet their demand that new competitors -- and old ones too -- have flourished.

Some people believe the American public is inherently stupid and need the Federal Government to step in and look after them, to protect them from making mistakes that will hurt themselves.

I see things the other way around. I put my faith in the American public. In its honesty. In its integrity. In its decency. In its intelligence. And there are many times when I believe that it rather the Federal Government that needs the American public to look after it, to protect the government from making mistakes that will hurt it.

Abraham Lincoln said that ours should be a government of the people, by the people, and for the people. It is those people who like telecards. It is those people who do not like paying unnecessary taxes. And it is those people who will yet save this government from itself.