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JULY 17, 1998 "0*0*0*J"  sK M  I. Consumer Demand   xI 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. xI 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. xA 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"l$0*(('$" take a dime to phone a phone booth. A longdistance 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. xA longdistance call a mere generation ago involved an operator. Direct longdistance dialing was an amazing innovation in the 1960s. x xBut 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. xI remember my first extended journey away from home. "l$0*(($" 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. xTen years later on my honeymoon in Italy, technology had advanced, but making a longdistance 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"l$0*(($" discounts. xThen, 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. xMaking 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. xI vividly recall my first 800 phone card from MCI. The"l$0*(($" year was 1985 or 1986. While spending weeks on end at Fort HunterLiggett 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. xTimes 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. xAll of these changes are, of course, of enormous value to"l$0*(($" 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. xAnd largely devoid of headaches as well.  sK II. Importance of Innovation xNowhere 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."l$0*((6$"ԌxIf 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. xRecent innovations such as prepaid calling cards are a great boon to many segments of the market. A sixteen yearold 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. xI 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."l$0*(($"Ԍ sKԙ III. Importance of Entrepreneurship xHow did longdistance phone cards get started? Not by government or regulatory edict. The 800 phone cards were the invention of some clever business people. xHow 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. xWhile 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. "l$ 0*((6$"Ԍ sK IV. Importance of Regulatory Clarity and Simplicity xTo the extent we have regulations, they should be clear, simple, predictable, and clearly within the law. You should not need an army of lawyers to interpret, a Ouji board to predict them, or a used car salesman to explain why the regulations really are within the law. xWe are making some progress at the Commission. Slow but steady progress. I wish I could tell you to fire all of your lawyers, put the Ouji board in the attic, and send the salesmen back to the car lots. I wish but I cannot really tell you that. "l$ 0*((6$"Ԍ sKԙ V. Telecommunications Act of 1996 xThe Telecommunications Act of 1996 was a landmark law. It set forth that competition rather than monopoly regulation was the future of telecommunications in America. xRegulation and old habits are slow to change. But change they are. xYour industry is one of the beneficiaries of deregulation and competition. "l$ 0*((6$"Ԍ sKԙ VI. Regulation, Particularly Price Regulation, and  sK Competition are at Odds xSome people believe that the way to get to more competition is through more regulation. A little regulation here, a dash over there, and tada, presto comes competition. xI am not a big believer that good things come from a little extra regulation. xI am particularly skeptical of price regulation. There is an old saying in economics. You can regulate price, you can regulate quantity, or you can regulate quality of service. If you regulate one of these, the other two are likely to change substantially for the worse. If you regulate two of these, the"l$ 0*((T$" remaining characteristic is certainly going to suffer. It is physically impossible to regulate all three at once. At times, it seems as if the Commission tries.  sh K VII. Dial Around Compensation xOne of the more difficult issues before the Commission is dialaround compensation. It is obscure to most of the world, but not this group. To the International Telecard Foundation, dialaround compensation is a central issue. xIn the old world of regulation, prices and cost never had to catch up. Pay phones could provide "free" 800 access, and its costs could be recovered elsewhere. "l$ 0*((6$"ԌxMany industries developed in the old world of "free" 800 access. Longdistance 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. xIn 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. xIn 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,"l$0*(($" consumers look to competition, not regulation, for protection. xThere 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.   xThe FCC has attempted mightily to comply with the 96 Act  xon dialaround compensation. If efforts alone could be rewarded. the FCC would be well rewarded in this as in other areas.   xIn the real world, effort alone is not enough. The  xCommission first tried 35 cents; that was assumed to be the"l$0*(($"  xaverage payphone coin rate. The Court said "no." The regulated could not be defended for dial around compensation.   "xThen we tried 28.4 cents; that was assumed to be the 35 x cent payphone coin rate less avoided costs. Again, the Court  xsaid "no." The regulated could not be defended because it started with the 35 cent rate again.   xI have yet to participate directly in one of these proceedings,  xand I can't say that I particularly am looking forward to it. It  xseems a little like a ping pong game. Pick a number, and the Court will slam it back in your face.   OxThe next go round, we at the Commission will have to be  xzparticularly careful to justify whatever number we develop. I"l$0*(($"  xzsuppose as an economist, and as a point of pride, I will take a  x2little more than passing interest in seeing that we at the  xCommission get it right this time. As a point of pride, I don't want the Court to slam the number back in my face.   ^xI don't know the number or numbers the Commission will  xdevine next time. Higher or lower? Who knows! But some  x#certainty in the market would be valuable to everyone:  xpayphone providers, telecard providers, other service providers, and, of course, consumers.  sK VIII. Universal Service   xAnother area of great concern to your industry is universal  xservice. Or at least the taxes that you have to pay for universal"l$0*((6$"  xOservice. Or at least the excessive taxes as a result of the  xCommission misinterpreting the Universal Service section of the 1996 Act.   xDuring the debate that led up to the l996 Act, many people  x.extolled the virtues of competition, particularly local telephone competition.   nxMost people thought local phone competition would be great. But not everyone.   xSome in Congress believed that rural, highcost areas of  x America received benefits and subsidies from higher rates in  xMurban and rural America. Moreover, some of these Members  xbelieved that competition would first, and perhaps only, come to"l$0*(($"  xOurban and rural America, attracted by lower costs and by  xartificially high rates to form subsidies for rural America. Subsidies that would dry up as a result of competition.   xThere were some members of Congress who believed that competition would never come to rural America.   xFinally, there were some members of Congress who  xbelieved that regulation, rather than competition, had been better  xfor rural America in many industries such as airlines, rail, and trucking.   xIt was these Members who wrote and who championed the  xzsection on Universal Service. Make no mistake: Section 254 was of, by, and for rural America."l$0*(($"Ԍ  ԙxI, for one, do not agree with all of the premises of Section  x254. I, for one, believe that competition is good for all of  xAmerica, both rural and urban. I, for one, believe that  xcompetition in telecommunication services can and will come to rural America.   xBut as an FCC Commissioner, it is not my job to write  xklaws; it is my job to follow them. Congress has spoken, and I  xyintend to follow all telecommunications laws, including Section  x254. I intend to follow the intent of Congress under Section  x/254, and I will be sensitive to the interests and rights of rural America under Section 254.   xA funny thing happened to Section 254 on the way to the  xFCC. It does not seem to have arrived yet. The FCC looked at"l$0*(($"  xSection 254, and first it saw, not rural America, but schools and  xylibraries. This is part of Section 254, and the Commission must enforce the schools and libraries provisions.   NxBut it is very difficult I dare say impossible to find the  xCommission's schools and libraries program in the Act. It simply is not there.   xEducation in America is important. As a parent, I would be  xdelighted if the federal government came in to my children's  xschools and subsidized all sorts of services and equipment. My,  xwouldn't that be wonderful. As a parent with six children, I would benefit more than most Americans.   xEducation is important. But the rule of law is more"l$0*(($"  ximportant. Indeed, the rule of law is perhaps the most important  xform of education we in government can give our children.  xIndividuals can and do try to get around the law here and there.  x\But you can always count on the government to be punctilious  x-about following the law. Government agencies should follow the law is it is written, not reinvent it.   NxOver the past several months, in a series of dissents, I have  xdescribed how the Commission's interpretation of Universal  x>Service is outside of the law. The Commission has had good  xintentions, but bad results. We have ignored the letter of the law. We have ignored the spirit of the law.   xThere is an old expression: The pathway to hell is paved  xwith good intentions. It is an apt description of the FCC's"l$0*(($" approach to Universal Service.   PxWe now have a tax without statutory authority. We are  xcollecting money, and do not know how to control it. We have  xreceived more than 30,000 applications for money which we  x/have no authority to grant, and for which the applications and the entire process have little auditing oversight. It's a disgrace.   lxAnd the American consumer is being asked to pay for all of this.   xThere are those cynical who say that we cannot spend  x.enough money on anything labeled "education" There are those  x\cynical enough to say that America can accept fraudulent and illegal activity as long as it is done in the name of education."l$0*(($"Ԍ  ^ԙxI don't believe the cynics. I believe the American people  xkwill see through this. I believe the American people want the  xrule of law. I believe the American people will not want the  xlrule of law trashed and discarded for any purpose, even for education.   xI have a great deal of faith in the American people. It is to  xzmeet their demand that clever entrepreneurs have offered new  xtelecard services. It is to meet their demand that new competitors and old ones too have flourished.   nxSome people believe the American public is inherently  xstupid and need the Federal Government to step in and look after  x"them, to protect them from making mistakes that will hurt themselves."l$0*(($"Ԍ  ԙxI see things the other way around. I put my faith in the  xjAmerican public. In its honesty. In its integrity. In its decency.  xIn its intelligence. And there are many times when I believe that  xit rather the Federal Government that needs the American public  xto look after it, to protect the government from making mistakes that will hurt it.   xAbraham Lincoln said that ours should be a government of  x[the people, by the people, and for the people. It is those people  xwho like telecards. It is those people who do not like paying  xunnecessary taxes. And it is those people who will yet save this government from itself.