NEWS November 15, 1994 CHAIRMAN HUNDT URGES MORE COMPETITION, LESS REGULATION, AT NARUC MEETING Today, FCC Chairman Reed Hundt urged his audience at the 106th Annual Regulatory Luncheon of the National Association of Regulatory Utility Commissioners (NARUC) to join him in creating a regulatory structure that relies less on government regulation and more on marketplace competition. ". . . We at the FCC began to lay out fair rules of competition for the telephone companies to enter the video business, and for the cable companies to add capacity to deliver new channels, broadband interactive services, wire and wireless telephony, and multimedia. I am referring to our Video Dialtone and Cable Going Forward decisions." "Competition in a marketplace governed by fair rules will itself determine the winners. But we know for certain that the ultimate winners will be the economy, consumers and American working men and women looking for jobs in the booming communications sector." Chairman Hundt acknowledged that a simple solution to regulatory problems is always more appealing that a complex solution but he said that while a simple correct answer is better than a complex correct answer, a simple wrong answer is unacceptable. "In all events, the real challenge for everyone is to appreciate the difficulty of the problems of transmission from monopoly to competition. Conclusory caterwauling against alleged complexity cannot simplify the problems that we must deal with." Chairman Hundt praised the states that are adopting incentive-based systems of regulation for local exchange carriers and removing barriers to entry into local markets. He encouraged increased federal-state cooperation toward their common goals of competition, efficiency and consumer satisfaction. He also noted the need to find a way to make the Joint Board process more productive and effective at problem solving. "Perhaps, the most critical area for federal-state cooperation is universal service reform," Chairman Hundt said. He noted that too many Americans still lack basic telephone service, disproportionately lower-income families. He continued, "perhaps our worst failure in providing universal service is to . . . school age children." He stressed that, just as with other consumers, schools should have the ultimate decision as to what services would best serve their needs -- wireline, wireless, or satellite connections provided by a telco or a cable franchisee. - FCC - SPEECH BY REED E. HUNDT CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION 106th ANNUAL REGULATORY LUNCHEON NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS RENO, NEVADA NOVEMBER 15, 1994 Thank you, Nan Norling, for the kind introduction. President Bissell, thank you also for inviting me to speak at the annual regulatory luncheon. So here I am out from Washington, D.C., taking my chances in Reno, Nevada: the "biggest little city in the world" (as it calls itself). If the new Congress lives up to its promises to shrink government, I suppose we'll be calling Washington the littlest big city in the world. One of the messages of the election, I read in the paper, is that people are hostile to government and in particular to Democrats in government. I'm not too concerned about this. After all, I regulate the cable industry: one thing I know is trouble. But I read in the election results a clear message that the people want the government to do less -- they want the federal government to do less, and they want the state government to do less. At the same time, I've never met a voter who wants to give up our jobs of standing between monopolists and the people's pocketbooks. So how do we reconcile the unambiguous call for smaller government with our duty to make sure that monopolists don't charge unreasonably high prices for fundamental services like electricity, local telephone service, and basic and enhanced basic cable? You might have thought in years past that the FCC was not sufficiently sensitive to the exigencies of the duty to protect consumers from monopolies. I can assure you that the 1992 Cable Act has given us an exquisite sensitivity to the demands and difficulties of this task. But at the state and federal levels, I think we have all discovered the solution that results in both smaller government and consumer satisfaction: Competition for all consumer products, including all communications services. When consumers have real, price-competitive choice for local telephone service and basic and enhanced basic cable, we can start going out of the business of regulating rates and let the markets generate fair pricing with an understanding that we have done our jobs well. When new businesses have the opportunity to enter all communications markets because incumbents with market power have to play by fair rules of competition, we will know that we can then meet the voters' demand that we start to shrink the size of government. At the state and federal levels, we are in a period of transition from monopoly to competition in all communications markets. For us, the election of 1994 sends the clear message: Get on with it, and hurry up. So, at the FCC we are informally changing our name to the FCCC: the Federal Competition in Communications Commission. In the last few weeks, we at the FCC began to lay out fair rules of competition for the telephone companies to enter the video business, and for the cable companies to add capacity to deliver new channels, broadband interactive services, wire and wireless telephony, and multimedia. I am referring to our Video Dialtone and Cable Going Forward decisions. Our intent is to set clear rules of competition for the telephone companies and the cable industry to compete against each other in the provision of voice, video and data services. We do not know which has the superior preexisting infrastructure, the better marketing ideas, the more innovative products, the clearest insight into the future of the information superhighway. At the FCC, our view is that we should not pick the winner in any competition in any of the five lanes of the information superhighway: cable, wireline telephony, wireless, satellite and broadcasting. Competition in a marketplace governed by fair rules will itself determine the winners. But we know for certain that the ultimate winners will be the economy, consumers, and American working men and women looking for jobs in the booming communications sector. The rules of competition, however, cannot be the same for all incumbent players. We do not have the same rules for telephone and cable, and everyone who understands these industries thinks that we should have parallel and harmonious -- but not identical -- rules. It is also imperative that our rules be simple, clear and as few in number as possible to meet the objective of fairness to both suppliers and consumers of communications services. Lobbyists in my office often criticize our rules by saying they are complex. I agree with them that a simple correct answer is better than a complex correct answer. But a simple wrong answer is unacceptable. It all events, the real challenge for everyone is to appreciate the difficulty of the problems of transition from monopoly to competition. Conclusory caterwauling against alleged complexity cannot simplify the problems that we must deal with. I know, for example, that the cable industry appreciated the complexity of how to set fair rules for telephone entry into video. I know that because the filings in our video dialtone proceeding amounted to 33,000 pages, a stack of paper over 12 feet high. These filings told us that the telcos are going to roll out their big cross-subsidization guns to blast the defenseless cable companies and that we have to be the peacekeepers. We were told we didn't have any regulations in place that could ensure fair competition, even though we had over 200 pages of rules called Parts 32, 36, 61, 64, and 69 to ensure fair competition. We were told that our own cost allocation rules were too complicated to give the telcos guidance on whether the telephone ratepayer would bear the burden of building video dialtone -- and yet we found a way to clarify our cost allocation rules and explain in no uncertain terms that the telcos will be required to allocate all incremental costs and a share of common costs, including overheads, to video dialtone service. At the FCC and on the state level, we are all asked why we should bother to allow competition against entrenched monopolies that deliver high-quality products. We are asked why we should go through the trouble to set fair rules of competition. We are asked, in effect, why competition is so important. Here are three reasons: First, competition is inevitable and the businesses that you hope to attract and retain in your states will insist on it. Second, competition is the only way to discover the lowest cost solutions to providing communications services. Third, competition creates the greatest number of new businesses, generates the greatest number of new product ideas, stimulates network usage, grows the economy to the maximum degree, and most important, creates the greatest number of good new jobs for Americans who are in what Secretary Reich calls the "anxious class." For those of you who are not sure who is in that group, my view is that they all voted last Tuesday. There is nothing easy about fighting for competition in communications markets. Let me tell you the story of how we at the FCC are trying to promote competition by permitting expanded interconnection of CAPs with the telcos' local networks. You probably know that earlier this year the U.S. Court of Appeals for the District of Columbia Circuit vacated our physical co-location rules. These regulations required the largest local exchange carriers to offer expanded interconnection to competitive access providers that used their own equipment located within the telephone companies' central offices. The monopoly exchange carriers fought us in court and won. The Court decided that the FCC lacked authority under existing law to order the telcos to do that -- a good argument, by the way, for federal communications law reform. At our very next open meeting, we adopted new rules implementing "virtual" co-location for expanded interconnection. This satisfies the Court's ruling by keeping the interconnection equipment under the telcos' ownership and control but dedicating its use to the competitive access providers. Now, getting out these co-location rules was not simple. But competition was too important for us to throw in the towel. The court gave us a new problem, and we found a solution. Of course, the story isn't over yet: the local exchange carriers are now appealing to the courts our virtual co-location decisions. The battle for competition goes on. Even while the telephone monopolies face only limited competition for CAPs, we want regulation of these monopolies to be sufficiently flexible to prepare for the coming competition. That was a key reason for moving to price cap regulation. Under price caps, LECS have incentives to reduce their costs. A major item on our agenda in the next few months is our fourth year review of our LEC price cap regulatory structure. Your comments in this proceeding will be taken to heart. In the reasonably near future we also are going to dig deeply into a number of local exchange competition plans put before us by the LECs. I believe we all have a responsibility to set clear rules for number portability. This is essential to meaningful competition in voice communications. We need to make progress on our open proceeding on equal access and interconnection among wireless and wireline carriers. Wireless is another lane of the information superhighway, and a booming wireless business naturally will lead to competition with incumbent telephone companies -- provided that we make sure that the new wireless businesses can fairly connect to the network. To anticipate the wireless, wire and cable competition in voice communications we expanded the Network Reliability Council. Everyone delivering voice services in this country shares the duty to provide reliable services. The FCC is also the Federal Consumer Protection in Communications Commission. Last week we began a Rulemaking intended to crack down on the practice known as "slamming". We discovered that consumers are being sent forms authorizing changes in long-distance carriers but disguised as contest entry forms, remittances for charitable endeavors, or negotiable instruments. We will gather evidence in this proceeding about the nature of these abuses and seek to devise rules that will put a stop to them and the burdens they place on consumers, regulators, and legitimate competitors. At the FCC we are learning a great deal from the growing number of states that are adopting incentive-based systems of regulation for local exchange carriers and removing barriers to entry into local markets. Illinois, Maryland, Massachusetts, Michigan, New York and Washington have already taken concrete steps toward authorizing competitive services in intrastate local exchange markets. California's legislature recently passed a significant measure to open up competition: they gave cable operators the right to apply to offer local exchange service if telcos win the right to offer cable or video dialtone. If a carrier files an application to construct a video dialtone system in a state that allows local exchange competition and the application does not raise any novel statutory or regulatory issues, the FCC will act quickly on that application. State incentive regulation is, like our price caps, a way to give the telephone companies motive to provide quality services at lower prices, and to introduce new services that will increase the use of the public switched network. We at the FCC are very grateful to the states that are generating innovative solutions to chronic problems such as the treatment of residential exchange prices. While I am encouraged by much of what is happening in the state regulatory arena, I am concerned about a recent development in the emerging market for wireless communications services. A handful of states have petitioned the FCC for the right to regulate the rates of commercial mobile radio service (CMRS) providers, such as cellular and soon-to-be PCS licensees. Even though the FCC, after an extensive investigation, found the CMRS market to be competitive, and even though available data indicate that the price of cellular service is continuing to fall from Florida to California to Hawaii, as the idea of PCS competition draws closer to reality, still a handful of states are seeking the right to continue to regulate rates for CMRS operating within their jurisdiction. I am concerned about this development because I believe continued rate regulation in a demonstrably competitive market disserves the interests of consumers. I am not prejudging these petitions -- but I would note that the statute governing CMRS requires the states to meet a substantial burden of proof to assure us that they would not impose a greater degree of regulation than is needed to address the perceived problems. I think that, at the FCC, we have a lot to learn from our counterparts in the states. I want to be sure you all get to know and frequently talk to Kathy Wallman, Chief of the FCC Common Carrier Bureau. Kathy and her staff will be working with you individually and with NARUC. You'll call us and we'll call you. We need to agree on principles and not fret about protocol. Joint Boards are one way that we can work together. But, I'd like to find a way to make the Joint Board process more productive and more effective at problem-solving. The voters certainly told us all last Tuesday that they want the different arms of government to cooperate, but they also want us to be efficient. Those of us who are laying out the rules of competition to build the information highway ought to make sure we use that highway. At the FCC we're going to figure out how to set up file servers that will enable state commission staff to directly access ARMIS information via the INTERNET. I understand this is something many of you believe would be useful, and we are enthusiastic about making this tool available to you in a format which is helpful to you. Earlier this year, as you know, we began making our orders available to you and the public through the INTERNET. We need to work together to sort out cost issues on new and planned network services. Last month, we announced that we will issue a notice of inquiry on the implications for the jurisdictional separations process of LEC provision of broadband network services, including, but not limited to, video dialtone. In the world of brave new competition, we need to continue to work together on federal-state joint audits. We are encouraged by our experience in working with state regulatory staffs in connection with the audit of Southwestern Bell. We will conduct additional joint audits in the future. We have augmented our audit staff. Audits are extremely important tools for safeguarding competition in this era of non-structural safeguards. Perhaps, the most critical area for federal-state cooperation is universal service reform. Our most recent statistics indicate that approximately 94 per cent of American households have telephone service. That is a remarkable accomplishment and state commissions have played a central role in achieving it. But in thirteen states more than ten percent of Americans still lack basic telephone service. Everywhere in the country the people without active telephone service are disproportionately lower-income families struggling to find good jobs, and families with children. More than one-quarter of the children in this country live in poverty. The adults in these homes need affordable telephone service to find work. The telephone is part of the road to a better future for their children. It's essential that, as a country, we do a much better job in getting everyone access to the networks. At the FCC we're going to reexamine our universal service programs. I've heard it said that competition in telecommunications markets is incompatible with maintaining universal service. I don't agree. Competition encourages firms to reduce the costs and prices of products and services: no result could do more to advance universal service. At the same time, we can't introduce competition in the telephone markets without reexamining the way in which universal service is funded. In particular, we need to make certain that the collection and distribution mechanisms do not cause significant distortions in competitive markets and that the financial burden is spread equitably among competing providers. Perhaps our worst failure in providing universal service is to a population that is right under our noses, or if your household is like mine, more likely underfoot: school-age children. The communications revolution is going to generate opportunities for millions of Americans to find better jobs, be more productive at work, seek new kinds of achievement, and reverse the decline in real wages that has plagued our working class. But perhaps more important than any of these, in the long run, this revolution can change our faltering education system forever and for the better. Each of our schools and libraries should be tied into local area networks. Each should be honeycombed with information pathways, accessible by teachers and filled with information for students. Our kids should be able to do research in the Library of Congress without leaving their schools. Their teachers should be able send their homework assignments over the networks to parents because we'll never reform education without bringing the parents into the process. A long, long time ago, I was a teacher. Like all teachers and all parents, I discovered that you have taught successfully when you can spark the ability to communicate in a child, to make connections. The tools to fan that spark into a wildfire of educational advancement are the tools of modern communication. We must give these tools to our teachers -- and we cannot afford to delay. The Harvards and the Browns and the private boarding schools already have built the information highway to their students. They're installing their networks now. Someone lucky enough to go to those schools will have to bring a personal computer to connect to a local area network in the dorm room. But the 45 million kids in the rest of the country aren't so lucky. Even though half of the classrooms already contain a computer, in 94% of the classrooms there isn't even a telephone line to connect it to. Now, I have seen the future at work. I have seen the virtual classroom, half in Japan and half in Hawaii, where the kids learn each others' languages by talking to, listening to and watching each other "over the phone." I have seen a classroom in Harlem where the kids are producing a daily newspaper with their class mates in Nova Scotia, via e-mail. Every kid I have talked to, all over the country, loves this electronic learning. All teachers want to provide it. All the experts agree. Everyone wants the information highway to reach the upcoming generation. This past January, President Clinton and Vice President Gore called upon the telecommunications industry to connect every classroom, every library and every hospital in America to the national information superhighway by the year 2000. Secretary Riley has made this a priority of the U.S. Department of Education, which is providing technology planning grants to the states. Secretary Riley and I will be meeting later this week with a group of educators and business leaders to discuss ways to connect the classrooms. I know that many states are already active in meeting this challenge. Many of you in this room are responsible for reducing the rates that schools have to pay for wireline connections. Nearly every state has projects underway to promote distance learning or run computer and video networks among at least some of its universities or public schools. Many of you are working actively to connect every classroom in your state. Many telcos have made significant commitments in the past few years to hooking up the schools in their regions. And if we fail to accept this responsibility, what will we tell our kids, our grandchildren? Will we say we didn't have the money, when we had the money to develop and buy teleconferencing, mobile phones and voice pagers for business, direct broadcast satellite dishes for our homes, and mobile faxes for our cars? Will we tell them we had the money to include our kids in the communications revolution, but we forgot? Those in the private sector and those of you who have been active in this field deserve a lot of credit for recognizing the problem and coming up with these pioneering, experimental solutions. As we undertake to connect classrooms universally, we will have much to learn form these early endeavors -- but we also should consider whether this approach is the right one, or whether another strategy, which focuses on the demand for these services, would better serve the consumer -- in this case, the schoolchildren. In telecommunications markets like the long distance market, we are promoting competition but not choosing the winners of that competition. I think it is time that we consider whether we should do the same in connecting the classrooms. Why should we deprive our schools of the choices and other benefits of competition that we seek to secure for consumers in other markets? Why wireline connections and not wireless or satellite? Why the telephone company and not the cable franchisee? My instincts as a regulator and a former antitrust lawyer tell me that these are choices that the marketplace, not regulators, should make. We need to create an education marketplace where supply and demand can meet. I believe that we can create such a marketplace, in which the educational sector's demand for telecommunications services generates the supply to meet it. This the challenge that we must undertake together: equipping our learning institutions, including those serving the most remote and most needy among our population, with the wherewithal to do this. Thank you. I'll be happy to answer any questions if your schedule permits.