SPEECH BY REED HUNDT CHAIRMAN FEDERAL COMMUNICATIONS COMMISSION DELOITTE & TOUCHE CONSULTING GROUP TELECOMPETITION '95 WASHINGTON, D.C. (AS PREPARED FOR DELIVERY) DECEMBER 5, 1995 COMPETITION IS THE KEY I'm pleased to be with you today to participate in this important conference. I understand there are plans to make this an annual event. That would be an important contribution to the consideration of the issues so important to all of us. As I may have told some of you before, I got my job because I have the same birthday as Alexander Graham Bell. What you may not know is that when Mr. Bell made his first phone call to his assistant, Mr. Watson, he said, "Come here. I need you. I want to talk about access charges." Maybe that isn't true. But that's the way we've always told it at the FCC. And within the next 6 months, the FCC, its state counterparts, and industry should talk about access charges. We should do this with the shared goal of completely overhauling the current system. The opportunity and necessity for change is now. At the FCC we have a twin mission: We are for private competition in communications, and for public benefit from communications. That means we should write fair rules of competition. These should be clear, simple, concrete, and easily understood. We should represent the public interest where competition policy won't deliver all the socially desirable benefits of the communications revolution. As to private competition, this is the most deregulatory, promarket, procompetitive, investment-encouraging, rule-simplifying FCC in history. As to public benefits, we are the most demonopolizing, consumer-aware, family- friendly FCC in history. And we are trying to state clearly, concretely, and specifically what public benefits should be delivered by the communications sector to each and every American. A great example of our precedent-setting work is the Commission's decision in which AT&T proved it was non-dominant in the provision of interstate long-distance services. In addition, AT&T guaranteed there would be a discount calling rate for low-income callers and that it would protect low-volume callers against precipitous increases in their rates. Our decision both fostered competition and furthered socially desirable benefits beyond those provided through existing competition. As we set the ground rules for competition in local markets, we will continue to promote both the private and public benefits. We will pursue competition and the lower rates, expanded service offerings, and increased innovation that competition will bring. We have seen the effects of competition in the markets for customer premises equipment, long- distance service, mobile services, and enhanced services. Competition has encouraged new and innovative entrants and lowered prices. It is important to continue to recognize that even in a competitive era, we have to remain vigilant about keeping subscribers on the network -- competition cannot be a convenient excuse to hang up on these consumers. The wire from each of our houses to the nearest telephone company office -- the local loop -- is the primary battlement protecting the local loop monopoly. Thirty years ago, most people believed that local telephone service was a natural monopoly that could be served most efficiently through a single provider. New technology and new marketing demonstrate that nothing's more unnatural than the natural market theory. We don't know today whether the local exchange market can become as competitive as the equipment market. But we will never find out if we don't write procompetitive rules that give a realistic chance for efficient competition to develop. The fundamental outline of these rules is clear: number portability, interconnection, equal access, access charge reform, and universal service reform. The Commission has already commenced rulemaking proceedings involving several of these key policy areas and I expect we will begin examining of all of these basic policy issues by early next year. In some markets, some competition is inevitable. But if we do not proactively reform current federal and state rules, we may severely limit the breadth and depth of real competition. We need new and smarter rules -- not just elimination of current rules. The states have started an irreversible drive toward competition. Thirty-one states permit local competition and twelve more are considering opening markets in their states to competition. Congress is considering legislation to open all local service markets nationwide. Our current access charge rules and the universal service system are not sustainable in an era of emerging competition. Together, federal and state rules should require the monopoly telcos to open their networks to competitors at fair, reasonable, and transparent prices. But the benefits that competition in this market could produce for consumers will never be realized unless we at the FCC and our state colleagues are prepared to grapple with the problems of unfairly low prices, cream skimming, and preserving universal service. For example, consider the case of unfairly low prices -- such as when the local telephone company gets a subsidy to provide residential service that no one else can get. To compete, the new entrant cable company or PCS provider not only has to beat the telephone company on cost, but also has to beat subsidies that go to the incumbent under current rules. Current rules therefore are anti-competitive and, if not changed, will radically constrain competition. Our current federal access charge system both builds barriers to competition and promotes cream skimming. It builds barriers to competition by discouraging competitive entry to serve residential and especially low-volume users because the price that recovers the fixed costs of serving such customers is capped at a low level and the balance of the fixed costs must be recovered from usage charges. At the same time, the current system encourages new entrants to engage in cream skimming seeking only lucrative high-volume customers. Because the incumbent LECs are required to recover from these customers some of the costs of serving low-volume customers, a new entrant may be able to offer high-volume toll customers a lower price even if it is actually more costly for the entrant than the incumbent to serve those customers. These rules invite competitors to enter -- but do not necessarily promote efficient competition. The truth is, the current system of access charges is both unfair and unsustainable. It is unfair because our current rules overcharge some people, give others a special deal they don't necessarily need, and give potential competitors distorted investment goals. For example, when you sign up for a long-distance company's cheapest rate, a big part of what you are paying is access charges. These access charges, set way above cost, don't just pay for phone service to those who can't afford it. They are also helping to pay the cost of providing a little-used telephone line to your neighbor's beachhouse. This isn't corporate welfare, it's jacuzzi welfare, and there's no need for it. As we reform federal and state rules, we have to demythologize the debate. For example, there is a myth that low-income consumers don't use long-distance services to the same extent as everyone else. That's just not true. According to information submitted by AT&T in the recent non-dominance proceeding, long distance calling patterns are not determined by income level. AT&T submitted an analysis of its customers' usage pattern which showed that low income users were as likely to be higher volume long- distance users (above $10 per month) as lower volume users. Based on true facts, good law, and sound economics, we should design rules so that the market can make the best decisions; all consumers can benefit from head-to-head competition; and those who need help to get access will get it. What can we expect of a system that encourages competition, and is fair? First, the structure of charges between carriers should reflect new technology and general principles of cost causation. It should not fly in the face of economic and technical reality. Second, we need to take a hard look at the hard caps on the subscriber line charge. Here states' experience is useful. Illinois, Massachusetts, and California have all changed their telephone service rate structures in recent years. The results are that a greater percentage of the fixed costs incurred to connect end users to the network are reflected in a flat charge on the monthly phone bill. Third, support mechanisms should be targeted and collected and distributed in a competitively neutral manner. By this I mean that we need to reform our universal service system. Our universal service policies are broke and need fixing. But let me be clear: I am committed to increasing nationwide subscribership. Our current 93.8% penetration of phone lines nationwide is a high number. It is also a low number. For example: -- One of every five homes in Camden, New Jersey does not have telephone service. -- In three states, more than 10% of the homes do not have active telephone service. -- Less than 60% of households completely dependent on welfare have phone service. -- Some 14% of African-American and Hispanic households do not have telephone service. -- 50% of rural Native Americans do not have telephone service. -- Almost 12% of unemployed adults do not have telephone service. This makes it infinitely more difficult to seek employment. -- And in 1993, more than one-quarter (27.1%) of below-the-poverty line households with children -- that is some 3.7 million children -- did not have phone service. In an emergency, they could not even call 911. I have been impressed by the different techniques that many states are inventing to help people manage their toll use, and to stay on the network. Some are even promoting "warm" or "quick" dial tone that allows even nonsubscribers to use the phone line to reach 911. We need these and other good ideas so that all Americans have affordable access to the telephone network. We also need to define what we mean by universal service. Should the same definition of universal service should apply to all customers, whether they are businesses, residential customers, or public institutions, such as schools and libraries? Shouldn't the term include putting communications technology in every classroom, clinic, and library in the country? The Snowe-Rockefeller-Exon-Kerrey provision of the Telecommunications Reform Bill tackles this issue head on. It would permit the FCC to create financial incentives to build networks into every classroom in the country. And industry is already getting more creative in serving education needs. This summer the FCC struck a deal with TimeWarner by which they agreed to provide a free modem to all the schools in its service areas, to provide them inside wiring at cost, and to provide them free access to the Internet. TimeWarner's commitments apply to one-eighth of all the classrooms in the country. And AT&T announced it will provide $150 million in the next five years to offer free Internet access to every classroom in the country. And TCI has announced it will commit $20 million to provide 10,000 inner-city, rural, and other uncabled schools in PRIMESTAR's service area access to the Primestar Goes to School Program. Alexander Graham Bell first demonstrated the telephone at the 100th anniversary of the Declaration of Independence in 1876 at the centennial celebration in Philadelphia. Recently, a survey revealed that 93% of elementary school children in the United States do not know what, if anything, happened in 1776. They heard of July 4th, but they don't know why we celebrate it. In the United States, our education system is broken and it needs to be fixed. We no longer need to demonstrate the telephone. What we do need to do is to teach kids what happened in 1776. Networks can help do that. On all these issues, let me hear from you. You can reach me at rhundt@fcc.gov, or you can write to us. We need the input of everyone so we can be sure to make the best decisions for us all. Thank you. - FCC -