SPEECH OF REED HUNDT CHAIRMAN, FEDERAL COMMUNICATIONS COMMITTEE TO THE COMMUNICATIONS COMMITTEE, NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS TUESDAY, JULY 23, 1996 LOS ANGELES, CALIFORNIA [As prepared for delivery] In Re: Arranged Marriages and Other Forms of Cooperation Thank you, Cheryl for you kind introduction. I want to take this opportunity to thank Cheryl Parrino for the guidance and counsel she has provided me over the past several months. The more I've gotten to know her, the more respect I have developed for her. I do believe Cheryl will come to be described in the deregulatory history books as one of the greatest NARUC chiefs ever, in a time of momentous change. I also want to acknowledge my close friend and former colleague Andy Barrett, now thriving in the private sector after many years of admirable public service. And I'd like to acknowledge my friend and current colleague Susan Ness, who is showing real leadership on our pending interconnection item even while finding the time to be with you. There are many people here who I've had the pleasure of getting to know during the last three years. Perhaps some of you feel you've learned something about me. It doesn't take too long to learn that I am a person who wears his heart on his sleeve from time to time. And that's a reason why the events of last week were so distressing for me. And you know that I deeply value partnership and team work, shared enterprise. And that's why the events of last week were so disappointing to me. And I think that what we can do together for the next generation is our highest responsibility as adults. And that's why the events of last week were so disheartening for me. When I talk of the events of last week, I am referring of course to the failure of the Washington, D.C., professional basketball team, the Bullets, to sign its star player Juwan Howard. The owner promised everyone in Washington that he would find a way to meet or beat the highest offer from another team, and then he let us all down. Howard himself told us all he cared about Washington, including my hero-worshipping ten year old son, and then he let us down. This event was only about sports. But sports is a metaphor for life, and at least for my ten year old son Nathaniel, sports is the best part of life. So it was deeply depressing for everyone in my family that the owner of our team and its former star player so disappointed us. The worst part is that we are doomed to watch the consequences of this failure of priority and collapse in conscience play out in future years of inferior competition and poor attendance at the new MCI arena, widespread public unhappiness, unaccomplished objectives and unfulfilled potential. Another sport in Washington is politics. The history of our democracy shows that people playing politics sometimes fight fair but sometimes err on the side of expedience, sometimes read a law right but sometimes read it a little strangely, sometimes seize an opportunity to do something grand for the country but sometimes face a great challenge and pass on it. These things can go either way. However, our sport here really isn't politics. Congress and the American people have given us our mission. Now we only have to implement pragmatic policies that will accomplish that mission and continue the great communications revolution. Politics need not concern us. We should be doing policy. Here's the way it is with policy matters: when you're right on the law and logic and economics, then eventually the correct view will prevail as long as you keep pushing for it. So the FCC fought for auctions instead of giveaways of the public's property of the airwaves and after ten years we got our way. So we are fighting for three little hours of quality TV for kids from every broadcaster everywhere and eventually we'll win this fight. So the FCC and many states have stood up for consumer welfare and innovation and fair play in competition in all communications markets. And with the help of the states -- and especially those who long ago led us in this fight -- we'll win the battle. So the Administration, Congress, the state Governors, the PTA and the FCC are fighting to improve the quality and the equality of education by putting communication networks in every classroom of every school in every district in the country. With the help of the states -- especially those who...led us down this lane of the information highway ...even before the new law was passed--- eventually we will win this fight. In all the battles for private competition in communications and public benefits from communications, the states and the FCC should be partners. Together, we are strong, effective, smarter, than we are when either of us acts alone or at odds with the other. The Competition Trilogy As I see it, in the next six months we've got a trilogy of rules to write at the FCC and in the Joint Board, and in the same time, each state has its own, local even more extensive version of these same rules to write in rulemakings and in arbitrations. And then to add to our labors, we have to work on the question of Bell entry into long distance. The three volumes of the trilogy are called Interconnection, Universal Service and Access Reform. The titles are boring; the subject matter is dense; the goal is nothing short of a peaceful, benign revolution in communications policy. With able help and extensive, detailed advice from the states, we're about to vote at the FCC on volume one of the trilogy: Interconnection. When you read the 500 page discussion and Order I predict you'll have two reactions: first -- the FCC has asked the states to do the greater part of the job of writing the blueprint for competition. Second -- at least our document is only one-third as long as FERC's retail wheeling decision. Of course, you'll see in our decision some uniform, national rules. Some interpretations of Congressional intent cannot vary from state to state and so might as well be decided by the FCC before states do the arbitrations of interconnection arrangements, rather than after the fact in litigation. Some economic principles are like the laws of chemistry -- they are uniformly applicable and so might as well be explicated on a national basis. And some procedures should be uniformly followed everywhere if only for the convenience of competitors and consumers. But I predict that when you read our decision you will not feel the ham-handed grip of federal bureaucrats constraining your willingness to create a procompetitive communications sector in your own state. Instead you will wonder how you can implement the Congressional mandate, as translated by the FCC, in the few short months available until the deadline for ending the arbitrations. And there will be hundreds of interconnection arrangements the new entrants can't get in fairness without your help in mediation, arbitration, and state rulemaking. The states are the salvation of competition. Competitors need to apply the cost-based pricing principles that will decide the loop price in urban, suburban and rural areas. They need you to determine the exact resale discounts on all appropriate services. They need you to define strictly all appropriate network elements with full functionality of use. The actual terms and conditions of the arbitrated arrangements are the single most important factors in determining whether a state will or will not see significant local exchange competition within its borders. In the wake of writing our Interconnection Order, the FCC will be available to you for formal and informal consultations and rulings as you proceed with the task of interpreting our decision -- and applying it in arbitration. But the greatest preponderance of work in writing the exact terms and conditions of the arbitrated interconnection agreements will be the states' responsibility. Of course, neither the FCC nor any state can expect to make each and every competition decision perfectly in 1996. In our rules, in your rules and in your arbitrations, it will be necessary to reserve the right to review the progress of competition, revise rules and arbitration results as necessary over time, and reconcile future conditions with this year's decision. With the comfort that only the first steps seem to be the hardest, we together should just do the best we can, as soon as we can, on every issue and then move on to the next issue. Universal Service The next volume of the trilogy will be the Joint Board's November decision in the Universal Service proceeding. As the sycamore leaves fall on M Street in Washington's sweet tempered fall, and as candidates contest in not necessarily sweet temper the prizes of elective office, the states and the FCC will be discussing nothing less than how to keep the American people's faith that the communications revolution should benefit all Americans. Our communications policy is built on two principles: private benefits through competition, and public benefits from competition. But what happens if competition does not develop everywhere or immediately? In the universal service proceeding we can continue to assure that even when competition does not drive prices down, local telephone rates still stay affordable. In that proceeding we can guarantee that more -- not fewer -- people become telephone subscribers. We can guarantee that the public receives what neither monopoly nor competition has yet given us: telecommunications networks in all of our country's classrooms, libraries and rural health clinics. For decades, we have all ordered super competitive prices on toll, business, vertical services, and certain urban residential dialtone to help pay for residential service in less dense, higher cost areas. Competition blunts and breaks these tools. Without complete reform of our universal service system, competition will eventually put universal service into a death spiral, as high volume customers move to new entrants to avoid subsidy payments. Fortunately under Section 254 Congress told us to find new ways to do the good old job -- and to expand that old job by providing affordable service for new customers, especially kids in classrooms. So how much money do we need to fund universal service? The United States Telephone Association says that the total should be around $18 billion. The December 1995 version of the Benchmark Cost Model says that if we want residential rates to be no higher than $20 a month, the total should be between $4 and 8 billion a year. Of course, the Benchmark Cost Model projects universal service costs of between $1 billion and $3 billion provided that the states let local phone rates go to $40 per month. Personally, I think the purpose of the new law was to reduce what people pay or at least let them get more for their money. I think a $40 per month residential local phone bill is bad policy. The Universal Service Joint Board must recommend a new way to recover the non- traffic sensitive loop costs currently covered by the Carrier Common Line charge. As everyone knows, under the CCL, high volume users help pay for the loops of low volume users. The amount of subsidy in the CCL is about $3.5 billion a year. How can this subsidy be obtained in a competitively neutral way? The Joint Board has to answer that question. The Joint Board must also decide how to distribute over five years the money necessary to fund the construction of modern communications networks in every classroom, library and rural health care facility in the country. We already have a telephone line in almost every school. The problem is that it ends in the principal's office. Kids are different today than when I was young, but there is one constant: kids still don't like to go to the principal's office. A bipartisan Congress asked us to put networks and Internet access in every classroom. These three evidentiary hearings and voluminous record in our Joint Board proceeding tell us that for less than one percent of telecom providers' revenues we can pay for networking classrooms in five years. After that the discounts for using these networks can be funded at even lower levels. The benefits to our country from this investment will be incalculably large. I hope you will all regard it as an honor to introduce the communications revolution into our education system. Access Reform In November, the FCC intends to issue a Notice of Proposed Rulemaking on access reform -- the third volume of our trilogy. Some of these tentative conclusions will be drawn from the Joint Board's universal service proceeding (such as the CCL). Others -- such as the D.C. Circuit's recent remand of our transport decision -- will reflect the inevitable changes that competition brings to the status quo. Every communications businessperson or policymaker I talk to agrees that in the long run good policy requires that state and national rules no longer distinguish between minutes of traffic according to whether the message terminates in the same state in which it originates or in a different state. This is expressed by the maxim, a minute is a minute is a minute. A smooth but certain transition to that result is at the core of access reform. In not less than two months, I'd like to receive the states' suggestions as to all issues of access reform that should be in our Notice. I know this puts pressure on your resources but we have no choice. All parts of the trilogy have to be written in a hurry if we are to have real competition in a hurry. That's what Congress asked for and that's what the country deserves. We intend to bring home our access reform order as early in the first quarter of 1997 as humanly possible. I recognize that each state has its own access issues to resolve; indeed intrastate access reform is no less important to competition than interstate access reform. Ted Turner has a sign on his desk that says lead, follow or get out of the way. Neither the FCC or the states can get out of the way of the other; we're on the competition march together. But where a state has taken the lead in developing a sound competition policy, you'll see us as very willing followers. Bell Entry into Long Distance I was tremendously encouraged by the spirit of partnership that brought 44 of the 49 states with Bell Companies to Washington on short-notice to participate in a forum on 271 issues. I am encouraged that Florida, Michigan and Ohio have already opened dockets to begin to compile the record necessary to judge Bell entry petitions. The states are showing critical leadership in implementing Section 271. The Act calls upon states to verify a Bell Company's compliance with the checklist. The Department of Justice, the FCC and the appellate courts that will review the FCC's 271 Orders -- all need to trust what you verify. Given our legal system, it inevitably will be necessary for states to conduct fact finding, permit adversary proceedings, and reach conclusions of law and findings of fact. Without an appropriate record from the states, the Bells' entry petitions will be unnecessarily flawed. Moreover, the arbitrations will inevitably help create in each state a record that informs all the Section 271 issues. Conclusion We've got a mountain of work to climb together. When we're done we can rename NARUC as the National Association of Deregulatory Utility Commissioners and we can proudly say the FCC now stands for Fostering Competition in Communications.