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January 14, 1997

Good afternoon and happy new year. One problem with this job of mine, which is the greatest job in Washington you don't have to get elected to, is this: you don't get any respect.

Now some of you are thinking, I'm misquoting (again), It's supposed to be "you don't get no respect." And others are thinking, at least he finally figured that out. But this is an ongoing discovery. Let me give you an example. The other day there was an article criticizing me for being a "spineless weasel" and my Chief of Staff, Blair Levin, told me that no one in the office thought "spineless" was fair. Let me give you another example. Last night someone came up to me and said, gee you were really funny in the comedy routine at the Chairman's FCBA dinner last month. He paused. I felt the slight frisson of pleasure that runs over any appointee to public office when the flattery first laps your consciousness. And then he went on: "You know, you're getting awfully good at reading Blair's jokes."

So today I'm reading OGC and CCB jokes. These are real tongue-twisters.

Actually, let's do substance instead of jokes. Let me move on to cover in the remaining few minutes our answers to access reform, universal service reform, separations, the WTO deal, our future of the FCC, and last but not least, Bell entry into long distance.

I will begin with access reform. You have already had the privilege of listening to the details from Richard Metzger, our telecom wizard, if Abe Pollin gives us the rights to call him that.

Everyone agrees that for reasons of economic efficiency and competition policy, access charges should reflect the underlying costs of providing access services and the manner in which those costs are incurred (e.g., in a traffic-sensitive vs. non-traffic-sensitive manner). This is a key step toward getting a competitive telecom market and competition is a precondition for deregulation of retail prices without causing welfare loss and consumer harm. And then, eventually, where infrastructure competition emerges, we can look forward to ultimate deregulation of these intercarrier transfer prices.

I would like to suggest to you that we can also agree about the following five points:

1) Access reform is not about solving the single most critical problem of competition: how to make sure the essential, bottleneck local facilities of the incumbent local exchange carriers are not a barrier to competition. That bottleneck either needs to be bypassed or shared. That's what our interconnection order is about. That's what section 271 is about in principal part. Access reform is about two other things: blocking the anticompetitive potential of the bottleneck and reversing the use of the bottleneck to fund social policies.

2) As to the first point, the key to blocking the anticompetitive potential of the bottleneck is what the FCC does (or, if the Eight Circuit so orders, what the states do) to permit the three rights of new entrants (interconnection, leasing, and wholesale purchasing) to be exercised fairly and broadly in the local bottleneck market, also called the local exchange market. A competitively neutral price is key. That's TELRIC (Total Element Long Run Incremental Cost). (Indeed, no one disputes that TELRIC is competitively neutral). As to the second point, the access reform and universal service items together are the dockets in which we must figure out how to make sure there are not any hidden implicit subsidies in access charges. That's one of the reasons they are part of the trilogy of interconnection, access reform and universal service, and one of the reasons why we will vote the last two parts of the trilogy within the same few weeks between mid-April and early-May.

3) Access reform is about both structural changes and about changes in price level. Each change arguably could be driven by competition in the bottleneck market -- either by competitors bypassing or by competitors sharing the bottleneck. So arguably a permissive approach to reform is appropriate. However, for some markets, competition may not be soon in the offing (whether for demographic reasons or because of the manner in which the state has implemented the Act's interconnection provisions). In those markets, a prescriptive approach may be better because ordering changes in both structure and access charges will be the only way to deliver to those markets efficiency and welfare gains that approximate competitive results.

4) Our ability to rely on market forces to set access rates is a function of the competitive state of local market in question. Yet, the same parties that will wish to see the market, rather than the FCC, dictate access prices are challenging our ability, and the ability of the states, to ensure that competitive alternatives for access exist. The less a state does to create the conditions for local competition, the stronger the argument for the FCC to take a prescriptive approach instead of a permissive approach to interstate access in that market.

5) Access reform does implicate the historic costs of incumbents. It is not true -- contrary to what is asserted in one of the briefs of the incumbents in the Eighth Circuit -- that this issue is not in the access reform docket. We have long recognized that we must address the issue of incumbents' historic costs in our access and universal service proceedings. It is plain to the FCC and has repeatedly been announced by us that, at least hypothetically, a valid argument for recovery of historic or embedded cost that can be made by an ILEC. But the following questions will need to be answered with respect to any such claim: How can such costs be determined? When will the determination be proper? What revenues are to be counted to cover such costs? Who has jurisdiction over this issue, the state or the FCC? And who should pay the costs?

These questions are part of our access reform item and our universal service item and our to-be-developed separations item and they are implicated even in section 271 applications. But at least the following answers so far appear to be true:

A. The determination of historic costs would require joint federal and state efforts, and would be affected by a number of issues, including depreciation policies, which are not yet fully addressed by arguments of the parties to us. In short, 1997 may be the year of the accountant and not the year of the lawyer. But the accountants' arguments have not yet been made in the necessary manner.

B. The question of historical cost recovery must take some account of the changes in revenue sources caused by competition, although the effects of marketplace competition do not in themselves necessarily give rise to legitimate claims. How do we balance the effects of competition with the arguably legitimate claim to the recovery of those historic costs for which the LEC has not had and may not have a reasonable opportunity to recover? Not enough work has yet been done by the parties in filings before us on this issue.

C. Any analysis of historical cost recovery -- especially historic costs related to those parts of the network that are common to the provision of multiple services -- must take account of the opportunity the LEC will have to earn new revenues from these services. For instance, if a Bell can offer alternative telecom services (including, e.g., long distance) with its network, then it must assign certain costs to the new affiliate that makes the long distance offering and the revenues from the new services will offset these costs. Not enough work has been shown to us to demonstrate how this possibility, which Ameritech already says should be its reality, affects historic cost claims.

D. Does anyone think this historic cost issue is exclusively federal or state? I don't think so. How will the FCC and the states work together to address it? The Act gives no specific guidance. I suggest a new state-federal partnership, again, is in order.

E. And as to who pays such costs, one thing that should be clear is that recovering legitimate historic costs exclusively and directly from new entrants is anticompetitive and is specifically forbidden by the new law's spirit, intent and language. That's what we said in the interconnection order and no reasonable disagreement has been voiced.

Access reform is complementary to universal service, where we have to implement the unanimous recommendations of the Federal-State Joint Board. Following the language of the Telecommunications Act, the Joint Board mandated that universal service be provided on a competitively neutral basis. For the first time in our history, anyone will be able to compete to provide subsidized phone service. We will thus break at last the previously iron link between monopoly and universal service. In doing so, we will accomplish the Act's goal of allowing competition to flourish while still ensuring that all of our citizens have access to quality telecommunication services at reasonable rates.

We are hosting workshops today and tomorrow at the FCC on the proxy models that we are to use in implementing universal service funding. These models will determine the size of the high cost fund. A more fundamental question, however, is from what sources to raise the revenues for this fund. Will we calculate U.S. assessments based on carriers' total telecom revenues or just interstate revenues? Will carriers be allowed by states regulating intrastate services to collect these universal service assessments in rates they charge for a wide variety of services or just from a narrow subject of services? What are we supposed to do about this version of the jurisdictional debate? We haven't heard enough debate on these issues.

As the case before the Eighth Circuit is demonstrating all too clearly, we face the great danger that the courts will take a piece by piece approach to review of the intensely interwoven policies and Orders before the FCC and the States. It was never practicable for the FCC to resolve all issues with one Order. And Congress, in any event, didn't give us the option to do so, since it set specific but different dates for specific but interrelated orders. Yet courts may look at the issues as if they were separate. I am afraid that courts will unintentionally look at related orders as if they were unrelated. If this occurs, the country and those concerned with these policies will reasonably have grounds to fear unfortunate results. The right answer is for the courts to show the traditional agency deference. Congress should care a great deal, I think, if courts don't show appropriate deference to the FCC for the reason that we are the agent of Congress for implementing the law and for the reason that we and only we have the role of issuing the key decisions that show the interrelationship of the issues.

This proposition was bolstered by support recently received from six of the leading members of the House-Senate Conference Committee on the Telecommunications Act. These six Conference Committee members, a bi-partisan group including the Chairman of the House Commerce Committee, the ranking Minority Member of the Senate Commerce Committee, and the Majority Leader of the Senate, took the very laudable step of submitting a brief to the Eighth Circuit in the case. The brief stresses that the attempt of the challengers "to remove the Federal Communications Commission (FCC) from any role whatsoever in implementing the Act's provisions requiring that incumbent local exchange carriers (LECs) charge their competitors rates that are 'just, reasonable and non-discriminatory'...would be an extraordinary reversal of a clear Congressional decision. Indeed, it would directly negate the balanced partnership between the FCC and States that Congress sought to establish." I totally agree.

It is important to emphasize that the case before the Eighth Circuit is not about retail rates. No one disputes under the Act that states retain the authority to regulate intrastate retail prices. Nothing in our rules pertains to intrastate retail prices. Rather, our rules set forth the just and reasonable standard under which state commission are to calculate, determine and "establish" the actual prices of these inter-carrier agreements. These are the prices between carriers for sharing and connecting to networks. A competitively neutral and national methodology is the only correct pro-competition policy. And local establishment of intercarrier prices by the states gives our state partner appropriate discretion and responsibility.

In any event, we need to undertake a comprehensive review of our separations rules to adapt those rules to the new competitive environment Congress has created, including changes in universal service, changes in technology, and possible simplification of separations. In that regard, I am pleased to announce that the Federal-State Joint Board on Separations will meet at the end of February. The Joint Board has a number of important issues to grapple with. Its job, however, could become infinitely more complicated depending upon the decisions reached by the Eighth Circuit. If the Eighth Circuit does order a rigid regulatory separation of network elements between the state and the federal jurisdiction, the Joint Board will be faced with the extraordinarily complex task of resolving the consequences of such an order.

No doubt, however, Congress wishes the FCC and the states to resolve all issues as quickly as possible and in a manner consistent with the pro-competitive, deregulatory purposes of the Act. Consumers, industry, and the financial markets also depend on us to find reasonable answers in the shortest possible time frame so as to minimize the uncertainty arising from the transition period from monopoly to competition and to avoid negative affects on the ability of parties to attract capital.

All revolutions, even policy revolutions, take time. We should be proud, however, that the American articulation of the three rights of interconnection, unbundled network elements, and resale is having profound effects not only within the United States but around the world. Regulators around the world ask us virtually every day for copies of our interconnection rules, and the rules are quickly becoming the gold standard of competition policy. To the rest of the world, we have demonstrated how to take the natural out of the so- called natural monopoly of telecommunications.

Our American commitment to make sure that telecom monopoly is not part of our future has significantly accelerated the World Trade Organization's talks on the liberalization of telecom services, which will end on February 15th. If we are successful in reaching agreement in these talks, the result will be an extraordinary growth in international services and global networks and a radical reduction in international calling prices. If we keep at the job here at home, we will see similar results here.

In order to reduce the exorbitant prices American consumers pay for international calls, we have also issued our benchmarks proposal to lower the high settlement payments that American carriers pay to their foreign counterparts to terminate U.S.-originated calls. These settlement rates are the international equivalent of above-cost access charges, but instead of being three or four cents a minute, they are all too often thirty or forty cents or more a minute. Our rules are designed to reduce these settlement payments closer to cost-based levels over a transition period that will give developing countries time to adjust.

While the WTO talks will determine the ability of US carriers to provide service without regard to national boundaries, we recently received our first invitation to decide about services crossing another important set of boundaries: LATA boundaries. Reaching a decision on Ameritech's 4,381-page petition to provide interstate services from Michigan within the 90-day statutory time frame will certainly tax our resources, which are already strained by the highly complex universal service and access proceedings.

The decision on this petition will, of course, turn in large part on whether the petitioner's local market is open to competition. This is the deal that is at the heart of the Telecommunications Act. A Bell company may only expand its offerings to customers to include long distance after it has demonstrated that its local market is fully open to competition. Congress specifically rejected a date certain approach to Bell entry into long distance, under which the BOCs would have been able to offer long distance as of a given date. Instead Congress conditioned Bell entry on fulfillment of their side of the Congressional bargain. A deal, in short, is a deal.

It was to the FCC that Congress assigned the role of determining if the Bell companies had indeed fulfilled their side of the deal. In making our determination, we are to consult with the relevant state public service commission and with the Department of Justice, whose evaluation we are to give substantial weight. Will it be economics or politics that shape the process of deciding on the Bell petitions? Congress told us a year ago that it should be economics not politics. If we had a war room and if we had a slogan on the wall to keep our focus the slogan would be "It's the economics, stupid." But if we sent a message about section 271 to the Bells on a postcard it would be, "Where there's a will there's a way." I mean by this that every Bell company has a right to know in detail what it must do in order to win approval for offering long distance. And these requirements must be clear and achievable. Then entry into long distance will turn on the will and capability of the Bell company to comply and not on the vagaries of policy judgments.

Of course, in our legal culture the parties will dispute the meaning of virtually every item on the checklist and the meaning and content of the public interest requirement. The Ameritech petition may or may not answer these definition issues. We probably shouldn't try to answer questions not presented squarely or amply by that petition. But over the next year I expect that the definition issues will be sorted out at the FCC. Of course again judicial review looms like a cloud over the future of these 271 proceedings, unless courts give the agency the deference I think is proper under the law and that accords with the respect owed to Congress.

We have already established the process for our review of Ameritech's application and subsequent applications. Commenters, including the Michigan Public Service Commission, have 20 days from the January 2 date of Ameritech's filing. That means their comments are due a week from tomorrow. The Department of Justice is to submit its evaluation by February 6, and parties are to file their reply comments by February 18. Our decision must be issued by April 2.

Last July, we at the FCC hosted a meeting with state commissioners to stress to the importance of their role in this Section 271 process. We emphasized that the states' knowledge of local conditions and experience in resolving factual disputes enabled the states to play the critical role of fact-finder. One vision is for the states to play a role akin to special masters in court proceedings. The states would make findings of fact based on an adversary process trying disputed issues relating to the opening of the relevant BOC's local network, and then we could rely on these findings of fact. If states played this role, then the record the state makes is more important than the vote it casts on the checklist.

No one disagrees that it is the Bell companies that carry the burden of proof in demonstrating that they have met their side of the Congressional deal and opened their local networks to competition. What if there are challenges of equal weight by the Bell rivals to the Bell's factual assertions? What should the FCC do under these circumstances? One choice would be to refer to detailed, well-supported findings of fact by a state commission that has conducted an adversary process complying with due process in all respects.

As I noted above, we have asked the states to provide us with their conclusions within 20 days of the Bell's section 271 filing in order to ensure other commenters, including the Department of Justice, have the opportunity to take the states' conclusions into account in reaching their positions. I am pleased to see that many states have realized the importance of initiating their review processes well in advance of the relevant Bell company filing its petition in order to ensure that they have the time to resolve fully disputed

In sum, our section 271 decision will ultimately be a fact-intensive, economically focused process in which we will determine if the Bell company has indeed fulfilled the requirements imposed by Congress and thereby satified its side of the Congressional deal.

I hope this has provided you with a useful overview of a number of the issues that we are all facing. It is my hope that 1997 will prove not only to be the year of the accountant and the lawyer and the lobbyist -- but also of the policy of competition.

- FCC -