text version
William Kennard
Federal Communications Commission
Organization for the Promotion and Advancement
of Small Telephone Companies
January 12, 1998
Fort Lauderdale, Florida

(As prepared for delivery)

I. A Vision for the Future

Thank you Ed (Eichler) for that very kind introduction. I particularly appreciate that introduction, because not long ago I left Washington to give a speech and my host said simply, "And now . . . for the latest dope from Washington, here's Bill Kennard." So I do appreciate your kind words.

I would also like to acknowledge Tom Power, my friend and colleague at the FCC. Tom is an exceptionally talented lawyer who advises me on cable and common carrier issues. I know you will enjoy working with him.

I am told that when FCC Chairman Al Sikes spoke to you several years ago, at the end of his speech, he was presented with an oversized cowboy hat and required to shout "Yahoo!" You may know that no FCC Chairman has spoken to you since. Well, here I am.

I am here because I want to share with you my vision for our country's future. And I'd even wear a cowboy hat to do it, because this group is important to my vision for the future. As you know, our country's future will be defined, in large part, by telecommunications. More than any other industry, the telecommunications industry is shaping our country's future in fundamental ways. It defines the way we that we communicate in society; the way we come to know each other, as individuals and as a collection of diverse races and cultures; the way we do business; the way we remain competitive as a Nation; the way our children learn.

As you all know, we are at a pivotal moment in the history of telecommunications in our country because we are transitioning from an era of monopoly regulation to competition. This is truly a historic time. For the past one hundred years, the telephone industry was considered a natural monopoly and regulated as such. The transition to competition is a monumental shift, and not an easy one. But we all know that it is the right one.

We have seen the benefits of competition in some sectors of the communications industry -- in wireless communications and long distance, for example. We have seen the consumer benefits from lower prices, more choice and more innovation.

But as I have travelled around the country and talked to many Americans about telecommunications, I've become more convinced than ever that competition is not the end in itself. Competition is important only if it serves to build communities. Because, in the final analysis, our goal is not just to deliver lower rates and more choices. Our goal is to foster a telecommunications system that brings us together as a Nation. The goal must be a telecommunications system that builds communities -- that keeps America connected.

The great federal highway projects of the post World War II era in this country were significant not just because they permitted the flow of commerce and allowed Americans to get more products faster and at cheaper prices. The huge investment that we made in those highway systems brought our Nation together. It connected communities once isolated from the mainstream of culture and commerce. It brought economic and social development to many communities.

But let us not forget that some communities were left behind -- bypassed by the great interstate highways. And, as a result, many of those communities suffered. In fact, some communities bypassed by the interstate highway system could not survive and became ghost towns -- left behind by the single most important factor in economic development of the time.

Well, like those conventional highways, the Information Highway of today can bring us together as a Nation, or divide us. It can connect small and rural communities to the world of commerce and culture, or it can leave them behind. It is the most important factor in the economic development of our time.

That is why you are so important to my vision for our telecommunications future. Because you are the companies that will determine whether the Information Highway connects all of America, or only some of America. So you are vitally important in my vision of our country's telecommunications future.

Last month, I had the opportunity to visit Allen Layman's company, R & B Communications, near Roanoke, Virginia, to learn more about what small telephone companies do. Those of you who are familiar with R&B know that it is a very impressive operation. Allen and John Rose of OPASTCO took me on a tour of R & B and showed me how the company is offering customers access to advanced telecommunications services through fiber optic technology and digital switching. I had the chance to visit with Allen's parents, Vivian and Ira Layman, who told me about how they struggled for years against very tough odds to build the company. The Layman family clearly shares my vision of the importance of making sure that small town America is very much a part of America's telecommunications future.

Companies like R & B are building the infrastructure that will keep rural America connected. This means jobs and economic development can flow to those communities. There is an increasing population shift from the cities to small towns and rural areas. So instead of leaving rural areas to find economic opportunity in the cities -- the trend that has characterized much of this century -- many Americans are now returning to small towns. Telecommunications makes this possible. And those rural communities with the infrastructure to allow people to do their jobs away from the big cities will fuel this economic development in rural America.

Now let's talk about who is going to fill those jobs. We know that within two years, 60% of the jobs available will require information technology skills. High tech jobs pay on average 73% more in wages than non-high tech jobs. And the three fastest growing occupations in America -- which are also high-paying -- are computer related: computer scientists, computer engineers, and systems analysts.

We must ensure that the children of rural Americans are prepared for the jobs of the Information Age. We have a long way to go. There already is a troubling gap between access to technology between rural and non-rural schools. Although 75 % of suburban schools have Internet access at least to one place in the school, only 61% of rural schools do. Sixty-seven percent of urban and suburban libraries offer Internet access, whereas only 49% of rural libraries do.

That is why the provisions of the Telecommunications Act of 1996 which include schools and libraries in the universal service funding mechanisms are so vitally important for rural America.

You have been playing and can continue to play an important role in your communities by bringing educational technology to rural schools and libraries. When I was in Roanoke, Allen Layman showed me a wonderful project that his company pioneered to connect rural and suburban schools through distance learning. I saw students from rural communities taking an advanced German language course using distance learning technology. Technology made their class possible and is preparing them to compete for jobs in a global, Information Age economy.

II. Meeting the Challenge to Keep America Connected

The great challenge that we face is to make sure that as we transition from monopoly regulation to competition, the small companies have the resources and the incentives to ensure that competition builds communities.

This is a challenge because in many cases, you receive much of your revenue from one, or just a few, multi-line businesses. So while there is no immediate prospect of broad based competitive entry in your areas, you are more vulnerable to cream skimming. One or two large businesses may generate the majority of your interstate minutes of use. It be a major farming concern in Iowa, a ski resort in Vermont, or an army base in Tennessee.

This is a challenge because many of you have costs that are higher than price cap local exchange carriers. Because you often serve areas that are less densely populated, you have longer loops and more expensive transport.

This is a challenge because many of you have higher network construction costs due to difficult terrain. And because you serve smaller populations, you may not be able to achieve the same economies of scale that larger carriers can achieve.

This is a challenge because on average, you serve between two and three thousand customers. Some of you receive more than half of your total revenues from interstate access and universal service, compared to just over 25 percent for the price cap carriers.

So because of these challenges, we must work hard to make sure that as the regulatory environment changes in this great shift from monopoly to competition, it is flexible enough to accommodate the special needs of your communities. Let me outline a few of the regulatory challenges that we face.

Universal Service

First, universal service. At the outset, I believe universal service is about economic development. It involves the fundamental policy of our country to reinvest in the telecommunications network so that all Americans remain connected. It is every bit as important as the investment that we made as a Nation in our interstate highway system.

Universal service is about economic development for every American, whether you live in a big city or a small rural community. So it means that if you are a livestock broker in Chicago you can grow your business by using the network to reach ranchers in Missoula, Montana. And it also means that if you are a computer company in South Dakota, you can grow your business by selling CD ROMS to customers in New York City, just like Gateway 2000 does every single day. This is about an investment in economic development. You have a big stake in this debate, so it is important that you make sure that the debate is framed in the right way.

Perhaps the biggest concern I've heard about universal service support concerns the forward-looking cost models. As you know, we are in the process of selecting a model to reform universal service for the largest telephone companies. In the Commission's Universal Service Order last year, the Commission said that it would not move the small companies to forward-looking cost methods until the next millennium at the earliest.

Several of you have expressed concern that a change in the method of determining universal service support from historic, book cost to a forward-looking method may be harmful to small companies. I think we would all agree that eventually we will need a more highly deaveraged means of delivering universal service support to small companies. But we should not act prceiptiously, and we should have a much better understanding of how to estimate costs on a deaveraged basis before doing so. The experience we gain from working first with larger companies before considering small companies will be valuable. And any new support mechanism for small companies will have to keep in mind the different economic and demographic circumstances small companies face. Most important, we must make sure that the new universal service mechanisms work. And we will need to work together to make sure that they do work.

While I am committed to ensuring that there are no precipitous changes in the level of universal service support for small companies, I think we would all agree that eventually small companies will need a much more highly deaveraged universal support system than exists today. It does not cost the same to provide service downtown as it does when you move outside the town limits. Anyone who drives through any rural town in America can see this. Ultimately, our regulations should move in the direction of reflecting that reality.

Average Schedules

We can't meaningfully discuss the challenges that face small telephone companies without spending some time on the average schedules. A little less than half of you currently settle with the NECA pools based on the average schedules. I have no plans to propose doing away with the average schedules. But I am interested in making them reflect actual costs as much as possible. We are continuously working with NECA to make the schedules more accurately reflect actual company costs.

Access Reform

We also need to work with you to determine how access reform should impact small companies. The first step in this reform process is to enable you to charge interstate access rates that are more consistent with principles of cost-causation and economic efficiency. Smaller rate-of-return telephone companies have expressed concern that existing high per-minute rates for interstate access places them at a significant disadvantage in attempting to compete with new access service providers. In particular, I have heard concerns that the rate structures and levels mandated by our current access charge rules make your most lucrative customers, those that make many long distance calls, especially vulnerable to competing offers from new entrants.

You need to be allowed to move your rates to more economically efficient levels. Otherwise, you face the potential loss of customers to less efficient new entrants whose rates are lower than those currently assessed , but higher than the rates you would charge if our access charge rules were reformed. In addition, reductions in interstate access charge per-minute rates translates into lower per-minute long distance charges for consumers, which benefits both customers and carriers. Customers get more value for their money, and can afford to make more long distance calls, while carriers obtain additional revenues as a result of the increased calling volumes.

I also recognize that access reform for the smaller, rate-of-return companies may raise new or different issues that we did not have to address in our proceeding involving the typically larger, price cap companies. Differences between rate-of-return and price cap carriers may require different approaches to reform, including a different transition to more economically efficient, cost-based interstate access charges. In light of the differences between rate-of-return and price cap companies, the Commission decided to initiate an access reform proceeding that would deal solely with the rate-of-return LECs. I support that decision.

Pricing Flexibility

There is the related issue of pricing flexibility for small companies. We must recognize that the economics of small rural companies is different from that of US West. You provide service where no one else wants to compete. The only competition you may see is someone trying to cream skim your largest customers. You must be able to respond to such threats. Many of you have expressed an interest in greater pricing flexibility. I agree. We need to develop a record on pricing flexibility for small companies and I would like to get the process started this year.


We need to strive to find a better paradigm for small company regulation. I think we can agree that it does not make sense to force small companies into a BOC-style price cap regime. But we need to look for creative alternatives to cost of service regulation. I would like to initiate an informal dialogue with you to discuss the future regulation of small companies. And I think that dialogue should include a discussion of the pros and cons of interstate regulation of small telephone companies. Many states do not regulate your rates, and others do not regulate you at all. Notwithstanding this lack of state oversight, local rates appear relatively low and stable and we don't see widespread deterioration of service. We could benefit from a frank discussion of whether we should import some of these ideas to the interstate jurisdiction.

III. A Framework for Dialogue

Well, clearly we have much work to do together. Universal service. Access reform. Pricing flexibility. Deregulation. As a starting point, and as I begin my tenure as Chairman of the FCC, I want to make sure that we have ways to maintain a dialogue on these issues. This is important to me and I know it is important to my other colleagues on the Commission. So we will be announcing in the next few weeks the membership of a Rural Task Force. The Rural Task Force will be selected by the Joint Board on Universal Service. Its members will be charged with fostering continuous dialogue and action on the issues that I am discussing today, and other issues of importance to rural subscribers.

We have also designated a senior-level member of the Common Carrier staff to serve as the FCC's ombudsman on rural issues. We have asked Sonja Rifken to serve in this role. Sonja and I worked together in the Office of General Counsel. She now serves as Special Assistant to Richard Metzger, Chief of the Common Carrier Bureau. She is a dynamo and I know she will do a wonderful job in making sure that your issues receive the focus that they deserve by the Commission staff and the Commissioners.

Another opportunity for dialog on these issues will be the proceeding on Section 706 of the Telecommunications Act. Under Section 706, this year the Commission will initiate proceeding to determine whether advanced telecommunications capability is being deployed to all Americans in a timely fashion. We want to identify and remove barriers to infrastructure investment so we can promote investment in more bandwidth capacity. This is so crucial to the development of infrastructure everywhere, and especially in rural areas.

I hope to hold a series of field hearings, perhaps in conjunction with your state and regional conventions. The purpose is to get a better handle on the state of deployment of advanced technology in rural communities. I hope that I can count on you to make this effort a success.

IV. Conclusion

In conclusion, let me just say that I hope you share my vision of a competitive telecommunications marketplace that leaves no one behind and keeps all of America connected. Competition building communities. Let's work together to make sure that this happens for our country.

Thank you for having me here today.