October 15, 1996 Commissioner Ness Previews Universal Service Solutions, Defends Local Competition Rules, in Speech to Chicago Lawyers FCC Commissioner Susan Ness outlined her views on pending universal service issues in a speech before the Midwest Chapter of the Federal Communications Bar Association today. She also strongly defended the Commission's local competition order. "The challenge of formulating new universal service rules is enormous," Commissioner Ness told her audience. "It is vital that [these] rules -- like our local competition rules -- send correct economic signals. The universal service regime should reward efficiency, not inefficiency." Emphasizing that universal service support ultimately comes from the pockets of consumers, Commissioner Ness asserted that "the menu of services initially to be supported for high-cost areas and low-income consumers should not be overly ambitious. I am not persuaded that we should be supporting multiple lines to a single residence or even single lines to second homes." She also reiterated her opposition to raising the Subscriber Line Charge for residential consumers. Commissioner Ness proposed that the Joint Board "use cost models to compute universal service support payments in areas served by the largest local exchange carriers. For small, rural carriers, I would make changes much more gradually." She called for using both intra- and interstate revenues to fund universal service subsidies, at both the federal and state level. Ness endorsed ubiquitous access to Information Age services through classrooms and libraries. "I have seen students energized by access to a new world of information. I have felt this as enthusiastic volunteers -- including my daughter and myself -- pulled wires to connect classrooms on NetDay." Ness called for rules that "reduce, not expand, the gap between 'information haves' and 'information have-nots.'" She advocated "aggressive discounts that enable poorer schools and those in rural areas to obtain the services they need." She also endorsed universal service support "to facilitate internal connections: local area networks linking each classroom." Commissioner Ness strongly defended the interconnection rules the Commission adopted in August. "As Congress intended, we set forth a strong national policy of competition, but we relied heavily on the states to shoulder many tasks of implementation . . . . Our rules did not trespass on the authority Congress reserved to the states." Ness warned that the judicial stay currently in effect will "deter investment, delay competition, and deny consumers the benefits Congress intended them to enjoy." She noted the irony of encountering a judicial roadblock, given the expressed "desire of legislators to curtail the role of the judiciary in telecomm policy." She expressed confidence that, ultimately, "our rules should be -- and will be -- affirmed on the merits." For further information, contact Jim Casserly, 202/418-2100. Remarks of FCC Commissioner Susan Ness before the Midwest Chapter of the Federal Communications Bar Association Chicago, Illinois October 15, 1996 (As prepared for delivery) It's great to have the opportunity to meet with members of the bar that we don't routinely see back in Washington. My speech was billed as a "Washington Communications Update." In past years, speeches like this undoubtedly focused on pending legislation and its prospects for enactment. This year, a new era began. After nearly twenty years of legislative battle, Congress passed landmark legislation, the Telecommunications Act of 1996. It's the most sweeping revision of the communications laws in over 60 years. It will guide the evolution of one of our nation's most vital and vibrant industries at the dawn of a new century. In the wake of the legislation the FCC, the communications industries, and the bar are experiencing the busiest period ever. Some have dubbed it the "Lawyers Full Employment Act." The new law requires dozens of rulemakings with short statutory deadlines. The Act has also prompted many mergers and acquisitions for the FCC to approve. Plus, we have our usual workload: license renewals, complaints, rulemakings, and more. It's an eventful time, filled with exhilaration and exasperation, excitement and exhaustion. To navigate through uncharted waters requires a reliable compass. I take my bearings from five bedrock principles: Fidelity to the law Fairness to all parties  Promotion of competition Emphasis on the interest of consumers Streamlining of government These principles apply to everything we do. No matter how compelling the policy argument, to be upheld, it must be anchored in the law. We are an independent commission, not an independent legislature. We answer to a higher authority. Industries previously deemed separate are now potential competitors with one another. The Commission must not favor one over the other. Competition is the vehicle that will deliver the greatest benefits to the consumer in the form of more choices, lower prices, and better service. And as competition takes hold, regulation can be reduced or eliminated. Indeed, in every area, we have an obligation to review our rules: Are they necessary? Are they narrowly tailored to achieve their intended purpose? These principles are central to our proceedings on local telephone competition and universal service. Today, I want to focus on the fundamental changes underway in the telephone industry -- and how these changes will affect industry and consumers. Local Competition The single greatest impact of the Telecommunications Act will be to transform the market for local telephone service. Where monopoly has long reigned, competition will now be king. The magnitude of this change is breathtaking. For decades, residential consumers and businesses alike have had no choice of local telephone carrier. Nearly $100 billion per year in revenues has been awarded largely on the basis of exclusive franchises. The reliability and affordability of services were enforced by regulation. The future will be much different. Congress has now chosen a path of competition. It has ordered that barriers to entry be struck down. And it has established a framework that is intended to enable new entrants to rapidly enter the local market -- using the services and facilities of the incumbent even as they compete against that incumbent. As a result, cable, wireless, long distance, and electric companies, among others, will all have the opportunity to vie for the consumer's affection -- and pocketbook. The heart of the local competition portion of the statute is the interconnection regime set forth in Sections 251 and 252. These provisions are unprecedented, not just in supplanting monopoly with competition, but also in eroding jurisdictional barriers. Traditionally, transmission services were classified as either intrastate or interstate, and jurisdiction between the state and federal commissions was allocated accordingly. But the Telecommunications Act creates a new jurisdictional animal to govern arbitrated agreements between incumbent telcos and new entrants. The policy is national, the rules are established by the FCC, but the details of implementation are assigned to the state public utility commissions. Just as Congress intended, we adopted rules which set forth a strong national policy of competition. But we relied heavily on the states to shoulder many tasks of implementation. Congress wanted the FCC to ensure that competition occurs in all 50 states, but with minimal disruption of the procompetitive progress already underway in some states. We established pricing principles governing the manner in which incumbent telcos open their networks for use by their new rivals. Our primary goal was to promote efficient entry and fair competition. I was pleased to see that many Wall Street analysts acknowledged the even- handedness of our ruling. This confidence on the part of the investment community should translate into capital available to both new entrants and incumbents. Our rules did not trespass on the authority Congress reserved to the states. It is the states which approve voluntary agreements between new entrants and incumbents. It is the states which mediate and arbitrate disputes between these parties. It is the states which conduct or review forward-looking cost studies. And it is the states which establish specific prices for unbundled network elements, resale, and transport and termination. Contrary to the claims of some parties, we did not adopt a "one size fits all" approach. The states retain appropriate latitude to consider local needs and circumstances. Unfortunately, our interconnection rules are now "on hold." The U.S. Court of Appeals has issued an interim stay. I hope that this stay is quickly dissolved. If it remains in effect, the inevitable result will be to deter investment, delay competition, and deny consumers the benefits Congress intended them to enjoy. It's ironic that we are encountering this particular roadblock. For the past 10 years, one of the main factors motivating the drive toward a new law was the desire of legislators to curtail the role of the judiciary in telecomm policy. The Bell companies, in particular, railed against judicial activism and urged greater reliance on the "expert agency" -- that is, the FCC. But that was then, and this is now. The judicial stay is most harmful to new entrants and to the consumers who still await the benefits of competition. But the stay also creates an awkward situation for the state commissions. They are required to reject arbitrated agreements between incumbents and new entrants if they do not comply with Section 251 of the statute, "including the regulations prescribed by the Commission." If the stay continues, and the state commissions reach the point in the statutory timeline by which they are required to make such a determination, what are they supposed to do? Not approve the agreements? Or find that the agreements are consistent with those of the Commission's regulations which are in effect -- that is to say, none? Another complication of the stay is its potential effect on the Bell companies' entry into the long distance market. If the stay chills investment and retards new entry into the local marketplace, it may become more difficult for the Commission to authorize the Bell companies to offer long distance. The Justice Department, whose views must be accorded "substantial weight," has already said that it will be reluctant to support entry so long as the interconnection rules are stayed. In short, the stay may not only impede the emergence of local competition, but delay an increase in long distance competition as well. So it's important that this stay be dissolved as soon as possible. We at the Commission are proud of our order, which we believe is fully consistent with the letter and spirit of the statute. We continue to believe that our rules should be -- and will be -- affirmed on the merits. Universal Service Universal service is the flip side of interconnection. Although firmly committed to competition, Congress recognized that competition alone may not yield the desired results for all consumers in all circumstances. Specifically, Section 254 of the statute directs us to promote affordable telephone service for all Americans. In most cases, of course, competition is the surest route to that end. But the law recognizes that special measures are needed to protect low income consumers and those living in rural, insular, and high-cost areas. It also extends the concept of universal service to schools, libraries, and rural health care providers. The challenge of formulating new universal service rules is enormous. Our current system has literally billions of dollars in implicit subsidies. So-called "vertical services" such as Caller ID and Call Waiting, business lines, and exchange access services are all priced well above cost -- and some of the excess helps to keep local phone rates low. Competitors, of course, will target the high-margin services, so today's subsidies will no longer be sustainable. We need to replace these implicit subsidies with ones that are explicit, targeted, specific, predictable, and sufficient to meet Congress's stated objectives. I have heard wildly different estimates of the funds needed to do this, from $4 billion to well above $20 billion. Our current system is not competitively neutral. The obligation to support universal service is not fairly distributed; neither is the opportunity to receive universal service support. Our task is to devise new mechanisms that expand the base of carriers who fund universal service and expand eligibility to receive universal service support. Today, wireless companies neither pay nor receive universal service support. Tomorrow, they may do both. A federal-state joint board has until November 8 to formulate recommendations for new universal service rules. The Joint Board will be meeting later this week to begin forging a consensus. My mind is still open, and I know the dialogue will be informative. At present, my thinking runs along the following lines: þ It is vital that our universal service rules -- like our local competition rules -- send correct economic signals. The universal service regime should reward efficiency, not inefficiency. We should not distort entry or exit decisions by incumbents or new entrants. þ We must not forget that the funds for universal service ultimately come from consumers. So we must "spend wisely." For that reason, the menu of services initially to be supported for high-cost areas and low-income consumers should not be overly ambitious. I am not persuaded that we should be supporting multiple lines to a single residence or even single lines to second homes. þ New entrants should not be burdened by cost accounting rules developed for a monopoly era. Instead, where feasible, regulatory burdens on incumbent carriers should be eased. þ The new law was intended to lower prices for telecommunications services, not to raise them. In my judgment, this is not the time to increase the residential Subscriber Line Charge, currently capped at $3.50 per month. þ We need to distinguish those markets that may soon become competitive from those where competition is a more distant prospect. I believe we should use cost models to compute universal service support payments in areas served by the largest telcos. For small, rural carriers, I would make changes much more gradually. þ We should not compound the anomalies caused by the artificial separation between intra- and interstate services. Nationally, all telecommunications services should help to support the federal universal service fund. Within any state that chooses to have its own fund, both intra- and interstate services should help to support that state fund as well. þ Transitional measures may be needed to reduce disruption to industry players. But I do not read this legislation to guarantee that incumbents continue to receive 100 percent of the revenues and profits they had as monopolists. Competition is not about "guarantees," but opportunities. I'd welcome your responses to any of these thoughts. But let me go on to the issue of how we extend the principle of universal service to schools and libraries. Access to Information Age services must be available to all American students and communities. I have seen students energized by access to a new world of information. I have felt the excitement as enthusiastic volunteers -- including my daughter and myself -- pulled wires to connect classrooms on NetDay. I favor a strong national plan to ensure access to telecommunications and information services. It is essential that we reduce, not expand, the gap between "information haves" and "information have-nots." That's why I support aggressive discounts that enable poorer schools and those in rural areas to obtain the services they need. Learning occurs in the classroom, not the principal's office. I share President Clinton's hope for a "day when computers are as much a part of the classroom as blackboards and we put the future at the fingertips of every American child." That's why I believe we should use the authority Congress has given us to support internal connections -- local area networks linking each classroom. But we should not overreach; teacher training and classroom computers, while essential, are beyond our purview. Last Thursday, the Administration continued its leadership by submitting a new proposal to the Joint Board. It has a number of intriguing features, including a no-cost "E-rate" for a basic package of transmission service, Internet access, and internal connection. I look forward to analyzing it with my Joint Board colleagues. I believe the five principles I mentioned earlier will be useful in evaluating this approach. Access Reform I cannot discuss local competition and universal service without briefly mentioning access reform. Both interstate and intrastate access are likely to have to change considerably. Today's high access rates have got to come down. It's senseless to recover non-traffic-sensitive costs through a per-minute burden on access. We plan to start a rulemaking on interstate access sometime in November. We need to bring this decision home at about the same time as the final decision on universal service. All three legs of the stool must be in place. Conclusion Even as we work through interconnection and universal service, we are continuing to promote other services and technologies that will alter the communications landscape. For example, we are pressing ahead with rules for Local Multipoint Distribution Service, Open Video Systems, Digital Audio Radio, and Advanced Television. And in our spare time, we are also refining our spectrum management policies, reviewing our broadcast ownership and attribution rules, streamlining our international procedures, and expanding the use of electronic filing. I'll be happy to answer your questions on these or any other topics.