Text Version

AS PREPARED FOR DELIVERY

REMARKS

by

MICHAEL K. POWELL
Commissioner
Federal Communications Commission

Before the
United States Telephone Association

"Section 271 Review: The Challenge of Charlie Brown."

Washington, DC
January 22, 1998


Good afternoon. First off, I'd like to thank Mary McDermott and the folks at USTA for giving me this opportunity to discuss my views on section 271, and more generally, on implementation of the 1996 Act because I believe it is the industry, rather than regulators or politicians, that will make the Act a success.

While my remarks today will focus on the challenges posed for regulation of the Bell Operating Companies, I recognize that what the FCC and other regulators learn in the context of section 271 may ultimately affect how we view incumbents telephone companies more generally. More importantly, I firmly believe that some of the most innovative moves to spur competition and provide value to consumers are being made, not by the BOCs, but by some of the smaller incumbents represented here today. I encourage all of you to keep my office and the rest of the Commission informed of your activities and how these activities can provide useful models or insights for the section 271 process -- we are all in this together.

The timing of these remarks is fortuitous for two reasons. First, given that it has been a week since I circulated a White Paper providing specific recommendations on reforming the section 271 process, this lunch allows me to enlist your support for these reforms personally. For those of you who have met with me, you know that I have been advocating a more cooperative approach to section 271 since I arrived at the Commission.

Second, the timing of this speech is fortuitous because it comes on the eve of Super Bowl Sunday, which provides a convenient hook for my remarks today. (For those of you who picked Pittsburgh or San Francisco for the Super Bowl, my condolences. I trust that your inability to predict outcomes in the sports realm is no reflection whatsoever on your business acumen.)

As you gather with friends this Sunday to root for your favored team and to marvel at these lucrative and intensely-watched exploits -- I'm referring to the commercials, rather than the game itself -- I ask you to take a moment to reflect that this is the second Super Bowl that has taken place since the Act was passed, yet local competition is still in its infancy and no BOC has gained entry into long distance. I know that some would see this as an indication that the Act has failed. I disagree, though I am disappointed. The Act's goal of opening local telephone markets to competition is a lofty one, and achievement of that goal is exponentially more difficult than any previous deregulation effort. We will all need to be patient as we unravel a regulated system that has been viewed as a legal and natural monopoly for almost a century. I will focus my remarks today primarily on one facet of this grand deregulation effort, namely, how can we improve our game plan for section 271 implementation?

So, how can we improve our game plan for implementing section 271? The Paper I issued last week was intended to offer some specific answers to that question. In short it outlined a process that: (1) would be less adjudicative and more collaborative in nature; (2) would strengthen consultation and cooperation with States and the Justice Department; (3) would aim at achieving success by working to take issues off the table in advance of an application, thereby clarifying the remaining hurdles to approval; and (4) would be less resource intensive in the long run. Before I say more about those proposals, let me address some of the reactions that I have received to the approach I outlined.

First, I have heard an enormous amount of positive feedback on the White Paper from the States, from the industry and the Justice Department. I am pleased that these folks believe we have advanced the ball down the field a bit, for that was our intention. I also have fielded a few questions about why I decided to write a Paper, why I chose to make it public, and how the approach it calls for differs from efforts already underway. Let me take a minute to shed some light on these questions.

Why did I write the White Paper? As I stated in the Paper itself, part of the impetus for putting my thoughts down in writing was to react to the district court in Texas, which, just as we were starting to think about how we could move the section 271 ball toward the end zone more quickly, attempted to swipe the ball and pronounce the section 271 game over. You may recall that I respectfully question whether sections 271-275 of the Act comprise an unconstitutional bill of attainder, as Judge Kendall concluded, and I sincerely hope that reviewing courts read the statute differently. But regardless of whether you think the Texas decision was right or simply a bad call by a referee who needs a new prescription for his constitutional glasses, I believe we must all take seriously the notion that any reasonable, objective person could characterize the initial section 271 process as punitive. In light of this disturbing notion, I became more convinced than ever that the Commission needed to kick off a new approach to implementing section 271, sooner rather than later.

My interest in spurring discussion about a more cooperative approach to the section 271 process, however, is based more fundamentally on my personal experiences, some of which predated my arrival at the Commission. Specifically, I have been able to observe the section 271 process since it came into being from two distinct vantage points: the Justice Department and the Commission. Having two views of the problem has, I think, focused my vision. Let me tell you what I have seen.

From my vantage points at the Justice Department and the Commission, I observed that BOCs were not fully committed to the section 271 play, out of concern about the execution. That is, from their perspective, opening up their network to would-be competitors would require significant expenditures. Such expense was justified if the promise of lucrative new markets was realized soon after taking these measures, before its competitors were able to cream-skim its high volume customers. The timing of the 271 play was critical, because if a BOC released its blockers from the front line, it had better find an open receiver quickly or it would be undoubtedly sacked.

As aggressive teams are prone to do, I believe the BOCs considered a number of tricks to make the play less risky: (1) They could limit their costs by doing as little as possible and seeing if they would nonetheless obtain long distance authority. (2) They could adopt a litigation strategy whereby they would submit minimalist applications and then appeal the rejected applications to court in an attempt to constrain the regulators' power. Or, (3) they could attempt to pressure or overwhelm the Commission by repeatedly filing lengthy applications in an attempt to force the Commission to approve those applications. The BOCs also could accompany such tactics with efforts to provide "spin" on the section 271 process in order to get the political winds to their backs. I think it is fair to say that we have seen examples of all these strategies in action. What they did not anticipate is that the referee was carefully scrutinizing the game and throwing penalty flags at every turn. The 271 play was not going to be easy.

And yet, I do not think that fact alone would have led to a breakdown in confidence among BOCs about whether they could successfully navigate the section 271 process. I believe that this breakdown was triggered in part by the quasi-judicial style of the review process. The BOCs saw a review process that, tended to be focused more on offering justifications for rejection than on offering comprehensive guidance for obtaining approval. Thus, even as the Commission began, in successive applications, to provide guidance on what BOCs need to do to satisfy the competitive checklist, many BOCs were left to conclude that the process was not simply rigorous, but rigged -- designed to keep BOCs out of long distance for a long period of time, regardless of what they might do to open local markets. These perceptions conspired to rob the section 271 process of the credibility it needed to produce constructive exchanges between the government and industry. Consequently, BOCs became less committed to investing in opening their networks, for they had even less confidence that they would be timely compensated with permission to enter new long distance markets.

To carry through the Super Bowl theme, I fear that the BOCs have viewed the process of obtaining long distance authority from the Commission less as professional football and more as playground football of the Charlie Brown and Lucy variety.

You remember Charlie Brown and Lucy, those memorable Peanuts cartoon characters. Year after year, Lucy would lure Charlie Brown onto the playlot with the prospect of kicking a football that Lucy promised to hold for him. Year after year, Charlie Brown would finally agree to kick the ball, perhaps tempted by the thought of achieving kindergarten fame and glory, perhaps betrayed by his desire to impress that Little Red-Haired Girl of which he was so very fond. And year after year, Charlie Brown would dash across the field and throw his leg back so he could kick with all his might. But just as he reached the place where Lucy held the ball, tilted upright under one of her fingers, Lucy would snatch the ball away, causing Charlie Brown to fly up into the air, land with a thud on his back, and, of course, scream AUGHHHH!!! And all Charlie Brown would get for his troubles was another dose of humiliation, and a comment from Lucy which seemed far too sardonic for someone in elementary school.

I fear that, in preparing and filing their section 271 applications, some of the BOCs have felt they were playing the role of Charlie Brown against the FCC's Lucy. I believe a less judicial and more collaborative approach would restore trust and confidence that we will not lift our finger before each kick.

I also observed, from my vantage points at the Justice Department and the Commission, that the Commission lacked the resources to provide complete and clear guidance to the BOCs, other carriers and the States. Two major resource limitations exist in the context of a section 271 application: time and people. The section 271 process allows the Commission only ninety days in which to issue a decision on an application. That limitation significantly constrains the Commission and severely limits our ability to conduct a full and complete application review -- one that would attempt to provide guidance on all the checklist items. You must understand that as a practical matter (with the layers of editorial review and the inevitable back and forth among Commissioners) the initial draft of our decision must usually be completed within a week or two of receiving reply comments, resulting in very little time for extensive and thoughtful analysis. Further, there are only so many hours in the day and we have only so many people to work on applications, which have been as long as 33,000 pages.

What is the result of these resource constraints? The Commission's analysis, of necessity, has been limited to explaining just a handful of dispositive deficiencies, rather than providing a blueprint to the specific company at issue on how it might succeed next time. For example, I think we did a tremendous job on our BellSouth application with respect to the items we analyzed, but I bet BellSouth has no firm idea of whether it would be approved if it corrected those deficiencies. The Commission and the Bureau simply cannot sustain the effort required to process applications fully within the time allowed. And this has been when the Commission is dealing with one application at a time. I can only imagine how we will be able to handle things when there are 7, 15 or 30 applications pending at once from around the country. Thus, I felt that we needed to make a change urgently.

Lastly, from my vantage points at the Justice Department and the Commission, I observed that, until recently, there has been insufficient cooperation among state and federal authorities to implement section 271. Further, the state-federal cooperation that did occur did not, in my view, take full account of the unique perspectives that each governmental entity brought to the collective goal of opening local markets and increasing the number of choices in long distance markets.

Now to be fair, during evaluation of an application there are usually some informal discussions at the staff level among the Commission, the States and DOJ. Nonetheless, I have observed a substantial amount of duplicative effort and differing viewpoints on compliance among these three areas of government, thereby making it unnecessarily difficult for BOCs to discern what they must do to comply with section 271. While it is important for each of these three areas of government to maintain their independence and to have their conclusions be their own, much more can be done to "front-load" and improve the level of Commission consultation with the States and Justice Department. The statute speaks of consulting the States and DOJ, and I do not think that consultation should focus primarily on the written comments that the States and DOJ file during the ninety-day application cycle. By working together before an application is filed, the Commission, the States and DOJ can get the best of each other's unique thinking, conserve our collective resources, and clarify the steps BOCs must take to succeed.

In light of these observations of the section 271 process, I drafted the White Paper. As you may recall, I stated in the Paper that a revised section 271 process should have several attributes. It should be:

Based on these attributes, I recommended what I termed a "multidimensional approach" to interpreting and applying section 271. There would be three dimensions:

  1. A national assessment conducted by the Commission, in collaboration with the States and Justice Department.

  2. State-tailored and regional solutions to checklist compliance.

  3. Efficient evaluation of the application, once filed.
The goal of taking into account these three dimensions would be to solve as many of the problems of checklist compliance for a given state well before an application for that state is filed.

Two things will be critical in making these first two dimensions of the new section 271 process work effectively. First, because the Commission will need lead time to work with the States and Justice Department, both to perform the national-level assessment of best practices and to develop state-tailored solutions, it is critical that BOCs give us this lead time -- notifying us well in advance of their section 271 filings. As I indicated in my White Paper, all of us -- the Commission, the States, the Justice Department and the industry -- are learning how to interpret section 271 at the same time. Dumping premature or multiple applications on the Commission is not the most efficient way to get into the long distance business, for while we are busy trying to review your lengthy applications, in which you have guessed what we think the statute requires, we will not be able to spend the time we need to determine what we think the statute requires. I understand that all of the BOCs are eager to score in the section 271 process with respect to each of your states, but I caution you that you may not improve your chances of success if you all try to "go for the ball" at the same time.

Second, and just as importantly, I believe the Commission must not develop this new approach to implementing section 271 in a vacuum. The last thing the Commission needs at this stage of the game is to leave out important details because we are too guarded to obtain important input from outside the Commission. Rather, we must articulate an open process for working with carriers, the States and the Justice Department that will structure how all stakeholders can make their views known and will give carriers some reasonable expectation that their pre-application efforts will take certain checklist items off the table, to the extent that doing so would not prejudge the BOC's application. I strongly encourage all of you to share your views on how to make this new process a success with the "Eighth Floor" of the Commission, as well as with the Common Carrier Bureau. You can perform an invaluable service to the Commission and to the companies you represent if you make your views known early and often, and at all levels of the Commission.

In this regard, I ask you to tell us several things about how to develop this new process to implementing section 271: (1) what do new entrants and BOCs need to know about each others' proposals for satisfying the checklist in order to provide constructive criticism on those proposals?; (2) what information about the market and their business needs can BOCs and new entrants provide that will demonstrate why the requirements they propose are neither unreasonably stringent nor unreasonably lenient?; (3) how should the Commission think about prioritizing its limited resources in carrying out this new collaborative approach to implementing section 271? The Commission cannot answer these and other important "process" questions without your help.

If the Commission, the States and DOJ engage in these collaborative pre-application activities -- including the national assessment of best practices and the development of state-tailored solutions -- I am very optimistic that we will be a lot closer to agreeing as to what a particular BOC needs to do to comply with many, if not all, checklist items prior to the filing of its application, such that the Commission will hopefully be able to resolve any remaining issues and, consistent with the statute, approve the application once it is filed.

Is my proposal anything new? As I acknowledged in the White Paper itself, the notion of a more cooperative and collaborative approach is not an original idea. Many people inside and outside of the Commission have talked about moving in this direction. I have worked with Montana Commissioner Bob Rowe, Chairman of NARUC's Communications Committee, who has himself offered a similar proposal. Moreover, I have acknowledged that the Commission has begun to take steps in this direction.

What has been lacking, in my opinion, is a comprehensive articulation of a collaborative approach around which the many players, including Congress, the industry, the States, the Justice Department and the Commission, can discuss change and build a new process. By laying out guiding principles and a general outline of how the approach would work, and by using my limited bully pulpit to express the concerns I have expressed more privately for months, I sought to significantly advance and accelerate our efforts in this area. I think it has been a constructive effort, and I invite others to carry on this tradition of offering detailed substantive contributions to the debate -- focusing on ideas rather than emotion or sound bites.

I should add a few words of caution here: those who wish to interpret my call for more collaboration as evidence that I am "pro-BOC" or "anti-IXC" will be sorely disappointed. Those of you who have met with me know that I do not believe there are good carriers or bad carriers, just profit-maximizing carriers. Moreover, I believe I would fail in my duty to uphold the statute if I were to advocate making it any easier to satisfy the competitive checklist than the statute allows. In addition, while I invite all of you to share your thoughts with me and with my colleagues on this new approach, I caution you not to abuse this invitation. The overall goal in developing this new process should be to allow parties who wish to participate constructively to do so, while guarding against procedural "gaming" that would distract us from the difficult task of opening local markets.

I also should add that the new collaborative approach I have described was conceived to be implemented seamlessly and immediately into the Act's current section 271 process. However, the "wake up call" to implement a revised section 271 approach is certainly not meant to foreclose other efforts and proposals to promote BOC entry into the various interexchange markets. For example, LCI International filed a petition today with the Commission for an alternative means of BOC entry -- what I would term, a section 271(x) -- whereby a BOC would be guaranteed entry into the long distance market if they agreed to separate their retail operations from the wholesale side of their business. I would not attempt to address the merits of LCI's proposal at this time. Although I firmly believe that section 271 can still work, I welcome any proposals that would make the long distance entry process more efficient.

In closing, I would like to point out that, contrary to popular belief, the Commission has, in fact, made at least modest progress in moving the ball forward in the effort to open local markets, both generally and with respect to section 271. The Commission has provided at least partial guidance on several checklist items, including OSS, access to unbundled network elements, interconnection, resale and access to E911 services. Moreover, to date, the Commission has concluded that BOC applicants have satisfied at least one element of the checklist (E911). Further, our Common Carrier Bureau has begun meeting with carriers to discuss how regulators and interested parties can reach common ground on what market-opening steps BOCs must take to satisfy the competitive checklist.

And so, as you gather with friends this Sunday, please do me a favor: remind them that this is the second Super Bowl since the Telecom Act was passed. Moreover, assuming your friends are at all interested in discussing telecom between plays and beer commercials, remind them that on the football field of local competition, we must remember that the BOCs, other incumbents and new entrants are the true players, not regulators like myself. The whole point of promoting competition pursuant to the Act is not to provide new authority for regulators to act as quarterbacks, calling the plays and determining who will run with the ball or catch the game-winning pass. Instead, the Act contemplates that regulators will serve, at most, as referees, enforcing the rules of play that will give all participants a fair chance to score.

It is my sincere hope that if we regulators collaborate and remember our role as referees, and obtain your constructive input as players in the market-opening process, all of us will be able, before the next Super Bowl, to score a touchdown in the form of both more local telephone competition and the chance for BOCs to compete in long distance. If that happens, I, for one, will be dancing in the end zone.

Thank you.