July 23, 1997

I want to thank Bob Rowe for inviting me to address you.

When he called, Bob suggested I speak right before noon. I brought my own lunch: a crow sandwich and some humble pie.

I want to congratulate Bob for the terrific organizational work. The scheduling has been masterful. Bob, how did you get the 8th Circuit to deliver its ruling just before the NARUC summer conference began?

Before the news on Friday, I meant to use this opportunity to talk about the unfinished business of local competition, and to discuss all the work we still have to do together.

That's still my message, but maybe now there's a little more for you in the states to do and a little less for us at the FCC.

As your authority has increased, so has your responsibility.

To a great extent, the fate of competition is in your hands. Whether consumers will enjoy the fruits of competition -- increased innovation, more service options, better customer service, and lower prices -- now depends, as never before, on the decisions you make.

It will come as no surprise to you that I still see our relationship fundamentally as one of partnership. That's what I said when I addressed the Communications Committee in February 1996, weeks after passage of the new law. That's still what I believe, three or four dozen rulemakings -- and a couple of judicial decisions -- later.

As I have said before, we are joined like participants in a three-legged race. Joined as we are, at the hip, knee, or ankle, we can't get where we want to go unless we work together. Cooperation and coordination are vital.

I thought I'd begin today by giving you all a chance to stretch. Not your legs but your arms.

Let's see to what extent our perceptions are the same, or different. Ready?

Please raise your hands if consumers in your state have as many competitive choices for local service as you would have expected 18 months ago.

Not a lot of hands. Let me try another one. Raise your hand if you personally have a choice of local phone service provider at your home.

Me neither. Let's try a few more.

Please raise your hand if you believe that new entrants in your state have access to operations support systems that allow seamless, automated, and reliable preordering, ordering, provisioning, billing, maintenance and repair -- and not just for POTS but for any and all unbundled network elements.

Please raise your hand if your state has established permanent -- not interim -- prices for unbundled network elements, including non-recurring charges.

Raise your hand if you think the FCC has moved swiftly and decisively to respond to your requests for help in reconciling conflicts between your state laws and the 1996 statute.

And let's not forget the incumbents, who benefit the most from delays.

Raise your hand if you think the incumbents in your state have done everything possible to fulfill their market-opening obligations under the law.

One final question. This time, let me ask you to think, not about your own state, but about the country as a whole: Raise your hand if you believe that Congress's goal of widespread local competition was advanced by the 8th Circuit's ruling earlier this week.

Well, I knew we wouldn't agree on everything.

What did impartial observers think of the ruling? Well, here's a quote from the nation's newspaper of record, The New York Times.

The federal appeals court ruling could further slow the introduction of unbridled competition and lower prices in the United States' telecommunications business, because it would allow states to develop different mechanisms for bringing new companies into the market rather than following uniform FCC guidelines.

The Times also noted, "[I]f the circuit court's ruling stands, companies that want to offer local telephone service across the country will have to negotiate a potential hodgepodge of regulatory environments rather than follow a single national strategy."

Strong words. Serious concerns. But I do recognize that there are other perspectives. In particular, I understand -- and I accept -- the reasons why some states chose to challenge the FCC's interconnection rules.

You thought we had overstepped our jurisdiction. You felt you had to settle this issue in court. And, for now, you have won.

But what about consumers? Have they won -- or lost? Will this ruling hasten competition -- or delay it?

I'm not asking for a show of hands on these questions. Why? Because the answers are unknown, and as yet unknowable.

My main message is that the effects of the court's ruling -- on consumers and on competition

-- remain to be determined. Now, more than ever, the answer is in your hands.

At the risk of oversimplifying, I'd like to suggest that there are two general ways in which states could respond to the 8th Circuit's decision. Option 1 is all about "turf." Summarize it this way: "We beat the FCC and the court has really shown those overreaching feds that they should keep their hands off."

Option 2 focuses more on competition and consumers:

"We're pleased the court has upheld the role of the states over intrastate services. But this jurisdictional row does not affect the end result. We will continue to establish pro-competitive prices for interconnection, to reform our state universal service systems, and to take strong and swift actions against discrimination and other forms of foot-dragging."

Here's a shorter version of the Option 2 thinking: "Those who believe today's decision means that carriers don't have to open local markets fully to competition are wrong, and we will prove them wrong."

I am glad to say that in my conversations with state regulators over the last few days Option 2 language and thinking is what I hear. Bob Rowe's opening comments were right on target. To oversimplify again, I think Option 1 is more like the old NARUC and Option 2 is more like the new NARUC.

I know you have all been working hard, as have we at the FCC, since the Telecom Act became law. You have been -- and you will continue to be -- arbitrating interconnection agreements. This work is as difficult as it is essential.

But now, almost a year and a half after the law was passed, consumers, would-be competitors, and the capital markets are growing impatient. On the first anniversary of the Act, I thought that the complaints about the pace of competition were premature. I likened it to going on a family vacation: You pile the kids in the back seat of the car. You put the car in reverse, and when you reach the end of the driveway, you hear this little plaintive voice from the back seat, "Are we there yet?"

But it's been 18 months now, and even the adults are getting restless and declaring the Act to be a failure.

How do we prove them wrong? Mainly by staying focused and committed. I don't mean to transgress a barrier that is "hog-tight, horse-high, and bull-strong."

But let me respectfully suggest six top priorities -- call them "guidelines," if you will -- for the state commissions.

(1) Finalize interconnection agreements

First, interconnection agreements must be finalized, and in a way that achieves Congress's objectives.

New entrants can't get started without the agreements. Our first Section 271 decision (Ameritech Michigan) illustrated the difficulties when there is ambiguity about whether agreements are final and approved.

We continue to hear about arbitration decisions that leave issues open, or direct the parties to negotiate further. I understand the circumstances that lead to these orders, but none of us should expect that competition will go forward when material terms of the agreements are left unresolved.

(2) Pro-Competitive Prices

This leads me to my next point. It's your job -- and yours alone -- to make sure that the rates and rate structures for interconnection elements are truly pro-competitive.

New entrants tell us that a large majority of states are using forward-looking pricing, that looks a lot like the TELRIC methodology in our interconnection order. These pricing principles -- which were based on the work done by some of the pioneering states -- are essential to send the correct economic signals and to enable fair competition.

But competitors also tell us that some states are not really using forward-looking cost methods, or that some used forward-looking methods to set interim prices but were awaiting the 8th Circuit decision before deciding how and at what levels to set the permanent prices.

Would you invest your capital if you don't know what your costs are going to be?

We also hear that sometimes the recurring charges are forward-looking but the non-recurring charges for installation and order processing are set at astronomical levels -- ones that will take five years to recoup.

Needless to say, progress on these topics will speed the emergence of new market entry.

(3) Operations Support Systems and Performance Standards

OSS is another top priority. Incumbents and new entrants alike say this is one of the most important hurdles that must be overcome. They disagree, of course, on how much progress has been made to date -- and on what remains to be done.

In most cases, there's not yet agreement on what standards of performance ought to be expected -- or even on how performance should be measured. In some cases, incumbents have even refused to bargain over performance standards -- notwithstanding their clear statutory obligation to bargain in good faith.

I was intrigued by the comments we heard yesterday from Anne Bingaman. I like her idea of bringing the ILECs and the new entrants, the states and the feds, to the same table.

It struck me that she had formulated her proposal with a keen sense of your jurisdictional rights while also securing the benefits of uniform standards and nationwide benchmarking.

Could I see a show of hands from you on whether this idea is worth pursuing?

Obviously, the FCC still needs to review the comments on the LCI petition, but we ought to find a way to work together on this. Let's do it.

(4) Enforcement

On a related note, another top priority must be enforcement.

Pro-competition rules are necessary, but not sufficient. New entrants and incumbents alike must know that bending the rules, or gaming the system, won't be tolerated.

Enforcement must be sure, swift and fair. Violations must be met with remedies designed not just to compensate, but to deter.

Competitors cannot wait for six months or a year to get what they are due today.

Over the next few months, we should coordinate our state and federal enforcement efforts. We may find that some issues can best be addressed in regional forums.

States sharing information about what the companies tell them separately can promote better enforcement. Please let me know if there are ways in which the FCC can facilitate this effort.

As an aside, I'd like to suggest that we work harder to seek opportunities to be mutually supportive, in pursuit of our common objectives. Too often, we only criticize each other. We both need to join each other when the other is right.

There are times when we can help you, such as when your Section 252 determinations are challenged. Last I heard, GTE had taken about two dozen of your decisions to court.

Likewise, we need you to join us in our battles on access charges and universal service reform where you think we have done the right thing. Perhaps, for example, on SBC's petition to stay the universal service ruling and the schools and libraries program?

(5) Section 271 Applications

You also have vital work to do on Bell entry into long distance.

As we have discussed on prior occasions, the statute merely requires that we consult with you on checklist compliance. In fact, however, your influence in the process can be much more substantial.

The records you build, and your conclusions -- when well-reasoned -- can have great impact. If conclusions do not appear supported by the record, however, they will not be persuasive. It's the record that makes the case. -- Or doesn't.

The Michigan Commission has earned high marks for the way that it has handled the Ameritech applications, especially in this second round. Others are also leading the way, for example, Wisconsin, with its painstaking review of OSS issues.

(6) Universal Service Reform

My final priority suggestion is reform of intrastate universal service support mechanisms.

We will continue to work at the federal level on federal universal service reform. But as our order reflected, states pay a critical role in identifying universal service subsidies implicit in today's intrastate rates, and making those subsidies explicit.

Universal service at both the federal and state levels must be competitively neutral and

non-discriminatory. If it is not, it will almost certainly be a barrier to entry.

As another aside, I recognize the incredibly difficult challenge you face in trying to forge a consensus within NARUC on how the federal high-cost fund should be designed.

This issue will require you to draw on every reserve of creativity and goodwill that you possess. But I urge you to pursue a solution where the burden is widely shared, that works for both the high-cost and low-cost states -- and that ensures affordable service, at comparable rates, for all Americans.

This problem is certain to be more capably addressed at this table, by the people who best understand the needs and differences of each of the many diverse states, than in some courtroom somewhere.

MERGERS

That's my list of priorities. But I also want to say a few words about a closely related subject where we have shared responsibilities. The topic is mergers. And, again, I think our efforts can be complimentary.

As you know, the Telecom Act opened the door for carriers to reach out and touch other markets. The long distance carriers can get into local phone service market. Cable can also get into local. So can wireless.

Meanwhile, telcos can get into video. They can also offer long distance, though there are preconditions for the RBOCs. And the path is now open for local companies to enter each other's territories -- as exclusive franchises are eliminated and market-opening measures are in place.

This cross-market entry was supposed to be at the core of competition Congress sought to foster.

But instead, we see many companies shrinking from competition and practicing, instead, what Senator Bob Kerrey calls the "urge to merge."

Mergers, as you know, can be procompetitive or anticompetitive. Procompetitive mergers put together companies that together can bring an increased level of competition to the marketplace. An example would be the merger of MFS and LDDS.

But anticompetitive mergers take the gas out of the engine of competition. The most problematic are mergers of firms that were well-positioned to become direct head-to-head competitors.

Keeping an eye on mergers is part and parcel of the task of unleashing competition in telecommunications. It is a major responsibility, because one bad merger can hamper competition.

The 1996 Act presents special difficulties for the application of traditional merger analysis.

That analysis traditionally begins by defining relevant market, by examining both the product offered and the geographic area served. But this approach may not sufficiently take into account the changes that are underway in telecommunications.

Congress ordered that legal and regulatory impediments to entry be removed. It also required specific market-opening measures. Under these circumstances, a new approach to market definitions may be required.

For example, a long distance company that is now free to enter local markets, and a Bell company that receives Section 271 approval, can both offer bundled packages of local and long distance. Such a bundle is really a new product, not one that traditional analysis would account for.

Geographic markets must also be viewed with a new lens.

Consider, for example, the proposed merger of Bell Atlantic and NYNEX. The concerns that have been raised aren't really about how much harder it is to compete against a $20 billion dollar a year company than against a $10 billion dollar a year company.

The core concern involves the loss of the competition that each of these companies might have brought to each other's markets.

Stated another way, the key issue is the lost prospect for competition between the entities that have chosen instead to combine.

State and federal regulators both need to be thinking about these concepts when we are asked to review mergers. And these are the reasons why the FCC sought and obtained specific, enforceable commitments to offset any negative results from the merger of Bell Atlantic and NYNEX.

It promotes competition that new entrants will be able to obtain uniform interfaces for OSS throughout the states served by the new entity.

It promotes competition to have performance reports in 22 distinct areas, with agreed-upon methodologies for measurement. (This information will be valuable to states in other regions as well, both to demonstrate the art of the possible and to benchmark the performance of other carriers.)

It promotes competition to have carrier-to-carrier testing of OSS access and a pledge to pursue creative solutions to the up-front burden of nonrecurring charges as well as a commitment to forward looking economic prices for all unbundled network elements.

In retrospect, I regret that neither the FCC nor the relevant states took the initiative to coordinate our review of this merger. For the future, I think this is an area in which we can increase our level of cooperation, and enrich our partnership.

Together, we ought to be able to conduct a more sophisticated analysis of the competitive effects of proposed merger.

Together, we have a better chance to secure pro-competitive conditions where necessary to offset limited anticompetitive effects.

That's why I was delighted by the decision this weekend to create a joint FCC-NARUC task force on mergers.

Again, an increased level of cooperation and consultation is essential.

As partners in a three-legged race, we must find ways to move rapidly forward toward our shared objectives. And even though we'll continue to have some areas of disagreement, we must try not to trip each other up.

GLOBAL COMPETITION

Since this is a joint meeting of the Communications and International Committees, I'd like to close with a global perspective.

Telecommunications companies increasingly have a worldwide reach. Other nations increasingly recognize the vital role of telecommunications in their economies.

The policies you and I adopt will influence where investments are made. If we facilitate market entry throughout the Nation, as Congress wanted us to do, we will attract domestic and foreign capital, create domestic jobs, and enjoy the myriad benefits of a robustly competitive telecommunications sector.

But, if we hinder competitive entry, or end up with a Balkanized set of rules and prices, some foreign carriers will stay home, and some domestic carriers may turn their attention abroad.

The 8th Circuit decision was issued on Friday. By Monday, our trading partners were already questioning our resolve to open our markets to competition. That resolve must not be placed in doubt.

Thus far, the U.S. has been a world leader in advancing the cause of competition. Our entire economy is stronger as a result. A continuing and ever-strengthening partnership by state and federal regulators is imperative to maintain success at home and leadership abroad.

Thank you.