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FCC chairman reveals more of his ideas about competition in the telecom market.

FCC Chairman Reveals more of His Ideas about Competition in the Telecom Market It's a pleasure to be here and welcome you to Washington. I'm reminded of my talk to this group three years ago. In 1983, things were pretty complicated. We knew we had to go back into our past--to rethink regulation's premise. The result: breakup of the Bell System.

May I propose that today we go back again, but this time back to the future. Why? Because the future of this country is tied to our ability to move and process information and lead the rest of the world in that hot pursuit. Unless we move forward, as businesses and regulators, we guarantee that the people we're supposed to be serving, the American people, like the fellow in the movie, will be marooned in a time warp. It's a time warp where regulation is a growth industry and competition is not something you beat but try to avoid.

There is a principled way back to our future. You've heard me many times discuss the touchstone of my stay in government--freedom. In most cases, the subject has been broadcasting, but freedom is also my guiding principle in considering telecommunications, and its instrument is competition.

Three years ago, I set forth a blueprint for my vision of a regulation-free telecommunications marketplace. I called for comprehensive reform on two levels: deregulate players with no market power, and deregulate markets that were competitive. Today I'd like to go further, to fill in some more of the blueprint. Because despite all that's gone on, there's an urgent need to rethink the way we regulate the telecommunications industry.

In 1965, we felt lucky if we could choose one of four colors for a pushbuttons phone. Technology has transformed not only rotary-dial phones, but also our ability to ensure that regulation is state-of-the-art. Energies have been expended solving immediate problems, sometimes forgetting that we were also pursuing long-term goals. Any detailed plan for a shift in regulation must be premised on some fundamental goals. What should these be?

First, we need fairness. That means reasonable rates, the absence of injust discrimination, and universal service.

Efficiency Also Is Needed

Second, we need efficiency. The world is spinning its way to a new Information Age--collecting, analyzing, transmitting and reporting information. As President Reagan has noted, our country can rightly claim to be at the leading edge. But we can't keep that edge by dulling the private sector with a regulatory grindstone. At the same time, society must not invest more of its resources than necessary in its information network; two subscriptions to the same newspaper don't make you twice as informed.

We've accomplished much already, I believe. During the last four years, once-unthinkable changes have become accepted parts of the landscape. Take customer-premises equipment and enhanced services, involving roughly $10 billion of rate base. Their regulation is now history.

And some of the difficult transition issues are now behind us. When I took office in May of 1981, forbearance of non-dominant carriers was thought too radical. Now, all nondominant carriers--resellers, OCCs and domestic satellite carriers--are deregulated. Satellite transponders can be sold outright. New competitors are on the horizon in the international arena. And the divestiture of the largest corporation on earth is a reality.

With it came a mechanism to assure a competitive long-distance environment--access charges. This new mechanism, combined with divestiture, replaced the separations and settlements system, a system already strained by OCC competition. This has led already to lower long-distance rates.

Discounts Encourage Competition

We enacted temporary yet steep discounts for new entrants in the long-distance business to help the transition to a competitive environment. The flurry of long-distance balloting nationwide has allowed consumers to emerge safely from the cocoon of monopoly to the free flight of choice.

And with all that we've done, telephone service remains a bargain. The cost-of-living index for all goods and services more than tripled since 1967, but telephone costs grew less than twice. Inflation in telephone prices is running at less than four percent a year--about the same as for other goods.

Local rate hikes are down from 10 percent in 1984 to three percent in 1985. Pending rate-increase requests have fallen dramatically, from $6.9 billion in 1983 to $1.7 billion at the end of 1985. Importantly, the number of households with a phone--the measure of universal service--is at a high of 91.9 percent.

But despite what we've achieved so far, we need to become more visionary. To do that, let us step through time, not to the future, but for a moment to the past--to the dawn of public-utility regulation, to an America of levees and toll bridges.

Public-utility regulation is a unique creation of the American political and economic system. It's a hybrid. Organization and management is private; central economic decisions are subject to government oversight.

It's also expressly premised on market failure. That is, the economics of scale and scope are so great that the industry historically has been considered to be a "natural monopoly." Enter the FCC stage-right, enter state PUCs stage-left. We reign in the power to overprice or discriminate by regulating prices and restricting a utility's participation in competitive markets.

That this PUC regime has left its mark on the telephone industry is something of an understatement. It reminds me of the remark attributed to Lord Astor on the Titanic. When the ship struck the iceberg, he said, "I ordered ice from room service, but this is ridiculous."

Being creatures of the political process, regulators try to influence prices for telephone service, not just according to its cost, but according to social and political objectives as well. How? PUCs historically slowed the depreciation of investment to about the pace of molasses in winter, artificially holding down current rates while maintaining a high level of investment on which the companies made their profits.

Now, We Must Add Up the Tab

Averaging of costs and rates, endorsed, if not mandated, by regulators, spread the cost of wiring the country to achieve universal service. And where companies were allowed to complete, rigid separate subsidiaries were required.

For all of these benefits, some real, some artificial, we've paid a price. Let's add up the tab:

Item One--We've distorted investment decisions and limited private incentive to innovative with new technologies. Or worse, we've affirmatively discouraged that innovation, since it would strand "useful" investment. Translation: "Why replace the copper with glass? The copper still works."

Item Two--We've discouraged price competition and provided only limited incentives to cut costs or increase management efficiency. Translation: "Go ahead, spend the extra money. We'll stick it in the rate base."

Item Three--We've dramatically limited the ability of players to respond quickly to changes in supply and demand. Translation: "But we really needed that extra seven months to review the implications of your tariffs."

Item Four--Prices ultimately charged are artificial, since rate making with gross numbers and political or social-oriented rate structures is terribly imprecise. Translation: "Abracadabra."

Item Five--Substantial resources are spent administering an extraordinarily complex regulatory structure with overlapping jurisdictions. Translation: "Let's refer this issue to the joint board." Question: "Which one?"

Last Item--Catch 22: The system prevents us from even testing its central premise--that telecommunications is a natural monopoly--by creating express barriers to entry.

Total Cost? Billions and billions of dollars and countless lost opportunities, including productivity gains for the economy in the hundreds of billions.

Public-Utility Model Is Limited

The past 30 years have made this clear: that the public-utility model does not always apply, and perhaps never should have been applied lock, stock and barrel, to the entire field of telecommunications. It's because the PUC approach forgets to consider competition, regardless of the facts. So when a regulator insists on the immutable presence of a natural monopoly, what happens? A persistent competitor pops onto the scene and spoils his fun.

The time has come to move from thinking of the past and advance to the future--away from traditional public-utility regulation and toward a competitive industry model. Unless we in government, including the courts, retard or kill its potential, telecommunications should become an almost completely competitive marketplace. Let the discipline of competition replace the squeaks and roars of regulators. Prices will fall or rise toward costs. Only minimal subsidies will be needed to maintain universal service.

We see the benefits of competition in the equipment industry. Thousands of domestic and foreign firms are offering more and more-complex equipment. The long-distance business is on the same track. True, one firm has significant market power, but isn't it remarkable how the market has changed in just a few short years? A number of committed players, starting with limited offerings, have expanded their shares dramatically.

Who benefits from all this competition? You and I do. So does the man in Iowa calling his daughter in school, the lady in the Bronx who is now paying 10 times less for her phone that she once rented and saving $20 to $60 a year, and the computer programmer in California whose entire industry revolves around devising a way to make one machine talk to another.

Competition will also be felt in the once-sacrosanct local telephone market. We see its glimmer already: digital termination systems, cellular radio, multipoint distribution, cable television, smart buildings, burst switching architecture, and yes, even direct connections by long-distance providers. As competitive choices increase in the local market, carriers will have to price their services at cost, improce service, offer choices--or lose customers. Regulators must let them try in the marketplace.

Consumers Will Be the Regulators

Make no mistake, though; as consumers replace the government as regulator, local telephone companies will inevitably lose their monopoly. Consumers will have a choice. And these local companies must now also have the choice of entering and operating in entirely new markets.

"But Chairman Fowler," you say, "we aren't anywhere close to that yet! Forget about getting back to the future. Get back to the present."

Well, that's right. We aren't in a competitive world, certainly as it applies to the local telephone market. But a lock-step adherence to the public-utility regulatory structure is probably counterproductive. We must not deregulate mindlessly or without vision. We must navigate by the light of the competitive industry model, cultivating new entry wherever possible. We must protect competition, not merely competitors.

Now, I don't deny there's danger during the transition. Some firms with monopoly power will use it. Regulators must be vigilant to oversee amd prevent abuse. Discrimination and cross-subsidization lurk in every market's pantry.

And efficient use of the in-place national network should, indeed must, be encouraged. Our telephone system is a national treasure that grows daily. It's the best in the world. But it's a national resource vastly underused. Many regulatory practices cause consumers to install unneeded special-access lines, or worse, construct private-line facilities where the in-place network would be more efficient.

To encourage efficiency, regulators should let domestic carriers price flexibly. Existing companies must be allowed to innovative to recover their costs and encourage users to stay on the system.

Setting a Model for the Future

Given all this, how do we set forth a model for the future? The model begins with equal access. Equal access to the network and customer was the linchpin for competition in the equipment industry. Equal access to the local exchange network has been the keystone for full competition in the long-distance market.

I say, let's take this concept further. Move local carriers to provide an "open architecture" network in which functional elements are offerd on an unbundled basis. Ensure would-be providers of enhanced services of that vital access to the local network, comparable to the access given to the local telephone company itself. With equal access, all players can operate in any market, including existing ones.

With this in place, we can approach the ultimate plan of a regulation-free marketplace--away, simply, to get us back to the future. Its essence is this: all telecommunications services will be deregulated as to both entry and rates, once an open architecture is achieved for all services. That includes access, enhanced offerings and local facilities. Coupled with this would be the absolute requirement that universal service must not be diminished.

As one exception to this broad deregulation, states or the federal government could regulate any service that they are willing to subsidize, but any such subsidy would have to be direct, not one based on monkeying around with the pricing of other services or the same service among different classes of customers.

Some Subsidy Funding Is Expected

Let me speak for a momenwt about the subsidy question. In the very near future, services in which the telephone companies have market power will be precisely those residential services that are today priced farthest below cost. Social and political pressures will lead to some amount of "subsidy" funding to maintain some--certainly not all--of these prices below cost.

This subsidy can be provided by either the telephone companies themselves or by government. If by government, then we should let it determine both the recipients and amount of subsidy, but if we require phone companies to determine the subsidy from competitive services to residential users, they will do it in a way that produces the smallest economic distortion. So long as we require no degradation in universal service, I would give them that freedom.

This open-architecture plan has several advantages. It more-rapidly introduces the positive magic of competition into the market. At the same time, it provides an economic mechanism for maintaining universal service. Prices are driven to costs. Costs are driven down. Importantly, universal service is nurtured without distorting the economics of the industry. In fact, subsidies could be extended not only to users of lifeline services, but also to other residential or small business consumers in high-cost areas.

Monopoly Abuse Still Limited

The ability of carriers to abuse monopoly positions is still limited under this plan. Continued provision of regulated, subsidized services would require allocation and accounting mechanisms to monitor for discrimination and cross-subsidization. Close tabs on telephone penetration levels and efficient complaint-resolution forums are a must.

Several states are considering programs that move in this direction. The time has come for a national debate, including the legislative and executive branches, over introduction of this program. I, for one, would like to see at least a three-year trial, I hope before the end of the decade.

Any movement to a plan like this carries with it responsibility for regulators. Too often during transitions, regulatory intervention is altered continually, sending false, interrupted and sometimes reversed signals to players. It's like a broken pedestrian stoplight, flashing "Walk", "Wait" and "Don't Even Start" in no particular order. Commissions should announce that deregulatory steps will be implemented on a date certain, when it appears that open architecture will be generally available.

The plan might also be implemented on an experimental basis in a specific geographic region. Working with state regulators, the FCC could develop precise details for the programs. For instance, in exchange for state adoption of this proposal for intrastate services, the FCC might deregulate that state's telephone companies access charges.

Key to Change Is Competition

The key to this change is a commitment and belief in competition. This type of deregulation is not abdication, for unless we pull away from the mind-set of traditional public-utilities regulation, we will be hoisting a 19th-century remedy to a 21st-century situation. In medicine, we wouldn't endorse the use of leeches when lasers are appropriate, no matter how loudly the patient screams for leeches. So it goes in communications regulation.

More is at stake in this debate than merely satisfying the aspirations of some local Adam Smith society. As we expand the means of transmission, we multiply the sorts of information that can be send and shared. Human knowledge expands not just by a new idea, but also by the ability to transmit it.

Give a scholar a modem, make it cheap enough, and you give him access to the world's knowledge, and you give the world access to him. The same goes for the world's breadbasket; the commidities market is more efficient when it can know the price of wheat in Bombay, Bristol, Bangor and Bangkok instantly and at a reasonable cost.

It's not just economists who love competition in telecommunications, it's all of us whose lives are made better and richer by it, because communications leads free men from the slavery of yesterday's prejudices and limits. Those of us who fuss with forbearance, facilities and Feature Group A and B sometimes forget that all of this depends on a fundamental assumption about what kind of society we are and what kind we want to be.

We are a free society. We are. And the more we let computers interface, and let calls be forwarded, and let parabolic dishes send messages or meetings up to the heavens and back down to the earth--the more we communicate, the better are our chances of staying free.

And maybe, just maybe, we help others to someday hitch a ride with us, back to our future and to theirs.
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Author:Fowler, Mark S.
Publication:Communications News
Article Type:transcript
Date:Mar 1, 1986
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