Speakers Include: Hon. Michael Powell, Commissioner, Federal Communications Commission; Hon. Billy Tauzin, U.S. House of Representatives; Hon. Richard E. Wiley, Wiley, Rein & Fielding; Prof. Robert Willig, Princeton

COMMISSIONER POWELL: In law school, I was constantly urging professors to adopt that "let you grade yourself" approach to things. I never could get it there, so I thought I'd welcome the opportunity to take it here. This subject is best explored in the context of the questions and discussions, but let me identify a few big themes or discuss a couple ways to look at it.

First of all, I think we have to sometimes separate the here-and-now from the future and the transition of the future. At the Commission, there are really two distinct though very interrelated categories of work going on. One of them is the continued implementation of judgments already reached in the '96 Act, what I would call the sort of messy work of the transformation from legacy systems and legacy regulatory structures to one that is more respectful and dependent upon competition and market forces for market discipline and judgment as opposed to regulatory discipline and judgment.

I think that in the context of the effort of transitioning from legacy systems, however, we have an industry that is driving rapidly toward getting themselves out of legacy network architecture and into some of the fascinating advances in network architecture, and we need to be cognizant in the context of doing our transition to develop the proper incentives for that continued transformation or, at a minimum, not be doing things in a rearwardlooking way that are disruptive of their efforts to do so.

Another dimension of that here-and-now component . . . is removing or at least rationalizing hundreds of assumptions and distortions that existed on the premise of monopoly. Not the least of these is . . . universal service, which is a wonderful policy to a point, but let's be candid about it — it's also a social policy woven through the history and legacy of telecommunications regulation. I like to say it's the one social system in America that's succeeded, and it continues to be valuable to the Congress and to the country, but it is premised on the assumptions of closed monopolistic structures, and those structures are very distorting when you transition to competition paradigm, as the companies are finding.

I regularly have to talk to Congressmen, and Congressman Tauzin knows this. Competition doesn't produce lower prices; it produces economically efficient prices. If those prices are below cost, the pressures are up, not down. And that has been a rude awakening I think to a lot of political figures, that the competition paradigm, while it is normally associated with driving prices down, can bring upward price pressures if there continues to be subsidies in the system that account for belowcost market economics. People ask me, where is the local residential competition? That's my short answer. There aren't a whole lot of people making massive capital investments to come into a market and compete for belowcost phone service and depend upon a government subsidy to make it work. That's not that extraordinary.

So I think that our continuing need is to finish access reform and universal service. I think the certainty alone is important to the market. But we also have to try to get them done in the manner that's most rational for economic incentives so that there is a realistic and viable chance competition takes hold. I think in the context of this work, the Commission has to be motivated by a really important principle, which is, as we used to call it in the Army, right or wrong, do something.

This kind of market and the speed of it needs to have certainty to the greatest extent possible from regulation. The pall of regulatory uncertainty in these markets are incredibly distorting in the direction they take and the capital that flows in them, and I think we have to be increasingly focused on being quicker with decisions. Whether you like the decision or not, I think everybody generally agrees there's a merit to it being made nonetheless. Companies are incredibly facile and capable of adapting to change, as are the markets and the capital markets, but they can't do anything until somebody makes clear to them what the context of the rule or policy is.

Now, with respect to heading toward the future, I think another thing the Commission needs to do which is not in the formal category, but in the informal category, is help develop what I'll just loosely call the new learning. The new networks entering into the telecommunications markets are completely different and have very fundamentally different characteristics and paradigms associated with them. We have a legacy in our intellectual thinking premised on the paradigmatic phone network in which the intelligence resides centrally in the hands of a few, and endusers are largely passive participants and buyers and purchasers of services. Compare this to the Internet or IPbased models in which the geniuses of networks are spun to the periphery. The companies in the middle have less of a capability to control goods and services in the way they once did, but just as importantly, so do governments who traditionally employ vehicles and mechanisms based on choke points associated with the centralization of the intelligence of the network. We need to get smarter about how to think about these network changes, as do, I think, the company and the academic community generally.

Similarly, I think there are a lot of fascinating and important thinking that need to be done to understand the network economy and network effects and network economics. I think we have to be very, very careful about looking into the regulatory crystal ball. If there's anything that I have found when I go back and look at the history of innovationdriven markets and the history of technological development, nobody gets it right. You are hardpressed to find examples of CEOs in particular — and never examples from the government — of actually correctly predicting the direction of markets, the technological advances that ultimately came to fruition, and I think that we have to be extremely careful about doing so.

You know, one of my favorite economists Freidrich Von Hayek once said it's high time you take your ignorance more seriously. Or maybe it was Schumpeter. But one of those two said that, and I think that's a very important guiding principle because I truly believe that we don't know, and neither do the companies, about where a lot of this stuff is going.

The second dimension of that is to wait for some demonstrable effects that necessitate government intervention before overriding market forces. To me, that's just a rule of presumption because every rule has a real cost. It's a cost in efficiency, it's a delay, it introduces subjectivity, and once they're on the books, as anyone who has worked in this area knows, they are impossible to get off. They outlive their usefulness usually by an order of magnitude of two or three. I think we are right to exercise caution in putting those rules on the books until we have a very persuasive case that includes some demonstrable effects to intervene, and then we should move, and we should move swiftly.

MR. WILEY: I think these are really exciting times in the telecommunications field . . . but I think there's also some bad news.

Despite the passage of a modern procompetitive 1996 Telecommunications Act, I think regulatory policies over the last three years are still wedded to what I would call an outdated mode. That is, keeping all services within separate but unequal cubbyholes; that is, the application of traditional regulatory models to different communications industries even when they're providing essentially the same service. Now, this is not a call for more regulation for some, but really a call for less regulation for all within what I think is a competitive marketplace, or certainly becoming a vibrantly competitive marketplace in many sectors.

So our moderator asked us, what are three things the FCC should do and three things it shouldn't do? I think the FCC has to think outside of the box instead of looking again at many different boxes, or different regulatory policies. I think it has to align and synthesize its regulatory policies to recognize converge. The search for the new Commission is going to be for some kind of regulatory parody when you've got competitive services being offered by different people. And third, without doubt, I think we have to stop the merger concession process except where it's linked to actual competitive merger issues or harms that are identified. I think all parties have to be treated the same in a merger context. There has to be some similarity of merger standards. And most of all, and I identify with the comments that Commissioner Powell made, at least in the merger context, I think expedited decision-making is absolutely essential.

Okay. What should the Commission not do in the future? One, I think it has to resist the temptation to try to fix any and all marketplace problems that might be identified and to look for perfection in the private sector before it can move ahead in the public sector, and I refer there specifically to the 271 process. Second, it's got to desist from picking winners and losers in the marketplace through regulatory handicapping or subsidizing. Finally, and most importantly, I think, we shouldn't take old policies and put them with new technologies. I wouldn't want to see the Internet infected with the curse of wellintended but misguided regulatory intrusions.

PROFESSOR WILLIG: We are really all very impatient, and rightfully so as consumers, and as members of the policy community. But nevertheless, for me, I think the bottom line is that we should largely stay the course with some suggestions from folks like ourselves.

From the point of view of focusing on the FCC, it's my view that the first report and order was really great, a wonderful document, a great step forward as far as policymaking was concerned. And now, thank goodness, it does seem largely to be back on track, and that's another good reason for us to feel like we are on the right course if we can be courageous about it.

That doesn't mean that there aren't things for the FCC to take to heart from a meeting like this. From my point of view, and perhaps, Commissioner, you're in agreement given your remarks, I think the FCC has got to fix access pricing. That's really an extraordinarily high priority item, not just for the reasons noted, but very much for the new reasons of development of the marketplace.

You asked us for past lessons. I'm an academic; I leap to that. Very old past lessons. I think there's three things I wanted to highlight that we should recall having learned from the history of telecommunications regulation and misregulation.

First, I think foremost is that commercial incentives matter and are ferociously strong in this business. Now, economists are always talking like that, but the lesson is that that is overpoweringly true. That goes to two kinds of incentives: good incentives that arise from market opportunities, and — how should we put it?— unfortunate incentives that arise from regulatory distortions. Those unfortunate incentives don't mean that regulation is bad; it just means that regulation is costly. It may be needed, but it's costly, in part because of the inevitability of those bad incentives.

The second big lesson is that we consumers want bundles of integrated services. We like that. We also want every bit as strongly, I think, the opportunity to unbundle, and we want the attentiveness from even our integrated suppliers that comes from our opportunity to unbundle. Even if at the end of the day we want to go with the bundle, we want the consumer benefits that come with the discipline on suppliers from the marketplace's ability to unbundle. And DOJ, wherever you are, please listen to this in your own concerns as well in regards to other related, perhaps convergent industries.

The third lesson is that changes in market structure come more slowly than we think they will. It's sort of a conundrum. Our thoughts are based on what we see about the cutting edge and our friends who have cuttingedge taste and the information we get about the cutting edge, and that conditions our thought process. But that's not the same as the demand conditions and the supply conditions that actually drive the market. So changes do come far more slowly than we expect.

I think the incentive lesson was the underlying force behind the first policy revolution of our time — namely, the MFJ. The incentive lesson taught policymakers that we couldn't get long distance competition without separation because without separation, the incentives were just too strong arising from regulation and from the monopoly bottleneck to impede the kind of competition that we needed. So to get competition, we had to separate, and that was a correct lesson, I think, arising from the incentive picture.

Then after the MFJ, we learned the second lesson. We learned that consumers want bundles, and the whole point of the MFJ was to make that impossible. So we had to adjust and we adjusted with the '96 Act, which replaced the premise of the MFJ with the permission to integrate, but only if there is successful tight regulation of UNE prices at competitive levels.

The conundrum for me, and this might be a question for all of us, is whether we in our impatience could have saved a dozen years by doing the Act in 1984 instead of busting up the old Bell system. Would that have helped with our impatience had we changed the phasing? Perhaps we weren't really acutely aware enough of the bundling issue.

I think, and this is just my speculation today, the answer to that is no, absolutely not, we couldn't have reversed the order. We needed the MFJ. We needed long distance competition before we were ready for the movement toward the '96 Act. We didn't have to wait a dozen years. Maybe six years would have done the job. But I don't think we could have reversed the order. Why? Imagine the incentives of the ILECs in a world of attempting to move to competitive pricing for UNEs had the ILECs already been in long distance in an integrated way as per the days before the MFJ. Imagine how much stronger even the ILEC incentives would have been to avoid unbundling and avoid competitive pricing had they already been in long distance and had their own long distance business. And then, of course, without the 271 carrot of long distance entry, imagine how weak the incentives would have been for the industry to move toward what we hope will be true UNE availability on a competitive basis.

REPRESENTATIVE TAUZIN: We, of course, are extremely interested at the Telecom Committee and Commerce Committee in the serious questions of how quickly broadband services will be fully deployed and fully competitive for Americans. Underlying our thoughts basically are that it would be much preferable if enhanced services were as deregulated and as competitive as possible. This is rather than seeing the regulated structures that have generally characterized the deployment of telephony and video services migrate over into the enhanced services area and infect them with the same sort of regulatory structures and subsidy arrangements that currently still infect the old world order.

Interesting in that regard, and we all focus on this fact, the browser was not even introduced to the public until 1995 while we were writing the '96 Act. The '96 Act refers I think to the Internet twice. And the '96 Act basically was an attempt to deregulate switched voice telephony and to deregulate as much as possible and provide a mechanism for the convergence of other industries like the provision of video services and voice. We really didn't contemplate this new generation of services that is possible under digital broadband. So as we look at the situation, we're, of course, extremely concerned that the process of deregulation under the '96 Act has proceeded so slowly and that it now serves as somewhat of an impediment for us to make good policy judgments about the new world of advanced services.

But there is a growing sense, at least I think on the Commerce Committee, that as one world merges into the new world, that it would be much better for us to have multiple competitive structures with as much overbuild as possible to accommodate real competition and consumer choice in these advanced services as the rule rather than the exception, and having as little of a Federal, even state or local, regulatory hand in that consumer choice. Getting from here to there is obviously extremely difficult.

As we have looked at the progress, or lack of progress depending upon how you see things, at the FCC in deregulating the old structures under the '96 Act, I think we've come to several observations if not conclusions. The first is mea culpa. We created a lot of the ambiguity that has led to the slow pace of deregulation and the court challenges. We did so not because we necessarily wanted to; there were many members in that debate who had either datecertain plans or other suggestions as to how to more rapidly encourage competition. For example, if you look at other models in other countries, there has been an emphasis on facilitiesbased competitors rather than resellers to encourage, you know, demonopolization of the local loops. Well, we made our choices and we made them ambiguous in the 14 points we laid down because it was the only way we could get a bill passed, the only way we could get consensus. Let's face that.

To the CLECs and new competitors and to the longlines, it obviously meant that because we were ambiguous, it left open for them the right —in fact, the responsibility as competitors to ask for as much as they could get from the Commission. To constantly ask for an expansion of those 14 points and as many particulars as possible so that they could have as good a position in competition as they could possibly win from the Commission as a condition of the Bell companies entering the long distance.

From the incumbent telephone company, the ILEC, it meant not knowing what was really required of them in specificity. They had to be as defensive as possible about not giving up anything more to their competitors than they would have to eventually give up under whatever orders the FCC finally developed.

[Questions from the audience]

[Excerpt from discussion of open access models for broadband]

COMMISSIONER POWELL: In fairness to the proponents of the [open access requirement for cable], there are a bevy of other arguments other than parity, the vast majority of which I would put in the kind of antitrust, anticompetitive effect danger category. Everything from [the cable] is an essential facility to it's an unlawful tying to market power over a particular market.

My problem so far with these presentations is they're extraordinarily shallow. They are more assumptions than they are analysis. For example, every antitrust scholar knows you start with what the market is. And it to me is far from clear, if that case were litigated today, that you would define the market as exclusive broadband. That you wouldn't define this market to include narrowband, which is, I believe, a substitutable choice for the vast majority of consumers for the services being offered today.

I noticed contradiction in some of the proponents' representations of this fact to me and what they tell Wall Street. They are very aggressive up there in explaining how narrowband is here for the foreseeable future. But I think that a more serious presentation would walk through what the product market is and be able to demonstrate that broadband truly should be viewed at its current state of development as a market segment unto itself. And I think that's a difficult sell. I'm openminded to it, but nobody is really making it.

MR. WILEY: Well, whatever they tell Wall Street, all things being equal, you would rather have one service a hundred times faster than the other.

COMMISSIONER POWELL: That's not true, though, Dick, because what you have to do is sort through what it is you're going to do with speed. Speed for its own sake isn't necessarily the answer.

For example, what is the killer application? Everyone says for broadband, it's streaming video. Now, how much capacity does streaming video require? One megabit per second generally is VHS broadcast quality video. If cable can do ten megabits per second and DSL can do 1.5, I'm not so sure that the delta is so dramatic in terms of its harm to the public without the development of applications that are apparently not here yet.

What I'm a proponent of is a more serious argument. Where should the burden of proof lie? I believe the burden of proof rests with the proponents of intervention, not on the Commission or the cable companies to explain why they shouldn't be allowed to do this.

But let's walk through this for a second, because I know I see proponents of this argument here. What you have to build in from my position, is that this relationship will be hostile. It's not going to be cooperative, okay? For example, GTE's recent proposal for technical solutions is very interesting and I think potentially very viable. But it suffers from many limitations, not the least of which it's all done in the context of a very cooperative relationship of mutually aligned interests without all the associated sort of other functions that are going to actually naturally result. But what we have to think about is a different scenario. AOL will come in and say I just want a fivecent nondiscriminatory access requirement. Okay, you have it. You're going to go back to Mike Armstrong — I know exactly what will happen next. We want on. What's the price? A trillion dollars a month. Get lost. I have a right, I have a writ of access here, the government gave it to me. So what? Get lost. Someone is going to come back to the FCC and want pricing principles or parameters, or TELRIC, or something.

[Laughter.]

And then they're going to go back and they're going to say, okay, you've got your writ of pricing principles, which will probably be litigated for the next five years anyway, but even so, I need to put my box on your premises. Well, no, you can't, no, and when you come, we're not going to let you use the bathroom.

[Laughter.]