Speakers include: Hon. Robert B. Baker, Jr., Commissioner, Georgia Public Service Commission; Mr. Michael E. Glover, Associate General Counsel, Federal Regulatory, Bell Atlantic Network Services, Inc.; Mr. Charles Kallenbach, Vice President for Regulatory Affairs, e.spire Communications, Inc.; Mr. Donald Stockdale, Associate Bureau Chief, Common Carrier Bureau, FCC

MR. STOCKDALE: When Congress passed the Tele-communications Act of 1996, it completely changed the paradigm because it rejected the view that telephone, or telephony, was a natural monopoly. Rather, it believed that competition was now possible, and in fact, Congress, in the 1996 Act, sought to introduce competition into local telephone markets and to facilitate increased competition in telecommunications markets already subject to competition like the long distance and the customer premises equipment markets.

One thing that it continued to do, however, was to maintain the division of responsibility for regulating telephony between the FCC and the States. Now, how it divided that responsibility was an issue of considerable controversy.

One problem was, as Justice Scalia observed, the Act itself is, "in many respects a model of ambiguity or, indeed, selfcontradiction." Congressman Tauzin also was quite candid when he admitted, "I've said my mea culpa. We made the law as clear as we could politically. If you had a law that everybody understood completely, nobody would like it." Thus, it is not surprising that the Telecommunications Act was nicknamed the "Telecommunications Lawyers Full Employment Act of 1996."

Another introductory point is that although there has been considerable debate about the extent to which the Telecommunications Act placed responsibility for introducing competition either with the States or with the FCC, it's important to recognize, that while there may be some debate about linedrawing, Congress clearly envisioned roles for both. Even after the Supreme Court decision, it is clear that if we want competition in local telephony, and I think most of us do, it is absolutely essential that the Commission and the States continue to work together.

Now, let me touch briefly on what I believe to be the most important part of the Supreme Court decision. From the Commission's perspective, the most important part of the decision was the Supreme Court's ruling that FCC had, in fact, authority to implement rules under the 1996 Act. Here, the Supreme Court decided this issue on the broadest possible grounds. As Justice Scalia wrote, Section 201(b), it means what it says. The FCC has rulemaking authority to carry out the provisions of this Act which include Sections 251 and 252, the local competition provisions.

Now, before the 8th Circuit, the argument was made and accepted that Section 152(b) of the Act, which gave States the authority to regulate intrastate services, precluded the Commission from acting or from promulgating certain rules in connection with the opening up of local telephone markets. With respect to this Section 152(b) argument, Justice Scalia wrote, "After the 1996 Act, Section 152(b) may have less practical effect, but that is because Congress, by extending the Communications Act into local competition, has removed a significant area from the States' exclusive control."

Now, because of the breadth of the Supreme Court's ruling, the Supreme Court did not even address two other issues that were hotly debated before the lower court and before the Supreme Court in oral argument. Those two issues are whether, under Section 251(d)(1) of the Act, the Commission was given explicit rulemaking authority to implement the local competition provisions; and second, the Supreme Court did not address the issue of whether the exception of Louisiana PSC applied; that is, whether the local competition provisions so entwined interstate and intrastate concerns that the FCC should have jurisdiction.

Now, after deciding the jurisdictional issue, the Supreme Court went on to decide six narrower substantive issues. It sided with the Commission on five of those and remanded the sixth to the Commission for reconsideration. The issue that the Supreme Court remanded to the Commission was how to interpret Section 251(d)(2) of the Act. Section 251(d)(2) provides in relevant part that, "In determining what network elements should be made available, the Commission shall consider at a minimum whether A) access to such elements as are proprietary in nature is necessary; and B) the failure to provide access to such network elements would impair the ability of the requesting carrier to provide services that it seeks to offer." Now, the Supreme Court concluded that the Commission in interpreting this statutory provision had effectively concluded that whatever requested element can be provided must be provided. The court found that in doing so, the Commission basically read out this particular provision from the statute. So the Commission sent it back to us and told us that we must give some substance to the necessary and impair standards of 251(d)(2).

MR.KALLENBACH: Iowa Utilities is probably the most significant case to emerge from the Telecommunications Act of 1996, and this is a key topic. Note that the Act is not the Telecommunications Deregulation Act of 1996 despite hopes to the contrary by some. Rather than providing the basis for deregulation, Congress wisely saw that immediate deregulation would simply mean deregulating monopolies. Instead, Congress chose to implement a new regulatory structure that promises deregulation only after competition is established and regulation is less necessary.

New entrants, such as e.spire, as a direct result of the Act have evolved from providing niche highcapacity telecommunications services to providing fullservice integrated voice and data services. I started at e.spire as Employee Number 140 three years ago; today, we have over 1200 employees. I was told recently that it's now over 1400. And we see that as a direct result of the Telecommunications Act. . . . e.spire provides integrated telecommunications solutions to small and mediumsized businesses. We provide voice, data and Internet services. And e.spire is a Tier1 Internet provider, meaning that we have one of the top ten largest Internet backbones in the country.

First, the effects of the decision on local competition. The Iowa Utilities case reinstated the FCC's unbundled network element pricing rules, but the actual effect of this will probably not be felt for some time as Don just mentioned. The States must reexamine the UNE ("Unbundled Network Elements") rates that they established to determine whether or not they properly follow the FCC's rules.

It's likely that unbundled network element rates will come down slowly in many states. Illogical UNErate disparities must be reconciled. Why, for example, should CLECs ("Competitive Local Exchange Carriers") like e.spire pay five dollars for an unbundled local loop which connects an end user to a central office switch in Boston, and 22 dollars for that same loop in Phoenix? States should, we believe, reconcile this discrepancy.

Beyond Iowa Utilities, states are seeing, we think, that the ILEC ("Incumbent Local Exchange Carrier") "Chicken Little" predictions of grievous economic harm as a result of not recovering stranded costs have just not come to pass, and that's going to put pressure, downward pressure, we hope, on UNEprices. In many states, the effects are going to be somewhat limited because although many states didn't use the FCC's TELRIC nomenclature, the TELRIC model was adopted in effect in many states.

Geographic rate deaveraging which was imposed by the FCC rules was reinstated by Iowa Utilities. We believe rates for urban and suburban UNEs could drop in states that didn't previously deaverage. The FCC has given an extension to states for six months after a new highcost funding mechanism is in place, so it probably won't be until the summer of the year 2000, before we will feel the downward pressure of geographic rate deaveraging in many states.

In addition, Iowa Utilities reinstated two important FCC rules as Don mentioned, the pickandchoose rule, which allows CLECs to select certain portions of interconnection agreements that ILECs have made with other CLECs, and also the rule on combinations of unbundled network elements which prohibits incumbents from disassembling UNEs that are normally put together. For example, the switching function can't really be provided without a switch port. Those are unbundled network elements that are typically put together and probably will be affected by that ruling.

Moving on to some of the effects of the decision on the deployment of advanced telecommunications services. By way of background, in order to provide ubiquitous data services, CLECs still need access to incumbent's data unbundled network elements in order to provide costeffective data services. Incumbents still control the last mile, whether voice or data, and many other data unbundled network elements. The FCC established a proceeding to give effect to Section 706 of the Act in part in response to petitions by Bell Atlantic, U.S. West, the Association for Local Telecommunications Services (which is a CLEC association designed to promote the deployment of advanced telecommunications services). In this proceeding, the 706 proceeding as its known, the FCC determined that the Act's interconnection and unbundled edicts apply to data as well as to voice services. The FCC was looking at additional measures to effectuate data services competition when Iowa Utilities unfortunately slowed down the proceeding. The FCC will probably wait until it has its unbundled network element rules in effect as part of the remand proceeding before moving forward with additional 706 rules, although it did rule on collocation issues. That was the only kind of noncontroversial rule that the FCC could rule on before the remand proceeding was complete.

MR. GLOVER: If I have a theme, it's that the decision gives the FCC together with state regulators an opportunity to get things right, and I don't mean that in a pejorative sense. What I do mean is that since the time the Act was passed and since the time that the FCC first adopted its rules, I think we've all had a fair amount of additional experience with the development of local competition, and I think a great deal has changed.

In the intervening period, competition has taken off, particularly facilitiesbased competition, and I think a few key statistics help to make the point. In the intervening period, over $30 billion has been invested in competing facilities just in terms of public financing. That doesn't even count private financing that's in addition to that. More than 700 switches have been installed by competing carriers, and there are now more than 725,000 miles of fiber in place from competitors.

In terms of Bell Atlantic itself, a few illustrative numbers. We've lost more than two million lines to competitors. It's a sad state of affairs when we start advertising as a good thing how badly we're doing in business, but that's the fact. A million of those lines, more than a million, are actually lines that are being served by competitors over their own facilities. Our competitors have in place some 750,000 interconnection trunks to connect their networks to ours, and they're connecting in more than 2,000 collocation sites around our region.

Have their been bumps along the road? Yes. Will there be others? Probably. But on the whole, is competition taking hold? Are people putting money in the ground? Are they building facilities? Yes, in a very big way. And I think that's one of the key things that has changed since the FCC first addressed the issue.

So what's next? Well, in terms of generalities, and then I'll come back to some specifics, I think the generalities are that the critical thing going forward is for regulators at both the Federal and the state levels to adopt policies that are going to promote competition for the long haul. And when I say the long haul, I mean promote competition on a facilities basis. I think in the end, that boils down to a couple of simple do's and maybe a don't.

In terms of the do's, I think the regulators want to adopt rules that will promote investment in competing facilities by all players, incumbents, new entrants, everybody. I think they also want to or at least should want to eliminate requirements and not adopt new requirements that are going to deter competition, particularly facilitiesbased competition.

In terms of a big don't, don't focus on shortterm policies, policies in particular that would encourage competitors to use a single wire to the home to create the appearance of competition. In reality, the competition that results in that scenario was competition at the margins. It only determines who's the more profitable marketeer, the more efficient marketeer, rather than to promote the kind of competition and innovation that takes place when you have competing facilitiesbased networks. Justice Breyer probably said it best in his concurring opinion, and what he said is that true competition takes place in the unshared rather than in the shared portions of the network. I think that's just common sense.

What does that all boil down to in terms of specifics? I guess you can break it down into maybe three pieces.

First, if you start with the traditional telephone business, both Don and Charles mentioned that the FCC now has proceedings underway to determine in the wake of the Supreme Court decision what network elements have to be made available on an unbundled basis.

The guiding standard is the one set out by Congress, and the guiding standard is that where competitors need to get individual piece parts of a network from the incumbent so they can fill out their own networks, they ought to be able to do so, but only where they need it. To steal a line from somebody else, it is kind of a Mick Jagger standard. If you try sometimes, you just might find that you can get what you need, but you don't necessarily get everything you want.

One of the problems, as Don pointed out, that we persuaded the Supreme Court the FCC had gotten wrong the first time around was that they had read the standards in the Act as a want standard — effectively, anything competitors wanted, they got. There is a big problem with that. The problem is that if competitors can get whatever elements they want from the incumbent and get them at rockbottom prices, particularly prices set based on the cost of a hypothetical alreadyideallyefficient network that doesn't actually exist, they're going to have no incentive to put any money, any investment, in facilities of their own.

So what should the standard be going forward? I think there's a pretty simple one. One of the things that the Supreme Court said is that in giving some substance to the standards in the Act, one thing that the FCC has to look to is whether competitors can get access to elements outside the incumbent's network. Can they deploy the facilities themselves? Can they get them from somebody else?

If you apply that standard, then a pretty simple test is where something is already being done, it probably can be done. If the FCC and other regulators apply a standard that's based on actual marketplace experience rather than hypothetical theories, I think what we'll find is that they will be able to develop some fairly balanced rule. Rules that will, in fact, give competitors access to elements that they need while not necessarily giving them access to so many things that deters investment in competing facilities by all providers. So in the end, if competitors have deployed facilities of their own or can get them from another source, they don't need them from an incumbent.

There are also a host of new issues on the advanced services side of the business. New entrants are arguing that incumbent telephone companies ought to have to unbundle and provide at cost, base cost, the new equipment they're now installing for the very first time to provide advanced services. And I'm not talking about the traditional pieces of the network; I'm not talking about loops; I'm not talking about other pieces of the traditional network. I'm talking about the new equipment that's being installed just to provide advanced services, equipment that the new entrants are installing right beside us, in parallel with us.

Why ought that stuff not be unbundled? It's pretty simple. If incumbents have to unbundle that equipment and make it available at cost, they're going to have very little incentive to invest in that kind of equipment. There's no justification for taking the enormous business risk of putting your money on the line if you're just going to have to turn it over to your competitors at cost. It just doesn't make sense. It doesn't make sense economically, doesn't make sense from a business perspective, and it doesn't make sense from a policy perspective because all it's going to do ultimately is slow down the deployment of advanced services by telephone companies that you want deployed to compete with the cable incumbents.

One area that I think the Act has not proven to work is in the long distance area. Why do I say that? Well, in contrast to a fairly concrete, straightforward, 14point checklist in the Act and a 90day review process for long distance applications, we instead find ourselves with an evolving and growing list of requirements. You can count the number of requirements in any number of different ways, but it's several hundred or several thousand depending on how you count them. It's kind of mutated in a sense to a multilayer and so far multiyear review process, all of which has sprung up to replace the 90day review process that was set out in the Act.

In addition, the Act has now been construed to apply to new areas that I don't think Congress ever had in mind when it wrote the long distance restrictions, such as Internet.

COMMISSIONER BAKER: At the state level, I think all regulators are trying to reach some kind of a balance between the ILECs and CLECs, and the ultimate goal is trying to develop that competitive marketplace out there. Our ultimate concern or interest is what is going to happen to the consumers out there and what benefit they can reap from the deregulation or reregulation process.

The negative side of the Supreme Court's decision, as I think has been pointed out, is on facilities-based competition. We in Georgia passed a local telecommunications deregulation act in 1995, a year ahead of the Federal act, and the whole emphasis or the principal emphasis in the Georgia legislation was to help develop a facilitiesbased combination. Everyone understood that resale or recombination would be part of service, but the whole ultimate goal was to help generate and facilitate the development of facilitiesbased competition.

As has been pointed out by Mike, if it gets to the point where you can get whatever you want at the TELRIC rate, you take away the incentive of a CLEC to introduce or to install some elements of the network into the system. Last week in the discussion at the hearing, the experts for some of the CLECs strongly disagreed with that issue. They argued that ultimately, CLECs would have a strong interest in developing their own facilitiesbased competition just because of the quality of service issues, pricing and offering of new services that they could not depend on the ILECs to provide for them.

Finally, from the state's point of view, probably the biggest issues that may come up and I know in Georgia will have an enormous impact on us at the local level is the deaveraging issue, which to a lot of you all out there may not be too important. If the loop rates are deaveraged into three zones or as many — I don't know how many zones ultimately will be done — it's going to cause quite a bit of problem at the local level, especially for rural communities.

The problem is we're not opposed to deaveraging; it's just the process to sort of implement that is the concern. If you do a flashcut deaveraging, I'm going to be referring a lot of my calls I get from angry legislators to the FCC.

In Georgia, I would have to say that ultimately we embrace the Supreme Court's decision because of the fact that once the Supreme Court decision is implemented, it takes away any excuses the CLECs have had in the past not to enter into local markets and offer local service. There are a handful of companies in Georgia, and e.spire is one of the few that have had the courage and determination to invest and put in place facilities and have made enormous investments. But the perplexing situation is that some of the larger CLECs have been hesitant and have not aggressively tried to enter into the local service market.

MR. GLOVER: I think the 8th Circuit's decision was important in terms of promoting competition in one very important respect. One of the FCC's rules — which I'm hopeful that on remand they will change given the experience we've had since the 8th Circuit's decision — was particularly pernicious for the development of true facilitiesbased competition. It was a rule that allowed long distance carriers to get what they call the unbundled element platform, which is a combination of all the elements that they would need to provide local service, but to get them at essentially prices based on the cost of an ideally efficient competitor.

The 8th Circuit's order had the effect of invalidating the platform requirement. I think that in large part is why we've seen so much facilitiesbased competition in the meantime. In the absence of being able to piggyback at very low cost on the incumbent's network, competitors have actually put money in the ground.

Companies like e.spire have actually gone out and invested in switches and other facilities to provide their own competing services. AT&T and MCI have gone out and bought facilities. AT&T bought Teleport, one of the largest facilitiesbased competitors in the country, and they bought ACC, another facilitiesbased competitor. They bought TCI. They're trying to buy Media One. They're buying facilities with which to compete. I don't think they would be doing that if they had had the platform available to them the full time as the FCC envisioned it initially. MCI in turn bought MFS, another of the largest facilitiesbased competitors.

So what has happened in the meantime? People have actually put money in the ground; they've invested. I think one of the challenges for the FCC on remand will be to give content to the necessary and impair standard in a way that will continue that investment. I think they have a strong interest in doing that and I think we all have a strong interest in having them do that. They can do that best, I think, by going back to where we started and adopting rules that really will promote facilitiesbased competition.