***Guiding Principles for the Age of Convergence***

FCBA Annual Meeting

June 24, 2004

Remarks of Commissioner Kathleen Q. Abernathy

(As prepared for delivery)

Thank you very much. I have been deeply involved with the FCBA for many
years now, and over that time this organization has provided me with
great training, professional opportunities, mentors, and many close
friends ― and more recently, speaking opportunities. So I am extremely
grateful for everything the FCBA has done for me, and it is a great
honor for me to appear before you at this annual meeting, where the
gavel is passed.

Shortly after I was appointed to the FCC a fleeting three years ago, I
wrote an article discussing the key tenets of my regulatory philosophy,
and I described these guiding principles at an FCBA luncheon. My overall
focus was on harnessing the benefits of market-based solutions rather
than relying on prescriptive regulation. Now that it's three years
later, I thought it would be interesting to discuss how those principles
have played out in the real world. And since Congress is beginning to
consider legislative reform and the Commission is also facing
fundamental questions of how to respond to an increasingly converged
marketplace, I think it is important to reflect on where we've been and
how policy-makers should proceed in the digital age.

#### Successes and Failures

First, I'll review some of the policy cuts we've made that have
succeeded in encouraging infrastructure investment and creating choice
for consumers. Foremost among the positives has been the Commission's
approach to broadband networks and services.

With respect to the deployment of broadband *facilities*, I am
particularly pleased that the Commission removed regulatory obstacles to
infrastructure investment by wireline telephone companies in the
Triennial Review Order. More specifically, the Commission made clear
that next-generation fiber networks would not be subject to unbundling
obligations at TELRIC rates, and thereby removed a significant
*impediment* to investment by both incumbent LECs and competitors. I am
also hopeful that the Commission will soon resolve some remaining
uncertainties on reconsideration, regarding both the treatment of
multiple dwelling units and fiber-to-the-curb deployments.

Based on discussions with carriers and equipment manufacturers, it
appears that the Commission's deregulatory action is already bearing
fruit. Many large and small carriers are stepping up plans to deploy
fiber deeper into the network, including fiber all the way to the home
in several areas. This increased investment has brought new life to the
equipment vendors and should spark a revitalization of research and
development activity. Earlier this week, for example, a senior vice
president at Tel Labs told me that, because of the Commission's
broadband decision, has company spent \$1.1 billion to acquire AFC, a
manufacturer of fiber optics and advanced electronics. And they will
invest millions more to help bring broadband services to consumers.
Unfortunately, the loss of jobs and R&D cutbacks cannot be reversed
overnight ― we still have a ways to go to recover from the economic
downturn of the last several years. But I am confident that eliminating
the specter of burdensome unbundling obligations will have a very
positive impact on broadband deployment, which in turn will speed the
adoption of faster and more exciting consumer applications.

So the broadband portion of the Triennial Review represents a major
success, and so too does the Commission's steadfast campaign to promote
the development of new *wireless* broadband services. I have often
spoken about the success of the Commission's lightly regulated model for
wireless services  there is no doubt in my mind that we would not have
seen the robust price competition and high degree of innovation we enjoy
today if not for the Commission's decision in the early 1990s to refrain
from imposing heavy-handed common carrier regulations on PCS services.
Recently, the Commission has built on this success by allocating
additional spectrum, increasing flexibility, and continuing to avoid
excessive regulation. At our June meeting, we provided increased
flexibility in the MMDS and ITFS bands to create the possibility of
innovative new uses, including commercial broadband services.
Previously, in cooperation with NTIA, the Commission allocated 90 MHz of
spectrum for 3G services, and we also issued licensing and service
rules. I am also optimistic that the FCC's efforts to develop more
effective secondary markets for spectrum will enable more consumers to
reap the benefits of broadband technology. And there is no doubt that
the Commission's allocation of *unlicensed* spectrum also has helped
promote broadband services. Many of us have become quite familiar with
the 2.4 GHz unlicensed band, as this spectrum has enabled an explosion
of Wi-Fi "hot spots" in homes, offices, coffee shops, hotels, and many
other settings. The FCC recently allocated an additional 250 MHz of
unlicensed spectrum at 5.8 Gigahertz for Wi-Fi. Thus far, Wi-Fi systems
complement, rather than compete with, last-mile technologies. But the
development of several new standards, including Wi-Max, as well as the
Commission's recent NPRM concerning the potential for unlicensed devices
to operate on a non-interfering basis in the broadcast television
spectrum, could dramatically extend the range and robustness of wireless
broadband services and provide another last mile to the home.\
Another promising broadband technology is broadband over powerline, or
BPL. Electric utilities have field-tested BPL systems and successfully
delivered broadband Internet service to a small number of consumers. If
interference concerns can be addressed, BPL will hold tremendous promise
for consumers, because it could bring broadband to any home that has
electricity. And I think they will be addressed. The Commission is also
sending the right signals to the market. We resisted efforts to impose
economic regulations on BPL services in the NPRM adopted last year,
because we wanted to give this nascent service room to develop before
embracing a specific regulatory framework. In fact, I doubt that there
will *ever* be a need to impose common-carrier-type obligations on a
nascent platform such as BPL.

In addition to promoting the deployment of broadband over wireline,
wireless, and electric utility networks, the Commission has maintained
its pro-investment framework for the market-leading cable modem services
by resisting calls for heavy-handed regulations in that arena.
Unfortunately, the *Brand X* decision by the Ninth Circuit complicates
the Commission's effort to regulate cable modem services under Title I,
as well as the Commission's proposals to develop comparable regulations
for DSL services. While this case  as I'll discuss later  underscores
the need to consider a regulatory regime that is less dependent on
arcane service labels, the good news is that the Commission's
investment-friendly treatment of broadband network owners has helped
ensure that the vast majority of Americans have access to high-speed
Internet access services, whether delivered via cable, DSL, satellite,
or wireless.

The reason I am focusing on broadband deployment ― and why I talk about
it so often ― is that it truly has the power to transform our society. I
just returned from a trip to Alaska, where I was able to visit with
Native Alaskans living above the Arctic Circle who are making broadband
services part of their everyday lives. A consortium of companies use DSL
and wireless broadband technologies to furnish the village schools,
health clinics, and a surprising number of private homes with broadband
connections. This trip really drove home something that has become
increasingly clear to me: broadband has the power to make geographic
isolation irrelevant. It brings a world of information to rural
communities via the Internet, so school children have access to the same
resources in Selawick, Alaska as children do right here in Washington,
D.C. It gives rural families access to medical specialists without
having to travel long distances. And it fuels economic expansion by
connecting small businesses to millions of potential customers all over
the world and by allowing larger businesses to set up call centers and
otherwise tap into a new employee base. Broadband networks also are
inherently more efficient than narrowband networks, so they allow
service providers to lower their costs. As a result of the consumer
benefits and efficiencies, companies in all segments of the industry
have strong incentives to build broadband networks, and our job at the
FCC is avoid getting in the way.\
In addition to our broadband policies, I also believe that the
Commission's approach toward Internet-based services and other
information services been a triumph for consumers. While the Commission
always regulated the common carrier facilities that underlie information
services, it adopted a deliberate policy of non-regulation regarding the
information services themselves. The Computer Inquiry proceeding
unquestionably set us on the right path by fencing off information
services from regulation. The result is a vibrant, innovative
marketplace that is highly competitive. The Commission's recent order
regarding Pulver.com's Free World Dialup service is faithful to this
model: Because Pulver does not provide the underlying telecommunications
functionality or even make use of the PSTN, the Commission correctly
concluded that there was no reason for federal or state authorities to
regulate its IP voice service. As I'll discuss more in a few minutes, I
am also encouraged that the Commission's NPRM on IP-enabled services
will preserve the environment of minimal regulation that has allowed
information services to flourish.\
The common thread in these success stories is that the Commission
trusted the market to deliver benefits to consumers. Wherever calls for
heavy-handed regulation have been beaten back  in the wireless sector,
in the broadband arena, and in the information services marketplace 
consumers have enjoyed a high degree of innovation, good service
quality, generally declining prices, and a choice of providers. Of
course, I recognize that it is not always possible or desirable to
eliminate regulation altogether. For example, the Communications Act
establishes core social policy goals that are not market driven and
require direct regulatory intervention. And some bottlenecks may exist
that prevent markets from developing in the first place. But my
philosophy has always been that where Congress gives the FCC discretion
to rely on markets in lieu of regulation, and there is no reason to
conclude that competition will not develop organically, we should be
steadfast in our search for ways to minimize the regulatory overhang.
Otherwise, we risk the perils of over-regulation, which can be quite
profound despite our best intentions.

Obviously, not everyone agrees that economic regulations should be
avoided where robust competition exists. There is a little voice in the
back of our heads that says, despite how competitive a market is, I'm
sure I can make it better. So we have the example of the California
Public Utilities Commission ― it recently adopted a set of regulations
to govern wireless services, and several others states are considering
similar action. While such actions are well-intentioned, I cannot quite
figure out what it is that they are trying to fix. In a market that has
six nationwide wireless providers and many local and regional providers,
the carriers have powerful economic incentives to provide the best
possible service to their customers. They compete not only on price, but
also on service quality. Especially following the FCC's introduction of
wireless local number portability, customers have the ultimate response
to inadequate service: they can switch to another provider.

And while I'm the first to admit that no service is perfect, even where
competition is cut-throat, additional regulation can't change the laws
of physics or eliminate zoning restrictions. It is simply a fact of life
that signal strength will vary from place to place, and some calls will
occasionally be dropped. Tempted as we may be to try and make things
even better, it is unlikely that additional regulations will improve
wireless service quality or the manner in which the carriers treat their
customers. But it is likely to add costs and result in unintended
consequences, and consumers will ultimately pick up the tab. Regulations
concerning contractual terms, billing practices, service quality, and
the like force carriers to develop new systems and safeguards and
inevitably engender litigation. Such costs divert capital away from
investment in new cell towers and other more productive uses. In short,
if ever we were to trust in markets and let go of the regulatory reins,
the wireless arena is the place to do so. I sincerely hope that other
states will think twice before following a similar path.

A related concern involves the efforts of several states to regulate
voice over IP services. As with wireless services, there is no dominant
provider of IP voice services, and the absence of a monopoly together
with the very low entry barriers makes it hard to understand the
justification for seeking to regulate these services. There is of course
a legitimate governmental interest in ensuring that consumers have
access to 911 services and that other core social policy goals are
achieved, but some states seem interested in moving far beyond these
issues. Especially given that the FCC has a rulemaking proceeding
pending, a wiser course of action is to show restraint with respect to
these nascent services. If providers are forced to deal with a patchwork
of disparate state rules, many providers may be unable to survive, and
costs to consumers will rise. That would be a terrible result, because
IP services hold such great promise for consumers. I believe that the
inherently interstate nature of IP services warrants a federal
regulatory regime, and that regime should rely to the greatest extent
possible on market forces rather than on prescriptive mandates.

There are similar examples of FCC decisions that were well-intentioned
but nevertheless headed down the path of overregulation. A notable
example that has been in the press quite a bit is the Commission's saga
involving UNE-P. I think everyone would agree that crafting the
appropriate regulatory regime in the wireline arena is more complex than
with wireless or IP services, because Congress enacted an extensive
sharing regime to address incumbent LECs' historical monopoly status.
But the fact that Congress mandated *some degree* of regulation should
not have been considered a license to order what the Supreme Court
called "blanket access" ― that is, access to virtually *every* network
element in *every* market across the country. When combined with a
TELRIC pricing scheme that makes unrealistic efficiency assumptions,
this approach resulted in a regulatory scheme that rewards unsustainable
business plans. It was inevitable that the FCC's myopic attempts to
promote a resale model of competition failed to encourage long-term,
facilities-based competition. Indeed, the Commission has effectively
*dis*couraged such competition by channeling capital toward UNE-P
providers.

As most of you know, the Commission has adopted three orders mandating
UNE-P since 1996, and each has been vacated. This remarkably poor record
has produced debilitating uncertainty, and that uncertainty has been
compounded as a result of the Commission's decision last year to
delegate the FCC's authority to every state commission to conduct
impairment proceedings. Apart from the sound principle that the FCC may
not abdicate its statutory responsibilities, the central lesson of the
repeated failures in the courts is that the Act does not permit the
Commission to order blanket access to incumbents' networks when some
lesser degree of sharing would enable competition to develop. Even if
the FCC had a rationale for unbundling circuit switches  and thereby
creating UNE-P  in 1996, by the time of the Triennial Review proceeding
in 2003, it should have been obvious that competition can succeed
without such a broad sharing mandate.

But now it is time to move on and spend less time and money on
litigation. I'm very pleased that the Solicitor General decided not to
seek Supreme Court review of the D.C. Circuit's decision, and that the
Commission in turn abandoned its appeal plans. Our job at this stage is
to follow a more market-oriented path towards sustainable
facilities-based competition.

#### A Blueprint for the Future

As we look back at these successes and failures, what lessons should we
draw? It seems clear that when the Commission applied a light regulatory
touch and found the courage to resist calls for increased management of
the marketplace, competition has thrived, innovation has flourished, and
consumers have been the beneficiaries. By contrast, overregulation in
the wireline arena has drawn all providers  incumbents and competitors
alike  into a downward economic spiral and litigation that has
benefited only lawyers. And state forays into regulating wireless
services and IP services threaten to diminish consumer welfare in those
arenas.

Hopefully, we will move beyond the contentious UNE wars that have
plagued the industry over the last several years, and we will develop a
greater consensus on the appropriate regulatory approach for the digital
age. Many people have called for a new regulatory model that does away
with the old regulatory silos for wireline, wireless, cable, and
satellite services. I couldn't agree more. The emergence of IP-based
services promises to reduce the significance of historical monopolies
and erode the boundaries separating these legacy service categories. I
believe we are finally witnessing the convergence that many have
anticipated for years. Cable operators are ramping up VOIP offerings
over their broadband facilities, wireline carriers are deploying fiber
optic networks capable of supporting high-speed data and video services,
wireless and satellite broadband options are multiplying, and other
providers using other platforms are joining the mix.

In this environment, I believe it is essential for policymakers to let
go of dated notions of dominant providers and public-utility regulations
 since *everyone* is a new entrant in the converged broadband
marketplace, the justifications for most forms of economic regulation
are rapidly becoming obsolete.

I have spoken previously about what I call the Nascent Services
Doctrine, which posits that we should apply a heavy presumption against
extending legacy rules to new services and technologies such as Voice
over IP. Rather, we should foster the development of such services in a
minimally regulated environment to promote facilities-based competition
and other important goals. Eventually, leveling the playing field is
necessary, but we should strive to do so by relaxing the legacy rules
applied to incumbent providers  in other words, the existence of
multiple facilities-based providers should enable us to "regulate down"
rather than "regulating up." Less is more.

When I developed the Nascent Services Doctrine, I also made clear that I
was not advocating complete freedom from regulation. Indeed, there are
certain core social policy goals that are not market-driven and probably
cannot be achieved without governmental urging, and perhaps mandates. I
have been very pleased to see in the developing record of the
Commission's rulemaking on IP-enabled services that almost all parties
support policies that would ensure access to 911 services, access for
persons with disabilities, compliance with law enforcement surveillance
requests, and the preservation of universal service.

And I think that NCTA has made a very helpful contribution to our
rulemaking proceeding by suggesting that network owners and other
providers of IP telephony services that are a substitute for POTS should
bear these *responsibilities*, and should also should be granted certain
basic *rights*. Such rights would include the ability to interconnect
with other network owners on a peering basis and the right to obtain
telephone numbers. This notion of adopting basic rights and
responsibilities ― but avoiding traditional economic regulations ― is
consistent with my call for the regulatory equivalent of strict scrutiny
in this arena. What I mean by strict scrutiny is that we should adopt
rules only where necessary to promote *compelling* governmental
interests, and we should ensure that any rules we do adopt are *narrowly
tailored* to the interests at stake. We have to ask ourselves
repeatedly, what's broken that we are trying to fix?

I also find myself in agreement with those who have advocated a layered
regulatory model. At the network layer, we should ensure that service
providers comply with these basic social responsibilities and possess
whatever basic rights are necessary for the market to operate
efficiently. And at the application layer, we should generally avoid
regulation altogether.

I am encouraged that the Commission's approach to IP services thus far
has adhered to these concepts. Our NPRM, as I mentioned, recognizes the
need for a minimally regulated environment, and it outlines the basic
rights and responsibilities we are likely to recognize. And our
declaratory ruling regarding the peer-to-peer service offered by
Pulver.com appropriately concluded that such application providers 
which neither provide telecommunications nor make use of the PSTN 
should not be subject to regulation at the federal or state level.

While the Commission appears to be heading down the right path, there
may well be limits to what we can achieve without legislative change.
The NPRM on IP-enabled services correctly states that our regulatory
framework should be guided by the functional nature of particular
services, rather than the regulatory classification as a
"telecommunications service" or "information service." But those labels
carry a great deal of weight and also present significant limitations.
For example, if the Commission classifies a service as an information
service, there is substantial uncertainty regarding the extent to which
we can use our Title I ancillary authority to establish the sorts of
social policy obligations we all deem to be critical. Conversely, if the
Commission classifies a service as a telecommunications service, that
label carries a lot of baggage. The Act authorizes the Commission to
forbear from unnecessary regulations, but it likely would be difficult
and burdensome for the Commission to develop the appropriate record to
make the requisite findings to support forbearance from vast swaths of
Title II. Moreover, the most significant risk of all is that the courts
of appeals may reject the Commission's attempts to apply the statutory
service classifications, notwithstanding the deference we are supposed
to receive. This is what happened in the *Brand X* case, because the
court considered itself bound by a prior panel decision, and it is what
we are hoping to avoid in the ongoing Vonage litigation in the Eighth
Circuit. These court cases and the prospect of others introduce
uncertainty that inevitably chills investment to some degree.

So I am encouraged that Congress has begun to hold hearings on possible
amendments to the Communications Act. I don't know how Congress will
proceed, but I believe that the layered approach and the nascent
services concept I described provide an excellent foundation for a
revised statute and warrant further consideration. Specifically, if
Congress were to define the core rights and responsibilities of network
owners and others that provide the functional equivalent of POTS, it
would likely be possible to do away with many legacy provisions. A more
streamlined Act would, in my opinion, usher in an era of increased
investment and innovation.

In addition, industry participants and regulators both would benefit if
Congress were to address the role of the states in the converged
broadband marketplace. I don't think there is any question that states
should continue to apply generally applicable consumer protection
requirements, such as laws prohibiting deceptive trade practices and
certain telemarketing practices. But it has become a significant matter
of debate whether states should be permitted to impose economic
regulations on IP-enabled services  or indeed *any* rules that differ
from the federal regime established by the FCC. As I discussed earlier,
companies seeking to offer broadband services such as VOIP will be
hard-pressed to pursue nationwide or regional deployment strategies if
they are confronted with a patchwork of burdensome and inconsistent
state laws. I believe that IP-enabled services are inherently interstate
 indeed, some are global in their reach. It follows that the regulatory
framework should be determined at the federal level.

And finally, while policymakers need to rethink the *substantive*
responsibilities undertaken by the regulator, the FCC in the future also
will need to rethink its *functions* by reorienting itself from a
rulemaking body to one focused on enforcement and consumer education.
The movement away from economic regulation undoubtedly will translate
into a substantial reduction in rulemaking activity. But with fewer
prescriptive rules, there is a heightened need for stringent enforcement
of the core mandates. This will produce a better, leaner model as the
FCC focuses on the policies that are the most important and ensures
strict compliance with them. In addition, I have spoken previously about
the need for the FCC to continue to improve its consumer outreach and
education efforts. Competition delivers tremendous benefits, but it also
can confuse consumers as they are faced with unprecedented choices. The
FCC plays a vital role in informing consumers of their rights and
opportunities so that they can better navigate the competitive
marketplace. To borrow from a discount clothing chain, an educated
consumer is our best customer.

In closing, I am truly excited by the limitless promise of broadband
communications networks and the IP services they support. When we look
back at what has succeeded in promoting investment and innovation, it is
clear that regulatory restraint is an essential ingredient. It is no
accident that our most problematic and sluggish sector is also our most
heavily regulated. I hope that the FCC, our colleagues in the states,
and Congress all heed these lessons and work together to create an
appropriate model for the future of communications. Thank you for
allowing me to share my thoughts with you today.