*Trust the Market*

**Remarks by FCC Commissioner Kathleen Q. Abernathy**

**to the Women's High-Tech Coalition**

**May 6, 2003**

(As prepared for delivery)

Thank you for your introduction. I want to thank you for inviting me to
join your group today for lunch. I believe that the mission of the
Women's High-Tech Coalition to leverage the significant power of women
senior executives from both the public and private sector to impact
public policy is extremely important. We cannot underestimate the
influence and power we have as a group. I know that in my role as FCC
Commissioner, I have endeavored to engage in frequent dialogues with
other women in both the public and private sector to gain their insights
into key policy issues, and learn from their experiences. I believe that
the very traits that sometimes hold women back, a lack of faith in our
own ability, that drives us to be better and work harder, can, in time,
become our strength and our best asset. As Harriet Beecher Stowe wrote,
"women are the architects of our society."

Today, I thought I would talk about how government regulation intersects
with market realities. More specifically, why, as a policy maker, one of
the principles I have tried to adhere to throughout my term is reliance
on market competitive forces, as opposed to increased regulation when I
am granted the discretion in making decisions. I firmly believe that as
a regulator I have the obligation to trust the market and forbear from
imposing unnecessary regulation because fully functioning competitive
markets make better decisions than the government can or will. As past
examples demonstrate, this type of decision-making ultimately results in
the most innovative and reasonably priced services being provided to
consumers by the communications industry.

One such example is the United States wireless industry. When the rules
for the wireless industry were being developed by the FCC, the
Commission considered imposing Section II common carrier type
regulation. That is, it could have imposed price regulation, service
quality controls, mandated certain technologies or demanded tariffing.
But the FCC instead let go of the reins and relied on market forces to
govern pricing and service terms for PCS and other mobile services.

This is not to say, however, that there was no regulatory intervention.
The FCC continued to place additional spectrum into the marketplace -
thus allowing multiple players to pave their own wireless last mile and
to compete with existing providers. Included in this policy was a
spectrum cap that guaranteed, at least initially, that there would be at
least four distinct wireless providers in each market. The Commission
also developed and enforced strict interference rules that prevented
competitors from interfering with each other.

So while the approach to wireless was largely deregulatory, the
Commission also engaged in limited interventions to ensure, for example,
that there was a diversity of providers of the \"last wireless mile\"
and to prevent competitors from externalizing costs onto one another or
consumers. In sum, the wireless experience illustrates how Commission
policy ought to work: We establish policies that encourage entry into
the marketplace; firms compete with one another based on price and
service quality; and consumers make choices that maximize their welfare.
In the end, some firms succeed while others fail, and it is the role of
regulators to referee between carriers and consumers and among
providers - not to pick winners and losers. Based on the success of the
U.S. mobile telephony industry, I believe that.

When I began as a Commissioner, I believed that adhering to the core
principle of trusting the marketplace would be relatively easy as a
Commissioner. In reality, it is often quite difficult. Regulators are
often hesitant to trust markets to operate rationally, even if they
believe it is the right thing to do and even if past Commission
decisions, such as the cellular decision, support such an approach. This
is despite the fact that time and time again marketplace forces have
delivered innovation, competition and their accompanying benefits to
consumers. There is always a tendency to believe that direct
intervention and manipulation will somehow yield a better result for
consumers.

Today I would like to share with you some of the more recent decisions
that the FCC has made whereby the Commission has placed its faith in the
marketplace as opposed to imposing market-stifling regulations. In
addition, I would also like to spend a few minutes discussing with you a
decision where the Commission, by failing to trust the marketplace
created an uncertain regulatory environment that has deterred investment
and innovation. But, first the good news \-\--

The FCC has recently focused on moving towards increasing the amount of
unlicensed spectrum that is available for new entrants to provide
telecommunications services. Today American consumers increasingly rely
on unlicensed devices in their day to day work and home environments.
For example, your cordless telephone, garage door opener and computer
all operate on an unlicensed basis under the FCC's rules. In addition,
many more innovative devices operating in the unlicensed bands are
becoming commercially available. These include Wi-Fi which allows you to
have wireless access from your computer to your ISP, and blue tooth
which provides wireless connections between your mobile phone, PDA, and
other devices, such as keyboards and earphones.

In the unlicensed environment, the FCC does intervene to establish
certain rules of the road to avoid harmful interference and allow
multiple devices to operate in the same frequency band. The success of
the unlicensed approach to spectrum regulation has been do in large part
to the Commission's willingness and ability to clearly define the rules
that govern the common use of this resource, while resisting the urge to
impose heavy-handed regulation. This approach has encouraged capital
investment, and in turn, new services, have been introduced to the
American people. Unlicensed bands, unlike the licensed bands, do not
create property like rights, but rather focus on communal use.
Accordingly, like drivers on the highway, all users must comprehend and
obey the rules of the road and the FCC, as the regulator, must ensure
its rules are clear.

The FCC is continuing to examine its current spectrum allocations to see
if additional spectrum can be made available for unlicensed use. Most
recently, the FCC affirmed its decision to allow ultra-wide band devices
on an unlicensed basis to be deployed in a large portion of the lower
frequency bands. Ultra-wide band technology holds great promise for many
applications including public safety. For instance, one company has
developed a device that allows police officers to see through the walls
of buildings to locate hostages.

The Commission is also looking at additional frequency bands at 70, 80
and 90 MHz for other unlicensed devices. And just last month the FCC
issued a notice of inquiry seeking information on what technical rules
are required to allow power line broadband carrier services to be
utilized. We are hopeful that power lines might offer a new broadband
pipe to the home and office over the existing power infrastructure by
operating in unlicensed frequency bands.

Another area where the Commission is adopting market-based solutions is
in crafting service rules for wireless providers. A good example of this
was our recent decision to craft a flexible regulatory regime that
offers mobile satellite service operators the ability to include an
ancillary terrestrial component to their satellite systems, as long as
the satellite operator meets certain gating criteria. This decision
enables mobile satellite operators to maximize the value of their
spectrum by offering an integrated service package of both satellite and
terrestrial mobile services in rural and urban areas of the United
States.

Similarly, the FCC last month adopted an order providing flexibility to
public safety licensees who use the 4.9 GHz band so they can offer both
mobile and fixed broadband applications. Such flexibility will allow
each public safety licensee to deploy systems in a manner that best
serves the service and technological needs of their community.

Unfortunately, in some instances, the Commission has taken a step back
from relying on competitive market forces to deliver value to consumers.
Such slippage will ultimately harm consumers by stifling innovation and
choice in the marketplace which may ultimately lead to fewer choices and
higher rates for consumers. It can also lead to unintended consequences,
such as uncertainty and a lack of capital investment. This is what
happened in part of the recently adopted triennial review order. While
we remain in our sunshine period, I am limited to discussing my own take
on the issues, so let me offer a brief summary of my views on two of the
key issues decided in that proceeding. One of which I supported and one
I did not.

One of these issues concerns the imposition of unbundling obligations on
fiber loop facilities used to provide broadband services, and the other
concerns UNE-P, which stands for the unbundled network element platform.
First, the good news. As most of you probably know, the Commission
decided not to impose unbundling obligations on new investment in fiber
loop facilities. Specifically, the Commission will not require incumbent
LECs to unbundle fiber-to-the-home loops. Nor will incumbent LECs be
required to unbundled a packetized broadband channel over hybrid
fiber/copper loops. What this means is that CLECs will continue to get
exactly what they get today ― access to copper loops, and access to
high-capacity loops over fiber, using a non-packetized technology called
TDM. In addition, I want to make clear that when I say incumbents are
not required to unbundle these fiber facilities, I mean that they need
not provide them at TELRIC prices. But the Bell operating companies
still must make the facilities available to competitors on a wholesale
basis, because section 271 requires them to provide competitive access
to their loops.

I believe this decision strikes the appropriate balance between the
goals of providing incentives to invest in new infrastructure and of
giving competitors access to bottleneck facilities. As I mentioned,
CLECs will not lose access to any existing UNEs. But we are refusing to
*extend* new unbundling obligations to the advanced networks of tomorrow
that do not yet exist. Why? First, because I generally do not support
adopting regulations based on what *might* happen, because it is
difficult to make accurate predictions about impairment. Second, I
believe that those next-generation networks may never get built if
incumbents are required to turn over the fruits of their investment at
TELRIC prices.

I did disagree with one aspect of the broadband analysis, which was the
decision by the majority to eliminate line sharing over copper loops.
Unlike new fiber investment, copper loops are already in place. So
giving competitors like Covad the ability to share those loops does not
deter investment at all. In fact, allowing competitors to offer DSL
through line sharing promotes competition *and* investment. If the
incumbent wants to find a way to differentiate its service offerings, it
can build new fiber loop facilities without being subject to the TELRIC
unbundling regime. I recognize that, in time, intermodal competition
from sources like cable, wireless, and satellite will be very beneficial
for consumers, but in the short term, as some of these new broadband
platforms are still getting off the ground, I think line sharing would
have provided a much-needed competitive alternative, but I was in the
minority on that point.

Finally, let me say a few words about UNE-P and why it represents a
failure to put some faith in the market. Fundamentally, I believe the
majority's decision to allow each state commission to decide the fate of
unbundled switching, based on a largely subjective analysis, was bad for
the telecom market and, in the long term, will be bad for consumers. The
majority concluded that, even though CLECs have deployed more than 1,300
switches nationwide ― in some 86% of all wire centers ― they were unable
to reach any conclusions about whether competitors are impaired in the
absence of unbundled switching.

I believe that the Commission had a legal obligation to take on the
challenge of deciding the circumstances in which impairment exists. For
example, all the Commissioners believe that certain operational issues
surrounding the hot cut process needed to be addressed through
performance metrics and other rules. The Commission also could have
determined that *economic* impairment exists in markets where fewer than
a particular number of switches have been deployed, or in markets with
fewer than a set number of lines, or based on a variety of other tests
in the record. But I believe we were not permitted to throw up our hands
and turn over the entirety of the job to the states. The FCC and state
commissions have an important partnership in promoting local
competition, but each has a statutorily defined role to play in that
partnership. Section 251(d)(2) of the Act makes clear that the FCC ― not
the states ― must decide which network elements must be unbundled.

While I believe the decision is legally indefensible, I am equally
concerned about its impact on the marketplace. What this market needs to
promote investment is certainty. A better approach, which I would still
have dissented from, would have been to make an actual *finding* that
impairment exists. But instead the majority established a *presumption*
that will give CLECs and ILECs no indication of whether UNE-P will be
available in a given state. Rather than adjusting business plans to a
new federal regime and investing in facilities-based competition,
carriers will now spend the next several years litigating before each
state commission, and then litigating in federal district court, and
ultimately litigating in the courts of appeals. To be sure, any decision
by the FCC would have been appealed as well, but there is an enormous
difference between the timing and uncertainty involved in a single
federal appeal and 50 separate litigation tracks.

I am disappointed by this outcome, because the FCC had an opportunity to
put us on a path towards more sustainable facilities-based competition
and, ultimately, a greater reliance on market forces. Instead, the
majority opted for an extraordinary degree of regulatory oversight and
uncertainty. And while I have no doubt that the state commissions will
attempt in good faith to make economically sound decisions, I also know
that different states will reach diametrically opposed conclusions based
on the same underlying facts. That can't be a good outcome for
consumers. In the meantime, legal and regulatory costs escalate for all
the carriers, whether incumbent wireline provider or new competitor. And
this fact combined with the overall uncertainty of the process drives
down the market valuation of all the players. At the end of the day,
both competition and innovation would have been better served by an
approach that recognized the value of allowing the market to work with
lighter touch regulatory oversight.

The good news, however, is despite regulatory failures, which are
inevitable since we lack perfect knowledge, technology never stands
still. New, innovative life changing services find their way to the
market despite the hurdles we may erect. And my hope is that we learn
from our past mistakes and continue to trust in competitive market
forces to deliver innovation and value to consumers. We can then focus
our regulatory efforts on enforcement and consumer protection, which is
a speech for another day.

Thank you for the opportunity to discuss these important issues. I would
be happy to take some questions.