***"Keeping the Consumer in Mind:***

***The U.S. Regulatory Experience with Telecom Competition and Market
Liberalization"***

**Commissioner Gloria Tristani**

**Federal Communications Commission**

**Keynote Address at Expo Comm Argentina '99**

# Buenos Aires, Argentina

**September 28, 1999**

Good afternoon! Thank you for having me here today. It is a great honor
to be back in Argentina, just a year and a half after my visit to
Bariloche. In April of 1998, I represented the United States government
at a conference of Latin American regulators. There, we spent a great
deal of time discussing implementation of our World Trade Organization
(WTO) commitments and the transition to cost-based accounting rates.

I owe my presence here today to one of Argentina's most effective
representatives, whom I also had the good fortune to meet in Bariloche.
I know I speak on behalf of the entire Federal Communications Commission
(FCC) in thanking Hector Carril for his outstanding leadership of the
CITEL Working Group on Universal Service. Hector has done a tremendous
job gathering and disseminating information about how the countries in
the Americas are approaching problems of universal access and universal
service. Hector's leadership demonstrates that we all have a great deal
to gain in learning from, and helping, each other as we tackle our
common problems. So it is a pleasure to return to Argentina today at
Hector's gracious invitation.

I also am delighted to be here at such an auspicious time in Argentina's
history. You stand at the cusp of exciting change. With early
liberalization, a year ahead of schedule, your country is on a steady,
inevitable course toward full competition. With competition come new
investment, infrastructure buildout and choice -- all things that will
benefit Argentine consumers.

Five years ago, United States Vice-President Al Gore came here to Buenos
Aires to call upon all nations to join in the creation of a Global
Information Infrastucture (GII). This network of networks, as he foresaw
it, would allow all of us, the world's citizens, "to transmit messages
and images with the speed of light from the largest city to the smallest
village." The Vice President understood that we were in the midst of a
revolution -- a revolution that would transform nearly every aspect of
daily life, from how we work and conduct business, to how we learn, to
how we receive medical care. He knew that the new technologies and
networks at the heart of the GII would enable us to transcend old
barriers of distance and time, and connect the people, cultures and
ideas of all our communities. And he predicted that this information
infrastructure would be the key to the future growth of our national and
international economies.

He was remarkably prescient. In the five years since his visit, the Vice
President's vision has taken firm hold in many parts of the world. In
others, however, it remains more hope than reality. There are still
parts of the world where teledensity remains at 1-2% of the population.
Throughout Africa, Asia and Latin America, many have yet to experience
*any* benefit from the telecommunications revolution. Half the world's
population has yet to make a phone call. How, then, are we to bring the
benefits of a digital economy, of distance learning and telemedicine, to
these people?

Certainly, our national governments cannot do it on their own. The World
Bank has calculated that over the next five years, \$60 billion per year
in capital investment is needed to help build this worldwide information
infrastructure. Governments alone cannot support this scale of
investment. In most of the U.S., we have had a private communications
sector from the outset. It is not a coincidence that our telephone
penetration stands at 94%. More and more countries in the last decade
have followed the path to privatization, as Argentina did in 1990. After
selling their state-owned telephone companies, for example, our
neighbors in Mexico, Venezuela and Chile have reaped the benefits of
private sector incentives: increased innovation, efficiency, investment,
and responsiveness to market demands.

In the U.S., the last state-owned telco was recently privatized in my
birthplace, Puerto Rico. When the Puerto Rican Telephone Company was
sold, I can assure you we reviewed the transaction carefully to assure
that the public interest would be served. I fully expect that my family
and friends will reap the benefits of privatization and competition.

Of course, privatization is not enough. Monopolies, even if privatized,
lack the incentives toward efficiency and innovation that competitors
have. And they certainly lack the incentive to lower their prices.
Ultimately, all consumers lose as higher prices depress demand and
usage. This means that there are fewer resources to dedicate to network
buildout and universal access.

When countries face the critical decision to transition from monopoly to
competition, it is understandable that they question whether
telecommunications is a natural monopoly. They voice concerns that
competitors will undercut the incumbent and divert resources from the
network, leaving consumers worse off. They also wonder how to promote
universal service in a competitive environment. On these points, I
believe that history is the best teacher. When Chile privatized its
telephone company in 1988, only 5 of every 100 Chileans had a telephone.
Within ten years of privatization, that figure increased over 300%. And
after the introduction of competition in 1994, Chileans have enjoyed
international calling rate reductions of more than 50%. Bear in mind,
however, that these reductions in rates do not signify reductions in
revenue. Rather, the lower prices borne of competition stimulate higher
demands and usage, supporting increased revenue overall. Continuing with
the example of Chile, lower prices increased traffic by 260% from 1994
to 1997. All of this means that consumers are better off.

In each nation, policymakers face similar challenges guiding the
transition from monopoly to competition. The challenges are tough, as I
will tell you. But there are a few stalwart principles to bear in mind,
to keep the transition on course. And in the end, all of us, regulators,
manufacturers and service providers alike, know that these are
challenges we cannot afford *not* to face. The telecommunications
revolution promises great benefit for our national economies and our
citizens, so long as we seize the opportunity.

I've been asked to focus my remarks on the U.S. experience -- I hope
that this recounting will provide you with both useful information and a
sense of excitement for what the future holds. Of course, the United
States is but one model -- we don\'t purport to have all the answers.
But in the United States, we have seen a dramatic increase in consumer
benefits with the advent of competition -- demand and usage are up,
rates are down, and economic growth and job expansion continue unabated.
I am confident that this, too, will be Argentina's experience as it
moves forward on its own path toward competition.

I mentioned before that there are some basic principles to keep in mind.
They are of universal merit and applicability. They are the principles
that Vice President Gore outlined as preconditions to a GII, and they
are at the core of my country's 1996 Telecommunications Act. What are
they? Briefly...

-   First, rely on a foundation of private investment, as I described
    above.

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-   Second, eliminate legal and regulatory barriers to competition.

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-   Third, facilitate open access and interconnection among all
    competitive service providers.

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-   Fourth, create a stable, transparent, and flexible regulatory
    environment.

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-   Fifth, promote universal service.

Focusing now on the U.S. experience, I can tell you that the
Telecommunications Act of 1996 was a tremendous paradigm shift for our
regulatory regime and our industry. At its most basic, the Act sets
forth the policies for movement from monopoly to competition. It gave my
colleagues and me the mandate, and the tools, to pry open the local
phone markets.

-   It aimed to provide choice to previously captive consumers.

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-   It aimed to spur investment and buildout.

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-   It aimed to encourage innovation and competition among providers.

Three and a half years after its passage, how have we fared? I would say
that we're not yet at our destination, but we're well along the way.

By every indicator, consumers are better off, and industry is thriving.

Since the Act's passage, the communications sector of the U.S. economy
has grown by over \$140 billion. Our information technology sector is
growing at a rate twice that of our overall economy. As noted recently
in *Business Week* magazine, "\[t\]hese are the fast-growth, falling
price industries, and as they become a bigger share of output and
employment, it means the U.S. can sustain a higher growth rate without
inflation." In other words, falling prices in the information technology
industries actually brought down overall inflation by 0.7 percentage
points, helping to control inflation and interest rates in a period of
high employment and growth. So you can see the critical role that
telecommunications can play for Argentina, not only as the backbone
supporting other industries, but also as a source of economic expansion
and stability.

Along with investment, hundreds of new companies have entered the
competitive fray. The number of publicly held telecommunications
companies has doubled in the last 5 years. We have approximately 300
mobile phone companies nationwide, and new facilities-based competitive
local providers in every state in the nation. These new companies and
new services have brought with them new jobs.

Of course, all of this has benefited the American consumer even more
directly -- in the pocketbook. In the last 3 years, wireless phone bills
have dropped more than 40% as a third, fourth or fifth service provider
has sprung up in most metropolitan markets. With these falling prices,
subscribership has skyrocketed to 77 million, indicating that mobile
phones have become a valuable tool to our middle class. And just this
month we've seen a real price war for long distance services. Three
years ago consumers paid 20 to 25 cents a minute for long distance. Now
the major carriers are offering plans for as little as 5 cents a minute,
any hour of any day.

As I indicated before, getting here has not been easy. We've hit a few
bumps in the road, but we've always been able to right our course. Doing
so has required strict adherence to that second key principle,
eliminating barriers to entry and taking affirmative steps to promote
competition.

Under the local competition provisions of the 1996 Act, we've sought to
ensure that three paths -- facilities-based competition, unbundled
network elements, and resale -- are fully open to new entrants. This
means knocking down legal or regulatory barriers to entry, as well as
eliminating bottleneck control and anti-competitive incentives of the
incumbent monopoly provider.

I'd like to take a few minutes to describe these methods of entry and
share some of the lessons we've learned. Facilities-based competition is
the easiest to understand, as the new entrant simply constructs a
network and uses its own facilities to reach its customers. Of course,
regulatory action is still necessary because facilities-based
competitors must have the ability to interconnect with other networks
and providers. Otherwise, the incumbent could use its bottleneck
facilities to thwart competitive entry.

Full facilities-based competition may not always be feasible for a new
entrant, as it entails building an entire network at once. For example,
though a new entrant may construct its own switching and long distance
facilities, it may be cost-prohibitive to duplicate the last mile of
facilities -- what we call the "local loop" -- connecting the network to
the customer's premises. Impediments may be based in either economies of
scale or difficulties obtaining access to rights of way. So a critical,
second means of competitive entry promoted by our law is one in which
the new entrant constructs portions of a network and then purchases
access to the remaining essential facilities of the incumbent's network,
such as the local loop. We refer to this in shorthand as "unbundled
network elements." In addition to minimizing barriers to entry, this
encourages innovation in the delivery of service, such as when a new
entrant purchases network elements to mix with new technologies like
packet switching based on Internet Protocol (IP).

Part of the FCC's role has been to establish basic rules of the road
between incumbents who don't want to relinquish their local monopoly and
new entrants who wish to enter the market *precisely* by means of the
incumbent's network. So, for example, we require incumbents to provide
non-discriminatory access at rates, terms and conditions that are just
and reasonable.

Recall that earlier I alluded to a few bumps in the road. Well,
unbundled access has been one of the largest, and it has been litigated
all the way to our Supreme Court. Naturally, incumbents would prefer to
keep competitors off their networks. Earlier this year, the Court upheld
the FCC's decision to require incumbent carriers to offer combinations
of network elements to competitors. The Court asked us to provide
additional support for our decision regarding what constitutes an
"essential" element that must be made available under the Statute, and
we completed that work just two weeks ago.

Resale is the third method of entry contemplated by our law. Resale can
be an effective entry vehicle for new competitors who initially lack the
resources to build their own networks. This is how MCI got its start as
a long distance carrier in the United States. It also has significant
benefits for consumers: as a form of arbitrage, a reseller purchases
large numbers of minutes at a discount and resells them at prices
otherwise unavailable to the end-user. Lower prices stimulate demand and
thus encourage the facilities-based carrier to bring its prices closer
to actual cost. Again, regulatory intervention may be necessary in order
foster resale: our law, for example, requires incumbents to make their
telecommunications services available for resale at wholesale prices.
Many nations have agreed to resale as part of their market-opening
commitments under the World Trade Organization (WTO) Basic
Telecommunications Agreement. I urge Argentina to implement the right to
resale.

Of course, open entry gets you nowhere without the ability to
interconnect with and terminate traffic on other networks. So, a second
key piece of our local competition policy under the 1996 Act has been to
require carriers to provide any reasonable means of interconnection,
including physical collocation. In addition, to limit the incumbent's
incentive to limit interconnection, transport and termination charges
are reciprocal and based on the long-run incremental cost (or forward
looking cost) of providing service on the incumbent's network.

Litigation over several aspects of our local competition provisions has
been unfortunate, and the uncertainty it engendered certainly had some
chilling effect on the development of local competition in our country.
Now that our rules have been upheld in the courts, we are delighted to
see the progress new entrants are making. A recent study shows that
although new entrants still have a tiny portion of local revenues --
approximately 4% last year -- they are growing at a tremendous pace.
Competitive local exchange carrier revenue doubled in 1997 and again in
1998. The number of resold lines has also doubled in the last year.
Perhaps most telling is the financial market's confidence in the
prospects of local competition: the top 20 publicly traded competitive
carriers have total market capitalization of \$33 billion, compared to 6
such companies with only \$1.3 billion capitalization before the Act was
passed.

So I think you'll agree -- we still have many miles to travel. But we
know the promise of competition, as we have experienced in our wireless
and long distance markets. And we are beginning to see our local
competition policies bear fruit. So there is much to celebrate, and much
to anticipate.

Earlier I described the 1996 Act as giving us both the mandate and the
tools to promote local competition. Some of those tools are the means of
entry I've just described. Another essential tool in our kit has been
the FCC's structure as an independent agency. In order to ensure that a
competitive market benefits consumers, it is essential that the
regulator be independent of the incumbent operators and shielded from
political pressure. My colleagues and I are appointed by the President
and confirmed by the Senate for five-year terms, and we cannot be
removed at will. Our accountability goes to the public, with an
obligation to fulfill our statutory duties in the public interest. In
this regard, it is important that we have a fair, transparent, and
predictable regulatory process that is subject to judicial review. With
Argentina's commitment to the principles in the WTO Reference Paper,
your entire industry will benefit from a clear, fair, and stable
regulatory environment.

Regulatory flexibility has also been important as our market structure
has changed. We have already begun to consider how our functions must
change in a competitive environment. In some areas, competition may mean
that regulation is unnecessary to protect the public interest. In
others, it may lead to the opposite result. For instance, with increased
competitive pressures, we have seen some unfair business practices, such
as consumers being switched to a new carrier without their consent. We
call this "slamming", and we have recently adopted strong rules to make
this practice economically unattractive to the unscrupulous provider. I
hope this is one problem we've faced that Argentina will be able to
avoid from the outset.

I began my talk today by emphasizing the tremendous revolution that
telecommunications has brought into all of our lives. I've focused on
the benefits of competition -- how competition will better serve your
industry, your economy and your consumers. Fortunately, our law is
founded on the premise that, most often, competition will serve the
public interest. But there are times when competition, alone, may not be
enough. And so, dating back 65 years to the creation of the Federal
Communications Commission, Congress directed us to ensure that a
national -- indeed global -- telecommunications system is available to
all Americans, "without discrimination on the basis of race, color,
religion, national origin or sex." It has been a critical role of the
FCC to make quality, affordable service available to those who otherwise
would not have access -- such as low income Americans and Americans
living in high cost or rural areas.

As a Latina, as a woman, as a citizen of a rural state, I have devoted
myself to these issues because I know how vital access is in promoting
equality and opportunity.

In general, our teledenisty of 94% suggests that we've done a pretty
good job. But that figure masks disparities of race and income. 95.7% of
White households have a telephone. But for Blacks, that figure drops to
87.8% and for Native Americans on some tribal lands, that figure is as
low as 20%.

In the past, our goal of universal service was pursued somewhat
haphazardly, through a system of implicit subsidies to the local
monopoly carrier. These subsidies shifted costs from rural to urban
customers, residential to business customers, and local to long distance
customers. Such a system of hidden subsidies could not survive a
competitive market, and so Congress directed us to re-work our
cost-support in several fundamental ways.

There are many effective means of providing universal service support --
and I know Hector and his group at CITEL have worked to publish a report
on "best practices" covering many of these alternatives. Let me simply
describe to you what we have done in the U.S. Most importantly, we have
embraced the principles of non-discrimination and competitive
neutrality. All telecommunications carriers pay into a universal service
support fund, based upon their interstate revenues. Correspondingly, all
carriers who pay into the fund are eligible to draw out of the fund if
certified to provide the supported services. This competitive and
technological neutrality benefits us in spurring competition in the
delivery of these services. One example is that wireless carriers are
seeking to provide basic service over fixed wireless systems. In many
rural areas, this can be an extremely efficient alternative.

I know your Secretariat a few months ago announced a "Regalmento General
del Servicio Universal" that is based on a uniform contribution by all
carriers. This is a wonderful development for your country, and I am
eager to see how the fund will be administered.

Beyond access to basic telephony, I have a great concern about the
growing "digital divide" in our country between the information "haves"
and "have nots." Black and Hispanic households are only 2/5 as likely as
White households to have access to the Internet at home. And,
controlling for income, those in rural areas are only half as likely as
those in urban areas to have access. To address some of these
disparities, we have provided discounts for schools and libraries across
the nation to purchase telecommunications services, internal
connections, and Internet access. The discounts are based upon need,
with the poorest schools receiving up to a 90% discount. This program
has been a huge success since the first funding commitments were made,
and our hope is that all schools will be wired by 2000.

The Internet is a great equalizer. A growing, evolving, unstoppable
source of information and knowledge, it has the potential to eliminate
old barriers of geography and wealth. It transcends such distinctions,
and has the potential to further democratize our societies. It can bring
the resources of the Library of Congress in Washington -- the repository
of every publication in the U.S. -- to the fingertips of a schoolchild
in a remote village in my rural home state of New Mexico. For that
matter, it can bring those resources to your children, here in
Argentina, and it can bring the pictures of the Museo Nacional de Bellas
Artes to my son Jorge, back in Washington.

This sharing among nations is what Vice President Gore envisaged those
five years ago. Ensuring access to the benefits of this revolution is
why I took this position, and I suspect it has something to do with the
reason you, too, have chosen to work in this industry. We are all
privileged to be where we are, to know the potential the
telecommunications revolution holds for our countries. With that
privilege, comes responsibility. A recent report by the U.S. Commerce
Department described the challenges we face this way:

> For developing nations, the productivity potential of the digital
> economy offers both hope and worry: with sufficient investment, it can
> provide the means to accelerated development, but without the needed
> investment, developing nations may find themselves falling even
> further behind in an increasingly wired world.

I am so pleased that you have invited me here to speak at this point in
your history. I hope there are some pieces of our experience that you
can draw from. A Global Information Infrastructure cannot exist without
a vibrant Latin American Infrastructure. Argentina, with its impending
liberalization and new universal service regulations, is certainly
helping to lead the way.

Thank you.