# Competition for Regulatory Ideas

Comments of Harold Furchtgott-Roth

Before the Committee on Telecommunications

National Association of Regulatory Utility Commissioners

Los Angeles, California

July 25, 2000

It is great pleasure to be in Los Angeles and a great honor to speak
before NARUC. Today, I would like to discuss competition and regulation.
Typically, when we as regulators speak of competition, we speak of
competition in a *regulated* market: competition for telecommunications,
competition for electricity, or competition for water. But there is
another type of competition---competition among regulators.

What does it mean to compete as a regulator? I believe there are least
five areas that help explain what it means to be a competitive
regulator:

-   Thinking competitively

-   Playing by the rules

-   Appealing controversial decisions

-   Playing smarter

-   Noticing opponents' attacks

## Thinking competitively

What does it mean to think competitively? Consider your favorite sport.
Now imagine your favorite athlete or team. How would you react if your
favorite athlete went up to a competing athlete on another team and
said: "Let's be friends;" or "Let's agree to do things only by
consensus;" or "Let's not challenge each other;" or "Let's promise never
to get cross with each other," or perhaps "Let's collaborate and decide
to do things the same way."

How would you react? You would probably think that there was something
profoundly wrong. Athletes strive to do better than their competitors,
not to engage them in conversations that lead to agreements not to
compete. It is time that State regulators began to think more like
competitive athletes.

### Independent State voices

Why do we have States? There are many reasons. You are not merely an
anachronism perpetuated by the Constitution. The role of State
governments is neither simply to pay homage to the federal government,
nor to collaborate with one another to reach consensus.

In our federal system, each State has a voice. It is a voice that should
be independent, reflecting the views of the State, not coerced into
either silence or agreement by either the federal government or a
majority of States.

### Extolling competition except for ideas

It is popular in Washington, DC for government officials of all stripes
to extol the virtues of competition.

Competition in technology? That's great!

Competition in the provision of telecommunications services? Could not
be better!

Competition in ideas about regulation? Hold on. Let's not get carried
away. Haven't you heard the logic? It goes as follows: "All of the
brightest people are in Washington, are they not? Consequently,
Washington has all of the best ideas about regulation, don't you agree?
When it comes to ideas about regulation, we don't need competition. We
need a monopoly of ideas established by the brightest minds and
implemented from Washington."

For those of us in Washington, we don't really want competition for
regulatory ideas. We don't really want to be challenged, in court or out
of court. We don't really want to compete. We simply want to do what all
monopolies want to do: be left alone and to use the power of government
to protect us from competition. Let's not have any competition from the
States.

### Competitive enterprises

The hallmark of a truly competitive enterprise is to seek out
competition. The hallmark of a failing enterprise is to fight against
being exposed to competition.

The sign of a competitive enterprise is to take on all comers, to defeat
many, and to learn from those that have bested it. The sign of a failing
enterprise is to avoid competition and to hide from it.

A competitive enterprise is not afraid to lose. It competes every day at
every opportunities. Sometimes it wins; sometimes it loses, but it
learns from those losses. A failing enterprise never competes, and
therefore it never wins nor loses. If it competed, it would only lose,
and the only lesson it would learn from the loss would be to avoid
future competition.

### Seek competition

State regulators must not fall prey to those who do not want to see
competition in the ideas of regulation. I urge you to compete with one
another and with the FCC in the battle for the best ideas on regulation.

Please note: I am a federal regulator. I seek to compete with you and
with others. I am not here to be your friend. I am not here collaborate
or to conspire to avoid competition. I seek competition in ideas: your
competition with your ideas.

Don't be afraid to be alone. Don't be afraid to be different, from your
colleagues at your commission, from other States, from the FCC.

Be wary of efforts to force you to surrender your competitive
independence. It is the hallmark of a failing enterprise to get others
not to compete, to co-opt you into silence, into inaction. To threaten
you: "you don't count, you don't matter." Or to seduce you into silence:
"Let's work together, not against each other." Or "Join our
collaborative process, and let's reach a consensus."

### Collaboration, good and bad

Collaboration can be competitive. In the world of academics, where
countless individuals and teams engage in a race for scientific
discovery, and in which combined the talents of two or more researchers
may be greater than their individual efforts, collaboration may be
beneficial and competitive. In science, there is glory, not only in
getting the right answer, but in being first. There is little glory in
being second to replicate the work of others. There is a winner, and
there are others.

Collaboration in the world of government has a different meaning. There
is a finite number of governments. And the result of governmental
efforts has glory in being right, but rarely in being first, or second,
or 50^th^ in a sequence.

Government collaboration today all too often reminds me of the most
famous of government collaboration: Vichy, France. In that
collaboration, there was a horrible winner, and an ignoble loser. In
that instance, "collaboration" was merely a euphemism for having given
up, having lost the will to compete no matter the odds, and preferring
the concession of acknowledged defeat to the challenge of competition.

The next time someone asks you as a government official to collaborate,
or to surrender your independence, I hope that you will at least pause
to ask why. Is it worthwhile? It is, of course, often easier to take the
path of least resistance, to go along with the crowd, to minimize your
efforts, to look the other way, to conform, to be agreeable. That's why
we are in government, isn't it?

The role of the States in not necessarily to be united on any issue,
much less all issues. There may possibly be one view among States, or
two views, or 50 or more views. If you have a view, don't let another
State bully you into changing it. It does not matter if one or 50 States
hold a particular view; if your State or your personal view is
different, so be it.

In my view, the proper role of NARUC is not to insist on a united front
among States, nor even to present a united front, but rather to serve as
a forum for views from States that may diverge. Then NARUC can trumpet
to the world: "Here is the range of views held by our Members."

Why are there States? I believe that States are profoundly important,
not anachronistic ornaments of constitutional federalism. You have a
voice, no more and no less than other States or than the federal
government. In the world of the FCC, States are competitors---worthy
competitors. Our job is not to collaborate, or to cooperate, or to
conspire together. Our job is to compete\--respectfully, aggressively\--
in public forums, for public opinion.

## Playing by the rules

Relative to State Commissions, the FCC has an easy job. We are bound by
one law, federal law. We follow primarily the Communications Act and a
handful of other federal statutes. In contrast, State Commissions must
follow bother federal and State law, and each State law is slightly
different.

State Commissions have important and unique roles under federal law. In
particular, sections 214, 252, 254, and 271 of the Communications Act
and Section 706 of the Telecommunications Act of 1996, among others,
provide for specific responsibilities for State Commissions. State
interpretations of these provisions need not be identical; indeed,
independent interpretations have value.

Each of us as Commissioners, in performing our official functions, must
be responsive to the laws that govern our agencies. We can interpret
these laws with various degrees of expansiveness or narrowness. I
personally prefer narrow interpretations; others prefer expansive
interpretations. Expansive interpretations of vague or ambiguous laws
can lead to unintended consequences. Laws have meaning only to the
extent they establish boundaries on behavior or other action; laws have
no meaning if they can be interpreted to vest in a government agency
limitless and self-determined powers. Similarly, rules that derived from
interpretations of law make sense only when they are based on clear and
unambiguous authority, not when they are based on assertions of broad
discretion derived from vague statutory authority. Let me describe three
examples that have recently been before the Commission that affect State
authority.

### Reciprocal compensation

In many States during the early Section 252 contracts between ILECs and
CLECs, reciprocal compensation terms were agreed that provided for
payments for termination of traffic. After the implementation of these
contracts, many ILECs discovered substantial imbalances in reciprocal
compensation payments, quite possibly related to Internet traffic
originating on ILEC facilities and terminating on CLEC facilities.

Several ILECs petitioned the Commission for relief. Yet, to the extent
there was problem, it was a problem under State-negotiated or arbitrated
contracts, not with federal law or federal rules. In early 1999, the
Commission granted the ILECs partial relief by asserting that Internet
and packet-switched traffic was indistinguishably based on one-call and
interstate traffic. This decision was a departure from Commission
arguments to preserve the enhanced-service-provider exemption based on a
two-call theory. Despite asserting federal jurisdiction over practically
all telecommunications plant and equipment around the world, the FCC
left intact existing State contracts, a logical inconsistency.

A few months ago, the D.C. Circuit vacated and remanded the FCC's
reciprocal compensation rules. The court seemed unpersuaded by much that
was in the Commission order.

Some observers see this issue as a fight between ILECs and CLECs. Others
see it as a fight between old technology and new technology. In a larger
sense, it is also a dispute about whether local networks are under state
jurisdiction or whether the FCC can unilaterally assert federal
jurisdiction indirectly through the reciprocal compensation rules. Make
no mistake: if all packet-switched networks are purely interstate in
nature, there is little future left in State regulation. Some may see
that as a good outcome; others would disagree. In either case, I believe
that it is an outcome that can be reached only statute, not by the
unilateral action of the FCC to expand its jurisdiction based on an
aggressive and expansive reading of existing statutes.

### FCC-FTC advertising guidelines

The recently announced FCC-FTC guidelines on advertising for common
carriers is another example of aggressive statutory interpretation. The
FTC is prohibited by statute from regulating such advertising. The FCC
has no plausible statutory authority to regulate such advertising.

What to do? Rather than issue regulations that would not withstand
judicial review, the agencies cleverly invented some "guidelines." Of
course these are not binding rules, but they certainly have the look and
feel of rules. For the FCC, an agency the regulated common carriers
daily, the mere presence of such guidelines certainly has a chilling
effect on behavior outside of the guidelines. The Commission issued the
guidelines based only on assertions of broad and vague authority.

These federal guidelines are, of course, entirely unnecessary. Consumers
have ample remedies available under State consumer protection laws.
Indeed, the federal guidelines undermine State authority by suggesting
there is a substantial federal remedy, where one is actually not
present.

#### Limited and private negotiations and administrative procedures

In the past year, the Commission has completed proceedings in which the
final orders contained language largely negotiated in private with
selected parties, and which may also have included secret side
agreements. The license transfer for SBC and Ameritech and the recently
concluded CALLS procedure are the most egregious examples. Some of the
side deals, such as on depreciation schedules, may have undermined State
authority.

All of this, of course, violates both the letter and the spirit of the
Administrative Procedures Act. But who is to know? When challenged, the
Commission rests its authority to negotiate these provisions in private
based on broad authority, not specific statutory mandates.

## Appealing controversial decisions

Being competitive in the arena of regulatory ideas means being willing
to challenge and to appeal regulatory decisions that you believe are
erroneous. One of the great strengths of our legal system is the right
of individuals to seek relief in court to resolve disputes concerning
the government's interpretation or enforcement of the law. This
principle extends to individual States seeking relief to resolve
disputes with the federal government.

As a federal official, I must and will side with federal authority, but
I view resolution of these disputes in courts as a healthy rather than
an unhealthy matter. The Supreme Court in *Iowa Utilities* has resolved
some, but by no means all, issues of controversy between the FCC and the
States on jurisdictional matters.

To hold that the FCC has encroached on State authority is not position
that a State should eschew, nor is it a position that a State should
hesitate to advocate in court either individually or collectively. Yet
challenges to FCC authority from States are rare. Earlier in my remarks,
I mentioned three areas where Commission decisions may well have
affected State authority. There are many more examples.

## Playing smarter

Being competitive in the realm regulatory ideas ultimately means being
smarter, having better ideas about regulation than anyone else. Some
people believe all the smart people are in Washington. I don't. Indeed,
at times it seems as if it would be impossible to develop worse ideas
than those developed in Washington.

A case in point is the FCC's universals service cost model that is
applied to large companies to distribute high-cost support. How bad is
it? To begin with, it takes 180 hours to run. Those are hours\--not
minutes, not seconds, not milliseconds. In the year 2000, when computers
can do just about anything in a fraction of a second, the FCC has
trained computers to come up with precisely the wrong answer, and the
computers have rebelled by refusing to provide an answer in less than
the stone-age time of one week. I simply call it "The Model That Doesn't
Work." I can only assume that an approximately right answer for
universal service would take only a fraction of a second to calculate.

It is difficult to interpret the results of the model. They change
depending on the vintage. One of the few consistent results is that most
States receive no high-cost support. Paradoxically, the Joint Board on
Universal Service recently recommended an interpretation of holding
States harmless that was based on phasing out existing support
mechanisms and then relying on "The Model That Doesn't Work." Rather
than being held harmless, many States would be twice harmed: both losing
current support mechanisms and then having to rely on "The Model That
Doesn't Work."

"The Model That Doesn't Work" is based on TELRIC pricing. I am not sure
how the recent Eight Circuit decision holding TELRIC inconsistent with
the '96 Act will affect the model. I am sure, however, that I would not
recommend that States adopt this model for internal State purposes, such
as a State universal service. In a world in which being smarter matters,
it would be hard to do much worse than adopting "The Model That Doesn't
Work."

In many areas of telecommunications regulation, the clever answer is
often elusive. Much fine work at both the federal and State level has
been invested in recent years in developing clever ways of to review
Section 271 applications, to provide funding for universal service
programs, and to calculate access charges. Yet, in each of these areas,
I am not convinced that we have reached the best and final answers. As I
have indicated in my separate statements in each of these matters, I
think there is yet substantial room for improvement. Please don't be
lulled into simply imitating what has succeeded in the past. Imitation
may be the sincerest form of flattery, but it is not a good method of
innovation.

## Noticing opponents' attacks

Finally, being competitive in the realm of regulation requires some
awareness of attacks from the outside. Let me give a recent example of
an attack on State regulatory authority generally to which there has
been relatively little State response. It involves Western Wireless's
efforts to receive Eligible Telecommunications Carrier (ETC) designation
in South Dakota. Western Wireless is a great company, and I very much
admire the company, John Stanton their CEO, and their service offerings.
I wish Western Wireless well in all of their endeavors.

Western Wireless's application for ETC status in South Dakota was
rejected by the State PUC, under Sections 214 and 254, in part on the
basis that Western Wireless was not actually offering the service for
which ETC status was sought. The State Commission's decision was vacated
and is being appealed through the State courts. Thus, there is no
current South Dakota decision. All of this process within the State is
fine.

Recently, the FCC has issued an "advisory opinion," ostensibly under
Section 253, suggesting that the FCC would preempt any State efforts to
limit ETC eligibility. Please read my dissenting statement to see my
many technical concerns with the item. Among these are that ILECs in
most areas of South Dakota receive no federal universal service support,
so it is difficult to see how failure to receive ETC status is a barrier
to entry. Let me highlight two that I believe should be of particular
concern to States.

First, the use of advisory opinions under Section 253 is a dangerous
precedent. The language of Section 253 describes responses to specific
and actual State actions, not hypothetical ones. When the FCC begins
issuing advisory opinions under Section 253, it has the effect of
foreclosing, without a fact record, State consideration of laws and
regulations that might well be consistent with the Communications Act.

Second, in this particular instance, the FCC advisory opinion has the
effect of rendering meaningless any State review of applications for ETC
status and render Section 214(e) hollow. Under the advisory opinion, a
State would be precluded from denying ETC status to anyone who remotely
contemplates offering service at any distant date in the future. And
yet, designating a carrier that is not actually offering service as an
ETC, a State would be effectively precluded from compelling the ETC to
offer service tomorrow as a carrier-of-last-resort.

## Conclusion

Thank you for permitting me to share a few thoughts with you today. I
hope that each of you will seek to be more competitive in the arena of
regulatory ideas. I hope that you enjoy the rest of your convention here
in Los Angeles.