Remarks of

##### Commissioner Susan Ness

**Before the**

**Communications Committee**

**National Association of Regulatory Utility Commissioners**

**San Francisco, CA**

**July 20, 1999**

**(As prepared for delivery)**

####  "The Geology of Telecommunications "

I am delighted to join my colleagues at the Summer NARUC meeting in San
Francisco -- one of my very favorite cities.

It's impossible to come to this city without thinking about geology.
Geology is the story of tectonic plates; those massive pieces of the
earth's crust that come crashing together to form continents and,
particularly around here, grind together to set off tremors and
earthquakes.

I want to take a few minutes this morning to discuss the geology of
telecommunications. After all, in considering the history of the
Telecommunications Act, it's easy to contemplate the earthquakes -- and
the subsequent tremors.

To many of you, our *Local Competition* Order in August of 1996 was a
shock. Those of us at the FCC sure felt the tremors when the 8^th^
Circuit stayed portions of our Order later that year. And the legal
Richter scale shook again when the Supreme Court decided *Iowa Utilities
v. FCC* in January.

The wake of an earthquake can leave aftershocks \-- and often a renewed
sense of community when people band together to rebuild. So let's talk
about how federal and state regulators can work together in the newly
formed landscape.

The FCC and state commissions are partners. I have always believed that
ours is a cooperative, rather than an adversarial relationship.

I said so at a NARUC meeting just a few weeks after the Telecom Act was
signed into law. I said so during the litigation in the 8th Circuit. And
I am still saying so after the Supreme Court's ruling in *Iowa Utilities
v. FCC*.

As I see it, the Telecom Act captures the strengths of each
organization. Where a national framework is needed, the Commission is
well situated to draw from the best practices and ideas of our state
colleagues in providing a common direction and guidance.

Where specific facts must be weighed in applying the national standard
or arbitrating agreements between parties, the states are far better
able to gather and rule on the evidence. State arbitration authority
over interconnection agreements is a prime example of that division of
labor.

Our relationship is based upon practical and functional expertise. In
the Section 271 context, our relationship has truly evolved as a
partnership, where the states have undertaken complete reviews of the
applicant's performance in opening its market, applying Commission
precedent, and interpreting requirements under the checklist.

Even where the Act has not given specific authority to the states, we
have come to rely heavily on our state colleagues.

With this federal-state framework in mind, I'd like to talk with you
about the future of local telephone competition in the wake of the
Supreme Court's decision.

Our shared responsibility extends to ensuring that new entrants have
access to unbundled network element \-- UNEs \-- a critical component
for competition. As in other contexts, I believe that the FCC and the
states both have a vital and complementary role to play.

While I would like to examine some of the specific questions raised in
the UNE proceeding, let me first state for the record that my mind is
not made up on these issues. I have not yet had the opportunity to meet
with all the parties and review all the comments. I am just beginning to
engage with my colleagues at the Commission. My goal today is simply to
explore basic principles and to float some ideas.

***Unbundled Network Elements***

As you all know, back in August 1996, the Commission established a list
of seven network elements that the ILECs were required to unbundle.

I'm the only current FCC Commissioner who voted for the original seven.
With only six months to conduct the proceeding (which, as an aside, were
six of the most intense months I've experienced during my five-years on
the Commission!), and given the limited exposure to local competition at
the time \-- I think we did a pretty darn good job.

But perhaps we were a little bit too cavalier about giving real meaning
to the "impairment standard." At least that's what seven men and women
in black robes have said, and I'm not about to disagree.

As with everything else, hindsight is 20-20. I'm delighted to take
another stab at it \-- especially with three years of experience to
inform our decision. And, maybe we required a little too much unbundling
in some areas and were not specific enough in others. Now we have the
opportunity to get it right.

# The Iowa Utilities Decision

First, I'd like to walk through a few significant aspects of the Supreme
Court's decision. Last January, the Supreme Court remanded to the FCC
the portion of our *Local Competition Order* concerning designation of
unbundled network elements.

In a nutshell, the Court held that we correctly identified what
constitutes a network element, but failed to adequately consider the
"necessary and impair" standard when we gave competitors "blanket
access" to the incumbents' networks.

In essence, the Court criticized the FCC for not applying some limiting
standard. The court directed us to revisit this issue and, this time, to
consider, among other things, whether network elements are available to
competitors outside of the incumbent's network.

This summer, we will be taking a fresh look at each network element
identified in our Local Competition Order to see whether it should
remain on a national list. We also will be considering proposals
requesting us to add elements to the list.

We will determine -- as the Act requires -- (1) whether access to
proprietary network elements is \"necessary\" and (2) whether the
failure to provide access to non-proprietary network elements would
\"impair\" the ability of competitive carriers to provide services they
seek to offer.

# 

# Issues Raised by the Further Notice

In response to the Supreme Court's remand, the FCC has issued a Further
Notice of Proposed Rulemaking on unbundling requirements. This notice
seeks comment on which unbundled elements incumbent carriers must make
available on a non-discriminatory basis under Section 215(d)(2) of the
'96 Act.

I am committed to moving quickly to resolve these issues and eliminate
the uncertainty that has plagued competition entering local
telecommunications markets. Any delay only serves to block competition.
In the current environment, competition delayed is competition denied.

# UNE Remand Proceeding

To simplify -- perhaps over simplify -- we have two big tasks ahead of
us:

-   First, we must develop a standard that gives meaning to the terms
    "necessary" and "impair"

-   Second, applying that standard, we must identify which network
    elements should be unbundled, under what circumstances, and for how
    long.

# Step One \--

#  

With respect to Step One \-- developing a standard \-- the Supreme Court
offered some guidance on this issue (or at least told us what will *not*
fly!). Again, I underscore that I am in the early stages of considering
these issues and I have not made up my mind.

In reality, there are two standards that we must develop, because there
are two parts to section 251(d)(2): First we must determine what network
elements are "proprietary in nature" and whether access to those
elements is "necessary."

Then we must determine whether failure to provide access to
non-proprietary network elements would "impair" the ability of other
carriers to provide service.

By singling out network elements that are "proprietary in nature," I
assume that Congress recognized that a higher standard should apply when
a company invests money to develop a unique facility or application.

Throughout our history, we have encouraged innovation and
experimentation and protected the rights of the inventor through patent
and intellectual property rights. Our task is to balance the need of
competitors to gain access to certain parts of the incumbent's network,
while at the same time preserving incumbents' incentives to innovate.

When considering whether a competitor is "impaired" from providing
service, the Supreme Court has directed us to look at not only whether
the service can be delivered over part of an incumbent's network, but
also whether the competitor can self-provision the element or purchase
it from another provider.

Indeed, purchasing capacity from other providers is more relevant today
than it was three years ago, because there has been a significant
increase in CLEC deployment of new facilities. Thus, a CLEC wholesale
market is beginning to develop.

But, how do you judge whether a competitor can self-provision an element
when the market has different sized competitors with different business
plans, some more efficient than others?

For example, a large, established CLEC with lots of resources and a mass
market entry strategy may have very different unbundling needs than a
small, start-up CLEC targeting a niche market.

In developing an appropriate standard, therefore, we need to consider a
number of factors to determine whether an efficient competitor is
reasonably able to compete with an incumbent without access to the
incumbent's network.

Which leads me to step two...

**Step Two --**

Step two requires us to apply the standard to identify a list of
unbundled network elements. Although I am not yet prepared to opine on
whether I think the list should be 3, 5, or 9 UNEs, one thing is clear:
there still is a need for a national list. Why?

First, the language of section 252(d) requires "the Commission" \--
meaning the FCC \-- to determine what network elements should be made
available to competitors. That language squarely places responsibility
on the FCC to develop a list.

Moreover, the majority of commenters \-- including some states \--
support this idea. New entrants must have a measure of certainty in
order to proceed. Wall Street needs regulatory certainty in order to
invest.

It would be extraordinarily difficult for a new entrant planning a
nationwide mass market offering to construct a business plan without
knowing that at least some network elements are available on a national
basis. And the litigation and regulatory costs and delays would be
prohibitive.

We must establish clear expectations that will allow competitors and
incumbents alike to make the strategic decisions essential for
competition. At the end of the day, we must have a regime that works in
all 50 states -- not some lesser number.

What makes our task more difficult, however, is that not all network
elements are created equal. It may never make economic sense for
competitors to duplicate some parts of the ILEC network.

Take residential loops, for example. Not only is digging up streets
costly, it is terribly unpopular. Some people thought that the FCC's
decision to fine Howard Stern created a public outcry. But imagine what
we'd hear if multiple carriers all start digging up the street**s** in
front of people's driveways -- one after the other.

On the other hand, a competitive market for some of the other network
elements has already started to develop. If reliable customer
information is widely available at reasonable prices, operator services
and directory assistance may be examples of services that new entrants
could readily provide themselves or purchase on the open market.

Other network elements \-- switching for example \-- fall somewhere in
between. In many major metropolitan areas new entrants have installed
their own switches primarily to serve business customers. Some
statistics indicate that competing carriers have installed as many as
700 switches nationwide \-- another example that the Act is working.

These numbers also suggest that competitors are no longer impaired if
they cannot obtain unbundled switching in major business centers.

But unbundled switching may still be necessary to serve residential and
rural markets for the foreseeable future. We look to our state partners
as we gather the facts.

Competition develops at a different pace and on a different scale in
different places. Thus, the wholesale market for certain elements will
develop at different rates. Reliance on the ILEC network will therefore
vary by geographic area.

It necessarily follows, therefore, that if we are to take into
consideration the availability of elements outside of the incumbent's
network, unbundling requirements cannot always be uniform.

By now, I have all parties to this debate quaking in their shoes.
Remember -- as I said before -- I have not reached any conclusions yet.

Another very controversial issue raised by parties is access to
facilities to provide advanced services. Incumbents claim that
unbundling requirements reduce the incentive to invest and innovate.
They note that, unlike copper loops which are already strung or in the
in ground, DSLAMS and packet switches require extensive new investment
for all, incumbent and insurgent alike.

On the other hand, new entrants argue that they need unbundling \-- at
least initially \-- to fill out a footprint. It is impossible to
collocate everywhere at once. Our challenge is to determine whether, if
we do not require unbundling, a new entrant's ability to provide service
is impaired. We are just beginning to unearth all of the complexities of
this debate.

No matter what list of elements we at the FCC determine are necessary
for competition on a nationwide basis, there may be some network
elements that states wish to add to the list. The national list should
be a foundation upon which states may elect to add additional unbundled
elements.

Some of you requested that authority in your filed comments. We
originally so ruled, and I think it was the right decision.

Although the FCC can determine what *minimum* standards are necessary to
create competition, you have a much better understanding of what
additional elements are essential to facilitate competition in your
local markets.

Indeed, the experience at the state level over the past few years is
instructive. After we released our *Local Competition Order* in August
of 1996, several states commenced state proceedings and added such
elements as dark fiber to the national list. States are terrific
laboratories for innovation.

# 

Of course, our job does not end after Steps One and Two. We must also
think ahead toward the day when there is a fully competitive
marketplace.

Will it still be necessary for each of these elements to be unbundled?
At what point and how should an element be removed from the list? What
is the role of the state commissions? Who bears the burden of proof?

Again, we want to encourage efficient local competition, not inefficient
competition that is sustained by regulatory fiat. I recognize that it
takes time \-- and considerable capital \-- to build a network
infrastructure.

I am heartened by what appears to be growing interest by some incumbents
in marketing their facilities wholesale. These incumbents presumably
have concluded that it is better to have competitors leasing portions of
*their* network rather than having them fill out their footprint by
leasing portions of an *alternative* provider's network.

Wouldn't it be nice if the market drove unbundling rather than federal
and state action?

# 

### Conclusion

Now, I've talked about geology and earthquakes. But destruction isn't
the only consequence of tectonic shifts. Continents are formed when
tectonic plates come together; when the earth's crust meets to form the
Rocky Mountains or, in my part of the country, the Appalachian mountain
range.

This nation is a continent, in every sense of the word. Different forces
have meshed together to form one country that stretches from ocean to
ocean. And our history of spanning the continent is a history that
recognizes the strength that comes from the diversity of different
regions . . . and different peoples.

So, too, in the geology of telecommunications, regulators at the federal
and state level need to recognize the diverse strengths we together
contribute to the new competitive landscape of telecommunications.

Of course I've used a metaphor of telecommunications and geology. Let me
conclude by telling you now a real story of telephones and earthquakes

On April 30, 1906, the San Francisco Chronicle reported that despite the
devastation left by the great earthquake, this city's telephone system
was left largely intact. In the parts of the city that were not burned,
normal telephone service was restored within two weeks of the disaster.

Even though the telephone company estimated that 33,000 out of 52,000
subscribers were lost, the company reported that its long distance
business was booming. People were calling all across the continent. In
the words of a company executive, "the fire seems to have created a boom
in telephoning."

Now I don't mean to extol the virtues of turn-of-the century monopolies
or suggest that natural disasters are good business. After all, I
suspect that, if there were a competitive market in 1906, there might
have been a greater incentive for the phone company to restore service
in less than 14 days.

But we can celebrate how the telephone back then was an essential
element of people's lives -- especially in times of disaster. People
*relied* on the telephone -- whether it was to call their families and
friends to tell them that they had survived, or to request supplies and
labor to rebuild the city -- the phone network was critical to
rebuilding the city and rebuilding people's lives. And so it is today.

The decisions we make today to facilitate local telephone competition
will have a great impact on people's lives and on the future of the
American economy.

We will be looking to you \-- our state partners \-- for your help on
unbundling and other critical issues as -- together -- we work to make
competition a reality.

Thank you.