*Pages 1--7 from  Microsoft Word - 21778.doc*
 Remarks  of 
 Michael  K.  Powell  Chairman 
 Federal  Communications  Commission 
 at  the  Goldman  Sachs  Communicopia  XI  Conference 
 New  York,  NY 
 October  2,  2002  [as  prepared  for  delivery] 


 I.  Introduction 
 Good  afternoon.  I  want  to  thank  Goldman  Sachs  for  inviting  me  to  speak  at  this  years  Communicopia  Conference  it  is  certainly  a  pleasure  to  be  here  before  you  today,  although  I  do 
 wish  it  was  under  better  circumstances  for  the  telecommunications  industry. 
 This  years  conference  finds  us  in  the  midst  of  difficult--  and  for  many  dire  times.  This  is  an  industry  suffering  there  have  been  nearly  500,000  jobs  lost,  a  reported  $2  trillion  of 
 market  value  extinguished,  and  by  some  estimates  companies  are  laboring  under  nearly  $1  trillion  in  debt. 


 Corporate  governance  scandals,  over-  capacity,  hyper-  competition  in  some  markets,  a  retrenchment  of  capital,  continuing  credit-  rating  downgrades,  continued  cuts  in  work  force  and 
 capital  expenditures  and  bankruptcies  sadly  characterize  the  day. 
 These  difficult  times  in  the  telecommunications  industry  have  understandably  raised  anxiety  high,  sometimes  even  bordering  on  hysteria. 


 And,  as  is  customary  in  the  world  of  Washington,  the  anxiety  is  being  translated  into  wails  of  injustice,  cries  for  salvation,  finger  pointing  and  recriminations.  It  is  sometimes  hard  to 
 distinguish  debate  over  war  with  Iraq  and  telecom  policy. 
 It  is  challenging  to  sort  through  the  noise  to  decipher  fact  from  rhetoric. 
 Indeed,  I  recently  met  with  a  senior  Senator  who  expressed  in  exasperation  that  he  had  no  idea  who  was  right  and  who  was  wrong.  I  told  him  that  in  a  way  they  are  all  right  and  all  wrong. 
 He  did  not  seem  particularly  comforted  by  my  answer. 
 The  result  has  been  an  unsettling  lack  of  consensus  on  what  to  do,  if  anything,  or  the  best  approach  to  cure  the  telecommunications  industrys  ills.  The  Senator  concluded,  Mr.  Chairman, 
 this  will  have  to  be  on  your  shoulders  do  something,  but  I  have  no  idea  what  that  is.  This  was  not  particularly  comforting  to  me. 
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 There  is  a  strengthening  consensus  however  that  the  industry  is  in  real  trouble,  that  its  difficulties  are  having  real  impacts  on  our  Nations  economy  and  that  there  have  been  real  policy 
 failings  that  have  played  a  role  in  the  industrys  demise. 
 II.  Steps  to  Economic  Recovery 
 The  telecommunications  market  suffers  from  many  ills  and  I  believe  it  will  take  efforts  from  all  stakeholders  to  bring  back  prosperity  industry,  state  and  federal  government,  Wall 
 Street  and  Main  Street.  I  think  there  are  some  clear  critical  steps  that  must  form  the  foundation  for  any  lasting  recovery. 


 First,  the  government  and  industry  leaders  must  ruthlessly  root  out  corporate  fraud.  The  deplorable  and  despicable  actions  by  those  select  few  in  the  industry  must  be  uncovered  and  the 
 perpetrators  punished.  As  a  member  of  Presidents  Corporate  Fraud  Task  Force,  I  echo  the  resounding  resolve  of  the  President  that  if  you  breach  the  trust  of  the  American  public,  we  will 
 find  you  and  we  will  punish  you.  Investment  activity  will  not  return  if  there  is  not  confidence  in  corporate  governance,  or  the  company  books. 


 Second,  we  must  work  to  restore  the  financial  soundness  of  the  industry  by  taking  the  painful,  but  necessary  steps  of  cleaning  up  bloated  and  often  opaque  balance  sheets.  Firms  must 
 find  ways  to  cut  costs  and  pay  down  the  debt  that  hangs  over  this  industry.  The  best  companies  with  the  best  leadership  are  those  committed  to  restoring  financial  fundamentals.  Those  that  are 
 should  be  rewarded  and  those  that  are  not  should  be  abandoned. 
 Third,  to  address  over-  capacity,  hyper-  competition,  weak  pricing  power  and  falling  revenues,  many  sectors  of  the  industry  must  undergo  some  prudent  restructuring.  Let  me  be 
 clear,  this  Commission  will  block  transactions  that  are  anticompetitive  and  harm  consumers;  however,  where,  as  here,  the  market  must  shake  out,  no  transaction  can  or  will  be  deemed 
 unthinkable  before  the  application  is  even  filed  with  the  Commission.  This  Commission  will  review  mergers  on  their  merits,  and  not  attempt  to  shape  the  right  industry  structure  by  public 
 musings. 
 Fourth,  as  communications  markets  mature  and  the  opportunity  for  further  market  penetration  wanes,  telecommunications  carriers  will  have  to  expand  beyond  the  traditional 
 business  of  selling  access  to  their  networks  and  begin  to  offer  new  services.  In  the  communications  space,  we  see  broadband,  and  wireless  technologies  such  as  ultra-  wideband  and 
 IP  telephony,  as  key  sources  of  revenue  growth  offering  consumers  a  wealth  of  new  benefits  in  the  years  to  come.  To  realize  this  future,  however,  it  will  be  vitally  important  that  new 
 investment  capital  flow  from  you  the  financial  community  so  that  todays  innovations  can  become  tomorrows  key  revenue  drivers. 


 Fifth,  and  this  is  where  I  would  like  to  focus  my  comments  today,  federal  and  state  policy-  makers  must  implement  reform  to  create  genuine  and  viable  economic  and  regulatory 
 foundations  for  communications  services,  growth  and  competition. 
 III.  Regulatory  Reform  Can  Government  Drive  Economic  Productivity? 
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 Any  discussion  of  how  to  revive  the  telecom  economy  must  start  by  asking  whether  the  government  can,  in  fact,  drive  economic  productivity. 
 More  particularly,  do  regulators  have  at  their  disposal  tools  of  sufficient  power  to  drive  forward  economic  growth  and  productivity  by  altering  the  telecommunications  regulatory 
 landscape? 
 The  market  will  always  be  the  principal  driver,  but  I  think  the  answer  is  yes.  Although  the  Telecommunications  Act  of  1996  is  far  from  perfect,  Congress  was  wise  to  explicitly 
 recognize  that  the  market  would  evolve,  or  even  convulse  as  a  result  of  the  massive  changes  it  was  introducing  in  the  market. 


 To  respond  to  upheaval,  Congress  legislated  mechanisms  to  re-  evaluate  and  calibrate  the  incentives,  rights,  obligations  and  competitive  landscape  of  the  marketplace  that  underlie  the 
 regulatory  regime.  By  creating  standards  for  assessing  the  terms  and  conditions  of  entry  and  access,  by  forcing  the  Commission  to  review  its  rules  periodically,  and  by  granting  powers  of 
 forbearance  and  preemption,  Congress  invested  state  and  federal  regulators  with  the  tools  and  the  daunting  responsibility  to  use  them  to  create  workable  economic  foundations  for  competition. 


 The  tools  are  there  to  respond  to  changed  conditions  if  only  we  have  the  courage  to  use  them. 
 Past  Policies 
 Times  have  changed  and  policies  must  change. 
 In  implementing  the  1996  Act,  previous  Commissions  were  faced  with  a  different  context  the  market  was  booming.  Internet  ecstasy  had  enraptured  any  one  who  had  a  way  to 
 touch  its  sacred  robes.  The  promise  of  a  new  paradigm  that  abandoned  the  natural  monopoly  thesis  and  saw  a  promised  land  of  infinite  competitors  was  fully  embraced. 


 In  first  implementing  the  96  Act,  regulators  were  writing  on  a  blank  slate.  Their  judgments  were  necessarily  predictive,  because  introducing  local  competition  on  this  scale  had 
 not  ever  been  fully  attempted.  The  policy  principles  were  clear  and  unvarnished: 
 Government  policy  was  to  create  a  competitive  industry  to  compete  in  the  local  telecommunications  market. 


 And  it  did. 
 Government  policy  was  to  provide  extraordinary  advantages  to  competitive  entrants  in  order  to  bring  competition  into  being  rapidly. 


 And  it  did. 
 Government  policy  also  explicitly  and  implicitly  signaled  that  it  would  protect  these  new  entrants  from  failure.  No  matter  how  weak  or  shoddy  the  fundamentals  or  poor  business  models 
 were,  and  no  matter  how  irresponsible  the  debt  levels  or  exaggerated  the  growth  expectations 
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 were,  policy  promised  that  all  competitors  could  be  salvaged  and  sustained  in  the  name  of  competition. 
 It  is  here  where  the  governments  pro-  competitor  industrial  policy  cracked.  It  could  not  possibly  protect  against  these  shortcomings. 
 The  reason  is  simple  money  flows  in  the  free  market.  While  the  terms  and  conditions  of  access  to  the  market  could  reside  and  be  controlled  by  the  government,  capital  could  not. 
 Government  was  not  offering  to  pay  directly  to  achieve  its  objectives.  The  capital  needed  to  build  the  information  autobahn;  the  cash  necessary  to  fund  competitive  entry;  the  dinero 
 necessary  to  lay  fiber,  install  switches  and  set  up  billing  systems;  the  coin  critical  for  paying  to  open  the  network;  ---  all  had  to  come  from  the  free  capital  market. 


 Capital  follows  its  own  rules  and  not  those  of  the  government.  It  demands  a  return.  It  will  not  follow  where  debt  has  ballooned  and  credit  has  suffered.  At  the  end  of  the  day,  no 
 matter  what  the  government  policy,  it  is  inconsequential  if  cash  will  not  go  along.  Government  policy  needs  to  follow  the  rules  of  capital  and  investment,  rather  than  the  other  way  around. 


 To  be  sure,  the  pro-  competitive  policies  did  help  attract  capital  to  sample  the  opportunity.  But  it  was  obvious  the  market  was  over-  valued  and  that  revenue  was  not  on  the  horizon.  Here, 
 the  investor  community  bears  serious  responsibility.  It  knew  or  should  have  known  that  the  fundamentals  did  not  justify  the  wash  of  cash.  The  bubble  had  clearly  shown  itself,  yet  every 
 one  wanted  to  sip  the  quick  riches  before  the  dam  broke. 
 And  when  the  first  signs  of  trouble  from  the  dot  com  crash  surfaced,  capital  went  running  scared.  It  is  sort  of  like  a  group  of  high  school  kids  that  break  into  a  pool  to  skinny  dip  at  night. 
 They  all  know  they  are  not  supposed  to  be  there,  but  came  nonetheless  for  some  quick  thrills.  The  second,  however,  that  someone  screams,  COPS  the  group  flees  at  light  speed.  When 
 investors  saw  the  first  sign  of  trouble  in  this  sector,  they  did  the  same.  They  fled,  leaving  the  poor  guy  they  pressured  to  let  them  in  holding  the  bag. 


 When  the  capital  woke  up  to  the  dangers,  it  exited  the  market  at  dizzying  speed.  The  government  was  left  powerless  to  stop  the  exodus  of  capital  when  King  Cashs  needs  could  not 
 be  met.  There  was  no  rule  or  regulation  that  could  make  it  stay. 
 F.  A.  Hayek,  in  his  famous  book,  The  Road  to  Serfdom,  observed:  We  are  ready  to  accept  almost  any  explanation  of  the  crisis  .  .  .  except  one:  that  the  present  state  of  the  world  may 
 be  the  result  of  genuine  error  on  our  part  and  that  the  pursuit  of  some  of  our  most  cherished  ideals  has  apparently  produced  results  utterly  different  from  those  which  we  expected. 


 It  is  time  to  look  critically  at  our  actions  and  their  failure  to  produce  the  hoped-  for  results. 
 What  we  have  learned 
 In  contrast  to  the  initial  implementation  of  the  1996  Act,  we  now  are  armed  with  more  than  predictive  theory  in  developing  our  rules.  We  have  nearly  seven  years  of  experience.  We 
 have  seen  the  criticality  of  tailoring  our  policies  to  respect  the  capital  needs  of  the  market.  And  we  have  seen  how  monumental  the  impact  on  our  economy  is  when  things  go  seriously  wrong. 
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 Government  must  now  approach  the  review  of  its  regulatory  structure  with  these  lessons  understood  and  digested.  It  can  advance  and  implement  a  regulatory  structure  that  more 
 faithfully  answers  more  to  capital  investment,  rather  than  airy  political  imperatives. 
 This  is  what  the  Commission  is  doing  today. 
 Just  as  corporate  scandals  must  be  rooted  out,  and  just  as  balance  sheets  must  be  repaired,  regulatory  foundations  must  be  restored  to  reflect  sounder  economic  fundamentals.  All  of  these 
 things  are  necessary  to  entice  a  return  of  investment. 
 This  view  is  frequently  attacked  and  mischaracterized  often  purposefully  by  those  whose  self  interest  is  furthered  as  anti-  competition  or  pro-  monopoly.  I  reject  this  homonym 
 completely  competition  can  and  will  succeed,  but  only  if  fundamentals  represent  genuine  and  sustainable  economic  competition. 


 We  must  not  confuse  change  that  adversely  impacts  a  particular  competitor  as  synonymous  with  hurting  competition. 
 It  is  exactly  that  kind  of  thinking  that  invites  political  power  struggles  to  compel  policy  to  choose  sides  between  competing  supplicants  rather  than  advance  sound  economic  structures. 
 Twin  Imperatives 
 Instead,  under  the  statute  and  given  the  current  characteristics  of  this  market,  we  must  be  guided  by  twin  imperatives. 


 First,  we  fully  recognize  the  dangers  of  continued  monopolization  and  control  of  critical  facilities.  Our  enforcement  policies,  our  faithful  application  of  section  271,  not  to  mention  the 
 backdrop  of  antitrust  law,  are  all  squarely  targeted  at  these  concerns. 
 But,  there  is  a  second  imperative  that  is  more  frequently  neglected  by  regulators.  That  is  in  introducing  competition,  we  should  no  more  trust  the  promised  benefits  and  representations  of 
 competitive  entrants  as  we  do  the  promises  to  do  no  harm  from  incumbents.  We  must  insist  on  market  fundamentals  that  provide  proper  incentives  for  long  term,  sustainable  competition. 


 Just  as  we  are  aggressive  in  policing  anticompetitive  behavior,  we  should  be  equally  aggressive  in  developing  incentives  that  push  entrants  to  enter  in  a  manner  that  offers  long-  term, 
 sustainable  choice  and  meaningful  welfare  for  consumers. 
 Economic  recovery  in  the  telecommunications  space,  as  it  is  for  the  economy  as  a  whole,  rests  on  spurring  capital  expenditures.  We  need  service  providers  buying  switches  and  other 
 equipment  from  the  Nortels,  Lucents  and  Ciscos,  who  are  ever  more  distressed  than  the  service  industry.  Such  companies  are  innovators,  the  R&  D  arms  that  have  kept  the  network  at  the 
 cutting  edge  of  the  world.  They  must  survive  for  our  future. 
 Economic  recovery  means  building  business  that  can  expand  employment  opportunities  for  our  Nations  citizens. 
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 It  means  bringing  real  competitive  choice  to  consumers  and  enhancing  consumer  welfare  through  differentiated  products  and  services  and  differentiated  pricing  packages. 
 It  means,  in  short,  investment  in  facilities.  For  only  through  facilities-  based  competition  can  an  entity  offer  true  product  and  pricing  differentiation  for  consumers. 
 Only  through  facilities-  based  competition  will  corporate  spending  on  equipment  thrive. 
 Only  through  facilities-  based  competition  can  a  competitor  lessen  its  dependency  on  an  intransigent  incumbent,  who  if  committed  to  frustrate  entry  has  a  thousand  ways  to  do  so  in 
 small,  imperceptible  ways. 
 Only  through  facilities-  based  competition  can  an  entity  bypass  the  incumbent  completely  and  force  the  incumbent  to  innovate  to  offset  lost  wholesale  revenues. 


 Only  through  facilities-  based  competition  can  our  Nation  attain  greater  network  redundancies  for  security  purposes  and  national  emergencies. 
 IV.  What  is  the  Commission  Doing  to  Effectuate  Positive  Change? 
 We  must  remember  that  the  difficulties  in  the  telecommunications  industry  were  present  long  before  this  season  of  corporate  scandals  fell  upon  us.  It  pre-  dated  the  tragic  events  of  9/  11, 
 or  the  current  upheaval  in  the  stock  market. 
 The  destructive  cracks  in  this  industry  surfaced  some  time  ago. 
 Seeing  the  need  to  take  action,  we  initiated  key  rulemakings  intended  to  tackle  these  and  other  issues  long  before  the  corporate  scandals  and  unrest. 


 We  initiated  last  fall  a  major  review  of  the  Commissions  unbundled  network  element  and  access  policies.  This  proceeding  is  only  months  from  completion  and  it  will  provide  a 
 meaningful  opportunity  to  improve  the  regulatory  foundations  of  competition. 
 We  also  initiated  a  comprehensive  review  of  the  appropriate  regulatory  regime  for  the  provision  of  broadband  services.  Such  new  services  are  going  to  be  indispensable  to  recovery 
 and  the  long-  term  growth  prospects  of  the  industry.  This,  too,  is  around  the  corner. 
 Because  we  started  these  proceedings  in  the  early  stages  of  the  turmoil  in  this  industry,  we  are  now  only  a  few  short  months  away  from  concluding  these  proceedings,  as  well  as  others 
 intended  to  assist  the  competitive  industry. 
 We  are  also  pursuing  equally  ambitious  initiatives  in  the  areas  of  spectrum  policy  and  media  ownership  that  we  believe  will  have  significant  and  positive  impacts  on  the  market  and  for 
 consumers. 
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 We  also  must  emphasize  that  we  cannot  succeed  alone.  We  share  authority  with  the  states.  States  have  yet  to  tackle  critical  issues  such  as  retail  rate  rebalancing  and  universal 
 service  reform.  These  and  other  issues  are  vital  if  our  objectives  are  to  be  realized. 
 Finally,  we  are  now  constantly  looking  for  targets  of  opportunity  that  might  stimulate  positive  economic  activity,  or  relieve  financial  stress  on  the  industry. 


 V.  Conclusion 
 What  has  changed  since  we  started  these  proceedings  is  that  the  industrys  troubles  have  deepened  and  they  have  spread. 


 Corporate  scandals,  WorldComs  bankruptcy  one  of  over  60  in  this  industry  and  the  declining  values  in  the  equity  markets  have  brought  with  it  an  intense  anxiety. 
 The  result  has  been  calls  for  the  Commission  to  do  something  immediately  though  what  exactly  that  something  is  enjoys  little,  if  any,  consensus  across  the  political  or  industry  spectrum. 
 We  do  not  have  the  luxury,  however,  to  wait  until  a  clear  consensus  is  formed. 
 But  these  are  major  and  tremendous  questions.  It  is  vitally  important  that  we  not  only  do  them  quickly  but  that  we  do  them  right.  For  the  much  needed  regulatory  stability  and  clarity  to 
 come  into  focus  for  this  industry  our  decisions  must  be  sound  and  judicially  sustainable  a  shortcoming  that  has  plagued  prior  Commission  efforts  in  this  area.  Those  unhappy  with  our 
 choices  have  never  hesitated  to  litigate  to  attack  them. 
 We  have  reached  a  pivotal  point  in  this  industry  and  we  are  in  the  process  of  determining  what  changes  to  the  regulatory  framework  are  indicated.  The  time  has  come  to  stop  the  finger 
 pointing  and  recriminations  about  what  happened  and  whose  fault  it  is  and  instead  to  focus  on  solutions. 


 Few  are  prospering.  Few  are  growing.  Few  are  spending.  Few  are  investing.  The  status  quo  is  certain  death  and  can  no  longer  be  considered  a  viable  option. 
 Winston  Churchill  once  remarked  Americans  always  get  it  right,  but  only  after  exhausting  the  alternatives.  We  have  tried  the  alternatives;  it  is  time  to  get  it  right. 
 There  is  little  prospect  Congress  will  act  soon,  so  the  task  falls  to  us  and  we  welcome  it. 
 For  in  the  immortal  words  of  President  Reagan:  If  not  us,  who?  And  if  not  now,  when? 
 Thank  you. 
 -  FCC  - 
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