NEWS                                                      November 15, 1994

         CHAIRMAN HUNDT URGES MORE COMPETITION, LESS REGULATION,
                            AT NARUC MEETING 
                                    
     Today, FCC Chairman Reed Hundt urged his audience at the 106th Annual
Regulatory Luncheon of the National Association of Regulatory Utility Commissioners
(NARUC) to join him in creating a regulatory structure that relies less on government
regulation and more on marketplace competition. 

     ". . . We at the FCC began to lay out fair rules of competition for the telephone
companies to enter the video business, and for the cable companies to add capacity to deliver
new channels, broadband interactive services, wire and wireless telephony, and multimedia. 
I am referring to our Video Dialtone and Cable Going Forward decisions."

     "Competition in a marketplace governed by fair rules will itself determine the
winners.  But we know for certain that the ultimate winners will be the economy, consumers
and American working men and women looking for jobs in the  booming communications
sector." 

     Chairman Hundt acknowledged that a simple solution to regulatory problems is
always more appealing that a complex solution but  he said that while a simple correct
answer is better than a complex correct answer, a simple wrong answer is unacceptable.  "In
all events, the real challenge for everyone is to appreciate the difficulty of the problems of
transmission from monopoly to competition.  Conclusory caterwauling against alleged
complexity cannot simplify the problems that we must deal with." 

     Chairman Hundt praised the states that are adopting incentive-based systems of
regulation for local exchange carriers and removing barriers to entry into local markets.   He
encouraged increased federal-state cooperation toward their common goals of competition,
efficiency and consumer satisfaction.  He also noted the need to find a way to make the Joint
Board process more productive and effective at problem solving. 

     "Perhaps, the most critical area for federal-state cooperation is universal service
reform," Chairman Hundt said.  He noted that too many Americans still lack basic telephone
service, disproportionately lower-income families.   He continued, "perhaps our worst failure
in providing universal service is to . . . school age children." He stressed that, just as with
other consumers,  schools should have  the ultimate decision as to what services would best
serve their needs -- wireline, wireless,  or satellite  connections provided by a telco or a
cable franchisee.
                                  - FCC -

                          SPEECH BY REED E. HUNDT
               CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION
                                    
                    106th ANNUAL REGULATORY LUNCHEON
               NATIONAL ASSOCIATION OF REGULATORY UTILITY 
                              COMMISSIONERS
                              RENO, NEVADA
                            NOVEMBER 15, 1994
                                    

Thank you, Nan Norling, for the kind introduction.  President Bissell, thank you also for
inviting me to speak at the annual regulatory luncheon.

So here I am out from Washington, D.C., taking my chances in Reno, Nevada:  the "biggest
little city in the world" (as it calls itself).  If the new Congress lives up to its promises to
shrink government, I suppose we'll be calling Washington the littlest big city in the world.

One of the messages of the election, I read in the paper, is that people are hostile to
government and in particular to Democrats in government.  I'm not too concerned about this. 
After all, I regulate the cable industry:  one thing I know is trouble.

But I read in the election results a clear message that the people want the government to do
less -- they want the federal government to do less, and they want the state government to do
less.  At the same time, I've never met a voter who wants to give up our jobs of standing
between monopolists and the people's pocketbooks.  So how do we reconcile the
unambiguous call for smaller government with our duty to make sure that monopolists don't
charge unreasonably high prices for fundamental services like electricity, local telephone
service, and basic and enhanced basic cable?

You might have thought in years past that the FCC was not sufficiently sensitive to the
exigencies of the duty to protect consumers from monopolies.  I can assure you that the 1992
Cable Act has given us an exquisite sensitivity to the demands and difficulties of this task.

But at the state and federal levels, I think we have all discovered the solution that results in
both smaller government and consumer satisfaction:  Competition for all consumer products,
including all communications services.  When consumers have real, price-competitive choice
for local telephone service and basic and enhanced basic cable, we can start going out of the
business of regulating rates and let the markets generate fair pricing with an understanding
that we have done our jobs well.  When new businesses have the opportunity to enter all 
communications markets because incumbents with market power have to play by fair rules of
competition, we will know that we can then meet the voters' demand that we start to shrink
the size of government.

At the state and federal levels, we are in a period of transition from monopoly to competition
in all communications markets.  For us, the election of 1994 sends the clear message:  Get
on  with it, and hurry up.  So, at the FCC we are informally changing our name to the
FCCC:  the Federal Competition in Communications Commission.

In the last few weeks, we at the FCC began to lay out fair rules of competition for the
telephone companies to enter the video business, and for the cable companies to add capacity
to deliver new channels, broadband interactive services, wire and wireless telephony, and
multimedia.  I am referring to our Video Dialtone and Cable Going Forward decisions.

Our intent is to set clear rules of competition for the telephone companies and the cable
industry to compete against each other in the provision of voice, video and data services.

We do not know which has the superior preexisting infrastructure, the better marketing ideas,
the more innovative products, the clearest insight into the future of the information
superhighway.  At the FCC, our view is that we should not pick the winner in any
competition in any of the five lanes of the information superhighway:  cable, wireline 
telephony, wireless, satellite and broadcasting.  Competition in a marketplace governed by
fair rules will itself determine the winners.  But we know for certain that the ultimate
winners will be the economy, consumers, and American working men and women looking
for jobs in the booming communications sector.

The rules of competition, however, cannot be the same for all incumbent players.  We do not
have the same rules for telephone and cable, and everyone who understands these industries
thinks that we should have parallel and harmonious -- but not identical -- rules.

It is also imperative that our rules be simple, clear and as few in number as possible to meet
the objective of fairness to both suppliers and consumers of communications services.

Lobbyists in my office often criticize our rules by saying they are complex.

I agree with them that a simple correct answer is better than a complex correct answer.  But
a simple wrong answer is unacceptable.  It all events, the real challenge for everyone is to
appreciate the difficulty of the problems of transition from monopoly to competition. 
Conclusory caterwauling against alleged complexity cannot simplify the problems that we
must deal with.

I know, for example, that the cable industry appreciated the complexity of how to set fair
rules for telephone entry into video.  I know that because the filings in our video dialtone
proceeding amounted to 33,000 pages, a stack of paper over 12 feet high.  These filings told
us that the telcos are going to roll out their big cross-subsidization guns to blast the
defenseless cable companies and that we have to be the peacekeepers.  We were told we
didn't have any regulations in place that could ensure fair competition, even though we had
over 200 pages of rules called Parts 32, 36, 61, 64, and 69 to ensure fair competition.  We
were told that our own cost allocation rules were too complicated to give the telcos guidance
on whether the telephone ratepayer would bear the burden of building video dialtone -- and
yet we found a way to clarify our cost allocation rules and explain in no uncertain terms that
the telcos will be required to allocate all incremental costs and a share of common costs,
including overheads, to video dialtone service.

At the FCC and on the state level, we are all asked why we should bother to allow
competition against entrenched monopolies that deliver high-quality products.  We are asked
why we should go through the trouble to set fair rules of competition.  We are asked, in
effect, why competition is so important.  Here are three reasons:

First, competition is inevitable and the businesses that you hope to attract and retain in your
states will insist on it.  Second, competition is the only way to discover the lowest cost
solutions to providing communications services.  Third, competition creates the greatest
number of new businesses, generates the greatest number of new product ideas, stimulates
network usage, grows the economy to the maximum degree, and most important, creates the
greatest number of good new jobs for Americans who are in what Secretary Reich calls the
"anxious class."  For those of you who are not sure who is in that group, my view is that
they all voted last Tuesday.

There is nothing easy about fighting for competition in communications markets.  Let me tell
you the story of how we at the FCC are trying to promote competition by permitting
expanded interconnection of CAPs with the telcos' local networks.  You probably know that
earlier this year the U.S. Court of Appeals for the District of Columbia Circuit vacated our
physical co-location rules.  These regulations required the largest local exchange carriers to
offer expanded interconnection to competitive access providers that used their own equipment
located within the telephone companies' central offices.  The monopoly exchange carriers
fought us in court and won.  The Court decided that the FCC lacked authority under existing
law to order the telcos to do that -- a good argument, by the way, for federal
communications law reform.

At our very next open meeting, we adopted new rules implementing "virtual" co-location for
expanded interconnection.  This satisfies the Court's ruling by keeping the interconnection
equipment under the telcos' ownership and control but dedicating its use to the competitive
access providers.

Now, getting out these co-location rules was not simple.  But competition was too important
for us to throw in the towel.  The court gave us a new problem, and we found a solution. 
Of course, the story isn't over yet:  the local exchange carriers are now appealing to the
courts our virtual co-location decisions.  The battle for competition goes on.

Even while the telephone monopolies face only limited competition for CAPs, we want
regulation of these monopolies to be sufficiently flexible to prepare for the coming
competition.  That was a key reason for moving to price cap regulation.  Under price caps,
LECS have incentives to reduce their costs.  A major item on our agenda in the next few
months is our fourth year review of our LEC price cap regulatory structure.  Your comments
in this proceeding will be taken to heart.

In the reasonably near future we also are going to dig deeply into a number of local
exchange competition plans put before us by the LECs.  I believe we all have a responsibility
to set clear rules for number portability.  This is essential to meaningful competition in voice
communications.

We need to make progress on our open proceeding on equal access and interconnection
among wireless and wireline carriers.  Wireless is another lane of the information
superhighway, and a booming wireless business naturally will lead to competition with
incumbent telephone companies -- provided that we make sure that the new wireless
businesses can fairly connect to the network.

To anticipate the wireless, wire and cable competition in voice communications we expanded
the Network Reliability Council.  Everyone delivering voice services in this country shares
the duty to provide reliable services.

The FCC is also the Federal Consumer Protection in Communications Commission.  Last
week we began a Rulemaking intended to crack down on the practice known as "slamming". 
We discovered that consumers are being sent forms authorizing changes in long-distance
carriers but disguised as contest entry forms, remittances for charitable endeavors, or
negotiable instruments.  We will gather evidence in this proceeding about the nature of these
abuses and seek to devise rules that will put a stop to them and the burdens they place on
consumers, regulators, and legitimate competitors.

At the FCC we are learning a great deal from the growing number of states that are adopting
incentive-based systems of regulation for local exchange carriers and removing barriers to
entry into local markets.  Illinois, Maryland, Massachusetts, Michigan, New York and
Washington have already taken concrete steps toward authorizing competitive services in
intrastate local exchange markets.

California's legislature recently passed a significant measure to open up competition:  they
gave cable operators the right to apply to offer local exchange service if telcos win the right
to offer cable or video dialtone.  If a carrier files an application to construct a video dialtone
system in a state that allows local exchange competition and the application does not raise
any novel statutory or regulatory issues, the FCC will act quickly on that application.

State incentive regulation is, like our price caps, a way to give the telephone companies
motive to provide quality services at lower prices, and to introduce new services that will
increase the use of the public switched network.  We at the FCC are very grateful to the
states that are generating innovative solutions to chronic problems such as the treatment of
residential exchange prices.

While I am encouraged by much of what is happening in the state regulatory arena, I am
concerned about a recent development in the emerging market for wireless communications
services.  A handful of states have petitioned the FCC for the right to regulate the rates of
commercial mobile radio service (CMRS) providers, such as cellular and soon-to-be PCS
licensees.  Even though the FCC, after an extensive investigation, found the CMRS market
to be competitive, and even though available data indicate that the price of cellular service is
continuing to fall from Florida to California to Hawaii, as the idea of PCS competition draws
closer to reality, still a handful of states are seeking the right to continue to regulate rates for
CMRS operating within their jurisdiction.  I am concerned about this development because I
believe continued rate regulation in a demonstrably competitive market disserves the interests
of consumers.  I am not prejudging these petitions -- but I would note that the statute
governing CMRS requires the states to meet a substantial burden of proof to assure us that
they would not impose a greater degree of regulation than is needed to address the perceived
problems.

I think that, at the FCC, we have a lot to learn from our counterparts in the states.  I want to
be sure you all get to know and frequently talk to Kathy Wallman, Chief of the FCC
Common Carrier Bureau.  Kathy and her staff will be working with you individually and
with NARUC.  You'll call us and we'll call you.  We need to agree on principles and not
fret about protocol.

Joint Boards are one way that we can work together.  But, I'd like to find a way to make the
Joint Board process more productive and more effective at problem-solving.  The voters
certainly told us all last Tuesday that they want the different arms of government to
cooperate, but they also want us to be efficient.

Those of us who are laying out the rules of competition to build the information highway
ought to make sure we use that highway.  At the FCC we're going to figure out how to set
up file servers that will enable state commission staff to directly access ARMIS information
via the INTERNET.  I understand this is something many of you believe would be useful,
and we are enthusiastic about making this tool available to you in a format which is helpful
to you.  Earlier this year, as you know, we began making our orders available to you and the
public through the INTERNET.
 
We need to work together to sort out cost issues on new and planned network services.  Last
month, we announced that we will issue a notice of inquiry on the implications for the
jurisdictional separations process of LEC provision of broadband network services, including,
but not limited to, video dialtone.

In the world of brave new competition, we need to continue to work together on federal-state
joint audits.  We are encouraged by our experience in working with state regulatory staffs in
connection with the audit of Southwestern Bell.  We will conduct additional joint audits in
the future.  We have augmented our audit staff.  Audits are extremely important tools for
safeguarding competition in this era of non-structural safeguards.

Perhaps, the most critical area for federal-state cooperation is universal service reform.

Our most recent statistics indicate that approximately 94 per cent of American households
have telephone service.  That is a remarkable accomplishment and state commissions have
played a central role in achieving it.  But in thirteen states more than ten percent of
Americans still lack basic telephone service.  Everywhere in the country the people without
active telephone service are disproportionately lower-income families struggling to find good
jobs, and families with children.  More than one-quarter of the children in this country live
in poverty.  The adults in these homes need affordable telephone service to find work.  The
telephone is part of the road to a better future for their children.  It's essential that, as a
country, we do a much better job in getting everyone access to the networks.

At the FCC we're going to reexamine our universal service programs.  

I've heard it said that competition in telecommunications markets is incompatible with
maintaining universal service.  I don't agree.  Competition encourages firms to reduce the
costs and prices of products and services:  no result could do more to advance universal
service.

At the same time, we can't introduce competition in the telephone markets without
reexamining the way in which universal service is funded.  In particular, we need to make
certain that the collection and distribution mechanisms do not cause significant distortions in
competitive markets and that the financial burden is spread equitably among competing
providers.

Perhaps our worst failure in providing universal service is to a population that is right under
our noses, or if your household is like mine, more likely underfoot:  school-age children. 
The communications revolution is going to generate opportunities for millions of Americans
to find better jobs, be more productive at work, seek new kinds of achievement, and reverse
the decline in real wages that has plagued our working class.  But perhaps more important
than any of these, in the long run, this revolution can change our faltering education system
forever and for the better.

Each of our schools and libraries should be tied into local area networks.  Each should be
honeycombed with information pathways, accessible by teachers and filled with information
for students.  Our kids should be able to do research in the Library of Congress without
leaving their schools.  Their teachers should be able send their homework assignments over
the networks to parents because we'll never reform education without bringing the parents
into the process.

A long, long time ago, I was a teacher.  Like all teachers and all parents, I discovered that
you have taught successfully when you can spark the ability to communicate in a child, to
make connections.  The tools to fan that spark into a wildfire of educational advancement are
the tools of modern communication.  We must give these tools to our teachers -- and we
cannot afford to delay.

The Harvards and the Browns and the private boarding schools already have built the
information highway to their students.  They're installing their networks now.  Someone
lucky enough to go to those schools will have to bring a personal computer to connect to a
local area network in the dorm room.

But the 45 million kids in the rest of the country aren't so lucky.  Even though half of the
classrooms already contain a computer, in 94% of the classrooms there isn't even a telephone
line to connect it to.

Now, I have seen the future at work.  I have seen the virtual classroom, half in Japan and
half in Hawaii, where the kids learn each others' languages by talking to, listening to and
watching each other "over the phone."  I have seen a classroom in Harlem where the kids
are producing a daily newspaper with their class mates in Nova Scotia, via e-mail.  Every
kid I have talked to, all over the country, loves this electronic learning.  All teachers want to
provide it.  All the experts agree. Everyone wants the information highway to reach the
upcoming generation.

This past January, President Clinton and Vice President Gore called upon the
telecommunications industry to connect every classroom, every library and every hospital in
America to the national information superhighway by the year 2000.  Secretary Riley has
made this a priority of the U.S. Department of Education, which is providing technology
planning grants to the  states.  Secretary Riley and I will be meeting later this week with a
group of educators and business leaders to discuss ways to connect the classrooms.

I know that many states are already active in meeting this challenge.  Many of you in this
room are responsible for reducing the rates that schools have to pay for wireline connections. 
 Nearly every state has projects underway to promote distance learning or run computer and
video networks among at least some of its universities or public schools.  Many of you are
working actively to connect every classroom in your state.  Many telcos have made
significant commitments in the past few years to hooking up the schools in their regions.

And if we fail to accept this responsibility, what will we tell our kids, our grandchildren? 
Will we say we didn't have the money, when we had the money to develop and buy
teleconferencing, mobile phones and voice pagers for business, direct broadcast satellite
dishes for our homes, and mobile faxes for our cars?  Will we tell them we had the money to
include our kids in the communications revolution, but we forgot?

Those in the private sector and those of you who have been active in this field deserve a lot
of credit for recognizing the problem and coming up with these pioneering, experimental
solutions.

As we undertake to connect classrooms universally, we will have much to learn form these
early endeavors -- but we also should consider whether this approach is the right one, or
whether another strategy, which focuses on the demand for these services, would better serve
the consumer -- in this case, the schoolchildren.

In telecommunications markets like the long distance market, we are promoting competition
but not choosing the winners of that competition.  I think it is time that we consider whether
we should do the same in connecting the classrooms.  Why should we deprive our schools of
the choices and other benefits of competition that we seek to secure for consumers in other
markets?  Why wireline connections and not wireless or satellite?  Why the telephone
company and not the cable franchisee?  My instincts as a regulator and a former antitrust
lawyer tell me that these are choices that the marketplace, not regulators, should make.

We need to create an education marketplace where supply and demand can meet.  I believe
that we can create such a marketplace, in which the educational sector's demand for
telecommunications services generates the supply to meet it.  This the challenge that we must
undertake together:  equipping our learning institutions, including those serving the most
remote and most needy among our population, with the wherewithal to do this. 

Thank you.  I'll be happy to answer any questions if your schedule permits.