Good afternoon. I’m delighted to be here at NARUC to address the topic of "The Future of Regulation." It’s also a pleasure to see so many familiar faces from my days at the Maryland Public Service Commission …

I believe that the topic of this session – Regulation’s Future – is one with which we have been grappling for several years. In discussing this topic I would like to conclude by talking about the road I’ve traveled over the past few years.

As a first step in discussing the future of regulation, we must agree on the goal of regulation. I believe that the overall goal of regulation is to ensure that consumers, in the absence of competition, reap the same benefits that they would receive in a competitive marketplace: cheaper, faster, better telecommunications services and equipment.

I know that you are all aware that regulation developed in the first place as a result of marketplace failure. Now, we have the option of no longer having to rely on regulation as a substitute for a competitive marketplace. Therefore, we must make sure that regulatory policy is geared toward encouraging competition.

I believe that the future regulatory agenda must focus on ensuring and maintaining open markets and promoting consumer protection. In this talk I will focus on the former.

Open, competitive markets serve the consumer interest by providing benefits far in excess of those to be obtained in a closed, regulated market. These markets are very competitive – we see the results every day. These markets are wide open as a result of government action – or inaction – during the past two decades.

At the same time local markets are not as open, and we face the danger of "remonopolization." Due to convergence technologies, there is a real danger that the local monopoly will be extended in the Long-distance and Internet markets. This is unfortunate, because monopolies do not innovate.

Monopolies also do not provide the cheaper, faster, and better services sought by consumers. We have not fought this hard for competition simply to see this happen.

Today we are seeing the regulatory framework evolving to accommodate changes in the marketplace and advances in technology.

We have witnessed the evolution from traditional rate-of-return regulation to various types of market-opening rules that provide companies with better incentives to compete and innovate.

All states are shifting their focus from rate of return regulation to consumer protection and antitrust.

Tariff regulation, too, is undergoing a "face-lift." In this new regulatory environment, our concern should focus on opening and maintaining open markets.

Tariffs should be mandatory only for dominant carriers. Competitive local exchange carriers (CLECs) should be subject only to permissive tariffs that ensure and encourage sound business practices instead of triggering onerous and unnecessary rate reviews

There still exists a deep chasm between dominant and non-dominant service providers, and we must avoid hamstringing CLECs with unnecessary or burdensome regulations.

"Parity" in the marketplace does not yet exist; it would be foolish, therefore, to embrace a regulatory structure that rests on an assumption that it does.

There is one particular area of concern in which I believe continued innovative regulatory leadership is needed.

Broadband technology holds the greatest promise for consumers to reap the benefits of technology and innovation. Broadband technology and its progeny have the potential to become the defining force of the 21^st century in the way that steel ruled the 19^th century.

As a consequence, Broadband is the perfect arena to hone and implement new regulatory policies based on the principles of open markets and consumer protection – principles that can be applied nationally.

Broadband policy must embrace three goals.

1. Broadband policies must seek to eliminate local access bottlenecks;
2. Broadband policies must keep the Internet free from unnecessary regulation and "open for business" to ALL providers and consumers; and
3. Broadband policies must promote meaningful industry self-regulation as the preferred approach to address consumer concerns.

We cannot risk underestimating the economic and societal impact of broadband.

Elimination of local broadband access bottlenecks means that all providers must have equal access to the "first mile." This is equally important for UNE-P providers as well as facilities-based providers. It is also important that we continue to promote all three methods of entry.

We must focus on next generation issues. That means that we must think beyond the central office and focus on the needs of competitors – the need for line-sharing, the need for connections at remote terminals and the need for equitable access to multi-tenant buildings and at other locations.

Moreover, we cannot rely on allowing the incumbents to form affiliated subsidiaries as protection against anti-competitive acts. This is particularly the case if those subsidiaries are then given advantages over new competitors or if those competitors’ access to network facilities or technologies is limited. I am talking about Project Pronto.

Currently, the most effective tool that regulators have for coping with the demands of an ever-changing marketplace is the 1996 Telecommunications Act. That law is under siege by the incumbent monopolies, which are pushing for what they call "relief" from the Act’s provisions that bar them from providing interLATA data services until they open their local exchange markets to meaningful competition.

InterLATA data "relief" legislation is nothing more than a way for the Bell companies to preserve their local exchange monopolies while extending that monopoly grip into the long-distance and broadband access markets. Their agenda clearly is to be the dominant – if not the exclusive – providers of end-to-end services.

This effort flies in the face of regulators’ mandate to ensure open local markets. Instead, we should be talking about the heightened implementation and enforcement of Sections 251, 252, and 271 of the Act.

Such enforcement is and must remain the key ingredient in any regulatory framework dedicated to opening up local markets and promoting competitive alternatives.

Pricing, in particular, is extremely important. Without proper TELRIC pricing of the RBOC elements that competitors need, the drive toward open markets will be thwarted. It is the only way to prevent RBOCs from collecting monopoly rents. Likewise, provisioning, OSS, and collocation are all vital to achieving the goal of opening local markets.

As an aside, inter-carrier compensation is a critical problem that needs to be addressed. Reciprocal compensation is only one of several inter-carrier compensation issues. It should be resolved separately.

In sum, the inter-LATA restrictions of the Act continue to be the strongest incentives that we currently have to encourage the Bells to provide competitive access to their networks.

Now, turning to the road I’ve traveled: I, like many of you, am frustrated by the fact that four and a half years after the passage of the Act, we are still fighting over these issues. I thought that this fight would be over by now. I have come to recognize that the ’96 Act cannot be a panacea for every kind of anti-competitive problem that arises.

We must consider whether the Act’s market-opening provisions and our rules to implement them are, by themselves, sufficient to open up markets quickly and whether they can prevent the stalling that hurts competitors both operationally and financially.

The difficulty with enforcing the market-opening provisions of the ’96 Telecommunications Act is that it is hard, if not impossible, to incent a monopolist to relinquish its monopoly. The alternative is structural separation.

The long-distance, Internet, and equipment markets are extremely competitive. In each instance, structural separation was mandated and implemented successfully, to the benefit of consumers and competitors alike. Structural separation already is required for regional Bell companies’ long-distance affiliates, and it also has been employed successfully in the energy markets.

I believe that the RBOCs should be split into separate retail and wholesale affiliates.

Functional separation within the RBOC organization is not enough. It must be complete, structural separation.

Structural separation has many advantages:

• it is the best way, I believe, to minimize or eliminate the current conflict that results from an RBOC’s dual competitor/supplier role;

• it creates a level playing field: the RBOC’s retail affiliate can deal with the wholesale affiliate on the same terms as it deals with a CLEC;

• in the long-term, it actually reduces the need for regulation, as the need for such oversight decreases with the increase in competition;

The PUC found that:

1. Verizon had a virtual monopoly in Pennsylvania’s local exchange market, controlling more than 90 percent of the business market;
2. Verizon controlled nearly 100 percent of the residential market;
3. Verizon abused its market power by providing competitors with less than comparable access to its network or had engaged in other discriminatory conduct that prevented customers from switching to a competing carrier.

The PUC found that structural separation of Verizon’s wholesale and retail operations was necessary to prevent cross-subsidization and discriminatory access to competing carriers.

The Pennsylvania Commission also stated that, without structural separation, it could not fulfill its duty to promote and encourage competition throughout the state.

The same conditions that the Pennsylvania PUC addressed in its Order exist all over the country; other states should consider structural separation as a regulatory approach to speed the process.

Consumers shouldn’t have to wait any longer for the cheaper, faster, and better services that are best generated in a competitive marketplace.

First, the focus of regulators should be on ensuring and maintaining open markets and protecting consumers.

Second, the infrastructure, content, and commercial environment on the Internet should continue to grow and flourish free from pre-existing monopolies and unnecessary regulation.

Third, government oversight remains necessary in order to open first-mile bottlenecks. Regulators must consider structural separation as a practical mechanism for opening local markets.

Thank you.

*****

Based in Washington, DC, CompTel is the leading trade association representing U.S. and international competitive communications firms and their suppliers who offer a variety of local, domestic and international long distance, Internet and wireless services. The association's members include global and national firms, regional carriers and emerging local competitive companies.

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