POWELL DEFENDS STANCE ON TELECOM COMPETITION

Apparently chafing under criticism that he’s too deregulatory minded and thus too favorable to Bell companies, Powell agreed to share his views on wide range of competitive telecom issues. He said FCC’s recent action on reciprocal compensation should help stabilize competitive telecom market because it would eliminate uncertainty that hurt competitors. CLEC stock went up after that ruling, even though decision set limits on how much compensation CLECs could collect, he said. However, he disagreed that regulatory uncertainty was key factor in financial failures plaguing CLEC industry. Govt. is “very convenient” scapegoat but “if there were 10 reasons why CLECs are in trouble, regulation might be the tenth,” he said. On other hand, raising size of fines against ILECs that violate competitive rules “can only help” competitive situation, he said. Powell has recommended that Congress raise ceiling on fines, and legislation to do that is pending on Hill. “It raises the cost of cheating,” he said.

Powell said FCC in past may have been too supportive of entry by competitors that didn’t have their own facilities because agency was so eager to see competition take hold. “I personally believe that you have to have more facilities of your own before you're really offering a differentiated product.” He said he supported competitive entry through platforms of unbundled network elements (UNE-Ps) but noted FCC had spent 3 years supporting it in courts because “you know it wasn’t in the statute. It was sort of a creative combination of the Commission.” FCC’s job now is to apply “the hard medicine,” clearing out arbitrage opportunities such as reciprocal compensation and CLEC access charges, so “whatever competition does come is real and lasting.”

Powell questioned “passion play” mentality of industry lobbyists, describing issues in terms of “good and evil,” rather than seeking middle ground. He said he was glad he tended to be “ruthlessly judicial” because otherwise he would get caught up in that “vortex.” Repeating his dislike of placing broad issue- oriented conditions on mergers, he said loading conditions onto merger approval was easy way out: “You'd never have to block a merger… You just start working on enough conditions that you can sell that it’s okay. You never have to have the courage to say this [merger] is harmful.”

On changes needed to make spectrum policy more market-based, Powell stressed role of technology and ways that FCC could move toward more flexible rules. Importance of shifting from existing system of permanently licensing spectrum to rules based more on trading rights was raised at confirmation hearing for FCC nominees last week by Sen. Wyden (D-Ore.). Powell said at hearing that “driver’s license” concept for spectrum could mean market decided on optimal use for particular band and Commission’s role was more of telling you what not to do in terms of technical conditions. “If we had that, I think that there'd be less anxiety about a national spectrum policy because the policy would basically be that the government doesn’t have to coordinate and Tom Wheeler and CTIA could go find their spectrum for 3G more flexibly in the market,” Powell told us.

One challenge connected with not giving such flexibility to market players is that FCC becomes forum for such debates, Powell said. “The minute the government becomes a broker, people go to their corner because they have a chance to win it all,” he said. “Companies come in, they don’t have any interest in being cooperative or reaching mutual benefit with the other provider because they might convince me or my colleagues to give them all of it.” Under system in which govt. strictly assigns spectrum for protected uses, “because you don’t allow the flexibilities of the market to readjust the use, then you almost have a stronger responsibility to make sure you kind of refarm it,” he said, saying that such model wasn’t necessarily best one over time.

Concerning national spectrum policy, Powell said: “I think there’s still a lot of thinking to go on about what that means.” Finding more efficient means for spectrum to get to its best use means “fundamentally different way of allocating in the first place,” he said. Role of govt. spectrum use in military applications at 1.7 GHz versus commercial users at 2.5 GHz has been at center of federal decisions on how to potentially allocate more spectrum for advanced wireless uses such as 3G. FCC has been overseeing review of 2.5 GHz and NTIA has purview over military users. In general terms, Powell talked about need for “honest broker” who could question various purposes to which spectrum was being used. “That’s something that the FCC can’t get near,” he said. That’s area where Commerce Dept. or White House could play “central role,” he said. Recalling his Army background, Powell said he “wouldn’t begin to second-guess some admiral’s claim that this is needed for wartime. But should somebody in the loop [review it]? [That’s] probably right.” He likened Dept. of Defense’s interest in keeping spectrum for its own uses to similar reluctance of broadcasters to switch from current airwaves. “If I were DoD, you'd have to come looking hard before I would just voluntarily hand over anything I had.”

Following is part one of transcript of Powell’s interview. The second part will run tomorrow (May 23) -- Edie Herman, Mary Greczyn

Q: How would you describe your philosophy on competition? You've said you favor market forces over regulation and some critics have seen this as an indication that you plan a more neutral stance as to the telephone competition. Is that true?

A: It is too simplistic, like most things that get debated publicly in telecommunications. The policy of the entire country is to favor competition and deregulation, lest one re-reads the 1996 Telecommunications Act, lest one misapprehend the basic economic model that operates in the nation. Of course we favor competition and we favor the notion, generally, which I subscribe to, which is there are appropriate places for regulation but they should be carefully scrutinized and one should be hesitant to interfere with those operations without clear and demonstrable reasons for doing so. Where you really get the debate is at a much more subtle level of what does it take to justify intervention and what level of evidence does one need to justify an intervention and what are your decisional rules. That is when, if you can’t really demonstrate a rule as absolutely necessary, do you leave it there for good measure or do you take it away as unjustifiable?

Q: What is your view, personally?

A: I certainly err on the side of, in this society and our market, that if we don’t have clear and demonstrable justification of a rule, then the appropriate role of government is to take the rule away or not interfere in the otherwise proper functioning of a market, rather than leave a rule in for good measure. Over history a lot of rules that were left for good measure are not neutral, that they have secondary effects that often harm the welfare of consumers. Rarely is a governmental rule or regulation or policy neutral with respect to what markets would otherwise do. And I think there are many, many examples of rules that people thought, well, we can’t prove that it works but it’s probably healthy to have it there, and then subsequently when the rule is eliminated you see some consumer welfare benefits. I would give the example of the wireless market. The country for a long time limited the number of carriers that were allowed to operate in a wireless market, I would argue for way too long. We allowed there to be only 2 of them. And when we liberalized that judgment, the wireless market exploded. There was an enormous amount of pent-up demand waiting to be served. There were many opportunities for business entry and now the average market in the United States has between 4 and 6 wireless providers, and there are 6 national providers offering nationwide plans, and there are nothing but declining price trends and greater buckets of minutes. If I were to describe what’s different about my philosophy, I accept the burden of my regulatory decisions, not the other way around. That is, I don’t think you've got to prove to me that a rule is not necessary. I think I have to prove that it is necessary. And if I can’t do that, I don’t think that I should intervene.

Q: Critics have said your alleged pro-Bell viewpoint is evident in the Commission’s action reducing the amount of reciprocal compensation paid by the Bells and the agency’s approval of Verizon’s request for long distance entry in Massachusetts, which critics said was premature.

A: I find that fascinating and I really wish people would thoughtfully look at the record. The reciprocal compensation decision was made 2 years ago. It went to the United States Court of Appeals and was remanded to this Commission. When I took over the chairmanship, reciprocal comp was an action that needed to happen and, if anything, I'm critical that it took us so long. The Commission had already made the judgment that it believed reciprocal comp was interstate in nature. I think that based on our decision 2 years ago the capital markets already had factored in the loss of reciprocal compensation. That revenue source was in effect, already eliminated. The uncertainty of no decision I would argue was much more disastrous for the CLEC industry and the ILEC industry. I love how everything is depicted in good and evil passion play terms, but the reality is that this decision was long overdue. The CLEC industry needed a decision, the state governments needed a decision, Wall Street needed a decision, Congress needed a decision and I would submit that the reciprocal comp issue would have been a lot worse if the Commission didn’t act and it became a subject of legislation. I personally believe the reciprocal comp decision was one that benefited CLECs just as much as it eliminated irrationality for ILECs. Go look at the stock prices of several CLECs the day after we made the decision. They went up. A number of CLECs actually had stocks rise as a consequence of that uncertainty being settled.

Q: What about the Massachusetts 271 decision?

A: There will never be a 271, I will submit to you, to which there will not be a community of competitive entrants and/or IXCs like AT&T who will not scream that it was premature. Why? Because as far as they're concerned entry will never be right. We're not naive about this. We expect that every 271 ever done, no matter how effective we are, how rigorous we are, will be criticized as premature. That’s not the mark to me. This Commission has approved only five 271s. I have voted on all of them. I'm not recordless, and I voted against them as well as for them. I have voted no differently than the majority on a single one of them. So I'm not quite so sure why someone thinks they see the decision that we just made as some radical departure. And I do think the decision was absolutely defensible from our precedents. So what people have to come to realize a little bit on 271 is that the Commission will develop precedent and the precedent will start to provide road maps for companies that are prepared to follow them, and those companies will start to get in. I mean, I can’t change the fact that the statute set that regime up and suggested that you were allowed to succeed if you complied with the checklist and the precedents. And I think that after 6 years and only 5 applications it will not be remarkable that the pace of those will start to increase.

Q: Why do you think the Bell companies will be more successful?

A: The success rates will increase because we've been more and more clear about what it takes to succeed. And I'm not going to shirk one bit from following that precedent because I think the statute calls for making sure these guys are efficient wholesalers. Some of the critics wish it was a market share test. And I won’t even opine on whether that’s good or bad, but I know that was expressly rejected by the Congress. It doesn’t say if there aren’t more than 10% of people in the market don’t approve them. That’s just not what 271 says. And I know that’s what a lot of people wish it said. But it doesn’t.

Q: You remarked that people involved with telecom issues look at things in kind of passion play terms. You don’t think you do that, do you?

A: I pride myself very deeply on not doing that. If I'm not ruthlessly judicial about it and base my decisions on the facts and the law and my very best judgment, then I could get caught up in this sort of vortex of favoritism. Well, you did this for them, and now you've got to do this for us. I'm happy that I came to this business a little bit from the antitrust route because antitrust is very antiseptic about companies. You know what they are? They're all profit-maximizing actors, period. I don’t expect Verizon to have wholesome motives. I don’t expect AT&T to have wholesome motives. I don’t expect any of them to do anything other than their self-interests. And so sometimes they're able to characterize their self-interest as on the side of right, and sometimes their self-interest looks like it’s on the side of wrong, but it’s always the same thing. I think part of what I get paid to do is not get caught up in that. There’s this almost theatrical quality to the debate of these issues. You can’t make defensible decisions and dispassionate ones when you get wrapped up in that. What I find is interesting is there’s often efforts to goad you in that direction in one way or the other, and it comes from all quarters. People have an interest in a certain perception and they try to propagate that perception for their own purposes. The only thing that matters for me is years after I've left this place if I look around and say I can see the fruits of seeds we planted years ago.

Q: You had mentioned something interesting at the [FCC confirmation] hearing concerning the importance of the Commission being somewhat ruthless in terms of making sure that spectrum that isn’t being efficiently utilized is returned? You had mentioned something about the concept of a driver’s license?

A: The fact is there’s a tension in those 2 statements, and a lot has to do with which direction do you think the overall policy should go. In one sense, if the government is willing to be in the business of strictly assigning [spectrum] for protected uses, then I think that it also probably plays an important role in making sure that we decide who gets it and [for] what uses. But when it’s being underutilized then, because you don’t allow the flexibilities of the market to readjust the use, you almost have a stronger responsibility to try to make sure you kind of re-farm it. I don’t know that I think that that’s the right model over time for the reasons of the transaction costs associated with doing that. It’s hard to do. You don’t get spectrum back quickly. You don’t get it back out quickly. But if you allowed more flexible use so that if a company got spectrum and over time hadn’t made good use of it, I'll tell you what happens in the market. Someone would ring their doorbell who had the better use for it and would start offering them money for it. And right now that’s very hard to let happen. And so I don’t think you would have to be that ruthless about getting it back if you had a market that allowed for change.

Q: So the idea of a driver’s license?

A: When I made the statement about the driver’s license that was more of my wishful view that we'd move in the direction of [that] we'll always kind of have this kind of sacred obligation of technical interference. But beyond that, whether this community ought to have it or that community ought to have it is going to become a tougher and tougher thing to do and will probably, no matter what your ideological bent, eventually render your policy futile. This was hard enough when we did it in broadcast alone, right? And we used to make comparative judgments about which applicant should get something and that regime ultimately fell in on itself. Imagine doing it across every possible spectrum usage, which you're almost doing when you make allocation decisions. If you say “this spectrum is for this kind of service,” you're essentially expressing a value preference for that kind of service. And you know when you start to have exploding wireless service I don’t know how we're going to do that.

Q: You also pointed out that you can have services that overlap our historic concepts on separations of types of technology?

A: This is an area where the rubber’s hitting the road right now. There are any number of companies and/or things going on in which people are trying to make innovative uses of both satellite and terrestrial spectrums. Well, the fact that they're just entirely different legal regimes, different allocations, different policies, different limitations, mean that you put the Commission in the position of arbitrating and determining whether the innovation gets to go forward or not. If you had greater spectrum flexibility and market-based approaches, you know the market will work that out. You know the satellite company would approach a wireless company and say I want to use whatever for this purpose. Let’s make a deal, let’s do it. But now we have to broker anything like that. The minute the government becomes a broker, people go to their corner because they have a chance to win it all. This is something I don’t think everybody ever focuses on in the theory of government. The minute you say you know we're a forum for debate, everybody goes to their ideological corners, right? Companies come in, they don’t have any interest in being cooperative or reaching mutual benefit with the other provider because they might convince me or my colleagues to give them all of it. And my experience is I haven’t seen very many people who do anything but play for all of it. And so it’s almost always adversarial. Government regulation of a dynamic market is adversarial and it becomes very messy. And sometimes the adversarial nature leads to a kind of baby splitting that doesn’t maximize anything well. Just to diverge a little bit, I hate when I see people writing articles, that they're [the FCC] laissez- faire. If you know economics, this is not laissez-faire. Laissez-faire in its original conception is free markets, good, bad and ugly, you know. That is not in any way my policy and is not the policy of any responsible thinker about free markets. Free markets only work pursuant to the rule of law. And the rule of law has to be enforced by the government, and I believe in that, that is not laissez-faire. That’s free market economics. [Laissez-faire is] far removed from the original notion of this country [which] never had laissez-faire except maybe briefly on the edge of the Depression.

Q: You recently urged Congress to give the FCC more enforcement power, raising the fines companies must pay for violating competitive rules. Sen. Hollings (R-S.C.) last week questioned whether that would be enough to keep Bell companies in line. Do you have any thoughts on that?

A: Our recognition that more enforcement is necessary ironically stems from competitive companies themselves asking for it. I can’t really speak for the full range of Senator Hollings’ views, but this isn’t just my view of what it takes to improve that environment. It’s also in response to many hours of conversations with competitive carriers about what they really need. Often when we push very hard, we don’t hear that a lot more rules are needed. Instead the bottom line is if only there was better enforcement of the rules that exist. I heard that message originally from CEOs, great CEOs like Royce Holland and then when we went back and examined our processes and the penalties, I concluded without question that these things were just completely inadequate.

Q: Is there an alternative, as Sen. Hollings seemed to suggest?

A: I don’t know what the alternative is. There are more intrusive approaches, but I don’t know why we shouldn’t pursue an effort to make the fines more substantial. It can only help. The reality of the way the ‘96 Act is written is that people didn’t emasculate the Bells. They're formidable companies, they remain intact. You have to be able to incent proper behavior and not negative behavior. What you count on in penalties is the resonance of deterrent. What you hope is that every now and then you get one, and it resonates because the idea that the government can be all these places at once is not true. I think that’s the theory of all punishment. I don’t know what it takes to deter, but I think we're raising the cost of cheating. And I think that can only help. If it’s ineffective, then we'll try something else. It’s a tough thing we're trying to do. We're trying to promote competition through interconnection with an incumbent. I do think that it has more possibility for succeeding than the rhetoric would suggest.

Q: What is your take on the downturn of the dot-com business?

A: I think the entire world has sort of pulled back a little bit to take a breath and sort of reevaluate. I think that’s healthy. I am one who is as enthusiastic about these technologies as anyone I know, but I also believe that we have a real tendency to get way ahead of ourselves. I think there’s a tendency for the capital market, for companies and for the government to get way ahead. I think a lot of what happened with dot-coms also happened to telecoms. People started trying to deliver the future over half-built networks, and, you know, I think that’s why consumers are experiencing sort of bad customer service and limitations. On the other hand, you'll hear the central theme -- get broadband out there now. Well, I agree with that as long as now is a relative idea, which means now at an efficient level, where we can sustain consumer demand. Because I think it’s far from clear yet what are the ways the consumers will be willing to radically alter their lives in the name of technology for its own sake. I think there are a lot of questions to be solved about what people are willing to pay for, what they're not willing to pay for, what kinds of applications they're going to respond to, and what kind they're not. I think what we're doing now is deepening our seriousness about what might work and what might not. That is probably going to produce a healthy response.

(Tomorrow: Part 2 of Chmn. Powell interview.)