WALTER MCCORMICK: Thank you, Jonathan. I appreciate the invitation to join you today and to address this forum. After reviewing your recent list of speakers, I am honored by your interest in telecommunications…its potential here in Alaska and throughout the country…and the pivotal turning point we stand at in Washington today.

We as a nation are about to make some critical decisions about how best to advance the nation’s broadband future… how we can speed innovation into more communities…encourage investment and competition…and create new jobs and information-driven economic opportunities.

It’s a pleasure also to have the chance to visit this beautiful state and to see firsthand what is hands-down the most difficult environment in the United States for delivery of telecommunications services. Yesterday, I visited with local phone companies at the Alaska Telephone Association. I couldn’t have more admiration for the work they do here often in very challenging conditions.

As I told the group yesterday, I grew up in a fairly rural area of Missouri where teenagers found mischief listening in on neighbors’ conversations on the party line. But what I have seen here in Alaska goes far beyond the obstacles Washington tends to lump together and call ‘rural America.’

Alaska’s local phone companies serve an area of more than 591,000 square miles—roughly equivalent to 1/5 of the ‘lower 48.’ They serve customer bases that range from less than 200 people to more than 150,000.
These companies regularly overcome extreme weather and great distances to ensure Alaskans have a lifeline that is reliable…have the ability to keep in touch with family and friends…and have access to the services that are creating new economic opportunities and new ways to enhance so many aspects of our quality of life.

Last January, at our USTA leadership meeting in Washington, D.C., Senator Stevens came by and was getting a real kick out of the fact that an ice storm had overtaken the city. Everyone was running around in their winter coats, and he just grinned and talked about it being “shorts weather.”

More important than the weather, however, he went on to talk about just how far Alaska telecom has come. Of course, having been in Washington when Alaska joined the union, he can really go back.

He recalled the days when phone calls home cost $5 a minute and were for emergencies only. He remembered when Alaskans regularly called the local radio station to pass on messages to friends because telephones were a rarity.

Then, he spoke about how much the world has changed. He recalled an Alaska snowmobiler whose life was saved by the fact that he had cell phone service in the middle of nowhere. He spoke fondly of his Blackberry—his wireless Internet handheld that keeps him connected to his constituents no matter where he is in his travels. And, he talked about the many innovations—like Internet telephony—that were simply not anticipated when the nation last rewrote its telecom laws in 1996—innovations that today are fundamentally transforming the communications marketplace.

That perspective—understanding both today’s marketplace and the unique challenges facing remote areas—will make him a very effective chairman of the Senate Commerce Committee next year. And, it will make the opinions of local phone companies and business leaders here in Alaska critically important to the country and its telecommunications future.

Without question, the telecom debate is one with extraordinary stakes for all Americans. In terms of our economy, we are squarely in a game of catch-up. The United States currently ranks 10th in the world in terms of broadband deployment—right behind Denmark. It’s hardly a position of strength, and it doesn’t bode well for our future competitiveness in the so-called Information Age.

The fact that the telecom sector is governed by rules written more than 8 years ago—before the Internet really took off—hasn’t helped. These outdated rules today hold back investment, have cost more than half a million Americans their jobs and burned more than $2 trillion in market cap.

The good news however is that given a more constructive environment—modern telecom reforms that reflect today’s marketplace—there is significant potential to renew our information economy.

In fact, one recent economic analysis found that just one policy adjustment: Allowing all companies—landline, cable, wireless, satellite—to invest and compete freely in broadband… could create some 1.2 million new U.S. jobs over the next two decades…by significantly boosting investments that would bring new advances from rural health care to education into our communities.

All it takes, by and large, is acknowledging that the world of communications has changed, and it’s time to catch the laws up with our lives.

Of course, it doesn’t take a policy expert to reach that conclusion. Back in 1996, when our telecom laws were last revisited, a blackberry was just a fruit…not a wireless Internet handheld device. A PDA was a public display of affection…not a personal digital assistant. And, cell phones were roughly the size of a brick and lugged around primarily by traveling businessmen. It was a simpler world. People bought phone service from their phone company and where there was cable TV, they bought it from their cable company. But there weren’t a lot of choices.

Today, more and more Americans can get digital television from a telephone company…voice service from their cable company and wireless Internet from a whole other set of companies.
These previously distinct markets—satellite, cable, wireless, landline and even powerline—increasingly are in direct competition. The result is a blurring of traditional boundaries…and the rise of one communications marketplace.

Here is just a quick overview of the landscape:

o 40% of communications that used to take place as local phone calls now occur as email or instant messaging;

o By the end of this year, there will be more cell phones than landlines in America.

o Two of the largest “telephone” service providers in the country are cable companies—Cox and Comcast.

o Now, Internet telephony is poised for rapid deployment, delivering yet another option…and who knows what innovation will come next.

Competition is not merely a reality, it is the defining reality of the new communications marketplace…and not just in the big cities.

This past Sunday, the Anchorage Daily News ran a story on a new choice available to consumers right here in Alaska: The choice to take your phone number with you if you change cell phone providers…and even take your home number with you if you want to become a wireless-only household, like 8 million Americans already are today.

Without question, all of these choices add up to good news for consumers. It further expands your options…and gives you greater convenience and power in selecting services and providers based on price…on quality…on features…on whatever is important to you.

But this evolution—from monopolies to real consumer choices—begs an important policy question: What constructive role should the government play in this new environment?

First and foremost, here in Alaska we are reminded that even amid a technology and marketplace revolution, some priorities must remain the same. With the rise of new technology, such as cell phones and the Internet, for example, our leaders have increased their emphasis on ensuring one high standard for addressing public safety and law enforcement needs, from 911 to wiretapping.

Next up must be universal service—ensuring essential telecommunications services remain affordable, accessible and reliable to all Americans—regardless of geography or income. Nowhere is the case for universal service more compelling than here in Alaska.

Local phone companies here receive about $85 million a year to help offset the high-cost of keeping people connected. And, 70% of universal service funds available to rural health care facilities come here to Alaska.

Telecommunications exist to defy geography. So long as communities need help with the costs of infrastructure to overcome those boundaries, the Universal Service Fund will be essential.

Unfortunately, the program is in significant jeopardy today—double jeopardy, in fact, as it is squeezed on both the supply side and demand side.

The costs of the program are growing exponentially as more companies gain access to the fund, even though they often do not have extensive infrastructure costs to support.

At the same time, fewer calls are taking place over wireless and landline networks, which are the primary funding base for universal service.

The result is a downward spiral: The more companies gain access to these resources…the higher the universal service fee must be to cover the costs…the more traffic migrates to newer platforms, like the Internet and cable, which are not required to pitch in.

The solution is obvious: Pass the hat to everyone. Like the rest of the 1996 Telecom Act, these rules were written before the newer platforms were even imagined.

So rewrite the rules for today’s world and ask everyone to contribute. The burden is shared by all…spread across a far broader group of companies…and the future of universal service is more secure.

Of course, once you safeguard key social objectives—from 911, to law enforcement, to universal service—you have to look more broadly to the marketplace and the appropriate role of regulation in it.

And, here I must say that Alaska is ahead of the curve.

I understand you had a debate in your recent legislative session about getting rid of your state regulatory agency. Your debate shows you recognize how much the landscape has changed.

In reading some of the coverage of the debate, I was struck by a notion that seemed undisputable: It was that regulators could do a better job than legislators of setting prices.

I would pose a more fundamental question today: Where there is real competition here in Alaska, what is either branch of your government doing setting prices?

Economic regulation aims to protect consumers where they do not have choices in the marketplace. In fact, our telecom rules trace their origin back to 19th century regulations designed to protect captive grain shippers, who were served by just one railroad. What happened in the latter part of the 20th century when competition arrived in the form of a truck? Economic regulation of railroads went away...and free markets and consumer choice took over.

I believe it’s time for the same to be true in telecommunications. Local phone companies face competition from wireless providers…cable companies…even utilities. Yet only local phone companies are denied a free marketplace. We remain subject to heavy-handed rules written before this competition existed.

Some assume local phone companies want our competitors to suffer alongside us. Not true.

We simply ask for the same right given everyone else to invest and compete head-to-head…free from regulations better suited to the former Soviet Union than the world’s leading free market-economy in the 21st century.

We simply ask for the same freedom our competitors already enjoy…the freedom to succeed or fail on our own merits and on the preferences of customers, rather than those of uneven regulation.

When you strip away all the acronyms and the rhetoric, that’s what the telecom debate boils down to today: Are there greater social and economic benefits with continued regulatory central planning…
or with the choices available, is it time to allow free markets and consumers themselves to guide telecom’s evolution?

I firmly believe it is time to unleash free markets, so they can bring to telecom what they have brought to the rest of our society: great innovation…consumer choice…lower prices…a rising standard of living…and the most resilient economy the world has ever known.

Fortunately, this line of thinking is gaining significant momentum. Congress has vowed to revisit the Telecom Act in 1996. And, as you may know, the D.C. Circuit Court of Appeals recently struck down the current regime of government-set wholesale pricing—called UNE-P.

UNE-P is a poster-child for regulation gone amok. It is a heavy-handed regime based on two central and false premises:

One…that only the government can bring competition—a premise flatly disproved by the inroads of wireless, cable and Internet ventures;

And, two, that competition can only occur if the government manufactures it by forcing companies that invest in local telecom networks to sell access to their networks to competitors that don’t invest and to do so, quite often, at a financial loss.

The argument went that such favorable treatment was necessary so competitors could save money and ultimately build networks of their own. But of course, with that kind of arbitrage opportunity, there’s no incentive to do so. Instead, we see a deflationary approach that discourages investment and costs the average U.S. household more than $100 a year.

Privatizing risk and socializing return is not a good economic model for America, and it’s particularly bad in places like Alaska where a pro-investment telecom policy is so critical.

Fortunately, the District Court recently threw out this regime… criticizing the FCC for clinging to what has become nothing more than corporate welfare. As the Administration decides whether it will appeal that ruling, which we are working against, the FCC has called for commercial negotiations.

And, this call has proven that market-based competition works. Several agreements have been reached…much like what you saw recently in Juneau with the ACS-GCI agreement that brings competition based on commercially-set wholesale rates, rather than those set by the government.

The Wall Street Journal on Monday argued forcefully to allow the market to work, recommending that state commissions be prevented from inserting themselves into private negotiations.

There’s currently a June 15th deadline for the Supreme Court appeal. While no one knows for sure what the Administration’s decision will be, I hope that President Bush’s recent remarks on the importance of broadband deployment will rule.

Whether regulators are ready or not…whether legislators have rewritten the rules or not…the communications marketplace is evolving at a dizzying pace…one set not by policymakers…but by the furious pace of a technology revolution. It’s time for U.S. policy to acknowledge that fact and look constructively to the future…by safeguarding universal service, 911 and other vital social objectives amid this sea-change…and, above all, by keeping the faith in free markets and the American belief that great things can come for our country if innovative companies are free to compete head-to-head, driving powerful new cycles of investment, growth and opportunity.

That said, I’d like to thank you again for the opportunity to visit with you today. Standing in this hotel named after the great explorer James Cook, I’m reminded of your state motto “north to the future.”

From the commitment of local phone companies to providing service in some of the most challenging conditions in our nation…to the independent thinking originating from your recent debates on the role of regulation...it is my hope that all of America will be looking “north to the future” as we engage in this very important debate about the future of our information economy…and our commitment to seeing the full promise of the broadband future reach all Americans.

I thank you again for the invitation to join you today and for the opportunity to share the perspective of local phone companies in this important national debate.