Good morning.

Sixteen months ago, on a cold day in February, 2001, I stood on the podium at the National Press Club and stated that the Telecommunications Act of 1996 was not working.

I said that if things did not change, AT&T would be forced to withdraw from the local-residential market in New York and Texas. And I meant it. We were losing millions of dollars.

Today, on a warm June morning in the nation’s capital, I am here to tell you that things are changing.

Competition is beginning to heat up in the local market, at least in some states. But the winds of change are still shifting. We could easily return to the chilly days of the past.

That’s why it’s more important than ever that we understand how we arrived at where we are today. And what the stakes are from here on out.

There are two points I want to discuss with you this morning:

First, the vision embodied in the Telecom Act of 1996 was the right one.

The deal that was struck called for the Bells to open their markets to competition by permitting competitors to lease capacity on Bell facilities for both voice and data.

Then the Bells would be permitted into the long-distance market.

My second point is that after a long and often painful startup period, the Telecom Act is now finally beginning to work.

Today we have local competition developing in several significant states. And reality is again confirming AEI’s belief in the fundamental economic principle that competition enables benefits for markets, customers, and the economy.

Now it becomes the responsibility of everyone involved -- industry players, legislators, regulators, and the courts -- to insure that competition continues to be allowed to work.

When it was signed into law six years ago, the Telecom Act was greeted like Michael Jordan, brought in to save the franchise. And with good reason.

The members of Congress knew the history of competition in the communications industry.

They knew the local monopoly could be ended only if the Bells leased elements of their local networks to competitors. They knew because it was the way the long-distance monopoly had been successfully broken a decade earlier.

Like other historic pieces of legislation, the foundation of the Telecom Act was a compromise.

The Bell companies agreed to the deal in exchange for getting into long distance.

Later Verizon and SBC re-confirmed the agreement and pledged to lease access to their networks in return for permission to carry out their mergers.

Today the seven regional Bells and GTE have merged to become four. And all four are entering the long-distance market.

The Bells got what they wanted. But now it appears they do not intend to keep their promise. Instead, they’re using political muscle in Washington and the states to neuter the Telecom Act.

While we should have expected the Bells would try to avoid opening their markets, we never expected the willingness of some policymakers to buy into their claims.

For example, the Bells claim they need regulatory freedom to give them the incentive to deploy digital subscriber lines, or DSL.

But they are already serving more than two million DSL lines. And they’re adding thousands more every day.

Last quarter, BellSouth grew its DSL service 140 percent. The Bells have reportedly invested nearly $5 billion in broadband DSL over the past two years.

In fact, between DSL and cable, about 80 percent of the homes in this country are already within reach of broadband service.

So despite the Bells’ claims to the contrary, broadband services are widely available.

And people are signing up for them. Nearly 15 percent of all households are already broadband users. That’s a faster growth rate than we saw for color TV or compact discs.

And broadband growth is being fueled in part by competition in the local exchange. Our experience is that customers first switch to AT&T for their local-residential service, then they sign up for our DSL service.

The second Bell claim -- after saying they have no incentive to invest in broadband -- is that they need regulatory "parity."

Of course, if they really want parity with the cable companies, they’ll need to be regulated by 30,000 different municipalities, just as cable is today.

The Bells also enjoyed nearly a century of government-guaranteed returns, subsidies, and benefits that the cable companies did not.

When the Telecom Act was passed, the Bells provided over 95 percent of local-exchange services. Today they still have about 95 percent of the residential and small-business market.

Meanwhile, cable companies face competition for all of their services. In recent years, cable has lost more than 20 percent of its core video business to competitors like direct-broadcast satellite. And today, four out of every five new customers go to the competition.

Is this the parity the Bells want?

The Bells also claim that they need to cut off competitors’ access to Bell facilities -- the so-called unbundled network elements platform, or UNE-P. In a form of economic "tough love," they say it will force their competitors to build their own facilities.

Yet they know that leased facilities are an essential first step to creating facilities-based competition. And they should know that industry investment is, if anything, higher in states with the most UNE competition.

States like New York, Texas, and Georgia have competition over leased facilities. They also have higher levels of Bell investment than California, Massachusetts, and New Jersey.

For our part, AT&T has deployed more switches, extended fiber to more buildings, and serves more customers using our own switches in New York, than in California. And we’ve invested heavily in DSL facilities.

So why have we invested in facilities when we can lease from the Bells? Simply because a competitive market encourages facilities investment by both sides to reduce costs and enhance services.

Facilities investment is made possible by leasing because it lets competitors gain scale in customers and revenue. The recent Supreme Court decision on the Telecom Act said as much.

The court said the Bells’ claim that the current pricing system is unreasonable because it does not produce facilities-based competition "founders on fact."

The truth is that a similar system of leased facilities produced a hotly competitive long-distance market.

In fact, today the Bells lease facilities from carriers like Sprint, WorldCom, and AT&T so the Bells can provide long-distance service.

When they lease facilities from us, the Bells receive market-driven, cost-based prices. When they lease to us, prices aren’t based on markets or costs. At least not without strong state oversight.

Discounts the Bells offer their competitors for local-residential service average about 20 percent. Discounts AT&T provides to its long-distance residential competitors run about 70 percent or more.

There are other disparities. For example:

Confusing? Absolutely.

These inconsistencies explain why consumers in some states are enjoying the benefits of competition and others are not.

But if I came here today with nothing more to report than the Bells have reneged on their promises, it would be a story no different from the one I told 16 months ago.

Instead, I have more hopeful news:

We now have clear evidence that the promise of the 1996 Telecom Act is beginning to be fulfilled. And the states are leading the way.

Millions of residential and business customers have switched their local service to competitive carriers. They’re starting to enjoy the benefits of price competition and product diversity that only competition can bring.

We finally have a formula for success with regulators who are committed to enforcing a law that works. It’s a formula that we need to replicate throughout the country.

Nowhere have regulators been more dogged in making the competitive market a reality than in New York State. I’ve been inspired watching their public service commission bring New Yorkers real competition.

The commission spent nearly two years reviewing Verizon’s pricing scheme. In the end, it insisted that Verizon set considerably lower wholesale rates for unbundled network elements, or UNEs.

It was a tough struggle against an entrenched monopoly. But it’s provided the people of New York with an extensive and effective local-service alternative.

AT&T and a raft of others now compete vigorously with Verizon for local-residential customers. And we’re talking about genuine competition. There’s nothing synthetic about it. Just ask customers who are choosing better rate plans, superior customer service, and lower prices.

When Verizon raised its rates in New York, AT&T didn’t. Instead, we guaranteed we would keep our prices for at least a year.

AT&T LD customers who switch to us for local service can save upwards of $4 a month on local, toll, and long-distance calls.

Multiply that by the more than one million local customers we serve in the state, and consumers could save more than $50 million a year in New York alone.

Today approximately 3 million business and residential lines in New York are served by competitive carriers.

About 1.7 million of those are provided over unbundled network elements. That’s nearly the same number as are provided by cable companies nationwide.

Unbundled network elements are a basic building block of today’s competitive market, both voice and broadband.

They are the method the Bells agreed to for creating competition in the local exchange. And it was that agreement that allowed them to complete their mergers and push into long distance.

The whole concept of leased facilities was first shown to be real and sustainable years ago in the long-distance market.

It was so effective that today carriers continue to lease capacity from each other. And that includes the Bells.

New York isn’t the only state where regulators got UNE prices right. They got them right in Michigan, Illinois, Indiana, and Ohio, too.

We entered the Michigan residential market in February. In three months, we signed up more than 100,000 customers.

Last week we opened for business in Illinois, and today we’re announcing that we’re up and running in Ohio.

Meanwhile, California’s public utilities commission recently slashed UNE rates by more than 40 percent. That brought California into line with states like Michigan, Illinois, Indiana, and Ohio.

And that’s why, if conditions remain as they are today, AT&T will be in the local-residential market in California in the third quarter of this year.

We hope other commissions follow the lead of the bellwether states. And it looks like they will:

Today AT&T local service is already available to more than 20 million households around the United States. If the states continue to choose competition over monopoly, AT&T local service will be available to more than 50 percent of Bell consumers by the end of this year.

The message is clear: Local service competition is heating up.

Now is not the time to change the rules. Misguided legislation or ill-conceived regulatory action would return us to the cold non-competitive climate we left six years ago.

Today we need to build on the gains of the past few months. We need to create certainty in the marketplace.

Last month’s decision by the United States Supreme Court was widely seen as providing some stability to the industry.

By a 7 to 1 margin, the court considered and rejected every one of the Bells’ arguments against the wholesale pricing standard the FCC adopted six years ago -- the same standard that states like Michigan use today.

It was the second time in three years that the court has clearly ruled in favor of consumers and competition in the local market.

Once again the court upheld the basic intent of the Telecom Act -- free and open competition in all communications markets.

In clear, unambiguous terms, Justice Souter said FCC rules aimed at encouraging competition are wholly in keeping with the intent of the Act.

In a bit of straight talk that every businessperson and every consumer could understand, he said that the upshot of the Bells’ scheme would be higher retail prices.

But that period of certainty lasted less than two weeks. Some pessimists already refer to it as "The Golden Age of Competition."

That’s because the Court of Appeals here in D.C. brought back the ambiguity.

The judges returned for reconsideration by the FCC the entire list of facilities that competitors are allowed to lease at wholesale rates.

So today we finally have a clear pricing standard. But now there are new questions about which facilities the standard applies to.

It’s enough to make investors run for the exits. And they have. And they will keep running until we have a strong and unambiguous commitment to competition.

The good news is that we have something today that we haven’t had for the past six years: We have real examples of successful local competition.

No one can say that we don’t know how to make local competition work in the residential market. It’s working in New York. And momentum is building in Michigan, Illinois, Indiana, Ohio, and California.

Today we are at a crucial juncture in our country’s communications future. If we are ever to enjoy the fruits of competitive communications, it’s essential that we let the Telecom Act and the states do their work.

To change course now would place a freeze on local competition that we might not see lifted again in our lifetimes.

But if we have the political courage to do no harm, to let the Telecom Act stand and continue to work as it is working now, America has an unequaled opportunity.

We will have a competitive local telecommunications market for the first time in nearly a century. And with it, all the advantages and possibilities it can bring to each of us, and to many generations to come.

Thank you.