Legislature(1995 - 1996)
09/27/1995 09:10 AM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 346 - TELECOMMUNICATIONS UTILITIES TAPE 95-61, SIDE A Number 000 [Due to a taping malfunction part of the testimony on HB 346 was recorded over] An unidentified speaker referred to local competition and stated there are two very different sets of issues which need to be addressed. The first issue relates to letting local competition happen. The bill does nothing in that regard. The unidentified speaker said the bill supposedly encourages competition. You cannot find those words in the bill. One would think it would say, "Local phone service competition should be encouraged." HB 346 doesn't even say it should be allowed. He said there is a host of issues that have to be addressed before local phone service competition can happen. The unidentified speaker informed the committee that interconnection is the most basic. He said if he were in the competitive local phone business and went to committee members to get them to sign up for his business, the committee members wouldn't obviously sign up for his business if they can't call any of the people who remain on Anchorage Telephone Utilities (ATU) system. You have to have interconnection between the two networks so that the people who sign up with the new provider can call the people who are signed up with the old provider. Interconnection in this business means much more than that. There are some details that have to be worked out and the details are totally unaddressed in the legislation. For instance, one is called "number portability." The particular phone number that people have, and particularly the ones that businesses have, is often very important to those businesses. He noted his parents own a book store and they have the phone number 782-BOOK. You see a lot of this with 800 numbers. Frequently, it is because a number describes the business in some way. There needs to be number portability as businesses have their number printed on stationary, advertisements, etc. The unidentified speaker said businesses would have a real problem going to a new customer if they have to change their phone number. He explained this is something that the long-distance company went through with 800 numbers. Currently, if you have an 800 number and you change from Alascom to GCI or vice versa, from AT&T to MCI, you keep your same 800 number. You do not have to give up your number when you change carriers. That is also necessary at the local level. The unidentified speaker said there must be something called, "Dialing (indisc.)," so you don't have a situation where if you wanted to use GCI as your long-distance carrier, you would have to dial a long series of numbers as compared to using Alascom where you only had to dial the seven numbers plus the area code. He said local phone customers can't be required to dial ten numbers while the existing carriers' customers only dial seven numbers. That is a major barrier and is something that must be worked out in the interconnection. The unidentified speaker said these are the kinds of issues which are addressed in legislation of other states. They say they're going to have full local competition, but you can't have it without addressing these matters. He explained HB 346, in its current form, doesn't address those issues. Instead, it addresses only the second set of issues which concerns the changes in the...(End of testimony). CHARLES E. MCKEE was next to testify on HB 346. He noted the bill is also listed on the docket with Alaska Public Utilities Commission (APUC), dated September 27, 1995, R-399. He explained he has difficulty with the lawyers that are working with APUC in their determination of the act before the committee, as well as their determination as to when someone can speak on an R docketed document or regulatory process if the person hasn't filed prior to, in writing, stating they wish to make public comment when it comes up on the docket. Mr. McKee said the reason being is legal counsel working for the state of Alaska has allowed a situation to continue to such an extent that he was forced to file a Claim of Lien which was issued to the Governor, September 21, 1995. He read the Claim of Lien to the committee. He informed the committee members that he didn't turn his Claim of Lien into the Department of Law because he would have received a gag order instantly because they are the defendants. How can they defend themselves if he makes the issue public that they've been skirting justice all these years. Mr. McKee explained the reason he did this is because he doesn't want to discriminate. He stated the largest school board in the state passed nondiscriminatory resolutions but yet these individuals and organizations, who are enlarged, wish to discriminate against him. Mr. McKee said one of his interests is to buy Anchorage Telephone Utility (ATU), in conjunction with the trust that is supposed to support the public library structure financially. He said take that foundation and marriage it with the accounting department of ATU, and also deal with the mining aspect. MR. MCKEE explained to the committee he has a 1950 Mining Regulatory Act that is federal and territorial in the state of Alaska. He said that is how this state was brought into recognition as a state, because of the mineral extraction and money made off of the seafood industries. He noted he has also given the Claim of Lien to the Speaker of the House, the Senate President, as well as other corporations in Anchorage. Mr. McKee said he would also be happy to give the committee a copy. MR. MCKEE said in reference to HB 346, he suspects it deals with pay telephones, of course you're using coins which to a degree, makes it a legal purchase but you're buying time. Part of his mathematical equation is a conclusion of time as well as the fact that the seal is a original (indisc.) - have the right to stamp. Mr. Mckee said of course when he refers to communist mind, he isn't referring to flesh and blood. Principalities in high places is what he is referring to. He said his weapon is not warfare of the flesh, but is powerfully God for overturning strongly and (indisc.), for we are overturning reasonings and very lofty things that raise up against the knowledge of God. He continued to read scripture from the Bible and discussed war time and peace time currency. CHAIRMAN KOTT said next person to testify was Don Schorer of the APUC. DON SCHORER, Commissioner, Chairman, Alaska Public Utilities Commission, Department of Commerce and Economic Development, said he was in attendance to respond to questions. CHAIRMAN KOTT informed the committee he understands the APUC had a work session the previous Monday. MR. SCHORER said he would like to make a few comments regarding that work session. He explained the APUC did have a workshop the previous Monday in which ATU, ATA, GCI and AT&T Alascom all attended. His noted his main purpose for attending the Labor and Commerce meeting is to answer any questions the committee members may have regarding their fiscal note. He pointed out Mr. Lohr was also in attendance and is the technician on the bill. Mr. Schorer said he believes the purpose of the bill is to promote competition and the APUC is in no way opposed to that whatsoever. The APUC has not formally taken a position as they haven't been asked to. He noted he would leave the committee members a copy of the tapes from their work session and will forward a transcript when it is completed. CHAIRMAN KOTT said he believes he heard the sponsor suggest that the bill is to facilitate competition. He asked if there would be more regulation involving the legislature in order to become a more competitive state. MR. SCHORER said it depends on the final outcome. He referred to the bill, in its present form, and said there is going to be a need for a lot of regulation. He indicated that at the work session, there was discussion that the APUC would have to develop or enforce some regulations regarding different parts of the bill. He said he really couldn't give a definitive answer but the way the bill presently reads, there would be more regulation. TOM EDRINGTON, General Manager, Anchorage Telephone Utility Telecommunications, was next to testify. He noted he is in attendance with Mark Foster and Chip Shooshan, via teleconference from Bethesda, Maryland. He informed the committee members he has personally been in the telephone industry for 25 plus years, retiring as a vice president of Pacific Bell before coming to Alaska. His area of expertise is focused on technology evaluation implementation policy impacts. Mr. Foster has been a commissioner with the APUC and Chip Shooshan has been involved in telecommunications strategy legislation at the national level for many years. Mr. Edrington said they are in attendance to talk about HB 346. He said he would offer some observations about the bill that he believes would be good to remember as hearings progress. First, the legislation is necessary and mainstream. Telecommunications policy at the national levels are undergoing profound changes and that legislation, should it pass, will leave wide discretion to the states in its administrative implementation. Alaska needs to be prepared to meet that challenge should the federal legislation pass. Secondarily, is to mainstream. Over 30 states currently have similar legislation on the books, the first such legislation being passed in 1983. Mr. Edrington said this is not a radical proposal, this is a moderate proposal. The second point to keep in mind is Alaska's scope and scale. In Alaska, at least two of the companies, GCI and ATU, have net incomes of around $10 million annually. Much of this legislation was built around a titanic struggle between the Bell operating companies, the baby Bells, and the long-distance carriers, where there are net income streams of a billion dollars a year and hundreds of millions of subscribers. Mr. Edrington said when you look at Alaska, you do need to make some accounting for the fact that things are different and smaller, both in the way we regulate our long-distance services as well as the way we regulate our local services. The things that apply on a huge scale don't necessarily work in the small scale of Alaska. Finally, technology has changed the economics of the telecommunications industry fairly dramatically. People just recently paid over $7 billion for licenses for personal communications service (PCS) which is a radio frequency capability to communicate directly with customers. Mr. Edrington said in Alaska, there are two parties who have paid over $1 million for those licenses. Basically, technology has removed most of the barriers to entry in this market and made entry into the market quite affordable on a number of fronts. MR. EDRINGTON said he believes that we need to keep in mind the legislation is mainstream, it's moderate, we do need to keep in mind scale and scope when setting rules. The technology has changed the nature of this industry considerably. Mr. Edrington stated that concludes his remarks. He said Mr. Shooshan was waiting to testify. HARRY (CHIP) M. SHOOSHAN, Strategic Policy Research, Incorporated, testified via teleconference. He said he hopes that in the months ahead when he is in Alaska he has an opportunity to discuss the issues. He said he would submit the prepared statement, for the record, and would take a few minutes to summarize his views. He explained he recently searched the Internet and came across a page of facts about Alaska. It was noted that the state fossil is the Wooly Mammoth. When recently reading through the APUC code, Mr. Shooshan said he was struck that it could easily be referred to the Wooly Mammoth of utility laws. It really is a fossil, an artifact of era. Mr. Shooshan said he understands that some parties may have heard the committee, during the course of these hearings, refer to preserve this fossil - to stick with the status quo. He suggested dispatching it to the public policy museum. Mr. Shooshan said he believes Alaska needs new regulatory tools and new public policy direction. He applauded Chairman Kott and Representative Moses for getting the process started. He said he believes HB 346, the Alaska Telecommunications Act of 1995, provides a sound basis for revamping the Alaska code to prevent efficient competition and it will help to usher in an era of new opportunities that ATU suggests. It's a fundamental principle in our free economy that firms respond to incentives. Thus, the (indisc.) provided by the marketplace or by regulation, where necessary, as a surrogate for marketplace forces that are important. He said the legislature has the opportunity to set the direction of public policy in this final sector and to make certain that regulation provides the right incentives, in this case, incentives to invest, to innovate and supply quality service at appropriate prices. As competition intensifies, spurred by federal legislation as well as by actions that are taken in Alaska, regulation must adapt to the new environment. Mr. Shooshan said he believes Alaska can and should move ahead without waiting for the enactment of federal legislation. He indicated Alaska shouldn't be bound, in any way, by the specific approaches through the various issues taken in that federal legislation or in legislation adopted by other states. MR. SHOOSHAN said he sees the legislation, the proposed act, has having three essential components. One component is it seeks to provide for fair competition and establishing terms for interconnections and for access to essential facilities. It provides for streamline regulations of new and competitive services, and while retaining a traditional rate of return regulation, it modernizes the regulatory treatment of investment and depreciation. Mr. Shooshan said he would like to address each of the essential components in more detail starting with interconnection. First, the obligation to interconnect should run both ways. That is they should be symmetrically imposed on all competitors, not simply on the incumbent firm. Second, while some parties will undoubtedly urge the legislature to go further by requiring ATU and other local telephone companies to desegregate their networks, requiring the interconnection of competitors is sufficient to permit local competition. The legitimate needs of competitors to be determined in part by who they are and by their relative position in all telecommunications markets. ATU, for example, is not now in the long-distance business, however, it faces competitors who are large formidable players in that business including AT&T, the new arm of Alascom, and GCI with it's partners MCI and British Telecom. These firms operate successfully in many markets around the world, offer a range of services and possess substantial resources, including substantial expertise in wireless communications. These resources will facilitate their vertical integration into the provision of local telephone services. In fact, these firms have the capability to bypass ATU's network completely to serve a wide range of customers. Third, the proposed act would require that the cost of any modifications or additions needed to facilitate interconnection are borne by competitors. Mr. Shooshan said in principle, this is unobjectionable. Fourth, Mr. Shooshan said he is unclear about the effect of conditioning interconnections in the absence of, "Injury to the owner or to other users of the facilities," and especially about removing the word, "substantial" which appears in the code today. If that language is read to require the APUC to consider whether competition generally might result in economic harm to a public utility, he is concerned that such language could be used by incumbent firms to block efficient competitors from obtaining interconnections. MR. SHOOSHAN referred to the second element of the bill, the streamline regulation, and said as competition continues to develop, it is appropriate to tailor regulations to fit the new circumstances. This means allowing the incumbent firm to respond when competition exists for a particular service or group of services. The proposed act's standards for classifying competitive services appropriately focuses on the availability of a substitute services and not on how many customers may actually choose to buy the substitute services. That's a form of measuring market share. The problem with the latter approach is it actually penalizes the incumbent firm for being an effective competitor. It forces the incumbent to lose shares by being unresponsive to consumer's needs in order to gain regulatory flexibility. He stated it is also important that firms have the incentive to introduce new services by providing for streamline regulation of those services. The proposed act would encourage regulated public utilities to innovate. Establishing a price floor, as the legislation would do based on incremental costs, is well supported in the economic literature and is consistent with the direction that public policy is going in other jurisdictions. Mr. Shooshan explained the purpose of a price floor is to provide regulatory, in addition to antitrust protections, against predatory pricing by a firm with market power. While competitors can be expected to argue to the legislature that incumbent firms should be kept under tighter rein, Mr. Shooshan believes the legislation should seek to avoid to the extent possible, a regime where the competition sets its prices based on the posted prices of the incumbent and where competitors are able to reprice their services while tying up the incumbent in the regulatory process. He said a question was asked earlier about whether more regulation may be needed in the interim. He suggested that the answer to that question is probably yes in that regulation will be required during the transition to competition, but the goal of that regulation should be to protect competition and not to protect competitors from competition. The full benefits to competitive markets can only be realized if regulation is appropriately streamlined. It is important to make these changes now so the regulatory ground rules are clear for all parties in the future. The goal after all is to have competitors fight it out in the marketplace rather than in the hearing room. MR. SHOOSHAN explained the third essential feature of the bill is its treatment of investment and depreciation. It would make important changes in the regulatory treatment of the valuation of property and the depreciation of investment made by public utilities. He said he believes these reforms are positive and he can support them fully. They are certainly reflective of the direction that public policy is going in the federal arena and also in the states around the country where he has had the privilege to work. MR. SHOOSHAN said in conclusion, overall he believes the Alaska Telecommunications Act of 1995, moves public policy in the right direction. It provides for incremental rather than radical change and represents a measured approach to modernize telecommunications in Alaska. As such, the proposed act is certainly consistent with developments elsewhere and with sound public policy. He thanked the committee and asked if there were any questions. The following is the written statement Mr. Shooshan submitted for the record: Testimony of Harry M. Shooshan III on HB 346, "The Alaska Telecommunications Act of 1995" September 27, 1995 Mr. Chairman, members of the Committee. I am Harry M. Shooshan, a principal in Strategic Policy Research, a telecommunications consulting firm based just outside of Washington, D.C. I am appearing here this afternoon on behalf of ATU Telecommunications. Although my complete bio is attached to this testimony, I would like to mention at the outset that I had the opportunity to help develop public policy in telecommunications for over a decade as a Congressional staffer, including six years as chief counsel to what is now the Telecommunications and Finance Subcommittee in the United States House of Representatives. After leaving the Congress, I have worked on issues of competition and regulation for a number of clients in both private and public sectors. For example, I have just completed a project for the Iowa Utilities Board (the equivalent of the APUC) related to implementation of local competition as mandated by that state's new statute. I have also consulted with the regulatory authority in the United Kingdom. My private-sector telecommunications clients have been primarily local exchange carriers, but I have also done some work with long-distance companies in the United States and Canada on pricing flexibility and regulatory modernization. I am pleased to have been asked to review HB 346, "The Alaska Telecommunications Act of 1995," and I am delighted to participate in these hearings on such an important measure. I intend for this testimony to provide a national perspective on this legislation. While I am familiar with the major players in Alaskan telecommunications, I do not appear this afternoon as an expert on your state and its needs. I consider myself a resource upon which this committee might draw as you consider the revisions to the Alaska Code proposed in this new legislation. On the whole, I believe that "The Alaska Telecommunications Act of 1995" provides a sound basis for revamping the Alaska Code to permit efficient competition and will help to usher in an era of "new opportunities" in this state as ATU suggests. I. Introduction The only constant in telecommunications today is change. In fact, as one observer noted, the world is changing so fast these days that the person who says it can't be done is generally interrupted by someone doing it. We have come to think of telecommunications, appropriately, as a form of infrastructure which is as critical to today's expanding information economy as roads, airports and shipping channels are to our traditional industrial economy. There have been a number of studies in recent years (some of which I have been privileged to author or coauthor) that have demonstrated beyond doubt that telecommunications matters in supplying tools for economic development. I note that the Alaska 2001 Advisory Committee, chaired by Lt. Governor Ulmer, has nearly completed such a study. But just as telecommunications matters, so do public policy and regulation. This is because so many of the firms that supply the vital telecommunications infrastructure are regulated. It is a fundamental principle in our free economy that firms respond to incentives. Thus, the incentives provided by the marketplace, or by regulation where necessary as surrogate for marketplace forces, are important. As the legislature, you have the opportunity to set the direction of public policy in this vital sector and to make certain that regulation provides the right incentives; in this case, incentives to invest, to innovate and to supply quality service at appropriate prices. As competition intensifies, spurred by federal legislation as well as by actions you take here in Alaska, regulation must adapt to the new environment. As I see it, in the brave new world, the information superhighway will not be some monolithic structure, but rather "a network of networks." Both wired and wireless; terrestrial and satellite. Many of these networks will ultimately be interconnected, with the public switched network serving as the backbone of the new information superhighway system. The switched network will likely have an important continuing role to play for many customers in providing the on-and off-ramps to the information superhighway. Furthermore, the lines between industries that have existed in the past as a result of public policy and regulation will increasingly become blurred or will be erased altogether. For example, in the future, the labels LED, CAP, and INC will be meaningless. We will not think of wireline and wireless as being two different industries, but rather as two different technologies for delivering essentially the same services. Similarly, we are moving to a world where any of a number of companies will be providing video, voice and data, regardless of their origins as cable companies or telephone companies. While the pending federal legislation will speed up this process, I believe these changes will occur whether or not we have a new Communications Act. Regulatory policy should anticipate these changes and seek to balance the needs of established providers, new entrants and users. In the words of Alaska 2001 Advisory Committee's draft report to the APUC: "In markets where competition is found to be in the public interest, state statutes and commission regulations should be amended to provide for an orderly transition to competitive markets in a manner that is fair to all concerned." I couldn't have said it better. II. The National Environment The past few years have been marked by a wide range of activity on the public policy front in telecommunications. This activity includes that consideration, and now likely enactment, of the first complete overhaul of federal telecommunications law in over sixty years. While a rewrite of the 1934 Communications Act is long overdue, Congress is simply following the lead of a number of state legislatures that have also enacted sweeping new telecommunications laws. These states include Nebraska, Illinois, Virginia, Tennessee, Florida, Iowa, Georgia, Hawaii, Minnesota, North Carolina, New Hampshire, Texas, Utah, and Wyoming. In addition to these legislative actions, as large number of state regulatory agencies have acted on their own to facilitate the transition to competition. Notable among these are New York, Massachusetts, Maryland, Nevada and Washington. While the details of these initiative may vary, their goals are the same - to bring regulatory policy up to date and to provide regulatory agencies with the tools they need to cope with rapidly changing markets. The approaches taken in other jurisdictions range from radical (e.g., Nebraska which effectively deregulated telecommunications markets by legislation nearly a decade ago) to more incremental (e.g., Iowa, which left more discretion with the regulatory agency). The pending federal legislation is far-reaching, although it would leave a great deal of implementation to the Federal Communication Commission (FCC) and to federal/state joint boards consisting of FCC commissioners and state regulator who are selected by NARUC. While there are some important differences between the versions passed by the House of Representatives and the Senate (where Senator Stevens has played a key role in advocating Alaska's unique interests) which will have to be worked out in a conference committee, it is striking how much agreement there seems to be on the direction in which federal policy should go. Both bills remove the lines between industries and open local and long-distance telephone markets to additional competition. Both bills require the interconnection of new entrants, but also provide for streamlined regulation of incumbents. It is also significant that the bills recognize that there are important differences among telephone companies. The bills provide for waivers or modifications of various requirements where they are determined to be economically burdensome or technically infeasible if applied to smaller companies which are not as diversified as the Bell Operating Companies and other large holding companies in terms of geographical coverage or lines of business. It is important to note that ATU would qualify for waivers under either of the two bill; a point to which I will return later in my testimony. Before giving you my thoughts on the proposed legislation, I want to emphasize the importance of moving ahead here in Alaska. In the first place, there are unique circumstances that exist in this state that should be reflected in telecommunications regulatory policy. This Committee is in a far better position that a Congressional committee in Washington, D.C. (even Senator Stevens on it) to make certain that these circumstances are addressed in the transition to competition. Secondly, as sweeping as the final federal legislation is likely to be, it retains the concept of dual jurisdiction. The states will continue to play important roles in developing and administering the competitive policy set out in the legislation. In addition, the states retain complete control in a number of important areas, such as the setting of rates for local service. You actually may be better off if you have established your own policy in terms of minimizing general preemption. Thus, I believe you can and should move ahead without waiting for the enactment of federal legislation. Nor should you be bound in any way by the specific approaches to the various issues taken in the federal legislation...or in legislation adopted by other states for that matter. It may be that some of what you do is ultimately superseded by federal legislation or regulation. You cannot determine that outcome. What you can determine is whether or not Alaska has the right public policy for the Information Age. I think the legislation which is before you moves things in the right direction. III. Putting the Alaska Telecommunications Act of 1995 into Perspective As I see it, the proposed Alaska Telecommunications Act of 1995 ("the proposed act") has three essential components. First, it seeks to provide for fair competition in establishing terms for interconnection and for access to essential facilities. Second, it provides for streamlined regulation of new and competitive services. And third, while retaining traditional rate- of-return regulation, it modernizes the regulatory treatment of investment and depreciation. The proposed Act also provides for discounted rates to schools, health care facilities and other institutions. In nearly every respect, the proposed Act appears to move Alaska in the direction many other states are already headed. In that sense, it is hardly radical. If anything the legislation could be characterized as seeking only moderate or incremental change in the status quo. For example, 18 states have abandoned traditional rate-base rate-of-return regulation for some form of price regulation. Another 12 states have paved the way for the adoption of price regulation plans. Some states have adopted even more streamlined regulation than is proposed here. While other states have taken different approaches to facilitating competition, I believe that the reliance on interconnection in the proposed Act is sound in light of the circumstances that exist in Alaska. I would like to address each of these essential components in more detail. I will also suggest some areas in which the proposed Act might be improved, including a couple of points that concern me and, at a minimum, should be clarified. A. Interconnection of Competitors The existing joint use and interconnection provisions of the Alaska Code provide a good starting place for the implementation of competition. As I read these provisions, telecommunications utilities are already required to provide interconnection to other public utilities as well as to nonutilities where the APUC finds that interconnection to be in the public interest. I would make four observations about his provision of the code and about the proposed changes to it. First, the obligation to interconnect should run both ways; that is, it should by symmetrically imposed on all competitors. If ATU, for example, is obligated to interconnect with a competitor, then that competitor should be required to interconnect with ATU. This symmetrical treatment is important in order to assure the interoperability of competing networks and to ensure that customers of competing providers are able to reach each other. Second, while some parties will undoubtedly urge you to go further by requiring ATU to desegregate its network, I am not persuaded that circumstances in Alaska warrant such steps. The critical requirement necessary to ensure competition is interconnection. It is not apparent to me that you need to go beyond that at this time. While other jurisdictions have required unbundling, their rules apply primarily to the Bell Operating Companies and to other large vertically-integrated telephone companies (GTE, Sprint, Frontier, etc.). As I noted previously, in pending federal legislation, Congress has provided for waivers of various interconnection requirements for smaller companies that are not similarly situated. ATU, for example, is not now in the long-distance business. It faces competitors who are large, formidable players in that business, including AT&T and GCI/MCI/BT. These firms operate successfully in many markets around the world, offer a wide range of services and possess substantial resources that will facilitate their vertical integration into the provision of local telephone service. In fact, these firms have the capability to bypass ATU's network completely to serve a wide range of customers. The legitimate needs of competitors should be determined in part by who they are and by their relative positions in all telecommunications markets. In the current environment in Alaska, requiring the interconnection of competitors is sufficient to permit local competition. Moreover, you have to be careful not to destroy what I would term "the economies of the firm" which might be the result of requiring ATU to desegregate its local network. Making "it" easier for competitors to compete may make "it" harder for the incumbent to respond. The imbalance can be even greater where, as here, competitors can rely on their own economies of scope. Removing the legal barriers to entry providing for access to essential facilities, and requiring symmetrical interconnection are the essentials for permitting expanded competition. Third, the proposed Act would require that the costs of any modifications or additions needed to facilitate interconnection are borne by the competitors. In principle, this is unobjectionable. However, to the extent that the utility making the modification or addition may also benefit, then it would be appropriate for some of the costs to be shared. For example, local telephone companies benefitted from deploying the digital switches necessary to implement fully "equal access" for long-distance companies. In addition, this language should not be seen as a "blank check" that could lead to increasing the cost of interconnection beyond what is required by prevailing industry practices. Fourth, I am unclear about the effect of conditioning interconnection on the absence of "injury to the owner or other users of the facilities" and especially about removing the word "substantial." If the intent of the language is to ensure that interconnection itself does not produce technical harm to the incumbent, does not degrade the technical quality of service to consumers and does not require the incumbent to incur cost for which it is not compensated, I think the standard is sound. However, if the language is read to require the APUC to consider whether competition generally might result in economic harm to a public utility, I am concerned that such language could be used by incumbent firms to block efficient competitors from obtaining interconnection. This would, in my view, be an unfortunate result and, perhaps, an unintended result of this language. However, there is a fundamental problem with the introduction of competition into a market where incumbent firms are rate-of-return regulated. If a regulated public utility is denied an opportunity to earn a fair return on its investment as a result of competition, the regulators have abrogated an essential element of the traditional social compact. This dilemma is compounded if the regulated public utility is constrained from restructuring its rates in the face of competition and, thereby, from making itself whole. Other jurisdictions have adopted price regulation as a means of protecting ratepayers, shifting more of the risk to shareholders, and giving the regulated firm at least some latitude to adjust its rates over time. B. Streamlined Regulation The streamlined regulatory framework contained in the proposed Act is similar to approaches advanced or adopted in other jurisdictions. At the heart of the changes is a recognition that, as services offered by local telephone companies become competitive, those companies must be able to price such services in a competitive fashion. The key elements of streamlined regulation in the proposed Act are: 1. A procedure for classifying services (e.g., as "subject to competition");and 2. Pricing flexibility (including contract pricing) for new services and services subject to competition. I would like to comment briefly on these important features. Classification of Services. As competition continues to develop, it is appropriate to tailor regulation to fit the new circumstances. This means allowing the incumbent firm to respond when competition exists for a particular service or group of services. The proposed Act would define as service subject to competition as "a service where a customer may purchase a substitute service from another entity." This is an appropriate standard for classifying competitive services and has been adopted, and is being successfully implemented in other jurisdictions (e.g., Illinois). It focuses on the availability of a substitute service and not on how many customers may choose to buy the substitute service (i.e., a measure of market share). The main problem with the latter approach is that it actually penalizes the incumbent firm for being an effective competitor; or put another way, it forces the incumbent to lose share by being unresponsive to customers' needs in order to gain regulatory flexibility. As I read it, the proposed Act would also permit a public utility to file a request with the APUC to reclassify a competitive service from regulated to deregulated. The filing would have to meet requirements established by the Commission with regard to the treatment of costs and revenues, and the Commission would have 60 days to review the filing and either accept or reject it. This approach provides an appropriate mechanism for ultimately moving competitive services "below the line." It is also important that firms have the incentive to introduce new services. By providing for streamlined regulation of new services, the proposed Act will encourage regulated public utilities to innovate. Moreover, this approach will prevent a competitor from holding up a new service offering of a rival in order to gain an advantage. While the proposed Act does not define "new service," the term can be presumed to mean a service that is not now being offered. One concern with the classification of new services is that a firm could withdraw an "old" regulated service that is essential to either consumers or competitors and attempt to substitute a new service which it could price as it chooses. As long as a public utility cannot withdraw any comparable existing regulated service without their permission of the APUC, this concern is mitigated, and streamlined treatment of new services if fully justified. I believe it is also desirable to limit that amount of time the APUC has to consider a classification request. The thirty day period provided in the proposed Act seems appropriate. This should give the APUC adequate time to make its finding without allowing the process to become bogged down with competitors' objections. Once the Commission has begun to administer this new provision it can be expected to actively monitor developments in the marketplace. The Commission should generally be well aware of the presence of competitive alternatives and, thus, able to complete its review of a classification request within 30 days. The goal is to have competitors fight it out in the marketplace rather than in the hearing room. Pricing Flexibility for New and Competitive Services. The propose Act would permit a public utility to price new and competitive flexibility subject to streamlined regulatory treatment. Prices could be set at whatever level the utility-and the market-dictated as long as the price covers the incremental cost of providing the service. Establishing a price floor based on incremental cost is supported in the economic literature and is consistent with the direction that public policy is going in other jurisdictions. The purpose of a price floor is to provide regulatory (in addition to antitrust) protection against predatory pricing by a firm with market power. The streamlined regulation of competitive services includes shorter notice periods for establishing initial rates (30 days to the Commission and 15 days to the public), shorter notice for changes to existing rates (10 days to the Commission) and the ability to enter into special contracts, subject to filing a notice describing any such contract with the Commission within 10 days after the effective date of the contract. The Commission retains the ability to investigate any rate fling and to fine a public utility for rates that are determined to be below the incremental cost of providing the service in question. Similar streamlining has been adopted by many states over the last 10 years. While competitors can be expected to argue that incumbent firms should be kept under tighter rein, I believe the legislation should seek to avoid, to the extent possible, a regime where the competition sets its prices based on the posted prices of the incumbent and where competitors are able to reprice services while tying up the incumbent in the regulatory process. Consider the following observation about local competition in the region served by Bell Atlantic made by an executive at Marriott International, Inc. whom I interviewed earlier this year: "As I see it, there are two problems with (regulation of local competition): One problem is that the competition fixes their prices based on the level of Bell Atlantic's regulated rates rather than their own costs. The second problem is that Bell Atlantic can't respond competitively to their competition. That is certainly a problem. We have priced access nationwide from competitive accedes providers for our private-line network... Their pricing is almost universally, exactly 10 percent below the Bell Atlantic price. Exactly 10 percent. We have written a letter to the Maryland Public Service Commission in which we describe our concerns about these competitive failures. We told the staff of the Maryland PSC that its terrifying regime is a two-edged sword, both edges of which are inhibiting competition: the tariffs restrict the LEC's ability to compete and they simultaneously act as a standard against which the alternate carriers fix their prices. We want prices based on true competition among all suppliers, including Bell Atlantic."1 This is consistent with the views of nearly 80 private- and public-sector users whom I have interviewed during the last 5 years for a number of studies. Users want competition. However, they want the existing providers to be free to compete as well. Large users, in particular, highly value special contracts which permit them to make the kind of arrangements with their telecommunications suppliers that they can make with practically every other vendor with which they deal. Moreover, these users highly value the ability to move quickly. As an executive at Safeway, the large grocery retailer, put it: "When we want to roll something out, we want it to be strategic-fast without announcing a whole lot to the world and, in particular, our competitors. (When our suppliers are regulated) everybody in the world ends up knowing what you are doing long before you are actually to do it."2 The full benefits of competitive markets will only be realized if regulation is appropriately streamlined. It is important to make these changes now so the regulatory ground rules are clear for all parties in the future. C. Regulatory Treatment of Investment and Depreciation The proposed Act would also make important changes in the regulatory treatment of the valuation of property and the depreciation of investment made by public utilities. The proposal would establish a rebuttable presumption that once property has been included in rates, it is presumed to be allowed for ratemaking purposes. This approach is 1. See John Haring and Harry M. Shooshan III, Universal competition in the Supply of Telecommunications Services: Eight Customer Perspectives, February 8, 1995, p. 36 (interview with Gary L. Helwig, Director of Telecommunications Planning and System Design, Marriott International, Inc.). 2. Haring and Shooshan, p.12 (interview with Gary L. Helwig, Director, Information Systems, Safeway, Inc.). becoming standard in utility regulation across the country. Its purpose is to reduce the likelihood of disallowances based on retroactive review by regulators. While it is often said that "hindsight is 20-20," the fact is that firms will not make investments in new technology and new services if they risk having those investments disallowed by regulators after the fact; that is, once the investment has already been factored into rates that the utility is lawfully charging. Given the heightened risks resulting from expanded local competition, public utilities that also face the risk of disallowances will be likely to make only minimal, "safe" investments. As a result, consumers who rely on that utility may find themselves with fewer choices in the short run and even declining service quality in the long run. The proposed language would put the burden of proof on the Commission if it chose to disallow such investment for any reason. Regulation has also controlled the rate at which a utility's investment can be recovered in the prices it charges consumers. This has been accomplished through a set of complicated formulas relating to estimates of how long plant will be "used and useful." Because telephone plant is subject to federal and state regulation (it is used to provide both interstate and intrastate services), the depreciation rules that govern telecommunications utilities in Alaska are set by both the FCC and the APUC. The proposed Act establishes a rebuttable presumption that the rates and methodologies accepted by the FCC should apply to telecommunications utilities in Alaska. In general, the FCC has moved more quickly than the states to adopt depreciation rules that are consistent with changing markets and changing technology. While I have not had the opportunity to review the APUC's record in this area, I believe that taking the necessary steps to "unify" the regulatory rules relating to depreciation moves policy in the right direction. These steps are important if incumbent firms are to be permitted a reasonable opportunity to recover the investments they have already made before competition intensifies. IV. Summary and Conclusion Overall, I believe "The Alaska Telecommunications Act of 1995" moves public policy in the right direction. It provides for incremental, rather than radical, change and represents a measured approach to modernizing telecommunications regulation in Alaska. The proposed Act seeks to achieve fair competition, especially in light of the relative capabilities of the major players. It recognizes the need for streamlining regulation and for ultimately withdrawing it altogether as markets become increasingly competitive. As such, the proposed Act is certainly consistent with developments elsewhere and with sound public policy. REPRESENTATIVE ROKEBERG asked Mr. Shooshan about his statement relating to pending federal statutory changes and its relationship to HB 346. He said he recalls Mr. Shooshan indicated he thought the legislature should go ahead on their own regarding this. Representative Rokeberg said he understands that but is curious about his perspective in what's happening in Washington, D.C., as far as the federal statute. MR. SHOOSHAN said as Representative Rokeberg is probably aware, both the House of Representatives and the U.S. Senate have passed a major telecommunications reform legislation. He added that, parenthetically, he thinks in the Senate's legislation, Alaska's interests have been extremely well articulated and protected by Senator Stevens. Senator Stevens has done work on behalf of the state in making sure that special circumstances of Alaska are addressed in the legislation. Mr. Shooshan said they are currently waiting for a conference committee to be appointed and then they will proceed to work out the differences in the legislation. He said his feeling is and the feeling of anyone who has been involved in the legislative process and has spent ten years on Capitol Hill is that we're probably closer than we've ever been to major reform on the federal level. In terms of the impact on Alaska, it seems that the bill makes major changes in introducing local competition and opening markets to entry. It still preserves something that was very fundamental in the Communications Act of 1934, which is the federal statute that governs today is the concept of dual jurisdiction. That is the fact that we will continue to see both the federal jurisdiction through the FCC and state jurisdiction, in this case by the APUC, is maintained. Mr. Shooshan said he thinks that the challenge is to move ahead with modernizing the Alaska statute to pave the way for the inevitable changes that will be coming so that Alaska can be steering the ship as opposed to just being on board when the ship begins to turn. He said he believes that there will continue to be an important role for the state and the state can begin to prepare for the role by moving to change the code now. Mr. Shooshan said even if the federal legislation does not pass, he believes that it is long overdue for the legislature to give a thorough review of the code and move forward with reforms to the statute. CHAIRMAN KOTT said he recalls reading in the Wall Street Journal that there was speculation that Congress would not address this matter in the conference committee until the middle of spring. He asked Mr. Shooshan if he has any comment as to whether or not that is accurate or if it is speculative. MR. SHOOSHAN said both houses have acted and the margin on the final passage, on most of the key votes, was overwhelmingly in favor of the legislation in terms of final passage. Mr. Shooshan referred to there being a lot of jockeying for positions in Congress and said because this is monumental legislation and because there are so many different aspects and angles involved, there is actually a (indisc.) now to get appointed to the conference committee. The focus clearly in Congress is working the budget impasse and getting beyond that. He said he suspects there will be conferee names within the next week or two. He said he would be very surprised if this is delayed until next spring. There may be a bill out of the conference committee before next year and then the question will be, "What does the President do?" The Administration has threatened a veto but he believes it was largely to gain leverage for some of the concessions in the House/Senate conference. CHAIRMAN KOTT said that seems to be what the article was suggesting, perhaps at the end of the year. However, it did also mention that there was this commitment to America, i.e., Medicaid reform, welfare reform, those kind of issues that Congress had to urgently take up before the end of the year before they could pursue the Telecommunications Act. He said he doesn't know if the President has any fear of an override if he vetoes it. Chairman Kott said he thought there was concern by the Administration on the existing piece of legislation that passed. There were some problem areas that he believes the President would like to see worked out. He said he suspects that if there is not a major change, the President will veto it. MR. SHOOSHAN said his own view is that the President probably won't veto it and we won't have to see an override. He emphasized that he believes it is appropriate and necessary for the legislature to understand what's going on at the federal level. Most states have moved forward without waiting for federal legislation to make necessary changes. Mr. Shooshan urged the legislature to move ahead in any event. CHAIRMAN KOTT thanked Mr. Shooshan for his comments. MARK FOSTER, Anchorage Telephone Utility, was next to testify on HB 346. He informed the committee members he served on the consumer and engineering seats on the APUC, from 1990 through the end of 1993. Since then, he has been involved in a number of consulting engagements including utilities, natural gas feasibility studies, and electric utilities. He noted he has done work for GCI, ATU and commercial customers in the telecommunications arena. MR. FOSTER said overall, HB 346 represents an incremental first step to step away from command and control regulatory structures based on statutes which have remained substantially unchanged since the 1970s with respect to local exchange markets. It is a step toward the 1990s where telecommunications markets are becoming increasingly competitive and legislators and regulators across the country are streamlining regulations in finding ways to produce incentives for investments. Mr. Foster said as a former commissioner, he finds one of the more troubling aspects of regulations is the question of its cost effectiveness. He noted he is familiar with many cases at the APUC, where the regulatory process leads to hundreds of thousands, and in some cases, millions of dollars being spent on staff, consultants and lawyers to fight pitched hearing room battles that ultimately yielded very few benefits. This regulatory burden is ultimately paid for by all of us through higher rates and regulatory incentives which discourages innovation and investment. Mr. Foster said he believes it is important to find ways to encourage investment and to reduce the reliance on the hearing room as a place to fight out competitive battles. Given Alaska's unique geography and the increasing connection to a global economy, reforms aimed at reducing the regulatory burden in providing a vital and robust telecommunications sector are vital. HB 346 takes some important steps along that path in reducing regulatory burdens and allowing the consumers, not the government, to pick the winners and the losers in those competitive markets. HB 346 does not guarantee competitive outcome. It reduces regulations and lets the market make that determination. It does not guarantee that rates will remain unchanged. As competitive markets emerge, rates that have historically been subsidized are likely to experience upward pressure. This legislation provides opportunities for success and failure for both competitors and consumers. It does change the market structure. Mr. Foster said he had passed out additional testimony and would like it to be made part of the record. He also noted he was available for questions. CHAIRMAN KOTT said he has Mr. Foster's testimony and it would be included as part of the record. The following is Mr. Foster's written testimony titled, "Sectional Highlights: SECTIONAL HIGHLIGHTS Consistent with the legislature's approach in long distance competition, the proposed legislation provides the APUC with discretion and flexibility to deal with changing circumstances. Section 2, Findings These findings are based in part on the findings the legislature developed in 1990 in conjunction with long distance competition. (AS 42.05.800) Section 3, Common Carrier This section is amended to make it consistent with other sections of the statute concerning rates -- the "just and reasonable" standard. Section 4, AS 42.05.191, Format of Orders This amendment requires the commission to format its orders to clearly state its factual findings and legal conclusions. This is common practice at many state commissions. It provides the public with a better understanding of the basis of the Commission's decisions. Section 6 & 7, AS 42.05.301 & 306, Discrimination in Service/Discounts for Public Purposes Section 301(a) is the general rule against undue discrimination in service. Section 301(b) allows the utility to offer a new service on a trial basis to selected customers. This allows the utility to do field testing (engineering and marketing) of new services to target groups prior to any requirement to provide the new service to all customers. Section 306(b) allows the utility to offer reduced rates to schools, universities, libraries, health care facilities, museums, public broadcast stations, public safety facilities, and other public institutional communications users. I am concerned that the existing statutes effectively preclude the utility from offering discounts to schools for Internet access lines. Keep in mind, that if the school cannot otherwise afford the service, by offering the service at a discount, the utility can spread its fixed overhead over more customers and all ratepayers benefit. Section 8 & 9: AS 42.05.311(a) Joint Use & 311(b) Interconnection: There are two basic questions in these statutory provisions: 1. Under what conditions should joint use and interconnection be allowed? 2. Who should pay for the changes involved? Who should pay? The language proposed here in 311(b) simply copies the existing language from 311(a) and states that the entity requesting modifications should pay for those modifications. Under what conditions should joint use and interconnection be allowed? The proposed amendment would allow interconnection when the interconnection was not detrimental to the utility, existing customers or existing services. Sections 10 & 11, AS 42.05.321 Commission role in settling interconnection disputes In the event of disputes over interconnection, the Commission may intervene to: - require interconnection when the interconnection is not detrimental to the utility, its existing customers or existing services and - settle disputes over price. Section 12. AS 42.05.361 Filing and Inspection of Contracts: In general, all rates and contracts offered by a utility are required to be on file with the APUC. In competitive markets, this allows competitors to not only see the move of the regulated utility ahead of time, but allows them to use the regulatory process to slow down and in some cases render ineffective legitimate competitive activity and first mover advantages. The proposed change would allow a utility to negotiate and execute a contract for competitive services prior to disclosing the terms and conditions to the APUC and competitors. This would allow a practice that is similar to those in place in Colorado and Wisconsin. This is especially important where a regulated utility is in competition with an unregulated entity. The unregulated entity can change prices and negotiate contracts without any requirement for prior approval by a third party. This amendment would bring regulated and unregulated firms closer to parity in competitive markets. Section 13. AS 42.05.391 Discrimination in Rates: In general, the statute prohibited "undue discrimination." This standard allows for "due" discrimination. i.e., discrimination based on some defensible rationale. The proposed language explicitly identifies practices that are considered allowable as "due discrimination." This section provides explicit statutory authority to the Commission to support policies developed under the old "liberally construed" authority which must now be reexamined under the "reasonably implied" authority passed last session by the Legislature. Service subject to competition This establishes the allowable price floor at the incremental cost of providing service to protect monopoly customers against cross-subsidy and protect competitors against predatory pricing. Examples of this practice include: *Homer Electric Association re: Kenai Peninsula Refineries *Alaska Electric Light & Power re: Juneau Area Mining Projects of Affiliated Interests *Alascom re: Private Line and Special Contracts *Local Exchange Carrier re: Special Access *ATU re: competitive services (voice mail, centrex) In summary, the Commission has historically allowed utilities to price down to the incremental cost when a service was subject to competition. The proposed language would provide explicit authority for that practice. New service Where new services are introduced, this would allow them to be priced at or above their incremental cost. Under the old regulatory regime, new services were priced on a fully distributed cost basis, which may have been too high to develop a new market. Consequently new services may not have reached their full revenue potential or in some cases even introduced. By allowing pricing flexibility, the utility can take advantage of price points where more customers will purchase the service. This provides a "win-win" situation for the utility. It generates more revenue and a higher contribution toward common costs which helps keep other rates lower than they would have been otherwise. This provides the utility with an incentive to introduce new services and develop new markets. Waive the nonrecurring charges The Commission has routinely granted requests to waive the nonrecurring charges for nonessential services as part of a promotional offering. Matanuska Telephone Association has often waived the sign-up fees for custom calling features (call forwarding) as part of promotion to get more customers to sign up for these value-added features. This amendment would provide explicit statutory authority for that practice and expand it to include competitive services. New service on a trial basis to selected customers This would explicitly provide statutory authority to allow utilities to offer new services on a trial basis to selective customers. This will encourage the introduction of new services and products and greater experimentation by the utility in its efforts to meet the needs of its customers. Sections 14 & 15: AS 42.05.411 New or revised tariffs for Services Subject to Competition: Firms need flexibility to respond to the marketplace. To be provided an opportunity to compete, firms simply cannot wait for the regulatory process to churn through paperwork under old outdated time frames. The proposed time frames for competitive services provide modest reductions from existing statutes and are reasonable in light of what the Commission adopted for the Alaskan long distance market and what has been in place in other states since the mid-1980s in some cases. Section 16. AS 42.05.421(a): Suspension of tariff filings. These sections limit the time period that the APUC can hold a filing in "suspension" before it is either rejected, modified, or approved. The proposed language would limit that period to six months for rule changes. It would limit revenue requirement and rate design to six months before the interim requested rate went into effect, and twelve months before the permanent rate went into effect. The basic time frames have not changed in this section. The Commission's authority to extend the time a filing can be held in "suspension" is eliminated. This is particularly important given the Commission's history. Under the existing statutes, the Commission's authority to suspend a filing five times, constituting a 22-month suspension was upheld in court. This is an unreasonable regulatory burden for any firm, especially in light of the pace of change in telecommunications markets today. Section 17. AS 42.05.426 New or Competitive Services Subject to Competition Determination In response to a utility request, the Commission is required to make its determination about whether a service is subject to competition within 30 days of the filing. If a service is subject to competition, this still gives competitors at least 30 days notice that a utility is seeking flexibility in a particular market. Is this enough time for the Commission to make a determination? Based on historic practices, this appears to be within the reasonable range. The Commission has already made determinations about the competitiveness of telecommunications markets. Examples special access, Centrex and voice mail markets. These determinations did not take a lot of time. Keep in mind, the burden still rests with the utility to make its case by filing information which demonstrates to the Commission that a service is subject to competition. Just and Reasonable Findings The Commission still has six months to make its findings regarding the appropriateness of the terms and conditions of a new or competitive service. Request for Deregulated Treatment The utility may file to offer a service that is subject to competition as a deregulated service. The Commission is required to adopt regulations governing the reclassification of a service from regulated to deregulated. Section 18. AS 42.05.436 RATES for New or Competitive Services. This section requires that the rate for a new or competitive shall be at or above the incremental cost of providing the service to ensure that the service makes a contribution toward common costs. If the Commission, after investigation and hearing, finds that a rate is below the incremental cost of service, it is required to ask the utility to defend itself against a fine for offering the service below cost! The risk of fines and public notoriety provides the utility with a powerful incentive to price services above their incremental costs; protecting customers from cross- subsidy and competitors from predatory pricing. Section 19. AS 42.05.441 Valuation of property The new subsection (d) establishes a rebuttable presumption that once property has been included in rates, it is presumed to be allowable for ratemaking purposes. This provides an incentive for the Commission and intervenors to make their case about whether a particular investment should be included in rates when it is first included in a rate case. When an item is first included in a rate case, the utility still carries the burden of proof to justify the item as reasonable. After an item has been allowed into rates, the entity seeking to exclude an item from rate base carries the burden of proof. This keeps the utility from continually having to carry the burden of proof to justify items that it has previously justified. Section 20. AS 42.05.471 Depreciation Rates This subsection establishes the rebuttable presumption that the depreciation rates and methodologies accepted by the Federal Communications Commission are reasonable. The costs involved in keeping different books for both the State and Federal regulators is not likely to be worth the effort. Nonetheless, intervenors still have the opportunity to challenge the FCC regulation and demonstrate another system will benefit the public. Section 21. AS 42.05.671 Competitively Sensitive Information This explicitly requires cost and marketing information for new and competitive services to be treated as privileged records that are not generally available for public inspection, except for "in camera" review. Section 22. AS 42.05.990 Definition of Subject to Competition A new definition is added to establish the legal standard for when a service is considered competitive. When a customer has an opportunity to purchase a substitute service from another entity, the service is considered competitive. This is consistent with several Commission decisions: Alascom Private Line ATU Voice Mail ATU Centrex In addition, the Commission has allowed rate flexibility for special access for several LECs. Providing flexibility to the Commission to examine markets as they become competitive is the best way to meet the goal of drafting legislation that will stand the test of time and not become obsolete or unduly advantage one party over another. Attempts to develop a detail definition which reflects the fashion of the day are more likely to generate future requests for statutory modifications. SUMMARY Because telecommunications utilities supply a critical service for most sectors of the economy, the performance of the telecommunications sector has an important influence on the performance of the entire economy. The performance of the telecommunications sector, in turn, is influenced heavily by the regulations imposed on the utility firms. Progress on regulatory reform for telecommunications is long overdue in Alaska. Without regulatory reform, the performance of the entire economy may well be diminished. Overall, this bill represents an incremental first step toward: . streamlining regulations .providing positive incentives to the industry to invest in new and competitive markets .providing protections for consumers and competitors Thank you, I am happy to answer any questions you may have. REPRESENTATIVE ROKEBERG referred to Mr. Foster indicating that the rates have been historically subsidized and are likely to experience separate pressure and asked if that is because of the changing technology or because of the recommended changes in the statute. MR. FOSTER said he would say it's because of conventional wisdom in the industry which is that residential rates have been subsidized historically by a combination of things. One is that high long- distance access charges have contributed to residential rates. Mr. Foster said he believes as the markets become more competitive and people seek other alternatives to those access charges, it puts pressure on those subsidies. He indicated he doesn't think those will be sustained in the long run. As a result, you'll see pressure on those kinds of rates that have been subsidized. It is a combination of things, technology is part of what is driving it and changes in the regulatory structure to allow more competitive markets to develop. REPRESENTATIVE ROKEBERG asked if the subsidy is more unique towards the Alaskan market or if it is nationally. MR. FOSTER stated he would characterize that as national and indicated Mr. Edrington could speak to that. MR. EDRINGTON said it is a national phenomenon. He referred to Representative Rokeberg's question regarding technology and said the monopoly nature of this industry has all been obliterated by technology. As the monopoly nature of an industry is obliterated and moves into more of a free market configuration, the ability to over charge somebody and under charge somebody else disappears over time. We will face those kinds of transitions. CHAIRMAN KOTT asked Mr. Edrington if he is prepared to comment on any particular section of the bill. MR. EDRINGTON said he is not prepared to comment. CHAIRMAN KOTT referred to Section 6 which talks about a trial bases to select customers and said that is a new service that Telecommunications Utility can provide. He asked what the trial bases would be about as far as the length period and what type of service. MR. EDRINGTON said he thinks the goal of that provision is to allow the existing regulated telecommunications utilities the opportunity to do market trials, just as their unregulated competitors are able to do today. With respect to what would constitute a time period or what kind of service would be allowed under that provision, Mr. Edrington said he thinks the Utilities Commission is charged with sort of policing. He referred to market trials and said it is conceivable that you would have a new service like caller ID. Rather then giving that new service to everybody at once, some telecommunications utilities offer it on a trial basis so they can try and assess whether or not they can make the investment profitable if they rolled it out to everybody. Mr. Edrington said he thinks things along those lines are what is being contemplated. CHAIRMAN KOTT referred to Section 7 and said it deals with the telecommunications utilities offering a discounted service or a reduced rate telecommunications to a number of other entities, generally supported by the political apparatus. He said we are expanding existing state or federal law. Chairman Kott said people who receive some kind of social assistance befit pursuant to a means test and are offered some reduction in rate. MR. EDRINGTON explained that is an existing statute which was passed in 1990. CHAIRMAN KOTT said since the institutions in Section 7 are generally supported by a governmental body, what would be the impetus for a telecommunications firm or utility allowing this to expand. MR. EDRINGTON said it is largely in response to the demand that has been expressed. In the Alaska 2001 process, there is a great demand, particularly among the schools and education facilities, for access to improved telecommunications and to the....(End of tape) TAPE 95-61, SIDE B Number 000 MR. EDRINGTON continued to speak to internal reallocation and said he thinks that process is occurring ever so slowly in the state of Alaska. Today, we're behind compared to other states in that process. What this provision does is allow the state to provide telecommunication companies to offer reduced rates to sort of assist in the endeavor to have more telecommunications access for those particular groups. He said he thinks it is a very modest proposal and sort of gets us started down the road. CHAIRMAN KOTT said in essence, the private rate payers are subsidizing these institutions. MR. EDRINGTON said he wouldn't characterize that as a subsidy. What you're doing is giving them a reduced rate and the presumption is that those reduced rates are still covering their incremental costs. Your getting a new customer who otherwise wouldn't have been able to afford that higher rate - the standard rate. Because it's covering their incremental cost, they're likely to be making a contribution to the overhead. If you didn't pick them up otherwise, then the overheads are still there for everyone else to pick up. CHAIRMAN KOTT noted he doesn't have a problem with the provision. He referred to the institutions that are listed such as university schools and said the financial support of those institutions generally come from some governmental entity. So shifting that over to the private, so to speak, is good public policy. REPRESENTATIVE ROKEBERG asked if Mr. Edrington or Mr. Foster could outline the players involved in the state of Alaska and the terms of local exchanges, cellular services in the Anchorage area, the PSCs and any other wireless type of activities, in terms of trying to define what is called the "Info Bond" that we're all focusing on. He said he would also like to declare that he believes he owns some stock in Nextel. MR. FOSTER said Nextel is an interesting PCS kind of a company. They operate in SMDR. He said to his knowledge, they do not operate in the state of Alaska. The industry in Alaska is composed in the traditional telephone side of basically a number of local exchange carriers who provide local telephone service within a specified geographies under a certificate of convenience and necessity from the APUC. These companies range in size from ATU, which currently has about 146,000 lines in 100,000 households, down to companies such as the company Paula Eller runs, the Ruby Telephone Company, that has 50. There are probably 23 such local exchange carriers. There is also a network structure that connects for "long-distance" communications in the state. The two facilities base carriers in that duelopoly are GCI and AT&T Alascom. Additionally, in the market there are numerous cellular companies owned by the wireline side, the local exchange side, or competitors. Mr. Foster stated he is not personally familiar with those markets outside of the Anchorage area. In Anchorage, there are two cellular carriers, Mactel which is owned by ATU in whole, and a company called Cellular One, which is soon to become AT&T wireless, which is owned in whole by AT&T. Mr. Foster said the other communication players are often overlooked on the Info Bond. We have the cable companies, Prime Cable is an excellent example and they are doing a fine job in the marketplace. They have recently upgraded their system to 71 channels and are in the process of beginning to contemplate offering interactive kinds of information services to the subscribers of their cable system. Mr. Foster informed the committee there are numerous private networks provided by major oil companies. BP and ARCO maintain their own networks with their own satellite capabilities up to Prudhoe and on down into Texas. There is a whole other layer of privately owned networks that customers communicate on and, in many cases, don't use our or the long-distance carriers facilities. In other cases they use a mixture of their personally owned equipment and our equipment to construct private networks. REPRESENTATIVE ROKEBERG questioned the recent bidding relating to PCS. MR. FOSTER explained there has been recent bidding on PCS licenses. He noted PCS is a radio frequency service touted to be lower costing than existing methods of reaching customers. It is built as an alteration of the phone company for the provision of local telephone service. Two licenses for that have been sold in the state of Alaska in federal auctions. One was sold to GCI for what he believes to be approximately $1.3 million. The other was bought by a company that takes its parentage from Thomas Data System (TDS) and that license was purchased for $1 million. Mr. Foster indicated there are other licenses yet to be auctioned off. There is a current auction that is undergoing some litigation that should probably clear by the end of the year. It'll provide a third Alaska wide licensing capability and there are three additional licenses after that. Assuming different players purchased every license available in PCS for Alaska, in Anchorage you could have up to six people offering communication services via PCS to subscribers. Whether the market could economically support that is a whole other question. CHAIRMAN KOTT asked how ATU would benefit from the passage of HB 346. MR. FOSTER responded ATU will benefit because it will move from the kind of operation and market it is now in into a competitive environment. By moving into a competitive environment, it will become more cost effective, more skilled at serving customers and it will become a hunting cat. In many ways, the legislation allows ATU to be sort of a complacent cat if it wants to be. Mr. Foster said he doesn't believe that's a healthy condition. He believes the biggest benefit to ATU is placing ATU and its culture into a competitive marketplace and allow it to learn new skills, add value to the customer. CHAIRMAN KOTT announced the next person to testify was Mr. Rowe. JAMES ROWE, Executive Director, Alaska Telephone Association, said he will make comments in support of HB 346. He said many of the states are facing local competition and have initiated local competition legislation. Certainly, the federal government has been looking carefully at federal telecommunications legislation going toward competition for the last two years. Mr. Rowe said members of ATA have been following and participating in it. They have been trying to convey to our Congressional Delegation what they think would be in the interest of the citizens of Alaska. ATA thinks it is important that the state, regardless of what the federal government does, should move toward a local competition bill that would modernize the regulations regarding telecommunications legislation. He said our state is fairly unique in its size, environment, geography and the challenges that we face in bringing telecommunications to all our citizens. A key aspect is universal service at affordable rates. Universal service is two things, it is the people they reach and the services that are available. Affordable rates are such that our citizens can afford to have that service. ATA would like to see competition, presumed to be in the public's interest, in large urban markets. They would like to recognize that competition or regulation are tools to serve the public, either one is a goal. Mr. Rowe said ATA would like competition to be presumed not to be in the public interest in rural markets and the determination in both of these markets would be up to the state commission. In markets that are competitive, there must be a level playing field. Reasonable costs that local exchange providers incur to permit competitors to use the local exchange network should be borne by the competitor. Regulation in all competitive markets should be minimal. Mr. Rowe said HB 346, introduced by Representative Moses, is an initial effort, and there will be many parties offering to Representative Moses ideas in the process. ATA will be looking forward to working with the legislature and Representative Moses in offering ideas that will make this a more detailed bill. CHAIRMAN KOTT referred to number 2 of information Mr. Rowe had given him titled, "Competition is presumed to be public interest in large urban markets," and asked Mr. Rowe how he would qualify or quantify "large." MR. ROWE said he appreciates the question. He said they are afraid that people in Washington will look at rural. They don't really have the concept of rural as we experience it in Alaska. When they think of large markets, they're probably not even thinking of Anchorage. He said he believes the federal legislation has the potential to overlook areas that we think are small, they think are nonexistent. Mr. Rowe said areas like Wasilla, that we think are at least moderate in size, might not even count. When they look at rural, he has a feeling that they are looking at the southern part of the Shenandoah Valley and they're not looking at Kaktovic and Anaktuvuk Pass. He said he appreciates that the state legislature will look more closely at the harm that can be done if we're cursory in the judgements we make with competition. Let it serve all our citizens everywhere. It does benefit the public interest. Mr. Rowe said he thinks it would be up to the state and the APUC to determine what those large markets are. REPRESENTATIVE ROKEBERG asked what the present status is for the cost or existence of any subsidies to rural Alaska and how that works in terms of long-distance. MR. ROWE said as Mr. Foster said, he might describe some things as a subsidy. It does depend on which side you're looking at. Some areas of the United States are much easier to serve by a low cost dollar local telephone or long-distance telephone. You have economies of scale. He suggested it is not a subsidy. The person in Los Angeles, Chicago or New York who wants to call their grandparent or child in Anaktuvuk Pass is buying part of a larger more valuable network even though they can make a local call perhaps cheaper than calling Anaktuvuk Pass. He noted he is talking about the toll service of long-distance. It is a subsidy in a sense. It might cost them $100 to put a customer on the line and there might be a very small share of each phone call that is made long-distance outside that is contributing to the rate beyond the $20, perhaps local phone rate that the person pays just to be on. Mr. Rowe said they also realize that many people in the small communities and the remote parts of Alaska pay a much higher percentage of toll because they don't really need to call the 135 people in their own community that are available by local service. Many of their calls are going to Fairbanks so they have proportionately a much higher toll bill then people might have in Lexington, Kentucky. He said what Senator Rokeberg is calling a subsidy, this fractional part, that if each access charge that is going to defray these rates through the universal service fund and what is called DEM waiting which is called "dial equipment minutes," that are proportioned higher in small communities that have smaller switches. It comes from a national source, but it also lets the people in that national network to be able to participate in a larger network then they would be able to do if they didn't contribute. They are buying part of the service, they're purchasing service to reach the high cost areas. Mr. Rowe said he thinks that is a more appropriate perspective to take. REPRESENTATIVE ROKEBERG asked if grandparents in Los Angeles are actually paying money into the universal service fund which is redistributed to the local exchange. MR. ROWE said it is being redistributed to the customer for the construction of the infrastructure to reach the customer. Representative Rokeberg asked if Anchorage isn't paying more. Mr. Rowe said the answer is no, they have affordable rates. REPRESENTATIVE ROKEBERG referred to there being certain institutions such as RATNET and asked if it is carried over long- distance telephone lines or if they have separate satellites. MR. ROWE indicated he didn't know the answer to that question. CHAIRMAN KOTT referred to Mr. Rowe's fifth statement relating to local exchange providers charging a reasonable cost to competitors for the use of its network and asked him to comment. MR. ROWE said they are looking at a competitor coming in and wanting access to the customers who are served by wire by the local service provider. There are costs entailed in having that wire go to those homes. There are costs entailed in the records keeping administrative procedures such as the personnel involved in having installed it, having developed it and keeping it running. If a competitor comes in and has access to some or all of those customers, they need to share in the cost of having that infrastructure built, of retiring the debt of the administrative costs that are entailed in keeping it running and the additional cost of figuring out who is paying for what part of the function of that delivery of the service now. CHAIRMAN KOTT asked if that concern would be more with local service, long-distance service or equally. MR. ROWE answered it concerns local service. CHAIRMAN KOTT said the next person to testify was Ted Moninski. TED MONINSKI, Director, Regulatory Affairs, AT&T Alascom, said he had served with Alascom before it became AT&T Alascom in a similar capacity that he is currently working in. Mr. Moninski said his comments are brief. He noted he didn't have written comments but intends to give them to the committee members along with additional information he might reference during his testimony. The committee has heard that there is a fair amount of support for HB 346 from the local exchange industry. AT&T Alascom doesn't view HB 346 as simply being a local exchange bill. As its name would suggest, it is a telecommunications bill. The policies and the specific components of the bill will affect local exchange, interexchange carriers and the industry as a whole. Mr. Moninski said generally speaking, AT&T Alascom believes this is an appropriate time to have this discussion. The committee has heard information about the state of telecommunications throughout the country, pending federal legislation and concepts of competition. Mr. Moninski said as he has reviewed the proposed legislation and as it has been reviewed by others in his company, they have come to the conclusion that there are some things in the bill that are good, there are some things they have a genuine objection to and some real concerns and reservations. MR. MONINSKI referred to a concern relating to the provisions of the bill that talks about interconnection and said the committee has heard some comments from Mr. Shooshan about interconnection. Mr. Shooshan had indicated that we need to have a certain symmetry in the interconnection. The rules have to be fairly reasonable and they have to cut both ways. Again, generally speaking AT&T Alascom probably would agree with that. He said AT&T Alascom agrees with a lot of the conceptual and philosophical comments the committee has heard but when we get down into the detail of the bill, there are some issues. Interconnection as it applies to companies, new entities or new competitors that want to move into the local exchange business is a significant issue because currently we know that local exchange companies, generally speaking, throughout the country as well as Alaska function in a monopoly situation. Mr. Edrington had indicated technology has pretty much broken those barriers down. Mr. Moninski said he would agree that there is some potential for those barriers to come down, but in the final analysis when we take a look at the local exchange industry today, we find that local companies control the vast majority of the access to the end user. So for competitors and interexchange carriers, in their normal course of business to reach those end users, you have to come through the local exchange company. So the interconnection requirements to get to the end user and the interconnection requirements to become a competitive provider of local exchange services is a significant element. We can readily recognize and agree that companies are not going to have the resources to come into Alaska or many of the metropolitan areas in the country and rebuild a local exchange company's plant facilities. It would be cost prohibited. So there has to be ways, as we have experienced on the long-distance side of competitors coming into the marketplace and facing fair and reasonable rates and conditions, in order to resell the services and the facilities of the existing incumbent carrier. Mr. Moninski said that was true when the long-distance interexchange service entered the Alaska market. Alascom's facilities, by the rules that were put in place legislatively and by the APUC, must be made available for resale to GCI and other competitors. That's how competition rolled forward and it's those interconnection specifics that his company has concerns about. AT&T Alascom believes that the existing language in HB 346 will make it difficult for competitors to enter those local markets. It will make it easy for local exchange companies, for fairly undefined reasons in may instances, to simply not allow that interconnection or to slow that interconnection down and then ultimately slow down competition. MR. MONINSKI said there are a series of sections that they have concerns about. One has to do with deregulation of competitive services. AT&T Alascom is before the committee being a strong component of lessened regulation and being a strong component of increased competition. He said he doesn't want to suggest that AT&T Alascom thinks deregulation of competitive services is a bad idea. There is some concern though, again, as you get into the specific provision of the HB 346 that the way you go about doing that operates in a fair and equitable way so that competitors face a level playing field. He said there have been some comment about having competition that is fair and reasonable, not necessarily to the competitor. He said he understands that nuance, but in order for competition to produce from it then those specifics - that playing field does have to be fair, reasonable and allow for access to the marketplace. If you have a situation, whether it's a local exchange company, AT&T Alascom or anybody, that has the ability to sort of, on its own without any real guidelines, deregulate certain products and services. You will then find an imbalance in that playing field. You're going to have a situation where, because a company is the incumbent carrier, it will be able to take advantage of that opportunity to drive its prices down to competitively, posture itself in a way that will make it difficult for competitive entry. He said he believes that is the policy decision that the committee is going to deal with and come to grips with which is how do we establish a framework that allows competition to come into being and to prosper. Mr. Moninski said they have some concern about the way that competitive deregulation takes place, not the concept of competitive deregulation itself. He said they believe in that and hopes it happens to the extent that they will work together on the bill as it move through the process. MR. MONINSKI explained the third thing AT&T is concerned about is a debate which is occurring nationally and even though it's a Lower 48 issue at the moment, AT&T Alascom believes it's an issue of Alaska as well. It has to do with the sequencing of market entry. What comes first? It is kind of a cart and horse theory. Do you allow a participant, who effectively operates as a monopoly, to move into competitive markets before that entities own market has become competitive or do you do the reverse? Do you say, "Lets go to this monopoly market and lets cause competition to come into being and to be demonstrated in that monopoly market, and then we'll allow those entities to move into other preexisting competitive markets." Mr. Moninski said that's really what we're facing when you look at local exchange markets and interexchange markets, long-distance markets. Currently, the local exchange market, in his opinion, is a monopoly market. The interexchange markets, the long-distance markets, he believes if they are not competitive they are well on their way to being competitive. He asked if we should allow that local exchange market to remain in sort of monopoly status or near monopoly status and then allow that local company move into long-distance competition while still kind of hanging onto the monopoly, or do we do it in the reverse. Do we cause the local market to be opened up to become competitive, to be tested to show that it is competitive and then allow the migration into other markets for competition. Again, nobody is arguing that any of those markets should remain monopolies. Everybody is agreeing that all of those markets should become competitive, at least to the extent that the market will allow it to happen. The question is sequencing, "What happens first?" AT&T Alascom thinks that the legislature has some options and HB 346 is the first step in the process. Mr. Moninski pointed out that Mr. Edrington mentioned that this is not a radicle bill, it's not a new bill, lots of other states have moved in the direction of implementing competitive structures and competitive processes in their states. Mr. Moninski said he agrees with that. He noted before he came to testify, he managed to get his hands on a copy of Hawaii HB 471. This was a bill recently adopted in Hawaii. HB 471 produces the balance that AT&T Alascom would advocate and hope for. It acknowledges the fact that we need to have a transition plan to competitive markets. It provides for, over a period of time, the plan to get us there. It doesn't hold any particular markets in a pure monopoly status for any length of time. AT&T's opinion is that the bill presents an interesting and useful model that will give some countervailing theories and concepts to HB 346. He said the Hawaii bill provides for the access to various networks on reasonable terms and conditions for new entrance into the marketplace. It provides for a universal service program. Mr. Moninski said some of the mechanisms that the committee has heard about today are mechanisms that were established and defined many years ago at the time when most of the markets were in a monopoly situation. So the ability to recover costs and share costs was different than it is today. The world is changing, the telecommunications markets are changing. Mr. Moninski stated it just isn't clear to him that those old mechanisms will continue to function effectively the way that perhaps they once did. That means we need to take a look at some new ideas and some new ways of reaching those goals. MR. MONINSKI referred to the Hawaii bill and said another thing that it does is it make a fairly clear prescription of events that need to take place, particularly in the local exchange market. It talks about unbundling services. The notion that companies must sell their services in piece parts so that what a competitive entrant may need can be purchased at the levels that they need them. There are also other issues in the Hawaii bill in terms of access to network, the pricing of networks, fair and nondiscriminatory access to networks. MR. MONINSKI said he believes that Mr. Shooshan mentioned that our current regulatory structure, the current enabling legislation that exists in Alaska today, is probably old. Mr. Foster mentioned it was put on the books in 1970s. Does it need to be changed? Mr. Moninski said he suspects so. He doesn't think AT&T Alascom is going to sit here and say the statute should be left alone, HB 346 should go away. In fact, some of the changes we think need to happen are not necessarily changes that were driven by HB 346, but are changes that need to occur in the existing statute because of the changing environment that we operate in. He thanked the committee for listening to him. REPRESENTATIVE ROKEBERG referred to any written comments anyone may have on the bill and said it would be helpful if they were in a sectional analysis format. CHAIRMAN KOTT said that seems to be a reasonable request. If anyone has any comments regarding the bill that they want to provide to the committee members, they should reference the sections being referred to. The next person to come before the House Labor and Commerce Committee was Jimmy Jackson. JIMMY JACKSON, Regulatory Attorney, General Communications, Inc., (GCI), said he would probably agree that there are things in the bill which GCI might agree to. However, the bill as written, GCI opposes it for the reason it does not encourage competition. It discourages competition. The bill puts the cart before the horse, it has the cart hooked up facing the wrong direction and at least one of the wheels on the cart is broken off. Mr. Jackson said the current trend in telecommunications today is competition at the local level, competition and the service that ATU and the other local phone companies provide. It's probably in about the state that long-distance competition was maybe 20 years ago with perhaps one major exception. Many state legislatures and utility commissions have looked at what competition has done in the long- distance market and in a few other telecommunication markets and have generally realized that competition has done good things. In the area of local competition, we don't have to fight about it for ten years as that is the time period it took GCI to get in the market in Alaska. Competition will do good things so we should put it in place and get on with it. He referred to an article from a trade publication, Telecom Potion Group, regarding state telephone regulation and said the headline of the article read, "New actions make it 21 states that allow full local competition." He stated that is the degree of the trend. Currently, there is very little actual competition at the local level. ATU and other local phone companies face a little bit of competition around the fringes of what they do, but none of us has a real alternative to the local phone company at our homes and businesses in terms of where we're going to get our phone service. TAPE 95-62, SIDE A Number 000 MR. JACKSON said it involves making new rules for what is called the "Incumbent carrier," the preexisting carrier, so they can face the competition that's entering their market. That is really the only aspect that HB 346 addresses and that is way Mr. Jackson says they have the cart before the horse. The bill essentially says that as soon as a local phone company faces the least little bit of competition, then they can choose to be deregulated, but it doesn't do anything to put the competition in place. In any event, that is not the way it should work. The way it should work is the amount of regulation that the incumbent carrier faces should gradually be phased down as the amount of competition increases. Mr. Jackson said the first problem GCI sees with the bill in its overall structure is it allows the local phone companies the flexibility to respond to competition without ever putting into place the prerequisites for competition. MR. JACKSON referred the committee to Sections 8 and 9 of the bill and said the existing statutes on interconnection between utilities say that a utility must permit interconnection if it would be in the public's interest and if there would be no substantial detriment or injury to the utility that is permitting the interconnection. The current statute needs to be expanded. HB 346 does the exact opposite and narrows the situation in which interconnection would be required. It does that by saying interconnection cannot be required if there is any injury to the utility permitting interconnection. Mr. Jackson said a utility that doesn't want to permit interconnection can always show some injury. The injury may be that they will lose a customer to the competitor. The way the proposed legislation is set up, there may have been a determination that competition is in the public's interest but the existing carrier could deny interconnection by showing that there is some small injury. That is going the wrong way from the way the statute needs to go. MR. JACKSON said when you have a regulated local telephone company, even as competition enters the market, the existing monopoly will retain many captive customers who do not have any choice of carrier. There is a tremendous ability for such a company to cross subsidize its competitive operations based from the charges that it places on its captive customers. Mr. Jackson said this means that ATU or any local phone company can offer very low below cost rates to any customers that do have a competitive choice while recovering their cost from the other customers who don't have a choice. It is cross subsidy. That enables the existing carrier to kill any competitive threats. They would have a tremendous ability to do that under the legislation, as it is proposed, because of the fact that they get to choose their form of regulation for any service for which there is substitute. MR. JACKSON informed the committee that those are his main points regarding sort of the competitive interplay that is set up in HB 346. There are also a number of sections which are attempts to reverse decisions that the APUC has made over the past few years. One example is that in the field of public utility regulation, the standard is that utilities can recover costs for equipment that is, "Used and useful in providing service." Mr. Jackson pointed out that not long ago, the APUC decided that almost $20 million of ATU's plant is not used and useful. Therefore, they decided ATU can no longer recover the cost of that plant from the rate payers because it's not doing the rate payers any good. That was the APUC's decision. ATU wants to change the statute so that if the APUC fails to catch such over investment in the very first rate case after the investment is made, the commission can never again look to see if the plan is used and useful. The statute has been rewritten so that if the local phone company slips it in once, they get to keep it in the rates forever. This is particularly inequitable because we now have a system of annual access charge proceedings, which are small rate cases that involve only very quick expedited review of the local phone companies. Under the new legislation, they could slip it in once through that very quick review, and then it would be there forever. Rate payers would have pay for it forever, even if it was totally useless. MR. JACKSON referred to the competitive interplay and said the bill describes the services where ATU can get totally deregulated, if they want to, as services for which there is a substitute. That is an extremely nebulous standard and one which can be subject to very much abuse. What is a substitute? A grilled cheese sandwich is a substitute for a prime rib dinner. He said ask yourself if cellular service today is a substitute for local phone service. Mr. Jackson said he doesn't think any of us really considers it a viable substitute for local phone service, but yes, you could get rid of your local phone and just rely on your cellular. It wouldn't be as good of a service. It wouldn't be a economical service. It wouldn't be a valid substitute but it is a substitute for local phone service. MR. JACKSON said he disagrees with the ATU witness from Washington, D.C. The witness said don't look at what customers are doing to determine whether or not it's a substitute. Mr. Jackson said he thinks you have to. The only way you can tell whether or not it is in fact a viable real life substitute is to look to see if customers are buying it as a substitute. MR. JACKSON referred to his last point and said several witnesses have presented that Alaska is different, Alaska is too small, competition may be O.K. for the big areas but it won't work in the rural areas. Mr. Jackson said that is the exact same argument that was used against GCI for many many years to keep them out of competition with Alascom. It was first used at the federal level to keep GCI out of the interstate long-distance business when it was flourishing elsewhere with the argument that Alaska is different. GCI fought that and finally they got the right to enter the interstate market in Alaska. GCI then began trying to provide intrastate long-distance service and it took from 1983 until 1990 before they were able to get into that market. Again, Alaska is too small, Alaska is different, competition will be bad if you allow it to happen in Alaska. Mr. Jackson said it seems evident to them in the long-distance market that those predictions have not come true. Competition has been good. Prices have gone down for long-distance service in Alaska, both intrastate and interstate. The service has been better, it has been good. The argument that some markets are too small and, therefore, you ought to prohibit competition there should be rejected. If it is too small, competitors won't go there. It is not possible for lawmakers or regulators to draw, if there is such a line anywhere, where that line is. The marketplace can decide where competition is feasible and where it is not feasible. Mr. Jackson thanked the committee for the opportunity to address the committee. CHAIRMAN KOTT announced the next person to testify would be Mr. Hamlen. STEVE HAMLEN, President, United Utilities, was next to address the committee. He stated United Utilities is a Native owned telephone company which provides local exchange telephone services to 58 communities in rural Alaska. They were incorporated in 1977, and prior to that point, the communities that they provide services to today didn't have local telephone service. Some of them had no telephone service and some of them had just two telephones, one for the public health service and one of the rest of the community. Mr. Hamlen said he has been in the Alaska telecommunications industry for over 20 years. He said when United Utilities first started out, the commission was very cautious. The commission certificated them in only four communities. Currently, their primary shareholder is Hooper Bay, Sealion Corporation of Hooper Bay. They needed local telephone service and decided it would be a good investment for their community to have local telephone service. Several other villages have also acquired stock in them. He said they went before the APUC to be certificated to provide local exchange service in four communities. Service was established and then they gradually expanded to 58 communities. As the system evolved, they found there was a problem with the tow under connection between RCA and United Facilities. RCA was very reluctant to install facilities in rural Alaska. In fact the state legislature had to appropriate approximately $5 million to install a number of earth stations just as a threat to get RCA moving along to fulfill its commitment to provide service in rural Alaska. United Utilities found that those RCA facilities were not adequate and were often installed in stores, schools and places where they were not protected. Their systems often went down. RCA had difficulty in sending a technician out, and being the local exchange carrier, United Utilities would get the brunt of the complaints scenario that was happening. Mr. Hamlen said United Utilities filed a application with the FCC to construct their own satellite earth stations. They couldn't operate a company, providing local exchange service to customers, whose primary purpose of having telephone to rural Alaska was to long-distance calls. United Utilities got into a debate with RCA, which lasted over six years, over who should own the earth stations in rural Alaska. The FCC determined that duplicate facilities in these villages were not in the public's interest because there clearly is not enough traffic, and the only reason that they were serving the communities was because it was a public interest question. They decided they wouldn't allow both of them to build facilities and interconnect them to the network, because that's not in the public interest. The resolution was that United Utilities would form a joint venture with RCA Alascom and jointly own 46 earth stations, and they would, as a local exchange carrier, have the responsibility for maintaining the earth stations in the villages. The long lines carrier would have the responsibility for providing a satellite transponder and network management of interfacing the villages into the public network. MR. HAMLEN explained that today, they have modern digital switches used to serve all their communities. They have approximately 4,000 access lines or an average of 70 customers in every location. The way in which his company recovers the cost of providing their service is through the local rates and net charges that are charged for access through the National Exchange Carriers Association and the Alaska State Carriers Association. Mr. Hamlen said they charge $19.23 per month for local service into the villages. Through the access charge mechanism they pool the access charges on a national basis for interstate rates, and on a state basis for state access rates. That mechanism is what has allowed service to rural Alaska to evolve. MR. HAMLEN said today they are faced with markets changing, new legislation and competition. With universal service, the FCC now has a proceeding going on their docket, 8286. They're reviewing universal service and there are a number of issues which are being hotly contested in that debate. Mr. Hamlen explained that what happens with the universal service mechanisms in the competitive environment is some of the inter exchange carriers, especially if they have an interest in competing in local markets, have looked at high cost areas in the sharing of cost mechanism and they would like to opportunity to participate to receive high cost assistance. He said if you take a village in rural Alaska, for example, that has 50 to 70 customers and there is the high cost assistance program that has a significant amount of assistance supporting local rates in that community, one of the proposals that GCI has on the table would force the existing carrier to share that high cost assistance with them based on whatever customers they sign up. He said his company doesn't believe that's a good idea because you're taking the support they need to support their facilities to the customers that they currently serve and are requiring that it be shared with somebody who is coming in to a market that wouldn't exist if it weren't for that high cost assistance. MR. HAMLEN said if you look closely at the ATA position on universal service and competition, their position is it should be encouraged in markets that can sustain competition. What that means is markets where more than one provider can provide services, and exist and thrive in that market. If you have markets where there are natural monopolies or the existence of service is dependent upon a high cost support mechanism, then that clearly in those markets it does not make sense to displace the existing carrier. The existing carrier should remain under regulation as to its rates and services by the Public Utilities Commission. Mr. Hamlen said their concept of universal service, when you stand back and look at what Congress was thinking about in the 1934 Communications Act and also in both HB 1555 and SB 652 that are currently in conference, their universal service is basically extending a basic level of service to everyone throughout the country. This means they are not going to exclude anybody. When you connect somebody to the public switch network, you're offering value to the entire network whether you call that person or not. By having access to the telephone to the public network, you enhance the value of our nationwide network. You're not excluding anybody in that definition of universal service. It is feasible technically and financially on a nation/statewide bases to connect everybody to the network. MR. HAMLEN said, "Now on the interconnection issues you'll notice that there's the interexchange carriers were both Alascom and GCI, talked extensively about interconnection and are very concerned about interconnection. They want number portability. Our customers want SS7 capability and the interexchange carriers want to be able to come in and have easy access to our offices, not only, you know, every office in the state to be able to configure their networks as they like. One of the problems we face in rural Alaska -- we just went through this with ten digit dialing is that we're being forced to incur cost to accommodate competition - facilitate competition in markets that purely are not competitive markets. In other words, they cannot sustain more than one carrier period and that's obvious. So we're being faced with an inter (indisc.) competition, having to incur costs to offer ten digit dialing, we'll probably be looking at having to offer number portability and other features to make sure our network is comparable to interface with the nationwide network. Those costs again are essential in our markets necessarily for us to be able to interconnect with the network because, I clean this out because I don't -- to some extent, forcing us to upgrade a switch at Birch Creek where the clear purpose of upgrading that switch is to be able to offer access few multiple carriers may not make sense. In a lot of cases doesn't make sense." MR. HAMLEN referred to the excess capacity language in the bill and said as exchange carriers, they take and plan their facilities in the least cost method over the long-term. In other words, if he has new housing being built in the village, he will plan, when they extend their outside plant facilities, they consider how many homes there currently are and how many homes are anticipated to be there in the future. Mr. Hamlen said they may have a requirement for 30 cable pairs. When they go to the expense of placing that cable, they're not going to put in 30 cable pairs. They need to plan for the future so they may put in a 50 pairs of cable. What happened with the ATU case is that in his example, the commission said, "Well, he put in a 50 pair cable, you're only using 30 pairs. We are not going to allow you to recover the cost of those other 20 pairs. You did not make a prudent decision to put that investment in." MR. HAMLEN informed the committee member that the commission decision is currently pending in the courts. It was appealed. It was not a good decision, it made no sense. It basically hamstrung ATU and its ability to plan for its facilities in a prudent manner. The interexchange carriers are very interested in increasing their profit margins. They're very interested and buying a new vehicle for doing that is to get a local exchange business and reduce their access changes. So they will, in any way, come before you and try to get the legislation structured in such a way to benefit them to be able to improve their profit margins. He asked the committee members to watch that carefully. CHAIRMAN KOTT said if the legislation were not passed, is there a mechanism available that will provide an opportunity for the local carriers to enter into the long-distance service. He asked if that was conceivable or what would it take. MR. HAMLEN said his company has looked into that issue. He said he can only comment for United Utilities as ATU has a different situation to some extent. When the APUC wrote its regulations promoting and providing for competition in the interexchange market, they specifically laid a whole section on a whole bunch of hurdles. They basically left it open for everybody else to come in. Mr. Hamlen said the APUC basically tied United Utilities' hands behind their back in terms of their ability to be able to get in and compete in the interexchange business. As time goes on and legislation is passed, hopefully those hurdles and barriers are going to come down. Currently, there are regulatory barriers that are in place that the commission has established that makes it difficult for United Utilities to get into the long-distance business. MR. HAMLEN said as time goes on, the committee might want to take note that the difference between interexchange and the local exchange business is sort of going to blend. The providing of telecommunication services, whether it's local or long-distance service, in the future because of the way technologies are developing and markets are merging, you probably won't know the difference. CHAIRMAN KOTT asked if his opinion is that HB 346 would reduce some of those regulatory barriers or barriers in general that will promote opportunity to venture in. MR. HAMLEN answered in the affirmative. He stated he commends ATU because what they have done is provided an avenue for competition to be developed and an opportunity for the local exchange carrier to adjust and participate. CHAIRMAN KOTT asked if Mr. Edrington or Mr. Foster wanted to address the same question. AN UNIDENTIFIED SPEAKER said he thinks it might also be productive if Mr. Jackson also had an opportunity to address the question. The unidentified speaker stated that if the bill does not pass, the entry of local exchange carriers into the long-distance market will continue to be governed by the sections that were passed in 1990 with respect to long-distance competition, 42.05.800. Within that context, the commission's order discussing entry of a long-distance carrier into that long-distance market, in state, suggested there were a number of areas that need to be explored with respect to a local company getting into the long-distance business. He said he believes that is basically the current state of the law and regulation. CHAIRMAN KOTT asked the unidentified speaker if the legislation would then be needed for his company to enter into the local exchange services. The unidentified speaker responded that he would agree with the way Mr. Foster said the situation currently is. As far as the in-state long-distance business is concerned, the APUC adopted regulations and in doing so, put significant constraints on whether or not the local phone companies can enter the in-state long-distance business. They have to apply and meet certain criteria. Those criteria are appropriate and necessary criteria. He continued, "The box that you hear about so much, they are prohibited outside from providing interstate long-distance business. The reason is that as a long-distance phone company in ninety-nine point something percent of the cases, we have to go through the local phone company in order to get to the end user. And the local phone company has what is known as a `bottleneck' because of the fact that we have to go through them. Now what does that mean is that in many many instances say a bank, NBA or whatever, wants a specialized long-distance phone service. The bank comes to us and says we, you know, want a special service - big pipes digital service. To get the connection from the bank to GCI, we have to go to ATU and say, `ATU, we need the connection from the bank to us that has to have this -- meet these standards, it has to be of this size, it has to have all this - these particular technical configurations.' If ATU is our competitor, what does ATU do when they get that information? First of all they slorel the dickens out of us in getting that connection from bank to us. And secondly, they go to the customer themselves. That was historically exactly what AT&T did which is what led to the break- up of the AT&T system in 82, which led to competition. The way in which we got to long-distance competition was the break-up of AT&T. And what the court said in that decision was that so long as the phone company controls the local in the long-distance, you'll never have competition. Therefore, you have to prohibit the local company from providing long-distance business. That's the derivation of the reason that locals can provide long-distance service. It still exists that way today. The similar rationale was adopted by the APUC. You also get into considerations, like I mentioned earlier, of cross subsidies of using you monopoly rate payers to subsidize you competitive enterprise and it's what I'll turn to Mr. Moninski at this point. It's what he talked about in terms of the sequencing of Mark. As soon as the local business is competitive and we have a choice as to how we get to the bank, then it would be appropriate for the long-distance, excuse me, for the local phone company to be in the long-distance business." MR. MONINSKI stated he generally concurs with Mr. Jackson's comments. Mr. Moninski said he doesn't think that we exist in an environment today in the absence of this proposed legislation or any new legislation that would make it impossible for a local company to enter the long-distance business. Not that long ago there was a plan on the table for ATU to do exactly that. Mr. Moninski said he thinks that the constraints on the interstate side are fairly negligible. There certainly are some issues before the APUC that ATU or any other local company would have to satisfy to enter the market. He said he doesn't believe that HB 346 is sort of a necessary condition or a necessary change in the structure to allow local companies to enter the long-distance business. He said the committee will find that AT&T Alascom's position will be more in the nature of that sequence in common that Mr. Jackson mentioned that regardless of what other constraints exist, he believes there are certain elements that have to be demonstrated that local competition exists before local companies should enter into the long-distance business. He said that is what he will advocate in terms of any changes that might be proposed for HB 346. Mr. Moninski said currently, he doesn't see any absolute obstacles to local companies entering that market that the bill would remove. An unidentified speaker said one point he didn't address is that he doesn't see where this bill addresses locals getting into long- distance or competitors getting to local at all. He said he doesn't see anything about that at all in the bill, one way or the other. CHAIRMAN KOTT said absent HB 346, is there any prohibition or grand hurdle that would prohibit the long-distance carriers from getting into the local business. He asked if there any such plan. An unidentified speaker said if anyone, not just a long-distance carrier, wanted to go into local phone business, they would have to file an application with the APUC for Certificate of Public Convenience and Necessity. In order to obtain that, they would essentially have to prove to the APUC that competition would be in the public's interest. If they proved to the APUC that competition was in the public's interest, which was the item it took GCI eight years to do on the long-distance era, then they could get a certificate. The speaker referred to the matter of PCS licenses, which Representative Rokeberg asked about when talking to Mr. Edrington, which are federally issued licenses for a service which is a wireless service and you do not have to apply to the APUC in order to be able to provide that service. It is a federally licensed service. The FCC has preempted the state from limiting entry of anybody who buys one of those licenses. The speaker said currently, there is a lot of debate about what PCS is actually going to be. Some people think it's going to be basically a better cellular service. Some people think it has the potential of actually becoming a replacement of the local phone company and that is something which we will know in six or seven years. MR. MONINSKI said there probably is no absolute prohibition today, with or without this proposed legislation, for long-distance companies or some other entity to enter the local market. He said Mr. Jackson made reference to the process that one would have to go through to secure that right. What we need to remember is we're dealing with an industry that has been historically viewed as being a monopoly industry. He said he suspects there would be a substantial burden and substantial opposition in going before the regulator, for example, to gain entry to that market. It would be a lengthy and a contentious process to do that. Should we, as a matter of policy, go that route or should we take a look at what's happening all over the country? Should we look at the federal legislation and should we simply acknowledge the reality and develop our policies here in the state of Alaska to allow us roll forward in the future with everybody else? He suggested that it should be the latter. An unidentified speaker said he agrees with Mr. Moninski in that we should clue off of the national legislation and apply it in Alaska, and let ourselves roll forward. That is not going to be an easy process, but he believes it is going to be a necessary one for all of us. The speaker referred to the local monopoly bottleneck and said that was a ten year old decision and one of the main reasons for the national legislation was to remove that court decision and set the industry free to compete. He stated the national legislation has been extensively debated on this topic and the basic decision is turn the rascals loose and let them have at each other. The speaker said the only concern in that regard is, "How do you turn that free market loose?" He said he is sure there will be a lot of debate over that. As to the bottleneck part, a specific example of going to the National Bank of Alaska was sighted. You could go out and buy a General Electric's 25 gigahertz microwave system and go handily from the NBA building right over to GCI for the grand total of about $25,000 investment. He said they are not standing in the way, technically, of any anybody legally. The speaker stated they may be standing in the way of people economically because they are an efficient competitor. He said the only reason he can find for anybody not bypassing ATU in economic theory would be that our price is below their cost advantage. Otherwise, if they can do something cheaper than he can, why don't they. The unidentified speaker referred to the 99 percent of the customers his company serves and said be aware that those people are paying a telephone bill of around $9 a month plus a certain overhead which takes their total bill to $14. That is what they basically pay to be able to access a long-distance carrier. He urged if any other company can beat that cost, have at it. The barriers, at this stage, are more emotional and more sequencing into market. He urged the committee members to be aware of arguments that don't reflect a free market condition. REPRESENTATIVE ROKEBERG said looking forward a few years and looking at the things like PCS cables and this whole new technological thing that is happening in this world, is there anything or should there be something in a bill that speaks to the APUC's ability to regulate those types of technological changes in the future. He referred to someone mentioning PCS and it could be, in essence, another wire type local exchange system. What if that happens two years from now, are we going to be naked regulatorily because the feds say we can't maintain it. He said he wants to get an impression of where we're headed in the future. An unidentified speaker said the federal legislation, as he understands it, is somewhat intolerant of local regulation at this point. A number of areas in the bill suggests that local and state regulations be preempted by the federal regulation such as nobody at the local or state level could prevent a telephone company from going into the cable television business and visa versa. One of the concerns ATU had, and a legitimate for Alaskans, is how much of that should be removed in terms of the structure of Alaska. He said he will maintain until somebody convinces him otherwise that Alaska is different. He said he thinks that the state regulation needs some latitude to determine its own future. Will we be able to do that in all cases? No. Will we be able to regulate technology? That has been tried countless times and is a short term (indisc.). People tried to regulate the printing of the Bible which he finds an interesting situation. There have been a few attempts through time to regulate technology. All of them eventually failed with passage of time. TAPE 95-62, SIDE B Another unidentified speaker: "...degree of federal preemption, and one is on the issue we talked about before regarding the box getting the long-distance. They certainly don't just say that the box automatically start getting into the long-distance business by any means. There are some competitive standards that have to come first in at least one and I think both bills. But in any event, on the particular issue I believe that there would be a fair amount of discretion left to state commissions in many areas. There are some where -- like I mentioned PCS has already been preempted. Let me confess something else, I've been working at GCI for two years. I worked for the APUC for nine years before that and I personally believe the APUC should have a fairly good bit of discretion in regulation. I think that -- I think trying to tie down the APUC too much in terms of exactly what it does is self defeating because they need the flexibility to address - to change for changing times. I think that it is entirely appropriate for the legislator - legislature to give the commission directives on certain policy issues like the way in which GCI finally got into the market was the legislature said, `You shall allow instate competition.' Well the legislature made that decision and said, `You shall allow it and you shall develop regulations by such and such at date,' which flushed it out and state the specific manner in which it should be allowed. And I think that's the kind of a legislation which is very very helpful to the APUC. You make the policy cut and leave it up to them to iron out the details. In terms of regulating the technology, I don't think you can regulate the technology. I would agree with that. There are instances like the APUC orders now prohibit cable companies from using their facilities to provide any sort of local phone service. We think that's not appropriate. We think that's probably eventually going to fall. That's the kind of policy cut that the legislature might need to make. I suspect that the APUC might reverse that on its own if it were presented to them and haven't addressed it in quite awhile. I'm not trying to predict what they will do. I don't know. They might change it if it was brought to them." REPRESENTATIVE ROKEBERG said it seems to him that there are greater threats to the local exchange. He questioned if that was the box he was talking about. The unidentified speaker responded, "The box or the big local exchanged in the Lower 48, the Bell Operating Companies, I'm sorry - acronyms - the baby bells, yes. REPRESENTATIVE ROKEBERG said in terms of long-distance, the wireless technology seems to be a threat to the local exchanges. He questioned if they is any threat to the long-distance carriers or is there a satellite or direct television type of things that he sees as a threat to long-distance. Representative Rokeberg asked if the local companies are a threat. An unidentified speaker said he thinks you currently can pick up a cellular phone and make a call to Homer and not incur any long- distance charges. Another unidentified speaker said you can but you have to pay the regular cellular per minute charge but that is not a long-distance call in the way they're handling it. An unidentified said ATU doesn't operate cellular systems in Homer, it is operated by another company that they have for convenience that are customary handoff capabilities. While one might argue that cellular is not a substitute for wireline, he can make that same argument. He said he can also make an equal argument that it is. It is just a different pricing structure in that you have to pay more per minute but on the other hand, you get the long- distance call free. He referred to the investments required for long-distance and said he has been out of that game for over a decade and isn't sure what they are. The unidentified speaker said except in Alaska, most of the long-distance companies in the Lower 48 are now fiber optic. They have very high band width capability between all their towns and cities. MR. MONINSKI was next to address the committee. He said he would like to pull together Mr. Edrington's and Mr. Jackson's comments. What you're seeing is what's happening in the marketplace. You're seeing the pressures that are beginning to percolate up without regard to legislative changes or without regard to changes in regulations. The problem is that while all of these forces are coming to bear and their beginning to make some things happen, the regulatory structure and the legally mandated market structures have not kept up. We've got this conflict. We've got issues that are creating strange results. Mr. Moninski said he doesn't mean to take issue with Mr. Edrington's comment about the efficiency of ATU but he mentioned that is, in a large measure, what allows ATU to charge very reasonable local exchange rates. He suspects that there certainly is a contribution in that regard. But another thing that allows that to happen is this arcane structure that we live with has driven costs to other places. They are costs that perhaps ought to be in one particular accounting bucket but are showing up in another accounting bucket and are being paid for by a different kind of customer. That allows the rates to remain low in certain segments while it drives rates up in others. Mr. Moninski referred to Mr. Foster saying in his comments that what we need to do is let the consumer make these decision. He said he thinks AT&T Alascom agrees with that but in order to do that, the consumer has to have the correct signals and the right economic information to know how to make those choices. He said he believes that is basically what HB 346 has the opportunity to do in some respects. Mr. Moninski referred to the question of future regulation and said he doesn't think that the legislature can and would want to try and prescribe all of these details. The legislature will have to rely on the regulatory structure to continue to monitor the marketplace and make sure that the public policy goals are being achieved and make adjustments where it is necessary. There being no further witnesses to testify, CHAIRMAN KOTT closed public testimony. He thanked everybody for attending.
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