Legislature(2003 - 2004)
05/20/2003 10:38 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 106(JUD) am
"An Act relating to retail tariffing standards in a
competitive local exchange service area; and to exemptions
from retail tariff filing requirements and certain other
provisions in competitive telecommunications markets; setting
a policy regarding unbundled network elements in the
telecommunications market; relating to depreciation expense
rates for certain telecommunications utilities; requiring the
Regulatory Commission of Alaska to conduct an investigation,
take certain actions, withhold certain actions, and issue a
report; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this bill, sponsored by the House
Judiciary Committee, "provides for changes in telecommunications
utility regulations and rates and policies regarding carrier
interconnection agreements. In addition, the RCA [Regulatory
Commission of Alaska] of Alaska is required to submit a report to
the Legislature within 180 days regarding the status of the
telecommunication industry in Alaska." He noted testimony and
questions would be limited to 15 minutes per witness.
REPRESENTATIVE LESIL MCGUIRE, Chair, House Judiciary Committee,
spoke to the three months of bipartisan work invested in this
legislation by the House Labor and Commerce Committee, as well as
the House Judiciary Committee. She admitted the limited time
available for the Senate to consider the complexities of this
substantive bill, but remarked that the Senate Finance Committee
"must put a certain amount of trust in your colleagues" serving in
the House of Representatives. She asserted this bill is "absolutely
necessary in the State of Alaska right now to keep
telecommunications industry competitive." She suggested she could
realize political consequences for her actions with this
legislation, but considered this to demonstrate her commitment to
the issue. She stressed the Legislature's duty is to set policy.
Representative McGuire characterized the RCA as similar to the
judicial branch, and as a "quasi judicial agency" is responsible
for issuing rulings on issues. She understood it is difficult for
the RCA to issue rulings because these rulings establish policy.
She therefore concluded that the legislature must intervene and set
policies. She surmised that the RCA could then interpret and
implement those policies in the same manner as the Alaska Court
System implements laws passed by the Legislature.
Representative McGuire stated that the federal Telecom Act of 1996
specifically recognized that each state is unique and must
establish policies to implement the Act. She informed that she
worked for U.S. Senator Ted Stevens at the time the Act was under
consideration and she recalled the Senator expressing that the Act
was not "crafted with Alaska in mind in any sense whatsoever."
Despite this, she opined, "we have been able to apply the '96
Telecom Act to Alaska in a way that is remarkable." She asserted
that Alaska has become one of the most competitive
telecommunications market in the U.S.
Representative McGuire asserted that, whether because of time
constraints or lack of resources, the RCA has "failed to act timely
in recognition to the shifts that have occurred in the
marketplace." She said this bill, therefore requests the RCA to
consider "certain policies" in regard to tariff filings and
unbundled network elements, which she considered the two most
important factors a monopoly must address.
Representative McGuire spoke of assurances in the bill's language
to require that the RCA must make the initial determination that
"the carrier is in a competitive marketplace". She stated that this
bill further clarifies that "a competitive marketplace isn't just
defined by the service area." She expressed concerns over potential
allegations that "if over 50 percent of the entire service area is
competitive, then therefore the company is competitive." She
remarked this argument would be undesirable and exampled the
community of Kodiak as being competitive while Nome is not and the
subsequent deregulation of the provider of the entire service area,
allowing it to operate without regulatory oversight in areas for
which there is no competition. Therefore, she pointed out language
addresses this in subsection (d)(1) of Sec. 42.05.433. Exemption
from retail tariffs for telecommunications services in a
competitive market., in Section 2 of the bill, which reads as
follows.
(1) "competitive service area" means an area served
by a local exchange carrier in which at least 50 percent of
all retail customers have a choice of facilities-based service
providers; the area may be
(A) the entire service area; or
(B) if the entire service area is not
competitive, specifically identified communities within
the service area that are competitive;
Representative McGuire emphasized the entire service area could be
encompassed in a competitive service area, and gave Anchorage as an
example. She considered this provision as "giving the RCA an
additional set of tools in their tool belt to make decisions."
However, she asserted this legislation requests the RCA to utilize
certain tools and make decisions that have not been addressed by
the RCA.
Representative McGuire pointed out specific timelines are imposed
in this bill. She opined that it would be in the best interest of
all parties, especially to the consumer, to resolve the issues in a
timely manner.
Representative McGuire told the Committee that representatives of
companies would testify to how this legislation would or would not
benefit them, but stressed that the consumers are priority. She
predicted that if the existing situation continues, competition
would be eliminated. She explained that one company with "virtually
an equal market share in certain areas of Alaska" could not be
regulated as if it were a monopoly. She remarked that such a
company "with its hands tied behind its back, fighting up against
its closest competitor within percentage points, and expect that
that company would continue to succeed; it is an impossibility
economically and I think we all understand that."
Representative McGuire expected it to be determined that Anchorage,
Juneau and Fairbanks would be deemed to be competitive markets
under the provisions of this legislation. She stated that carriers
operating in these markets would not be required to undergo a
"tariff rate filing case" because it is not required of
competitors. She commented that this is a "recognition of
capitalism; of free market; of the invisible hand; this is
Economics 101." She told of her college courses in economics.
Representative McGuire assured that if "elements" were later found
to indicate that the free market system has not operated as
intended with regard to this matter, this bill would allow the RCA
to revisit the issue and make a different determination.
Representative McGuire next pointed out that the Telecom Act
requested monopolies to lease out portions of their unbundled
network elements; those portions necessary to allow competition in
the marketplace. She noted this has continued in Alaska and has
"worked magnificently; wonderful for all of us." However, she
stated that the monopoly company is forced to lease out their
facilities for less than their costs. She attributed this in part
to project labor agreements and to Alaska's "unique landscape" and
existing equipment. She stated that the cost in Fairbanks to the
incumbent carrier is $32, yet it can only charge the competitor
$19, resulting in a monthly loss of $500,000.
Representative McGuire asserted she presents this bill not on
behalf of any company or lobbyist or individual.
Senator Bunde understood that while this legislation would provide
the RCA with "more tools" it also requires the Commission to
utilize those tools.
Representative McGuire affirmed.
Senator Bunde spoke to the importance of an independent judiciary
and warned that once the legislature begins to intervene in the
policy of the RCA, the Commission is no longer an independent
entity.
Representative McGuire replied that the RCA should be maintained as
a quasi-judicial body in that the legislature should not be setting
rates or determining dominant carriers. However she asserted it is
"absolutely appropriate" for the legislature to set policy for the
RCA. She stated that evidence exists that the legislature has
provided inadequate direction to the RCA.
Senator Taylor noted receipt of an e-mail from Commissioner Dave
Harbour of the RCA to Senator Bunde dated May 20, 2003 [copy on
file], indicating that because Co-Chair Wilken had excused himself
from Committee action regarding other legislation relating to the
RCA, due to a conflict of interest, Mr. Harbour assumed Co-Chair
Wilken would do the same with respect to this bill.
Co-Chair Wilken clarified he has a conflict on interest with HB 111
due to his involvement with a regulated water and sewer utility;
however, this legislation relates to telecommunications and he has
no conflict.
LEONARD STENBERG, General Counsel, Alaska Communication Service, in
support of the House Judiciary committee substitute for this bill.
He expressed that if "Alaska is to remain on the forefront of
telecommunication policy, passage of this bill is essential." He
opined that Alaska has the most competitive local exchange market
in the nation; however, State laws still reflect the "old era of
monopoly regulation." He furthered that this bill would be an
important "first step" in "modernizing State law in Alaska."
Mr. Stenberg stated that this bill addresses "two major
deficiencies in Alaska policy; first, fully consistent with federal
law, it provides policy guidance to State regulators that will
ensure fair pricing of facilities leased by one carrier to another
carrier; second, it delivers on the promises of the federal
Telecommunications Act of 1996 by deregulating local exchange
markets once they have become competitive."
Mr. Stenberg recommended passage of the bill.
Senator Bunde relayed he has received differing reports that ACS
has substantial assets and is financially strong, but also that the
company is near bankruptcy. He asked the witness to clarify the
solvency of the company.
Mr. Stenberg replied that ACS is a multi-faceted business with the
local exchange operations a significant portion. He stated that the
local exchange business is largely regulated and this is the area
of greatest concern. He noted that other operations of ACS are not
regulated and the financial status of those functions is irrelevant
to this discussion. He told of a recent analysis of the return on
investment of the regulated business activities in Anchorage and
found "it is extremely low". He qualified that the RCA would
determine otherwise; however, he cited the rate of return for
Anchorage business at zero to two percent. He informed that this
rate of return stymies incentive to invest for the future.
Senator B. Stevens referenced the definition of competitive service
area in Section 2, which he identified as "the trigger for
deregulation" and asked how the definition was determined.
Mr. Stenberg responded that the "appropriate measure" is the
presence of "facilities-based competition".
Senator B. Stevens interjected if this definition exists in federal
law, or is utilized by the Federal Communications Commission (FCC)
and how "50 percent of customers" as a litmus, was reached.
Mr. Stenberg answered that the amount is not contained in federal
law, but rather was considered, discussed and agreed upon by the
House of Representatives.
Senator B. Stevens asked if the State of Illinois is the only state
with and established percentage of customers used in determining a
competitive marketplace.
Mr. Stenberg affirmed and remarked that Alaska is "on the
forefront" of this matter, as no other state has experienced the
same "levels of competition". He noted that other criterion was
considered, including market share data, and an "anti-trust
concept".
Co-Chair Wilken requested the witness comment on the correspondence
from Mr. Harbour.
Mr. Stenberg respectfully disagreed with the positions expressed in
the e-mail. He qualified that the amendments to Section 2 adopted
by the House of Representatives "left some language unclear;
there's probably some technical clean-up that could be done there".
However, he opined that these would not "constitute any kind of a
policy issue" and he concluded, is not important for the Committee
to discuss.
Mr. Stenberg next addressed Mr. Harbour's concerns with the
competitive service area, and remarked that the target areas of
Anchorage, Juneau and Fairbanks are identified. He pointed out that
facilities-based competition is available to "virtually all"
consumers in those communities. He added that when the FCC "de-
tariffed" interstate long distance rates, it "realized that it may
not be true that every consumer has access to facilities-based
competitors"; however, the FCC concluded that it was in the best
interest of the public in general that deregulation occur "in that
context".
Mr. Stenberg spoke to Mr. Harbour's comments relating to pricing
for unbundled network elements. Mr. Stenberg opined that
unfortunately, this "complicated area of law" in which the federal
government has "created the obligation" for carriers, such as ACS,
to share their network. He noted the federal government has
provided "some broad policy guidance" in terms of how to establish
prices for those lease facilities and then has delegated to the
states "a great deal of discretion" to set those prices. He stated
that in the establishment of those prices, policy calls must be
made. He disagreed that the policy guidance proposed in this
legislation is "in any way inconsistent with federal law."
Mr. Stenberg explained "accelerated depreciation", stressing that
the "regulation of rates for lease facilities is fundamentally
different than traditional rate regulation." He opined that the
intent of traditional rate regulation was to "recover costs plus be
allowed a reasonable profit." He stated that in relation to lease
facilities, the federal government has instructed states to "throw
out everything we know about traditional rate regulation" and that
regulators should instead be "attempting to emulate what a new
company's costs would be if that new company were to go out and
build an efficient new network." He surmised that such a new
company would use accelerated depreciation in determining its
internal economics. He remarked this is logical as well as
"factually shown to be true," in that the chief competitor of ACS
has utilized this method in facilities it has invested in.
Therefore, he surmised that if the goal were to emulate the actions
and costs of a new company, accelerated depreciation is "absolutely
appropriate."
Mr. Stenberg furthered that when changing to a competitive
environment from a monopoly situation, increased demands for
innovation, investment as well as increased risks, arise. He gave
an example of increased risks in that costs might not be recovered
on some facilities. He cited this as another reason for allowing
accelerated depreciation.
Senator Bunde, noting the highly specialized field of utility laws
and asked if the witness was available for consultation during
"creation" of this bill.
Mr. Stenberg replied that he testified "at some length" before a
subcommittee to the House Labor and Commerce Committee, as well as
the House Judiciary Committee.
DANA TINDELL, Senior Vice President, Legal and Regulatory Affairs,
General Communications Incorporated testified in opposition to the
bill, as it is "anti-competitive and anti-consumer". She continued
reading a statement into the record as follows.
It is bad public policy done at that eleventh hour and should
not be passed. CS HB 106 promised local telephone companies
with monopoly power to raise rates whether or not there is
competition. Moreover, CS HB 106 permits local telephone
companies with monopoly power to raise its competitors' costs,
thus [inaudible] any ability of competition to keep rates down
where there is competition. In a market where one competitor
controls another competitor's costs, you cannot have true
competition.
In addition, this bill, as a result of last minute floor
amendments, is internally inconsistent and it is not clear in
its intent. It is difficult to tell what the Legislature's
intent is because it has been cut and pasted with words of
previous sections left in the bill that are inconsistent with
amendments that have been made on the floor in the House.
Without exception, legislators that rose on the House floor to
speak on this bill discussed the complexity of these issues.
This bill changes the way utilities are regulated. It doesn't
give intent language; it actually changes the way utilities
are regulated. There are serious public policy issues at
state. Please do not move a bill that changes the way
utilities are regulated without serious thought. This is a
complex bill. It reverses past RCA decisions. It effects
pending decisions now before the RCA and in our view will
diminish local telephone competition in the marketplace.
The Governor has just appointed three new commissioners to the
RCA. There are a total of five commissioners to the RCA, which
means that that is a 60 percent turnover. The RCA is in the
middle of a proceeding to deregulate the competitive markets
for local services. They have not completed that proceeding.
Both ACS and GCI have filed pleadings in that proceeding.
Please allow the RCA to do its work. It is an evidentiary
body; it can engage in discovery; it can get the actual facts
on the record. With the new RCA and no possibility of bias,
GCI requests the Legislature to permit the RCA, as the expert
body, to make these decisions.
Ms. Tindell addressed the issue of low costs, referencing
discussion that GCI leases "loops" from ACS at $19, whereas ACS
costs are between $33 and $40. She remarked, "That is an apples to
oranges comparison," explaining ACS reference to "loop costs as an
accounting purpose" their loop costs consists of the "length of
facilities from the switch to the home". She informed that GCI does
not lease that entire facility, but rather the portion from "the
neighborhood to the home." She stated that GCI provides its own
"fiber" around the community and throughout the city and also
provides its own "switch". She listed GCI costs at approximately
$33 for the "same comparison of what ACS is representing their
costs to be."
Ms. Tindell furthered that depreciation is also an "apples to
oranges comparison". She explained, "a rate based regulated company
that's rates are set. The overwhelming determination of those rates
is 'what percentage of the plant in the ground do they get to
allocate to the consumer for the purpose of setting consumer
prices." She characterized this as an allocation cost rather than a
depreciation cost, which "is a totally separate phenomena than
depreciation for tax purposes." She stated that depreciation for
tax purposes does not affect "the price that a company gets to
charge for consumers; it is simply a tax issue that determines the
amount of taxes that company will pay that year. In contrast, she
said depreciation for ratemaking purposes "directly gets plugged
through to the consumer."
Ms. Tindell expressed that this bill would "deregulate local
telephone companies with monopoly throughout their entire service
area in many cases where there is not competition, for the purposes
of depreciation." She informed this would allow the companies to
"automatically increase the rates they charge, whether or not
there's competition."
Ms. Tindell furthered that this bill would allow a company to
deregulate in areas where no competition exists. She suggested the
provisions are unclear as to "which direction the RCA is supposed
to go."
Ms. Tindell spoke to the inconsistencies of the bill, referencing
page 2, lines 6 - 13, a portion of Section 2, which adds new
sections to AS 42.05, and reads as follows.
Sec. 42.05.433. Exemption from retail tariffs for
telecommunications services in a competitive market. (a) A
local exchange carrier may petition the commission for a
determination that one or more of its markets is a competitive
services area. The commission shall, within 90 days, grant or
reject the petition according to the standard set forth in
this section. If the commission fails to act within 90 days
after the submission of such a petition, the petition shall be
deemed granted. A certification exempts the telecommunications
utility from retail tariff filing requirements.
…
Ms. Tindell pointed out the origin and issuing authority of the
aforementioned certification is not specified. She continued citing
subsection (b) on lines 14 - 17, which reads as follows.
(b) A certification filed under (a) of this section is
effective upon filing. The commission may deny a certification
only upon a written finding and order that, based on a
preponderance of the evidence, the competitive service area
standard has not been met.
Ms. Tindell questioned the establishment of both a petition and
certification and the 90-day effective date provision of the
petition compared to the immediate effective date of a
certification filing.
SFC 03 # 2, Side A 12:21 PM
Ms. Tindell referenced Section 1 and commented that "in order to
get competition using [an existing] carrier's network for a rural
area, there must be a finding that it will not affect universal
service or rates to that rural area." She opined that it would be
"difficult if not impossible" to meet that finding.
Ms. Tindell indicated other representatives of GCI were available
to speak to the incompliance of this bill with federal law.
AT EASE 12:22 PM / 12:28 PM
Senator Taylor asked for an explanation of the differences between
"bundled" and "unbundled".
Ms. Tindell informed of the separate issues of "bundled packages"
and "unbundled elements". She explained that under commission
regulation, a dominant carrier with monopoly power is not permitted
to bundle its local services market with other offerings because
the regulation presumes that this carrier has all the customers for
the local service and that it would be unfair to provide that
carrier with "a leg up" in attracting those customers to other
services for which competition exists. She qualified that the RCA
granted provisions to allow the dominate carrier to request
exemption.
Ms. Tindell then defined unbundled elements as "a notion of carrier
to carrier costs", explaining this relates to a competitive carrier
entering the market and leasing the existing carrier's network in
order to provide service. Because the existing carrier has a
"bottleneck facility" and has monopoly control over that facility,
she stated that the U.S. Congress has ruled that the network
facilities should be "broken down into its smallest elements
possible" to allow a competitive carrier to lease only the elements
necessary to provide service.
Senator Taylor thanked the witness for the explanation.
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