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.