Legislature(1995 - 1996)

09/27/1995 09:10 AM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
 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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