SB 346 - LOCAL EXCHANGE TELEPHONE SERVICE CHAIRMAN LEMAN announced SB 346 to be up for consideration. MR. RON DUNCAN, President, GCI, supported SB 346 saying it is vital to the future of the telecommunications industry and the economic infrastructure of the State. He said the better our telecommunication infrastructure is in our State, the easier it's going to be to develop our intellectual-based resources. Telecommunications creates the opportunity to perform services in one location and have them consumed somewhere else. In many ways it is more important in Alaska, because it has always suffered from its isolation and remoteness. It's a tremendous potential addition to the Alaskan economy. A gentleman from Sitka who was working on economic development issues there told him about a study they had just commissioned for identifying new areas of economic development in Sitka and the top 15 prospects on the list identified the major detriment as the lack of a well-established telecommunications infrastructure to allow them to perform services in Sitka that could be consumed elsewhere. Competition is essential to assure that we have the best possible and the most thoroughly developed telecommunication infrastructure we can get. The legislation is necessary because the implementation of competition requires change and some of those are complicated. Incumbent local telephone companies who have monopolies today resist that change, because it forces them to alter the way they do business. The APUC is overly cautious and too slow in addressing this issue which retards the development of both competition and the facilities that are necessary for economic development. The APUC doesn't really like competition because it's messy and is not as predictable as well-regulated monopoly. It thinks Fairbanks and Juneau are too small for competition. Finally, the APUC won't act as long as there are questions about competition. This bill doesn't really do very much, but it says that competition is the desirable policy where possible and it tells the APUC to get going by setting deadlines for its action and tells them which issues to be resolved. It establishes a time-frame in which competition can be implemented in Alaska. It doesn't mandate competition in any particular place or tell the APUC how to resolve the rules. It leaves the expert jurisdiction to the expert agency, but it tells them to get on with their job. He said there are 200 areas where GCI doesn't serve today and the only reason they don't is because the APUC still prohibits competition in the smallest areas of the State. Three years ago they asked for permission to serve 50 of those smallest areas to prove that competition could work there. The day that waiver was granted, Alascom announced the upgrade of their facilities in those same 50 areas and has since gone on to upgrade its facilities statewide. Six months ago in a presentation to the Anchorage Rotary, the President of Alascom stated that the only reason they upgraded the bush facilities was in response to competition. The end result of competition in Alaska is that it has worked spectacularly well. Nobody's rates have gone up as a result of competition and bush Alaska has state-of-the-art service with high speed switch data available in communities where two years ago, a fax couldn't go through. Rates are down 25 - 50 percent and Alaskan consumers saved more than $100 million per year compared to what they would pay without competition. Competition has been an unqualified success on the long distance side of the business. Given time and the appropriate actions from the PUC, the same thing will happen in local service. Number 485 CHAIRMAN LEMAN asked if he thought increasing the 1,500 or more access lines to reduce the pool to the largest market areas would be a step in the right direction to try and build consensus in the remaining days. MR. DUNCAN said they should be real careful, because the bill talks about lines by study areas which are a way in which telephone companies are broken up for regulated service. If the lines issue was to be addressed, they would work with it, but rather than change the absolute level of lines, they would look at multiple vectors, so that they got the correct set of communities in the competitive niche. Anything that moves competition forward would be helpful to them. CHAIRMAN LEMAN asked which areas would have priorities in best moving into competition of local exchanges. MR. DUNCAN replied that GCI's business plan sees local competition evolving the same way long distance competition evolved. They would like to go to Fairbanks and Juneau next and shortly after to the urbanized areas along the road system, which would include the Kenai Peninsula and the areas surrounding Fairbanks. Then building out from there to the regional centers of Sitka, Ketchikan, Valdez, Kodiak, Kotzebue, Nome, Barrow, and then in the final stages building to the very smallest communities. He thought it was 3 - 5 years before competition knocks on the door of many of the smaller communities, but the threat of competition, itself, does as much good as competition does for keeping rates and costs down. CHAIRMAN LEMAN said he didn't mentioned the Mat-Su area. MR. DUNCAN responded that to him the urbanized areas in Alaska are everything on the road system. CHAIRMAN LEMAN asked if that included Glenallen. MR. DUNCAN said yes, because fiber facilities pass those places now and once they do, there is no reason not to extend the full range of modern technology of competitive offerings to those areas. SENATOR HOFFMAN mentioned that he left out Bethel. MR. DUNCAN said he didn't mean to leave out Bethel. MR. JIM ROWE, Director, Alaska Telephone Association, said the Telecommunications Act of 1996 does not mandate open market competition in every telecommunications market. It conditions every competitive section with a restriction that it be consistent with Section 254 of the Act which is a mandate to maintain advanced universal service. Congress acknowledged that rural areas present a telecommunications environment where competition might put universal service at risk. Recognizing that risk, the Telephone Act provides an exemption for rural carriers from unbundling network elements and collocation. It specifically says, "The State Commission shall conduct an inquiry for the purpose of determining whether to terminate the exemption." Section 870(b)(1) of this bill prevents the APUC from making that determination. This conflict is particularly significant when you consider that the Congress was thinking of rural and West Virginia, not Bush Alaska when they wrote rural safeguards into federal legislation. The APUC conducted a very lengthy hearing and came to a decision on this issue that prompted GCI to take this action. It could not determine that affordable rates could be maintained and refused to lift the rural exemption. This meant that GCI could build facilities to compete, it could resell the local carrier service at retail, it could buy the local carrier service at a wholesale rate; all GCI cannot do is resell to the local carriers unbundled network elements and collocate. GCI comes before the legislature asking them to circumvent a public policy safeguard that says the State Commission shall conduct an inquiry for determining whether to terminate the exemption. The Alaska Telephone Association opposes this bill. SENATOR HOFFMAN asked who the members of his association are. MR. ROWE answered the incumbent local carriers in the State - 23 members, except for Circle. SENATOR MILLER asked if he would classify Fairbanks as rural like Virginia. MR. ROWE said it's completely perspective and when he reads national telecommunications publications, their concept of rural is Appalachia, not Bethel. TAPE 98-20, SIDE B He hoped they would be careful with our rural areas as the Congressmen were with Virginia. SENATOR MILLER commented if Fairbanks was going to be defined as rural, he wanted it defined as rural under ANILCA for subsistence preference. MR. ROWE added that the bill is very specific about what is rural using census bureau blocks. SENATOR MACKIE asked why it wouldn't be good for the people of Alaska to not have a competitive environment in terms of better rates, access, and technology whether it's in Bethel or Fairbanks. MR. ROWE answered that he absolutely believed if competition is going to bring better services, lower rates, and more features, that's wonderful. That's what the APUC is supposed to decide. As this bill does, it's incorrect to assume that competition is going to bring lower rates. It's going to move rates toward cost which is typically what's done. Everyone in this state, exclusive of the Anchorage area, receives contributions of universal service support in the amount of between $40 million - $60 million per year. In rural areas where people are paying $10 or $15 for local service, that doesn't mean their service costs that per month to provide. It is far more than that. MR. ROWE said he talked to a state commissioner in Illinois who said he didn't want to support the people in Alaska. He feels that they don't support Alaskans; the people in her state were supporting a national network of telecommunications that is valuable only as a national network. If competition comes in to rural areas, there will be competition for the universal service support money and for the business customers. SENATOR MACKIE asked if anyone under the 1,500 phone lines wouldn't be affected. MR. ROWE answered that was correct. SENATOR MACKIE said he agreed with many of his points; his concern is economy of scale and if it would cost more in smaller areas to provide a service, like education. He asked if he would put his finger on a particular number that would protect the small areas of the State. MR. ROWE said he didn't have an answer and feared that putting a number there would be incorrect. He wanted the APUC to move just as quickly as possible to decide where competition would be advantageous to the public. He thought this bill is trying to circumvent that opportunity for them to make that decision. SENATOR MACKIE asked if this bill mandates them to make competition. MR. ROWE answered yes, absolutely. He said this bill is not about time. It allows APUPC to make the determination that there shall be competition under any method allowed in the federal act and if they don't decide within 90 days, by default, there is competition by any method under the federal act. That's on page 2, lines 8 - 12, the collocation language where you go into the facilities of the local company that is already out there and get to use some of its space to put your equipment in. Unbundled services is where they break down the elements and sell them that way, he explained. Number 512 MR. BRIAN THOMAS, Director, Government Affairs, Pacific Telecom (PTI) said they oppose this bill. PTI understands that change is forthcoming and inevitable, but when Congress allowed competition, they were concerned about its affect on universal service. That's why they created rural exemptions for some of the more onerous requirements of the Telecommunications Act. This bill is unnecessary and misdirected. Contrary to the public statements of others, local telephone competition in most forms may proceed in all of PTI's communities at any time. SB 346 is misdirected because it attempts to put a definite time frame on matters which, to some extent, are outside the scope and jurisdiction of the APUC. Today every area that is served by [indisc], including Anchorage, Fairbanks, Juneau, and the Kenai Peninsula is open to competition. When representatives of other telecommunications entities claim that the APUC's decision to retain the rural exemption blocks competition, they are being misleading. This decision really means that three of four forms of local telephone competition may proceed at any time in any of Pacific Telecom's service areas. The fact that competition has not progressed, rests not with APUC or Pacific Telecom or even other Alaskan telephone companies, but with the new entrant's own corporate decision. The reason is that a new entrant may construct its own facilities, resell PTI's local exchange service at retail, resell local exchange services at a wholesale discount, or purchase unbundled elements and collocation. There is nothing today stopping anyone from competing on the basis of the first two. The rural exemption applies only to the third and fourth methods of competition. It is important to note for all areas served by PTI, that the third form of competition is also available, because they voluntarily waived the exemption. They are in active negotiations with another carrier right now for this form of competition in Juneau. In the recent rural exemption proceedings, the Commission appropriately found that only the fourth form of competition should not be allowed for awhile in rural markets. The Commission reasonably concluded that until certain state and federal matters have been resolved to provide for continued protection of universal service, there was sufficient cause to restrict this form of competition. There remains concern that they wait until access charges have been appropriately formed and both federal and state universal support mechanisms have been better targeted to provide support to those consumers where support is most required. Because unbundling and collocation allow competitors to immediately avoid access charges and cherry pick the universal service support, competitive unbundling and collocation would be inconsistent with preservation of universal service and would lead to dramatic and damaging local rate increases, particularly for residential consumers. At the federal level, the FCC will soon be convening a task force to examine and make recommendations regarding future federal funding of rural areas. Of particular interest to Alaska consumers will be both the amount of federal funding to be made to rural areas as well as the means to target such support to the appropriate consumers. Unfortunately, the fact is that neither the Alaska legislature nor the APUC control this process. Until such matters are ultimately resolved at the federal level, the APUC reasonably found that conditions are not appropriate for the fourth form of competition. Premature removal of the exemption for this type of competition means the new interest, like GCI, has the ability to use its network for free or at very little cost to skim the market immediately by targeting select customers and avoiding payment of access charges. Such a result is inconsistent with preservation of universal service. While SB 346 is well-intended and seeks to put a time-frame on competition by requiring the APUC to act on certain matters by the end of this year, the fact is that some matters are simply beyond state jurisdiction and the legislature's efforts. Until they know with certainty how federal universal support will be handled and the APUC has had a chance to consider and adjust its policies to be consistent with or complementary to the federal approach, it would be careless to proceed with the final form of competition that would occur under the time-frame contemplated in this bill. Number 457 CHAIRMAN LEMAN said page 2, lines 9 - 10 provide that the Commission adopt regulations ensuring universal service and provides for access charges compatible with full competition. He said it wouldn't be his intent that the fourth form of competition not lead to universal service and he didn't think it said that. MR. THOMAS said the problem is that the APUC by the end of the year won't necessarily know what the federal mechanism will be in order to adjust its policies to be consistent with the federal mechanism. SENATOR MACKIE asked how GCI could build facilities. MR. THOMAS said they could construct their own facilities and in Fairbanks, they have already been deploying fiber optic cable. They own the cable companies in a lot of communities and can utilize those facilities to provide telecommunications services. They also own PCS licenses across the State and they recently won the LNBS (for two thirds of the State) auction, which is a new technology that the FCC is making available through an auction process and they could use that as a vehicle for competition. CHAIRMAN LEMAN asked if he considered Juneau to be rural. MR. THOMAS answered that he considered it rural from the perspective that there is a core area and a noncore area. He changed his mind and said he wouldn't consider it rural. There are rural aspects to serving some customers, like the ones at the end of the road, in Juneau. This needs to be considered as they allow the final form of competition to take place, even in Juneau. Number 417 MR. MIKE NOTAR, Assistant Business Manager, IBEW Local 1547 in Juneau, opposed SB 346. They are not sure that the competition GCI speaks of in support of this bill is in the best interests of their 5,000 Alaskan members and Alaskans in general. The competition GCI is seeking creates very complex issues and several items need to be addressed prior to this occurring. GCI now has the ability to compete head-to-head, but is not willing to do so in those ways. They believe the APUC has made a prudent decision regarding this and that process should be allowed to continue. They would like to see a level playing field of competition where the residential customer doesn't get adversely impacted by either higher rates or a degradation of service quality. They believe the local service competition in Alaska requires a more comprehensive look before taking the proverbial leap. SENATOR MACKIE asked him how this bill would negatively affect the members of IBEW. MR. NOTAR answered that they see it as a potential job loss and a degradation of wages in the State of Alaska and in the telecommunications industry. SENATOR MACKIE asked how that would happen. MR. NOTAR explained that for GCI to go into an area and be able to glean off the customers that they wanted would potentially drive wages down and eventually drive people out of work to a certain extent. SENATOR MACKIE asked if IBEW worked for certain companies and not for others. MR. NOTAR answered that IBEW represents a lot of telecommunications workers and a lot of local operating companies in the State. SENATOR MACKIE asked if they worked for GCI. MR. NOTAR answered no, that GCI is an unrepresented company. SENATOR MACKIE asked if he had IBEW people working for GCI, would he think this is a good bill. MR. NOTAR said he would still want to look at how the competition would affect the consumer. MR. STEVE HAMLEN, President, United Utilities, said they serve 58 rural communities and have approximately 5,500 access lines and 100 employees. They would like to compete. The problem is that they can't compete effectively and their concern is that the deep pocket players can get special legislation and then use their substantial financial resources to drive the competition off. For small rural companies, like United Utilities, to compete with GCI and AT&T Alascom, the first thing you find is that there's not a level playing field. United Utilities, through its affiliate Unicom, has had a complaint pending before the APUC for two years. They have not been able to get that complaint resolved and have been told by the Commission that it will address the issues in an up- coming market structure docket. Those issues include having access to the same rules and capabilities to compete. He suggested deleting on line 9 "regulations insuring universal service" and inserting "regulations promoting competition in all telecommunications markets including long distance and local markets and insuring cost effective universal services" which would begin to level the playing field and give them an opportunity to compete. CHAIRMAN LEMAN asked how many access lines they have in Bethel. MR. HAMLEN answered that they serve 58 villages and the average number of access lines in each village is 87. They do not provide local service in Bethel, but they would like to compete in Bethel and provide local and long distance services. If they cannot offer both, they are unable to compete effectively. The rules the APUC has right now do not give them the same abilities that GCI has to resell unbundles networks to resolve disputes and to operate through a single corporate entity. MR. GREG BERBERICH, Matanuska Telephone Association, opposed SB 346, because it is a self-serving attempt by some to circumvent a specific mandate by Congress that in rural areas state commissions will determine on a case-by-case basis whether to allow the rural companies exemption to provide interconnection to competitors on an unbundled basis. The Telecommunications Act mandates competition in the local exchange market and competitors can enter the market in the four ways mentioned. There are no restriction or approvals required. However, Congress did recognize it may not be appropriate to require collocation and the purchase of unbundled elements in rural areas. That is why it set out in law that state commissions review competition through the fourth method. GCI has mounted a campaign that the APUC has stopped competition which is just not true. Rural companies are not exempted from competition. Congress realized that in rural high cost areas, all forms of competition may not be consistent with the universal service provisions of the Act which have two objectives: to open the local exchange market competition and to maintain universal service that is affordable throughout the country. Rural companies in Alaska currently receive over $50 million in universal service and access charge support. The FCC is currently considering shifting 75 percent of that support to the states and he asked where that support would come from. He said that support keeps the rates as low as they are now and those rates are way below cost. This issue and many others need to be resolved before opening markets to unfettered competition. It is the role of the APUC to develop a competitive marketplace while insuring affordable telephone service throughout Alaska. Number 276 MR. TOM MEAD, Telalaska, opposed SB 346. He said they have about 5,000 lines in 21 villages and serve little villages from Little Diomede to Fort Yukon and Galena to Dutch Harbor. The bill is in direct conflict with federal law and the APUC is already acting to meet the requirements of the Telecom Act. GCI's position in recent APUC hearings undercut its own stated objectives of modern, affordable service. A blanket bill such as this which essentially mandates competition for all but 2,700 of the 373,000 lines in the State of Alaska goes against the Telecom Act. The APUC has a schedule to implement changes that are required by the end of the year and everyone in the industry, including GCI, agreed that was appropriate and they would all work together to get the regulations in place by the end of the year. He did not believe there was a legitimate purpose for this bill. He pointed out that it is APUC's responsibility to protect the public's interest. Mr. Duncan is protecting the shareholders' interests at GCI which is appropriate for him. The APUC has a balance to maintain and its caution is justified. He said that rates came down when competition was introduced to the interexchange market because the interexchange market was subsidizing local rates at the time. When competition was introduced into Tok, local rates went up. The subsidies that were being provided by the telemarket were being driven out. In Anchorage, alone, they had a twenty percent rate increase in 1988 and a 50 percent increase in 1992 - purely as a result of competition coming in and driving out subsidies. Competition doesn't reduce costs, it just drives the price toward costs. If the cost of service is $150 a month per line, competition will drive the price toward that. When you talk about what size is appropriate and who should be served competitively, he knew that for his company, Dutch Harbor, their largest exchange, supports all the other exchanges. If they had to bring their price toward cost at Dutch Harbor, it would bring their business line rate down to $20, but it would bring the local residential rate in Cold Bay and Fort Yukon up to $46 per month. Competition isn't necessarily in the public's best interest. The new satellite services that are available right now through GCI are far less than what's deliverable through the current local exchanges. Essentially, they are the bottleneck. MR. DAVID FAUSKE, General Manager, Arctic Slope Telephone Coop, opposed SB 346. He wanted to speak particularly to the issue of the suggested deficiency in local exchange service. He wondered why this proposed legislation is not expanded to be an omnibus rural utility competition bill. Why focus on only one public service utility. He said the reality is that the subsidy is what is being competed for and the monopoly service would shift from one monopoly provider to another monopoly provider. Number 185 MR. KEN TROUT, Summit Telephone Co., opposed SB 346. He said they are a small company with 140 access lines and serve Ferry Summit, Chena Hot Springs, Coldfoot and Wiseman areas. Although they would be exempt from the competition under consideration in this bill, they are concerned about the process of implementing the competition process. The determination of the public benefit or harm done by the competitive market should be done on a case by case basis by the APUC. Summit has three concerns: forcing a due date for regulations while federal regs continue to move and affect our State, the size of competitive areas, and the lack of protection for the incumbent telephone company universal service and reasonable pricing. While it's true that the Commission may not be as expeditious as everyone would like it to be, its responsibility is to protect the interests of the State. This bill would detract from orderly transition to competition. The Commission is presently dealing with the issues and APUC's concerns are for the consumers and smooth integration of federal regulation. The cost of serving remote and rural territories is high and the support that's given to them is an integral part of the process of serving those customers. While a company may successfully service remote areas under current status, allowing competition into small areas may be to the detriment of their consumers. MS. LAURIE HERMAN, Alascom, said they do not oppose SB 346 in its current form. She said they look forward to participating in future discussions. CHAIRMAN LEMAN asked if they amended the bill to restrict its application to the larger service areas, would that change her recommendation? MS. HERMAN said their position is whatever moves competition forward is good for the State and its residents. She would want to see what the magic number was and how it was calculated. She didn't have any recommendations for that, however. TAPE 98-21, SIDE A MR. DUNCAN responded that many of the same arguments were used when they proposed competition in 1982. The process ultimately resolved in a way that rates went down and today AT&T operates without a subsidy and the network is more efficient. In talking about the need to reform state access charges and FCC action before the APUC can act is a catch-22 situation, since the FCC is opposing any reform to current access rules. Some people are suggesting that GCI is the bottleneck in rural Alaska, but that's simply not true. Today the interface speed is not appropriate which is an issue that will be solved soon. Generally, the message the legislature is getting is to go slow and be careful. That's because the incumbents have everything they need today and the longer it stays the way it is, the happier they are. There have been suggestions that GCI has the opportunity to compete in other ways. If they believed that was true, they would have less incentive to press this bill. However, if GCI goes back to the Commission and asks to compete using its exclusive facilities, they would be told they face the same roadblocks and would be back before the legislature next year. CHAIRMAN LEMAN asked him if he thought this bill was in conflict with federal law. MR. DUNCAN answered that they wrote the bill very carefully because it's difficult in light of the comprehensive federal law to provide much direction to the PUC without running into that conflict. That's why it's so skinny and says implement competition in any way you can that's consistent with the federal act. CHAIRMAN LEMAN said he wanted to clarify the legislative drafters wrote the bill. MR. DUNCAN agreed with the correction. SENATOR MACKIE asked if he had a list of phone exchanges in the State. MR. MEADE answered that there are 3,541 subscriber access lines in Bethel. SENATOR MACKIE moved to amend on page 2, line 16 to change 1, 500 access lines to 5,000 access lines. There were no objections and it was so adopted. SENATOR MACKIE moved to pass CSSB 346 (L&C) from Committee with individual recommendations. There were no objections and it was so ordered.