SENATE LABOR & COMMERCE COMMITTEE February 27, 1996 1:30 P.M. MEMBERS PRESENT Senator Tim Kelly, Chair Senator John Torgerson, Vice Chair Senator Mike Miller Senator Judy Salo Senator Jim Duncan MEMBERS ABSENT All Members Present COMMITTEE CALENDAR SENATE BILL NO. 300 "An Act relating to the Uniform Commercial Code, primarily to investment securities; amending Rule 8(d), Alaska Rules of Civil Procedure; and providing for an effective date." SENATE BILL NO. 299 "An Act requiring competition in local exchange telephone service." SENATE BILL NO. 43 "An Act relating to membership on the Board of Registration for Architects, Engineers, and Land Surveyors; relating to registration by the board; clarifying the meaning of practicing or offering to practice architecture, engineering, or land surveying; deleting teachers of postsecondary land surveying courses from a registration exemption; and amending the definition of 'practice of land surveying.'" PREVIOUS SENATE COMMITTEE ACTION SB 300 - No previous Senate committee action. SB 299 - No previous Senate committee action. SB 43 - See Labor and Commerce minutes dated 3/7/95 and 2/20/96. (SCHEDULED BUT NOT HEARD) WITNESS REGISTER Art Peterson 350 North Franklin Juneau, AK 99801 POSITION STATEMENT: Gave summary of SB 300. Jim Jackson GCI 2550 Denali St. Anchorage, AK POSITION STATEMENT: Supports SB 299. James Rowe Alaska Telephone Association 4341 B Street Anchorage, AK POSITION STATEMENT: Commented on SB 299. Mark Foster 625 West 10th Juneau, Alaska POSITION STATEMENT: Commented on SB 299. Dave Fauske 4300 B Street Anchorage, AK 99503 POSITION STATEMENT: Commented on SB 299. Dennis Niedermeyer Bristol Bay Telephone P.O. Box 413 King Salmon, AK 99613 POSITION STATEMENT: Opposed SB 299. Dana Tindall, Vice President Legal and Regulatory Affairs GCI 2550 Denali, Suite 1000 Anchorage, AK 99503 POSITION STATEMENT: Supported SB 299. ACTION NARRATIVE TAPE 96-15, SIDE A Number 000 CHAIRMAN KELLY called the meeting to order at 1:30 p.m. and announced SB 300 to be up for consideration. SB 43 was rescheduled to be heard on Thursday. SB 300 UNIFORM COMMERCIAL CODE:ART 8(SECURITIES) SENATOR KELLY informed committee members the Division of Banking does not object to any of the provisions in SB 300. ART PETERSON, Uniform Law Commissioner, stated SB 300 was supported, drafted, and promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL). Article 8 is based on the 1909 Uniform Stock Transfer Act which was incorporated into the UCC when it was developed in the 1950s and revised in 1977. SB 300 amends Article 8. However, some of the amendments on page 1 pertain to Article 1 of the UCC. That material, as well as the material following page 39, are compatibility amendments, therefore the bulk of the bill is between pages 2 and 39. It recognizes both the technology, the increase in the number of people buying investments, and the development of a clearinghouse corporation system of holding securities. Because it is an indirect way of holding securities, many of the traditional rules in Article 8 do not apply. Therefore, new material must be adopted to deal with a variety of transfer questions that arise because of the indirect relationship. The main features of SB 300 are as follows. It establishes consumer specific rights in one's securities account in relationship to brokers and dealers. It enables customers to obtain credit secured by the securities account. It makes it easier for broker/dealers to obtain secured credit on their accounts with the securities depositories. It helps avoid a meltdown because broker/dealers cannot obtain credit when a market crashes. It gives creditors better control over collateral that includes securities accounts. It assures smoother function of securities markets over the long term. It reduces the prospect of litigation over broker/dealer customer relationships. It assures that the transfer rules for securities will remain in state law rather than federal regulation. Last, it makes it easier and less risky for people to invest through broker/dealers. There being no further testimony or questions on SB 300, SENATOR KELLY announced it would be passed out on Thursday unless opposition to the bill is heard. Number 200 SB 299 COMPETITIVE LOCAL PHONE SERVICES  Jim Jackson, representing GCI, testified in support of SB 299. Congress passed, by an overwhelming margin, a rewrite of the telecommunications law a few weeks ago to open all telecommunication markets to competition. Whenever segments of that market have been opened to competition in the past, despite dire predictions, favorable results have occurred, such as improved services and lower cost equipment. Competition in the local service market will bring the same benefits brought to the other segments of the market. Although the federal legislation opens up the telecommunication market to competition, it leaves the implementation to the APUC. It also allows carriers exceptions from specific rules at the discretion of the APUC. The purpose of SB 299 is to establish legislative policy supporting competition. The APUC will then implement the federal legislation recognizing that support. Number 267 MR. JACKSON addressed concerns raised about SB 299 in a previous committee hearing. First, SB 299 should not cost the APUC anything. Implementing the federal legislation is going to be costly, however SB 299 will create no additional costs, and should facilitate implementation. A second concern was whether competitors could enter a market and choose only the best customers. The federal legislation contains a protection to prevent that from occurring; it allows the APUC to require that new entrants cover the entire service area. A third concern was whether SB 299 could undermine universal service. The federal law contains extensive provisions to protect universal service even as competition is introduced. Additionally, two existing statutes (AS 42.05.145 and AS 42.05.840), require the APUC to consider universal service in all of its decisions. A fourth concern is that SB 299 promotes competition in local service, but does not address long distance service. The Legislature addressed that in AS 42.05.800 which established a policy favorable toward competition in long distance services. The last concern related to a comparison to the electric utilities. There are very big differences in the two industries. One of the means by which competition will enter the phone industry is through the existing cable telephone company which already has duplicate wires in many locations. It will also be provided through wireless services which does not require duplication of facilities and replacement of existing facilities. Number 336 JAMES ROWE, representing the Alaska Telephone Association (ATA), stated his opposition to SB 299, because the recently passed federal legislation took many years to pass, was very contentious and lengthy, and cannot be addressed at the state level by a one page bill. The federal bill changes a public policy in existence since 1934, and addresses universal service. Members of the ATA feel that if Congress can recognize the difficulties inherent in providing services to rural areas, the Legislature should do so too. The federal legislation does not require competition, as SB 299 does, it encourages it. It enables the states to choose how the public is best served in a particular area. ATA is in the process of addressing the federal legislation, and believes the issues are too complex to be addressed by a one page bill, such as SB 299. SENATOR SALO asked how many local carriers ATA represents. MR. ROWE replied ATA represents 22 local exchange companies; there is one circle not represented by ATA. SENATOR SALO asked how the service area boundaries are established. MR. ROWE explained it is not clear under the new federal legislation, however present regulations determine boundaries by using study areas. A local exchange company has not had the option in the past to choose the areas it wanted to serve, and was often directed by the APUC to make investments to reach communities that were not economically profitable. In the future another carrier could request to compete in a local service area which might, or might not, have the same boundaries. He argued if a company can now come into an area to compete and choose only the densest area of population, the best interests of the rural customers will not be served. Number 392 HARRY SHOOSHAN, an ATU consultant, discussed his experience working on competition issues from a variety of perspectives. The objective of the new federal statute is to open all markets to competition, not just local exchange. It grants the FCC the ability to pre-empt any state regulation that acts as a barrier to entry or restraint on competition. This ability raises the question of the need for SB 299, especially since it has been characterized as an emergency measure that must be acted on in its current form. The federal act retained substantial powers but gave the state absolute discretion to decide on alternatives to traditional public utility style regulation and to implement pricing flexibility for incumbent firms. He urged committee members to exercise that discretion and provide the APUC with tools to adapt regulations to the realities of the 21st Century. He believed SB 299 is deceptively simple. It is too narrowly focussed, generally worded, and fails to address the need for alternative forms of regulation, pricing flexibility and the power to forebear: critical components of a fair competitive framework. Regarding federal protections of universal service, the new federal statute seeks to restructure only federal support mechanisms, not those existing in the various states. He did not feel existing statute provides enough stimulation to increase long distance markets. MARK FOSTER, a telecommunications consultant and former APUC commissioner, testified on behalf of ATU. He focussed on one example of the kind of marketing and pricing flexibility issues referred to by Mr. Shooshan. When the State of Alaska solicited new phone services for state offices, it received a number of offers; the best was from PTI. Because of the regulatory process and time required to process that contract, the state was unable to get the service from the preferred vendor, the local phone company, and was forced to buy equipment from an outside vendor. The new federal act will allow the APUC to provide needed flexibility to enable local companies to compete with other competitors in the local phone markets. STEVE HAMLIN, President of United Utilities (UU) which provides services to Western Alaska, noted the APUC has expressly asked for clear legislative direction in response to the federal act. In that act, Congress eliminated all barriers to entry into interstate and intrastate telecommunications services. The act contains an extensive list referred to as Duties of Local Exchange Carriers. Some of the duties require carriers to resell services at wholesale rates and to provide: number portability; dialing parity; access to rights of ways; physical and virtual co-location for competitors; and interconnection to competitors. The list also prohibits cross- subsidation between non-competitive and competitive services, and establishes procedures and standards for negotiation, arbitration, and approval of interconnection agreements. The federal act even describes how competitors can access telephone poles to place attachments. The FCC has been assigned the responsibility to adopt regulations to implement the act. FCC regulations for interconnection for competitors are scheduled to be completed by August 1, 1996. MR. HAMLIN said that telecommunications providers, local exchange companies, and long distance companies want the ability to be one- stop providers for consumers, however the playing field is uneven. The duties that now apply to local exchange carriers do not apply to interexchange carriers, which is why local exchange carriers need assistance from the Legislature. The 22 local exchange carriers, in their attempts to provide long distance services, will be competing with the two existing large companies providing those services. Those two companies have a substantial advantage over local carriers in terms of financial resources and capabilities. SENATOR KELLY asked the names of the two companies. MR. HAMLIN replied AT&T Alascom and GCI. MR. HAMLIN explained the first barrier to local carriers is the requirement to resell services at wholesale rates. Alascom's wholesale rates are greater than its retail rates but local carriers are prohibited from charging more for wholesale rates. Therefore local carriers who want to provide long distance services cannot compete since Alascom could resell its services to local carriers at wholesale rates, which are higher than retail rates. TAPE 96-15, SIDE B MR. HAMLIN stated a second barrier is access to unbundled network elements. Both GCI and Alascom are introducing new technology, called Demand Aside Multiple Assignment (DAMA) technology, to serve rural Alaska, which will be available next year. A call between Hooper Bay and Bethel is currently routed to a satellite, to Anchorage, back to the satellite, then to Bethel, which requires a double satellite hop. That transmission delay causes problems in the quality of the circuit including voice, fax, and data transmission. With DAMA technology, a network controller will be located in Anchorage, and through a signalling channel, will route the call from Hooper Bay to the satellite, directly to Bethel. Local exchange carriers who want to provide such long distance services will need to capture information from the telephone calls made for billing purposes. They can provide for that capability at each rural site, at a cost of $12-14,000 per site, or they can purchase that capability through Alascom's network controller. The problem lies in the fact that Alascom is not subject to the same requirements that the local exchange carriers are, therefore does not have to provide any services, which is why the playing field is uneven. MR. HAMLIN commented on three other areas of concern. The APUC should be required to act in a timely manner on rate changes and requests to extend services to new areas. In the past the lack of timeliness has caused considerable difficulty and will hamper companies trying to compete. The APUC needs a legislative directive requiring the creation of a new scheme for local carriers subject to competition. Local carriers need the ability to notice the public on rate changes and have the APUC act within 30 days. Local carriers also want complete rate deregulation once competition occurs. Last, the federal act has established a federal-state joint board to ensure rural consumers have access to telecommunications services at reasonable and affordable rates. The board must define what universal service is and design a mechanism to require all providers to fund universal service and make that cost explicit. He stated places like Hooper Bay have state-of-the-art telecommunication services available today which was not made available by competition, but by public policy. He believes Alascom and GCI want to enter these markets and have access to the high cost support provided to local carriers to support facilities in rural areas. Congress left those decisions up to the states recognizing the amount of money from the federal jurisdiction to fund universal service will be limited. He stated to get the most mileage out of that funding, the APUC needs to be directed to determine whether allowing more than one carrier to be eligible for high cost assistance will drive up costs and will ultimately result in fewer, lower quality services because of uneconomic duplication of facilities. He warned that SB 299 will result in less competition and fewer choices for consumers, and consumers will end up being held captive to a few deep pocket players. SENATOR DUNCAN asked those testifying to provide position papers on the bill to committee members. MR. HAMLIN stated UU is a member of the ATA, and has been working on draft legislation with Representative Kott in the House Labor and Commerce Committee which addresses the issues he mentioned. SENATOR DUNCAN asked if UU is opposed to SB 299 but believes something needs to be done this session. MR. HAMLIN responded UU is opposed to SB 299 and definitely believes something needs to be done this session. The committee took a 10 minute recess. Number 506 DAVE FAUSKE, general manager of Arctic Slope Telephone Association Cooperative, testified. The Coop serves the North Slope area which includes seven villages and the Prudhoe Bay/Deadhorse industry complex. The Arctic Slope Regional Corporation, in 1977, wanted to develop a phone company in the North Slope Borough. For several years, a for-profit phone entity was attempted through various joint ventures, however the only economic way to provide such service was through a cooperative. The Coop was established in 1980. He did not believe the significant hurdles which prevented a competitive company from being established initially, have not been removed. He stated the Legislature needs to pass a bill that guides the APUC and establishes a reasonable and practical adjudicatory process in implementing the state's intent, as well as the federal intent. He did not oppose SB 299 in principal but sees it as a resolution endorsing an economic principle rather than legislation providing guidance to the APUC or operating telephone companies. Number 461 SENATOR KELLY asked if the Coop is a non-profit company owned by the subscribers. MR. FAUSKE answered the coop is a subscriber owned cooperative under the general REA procedure. Its owners are village residents, ARCO, and BP. SENATOR KELLY asked if the village of Fort Wainwright belongs to the Coop. MR. FAUSKE replied the village of Wainwright does, not Fort Wainwright. SENATOR KELLY asked if Wainwright is hardwired for telephones. MR. FAUSKE explained Wainwright has an outside copper plant distributed within the village, and each village has a "pod" on the tundra which links it to the satellite. SENATOR KELLY asked a typical monthly subscriber rate for a home in Wainwright. MR. FAUSKE replied the rate for residential subscribers is $7.30 per month; the rate for business subscribers is $15.60 per month. He believed those rates to be the least costly in the state. SENATOR KELLY asked if the Coop was thinking of moving into Anchorage. DENNIS NIEDERMEYER, representing consumers in rural villages, such as Ekwok, Naknek, and New Stuyahok, testified in opposition to SB 299 because it sidesteps the creation of a process to provide direction in rural areas envisioned in the federal act. The direction needs to address issues much more complex than what is contained in SB 299. Consumers of the coop he represents have foregone dividends to build up a good system but still need better long distance service. He stated that although competition sounds good, it costs more to operate with multiple infrastructures in small communities than with less. He believes rates will increase in small communities if SB 299 passes. SENATOR KELLY asked what a resident subscription rate is in New Stuyahok. MR. NIEDERMEYER replied he pays $22 per month for basic service. SENATOR KELLY asked what the typical resident rate in Anchorage is. An unidentified ATU representative estimated $9 per month. MR. NIEDERMEYER felt SB 299 would put at risk the large investment and commitments to loans that local telephone companies have incurred by allowing competition with minimal review. Number 394 HOWARD GARDNER, Executive Vice President of Alaska Power and Telephone Company, a for-profit company owned primarily by its employees, testified in opposition to SB 299. Alaska Power and Telephone serves eight utilities and is concerned about protecting its investments in Alaska. He urged the Legislature to establish a clear policy in response to the federal legislation. He did not believe competition, per se, will improve the level of service or reduce costs in isolated rural areas. DANA TINDALL, Senior Vice President for Legal and Regulatory Affairs for GCI, stated SB 299 is simple in that it merely supports the philosophy of competition. The federal act mandated that all telecommunication services be open to competition but does allow telephone companies with less than two percent of the nationwide access lines to try to make a burden of proof argument that interconnecting with competitive local telephone companies is not in the public interest. Without SB 299 competition will occur because it is the national policy. Without SB 299 there will also be 22 separate proceedings and fights before the APUC on whether or not interconnection with competitive local telephone companies is in the public interest with the incumbent local telephone companies having to bear the burden of proof. SB 299 leaves the implementation of fair competition up to the APUC and sets up the level playing field in Section 1 (4). The APUC already has the right to waive any regulations and to adopt pricing flexibility for local telephone companies. What the APUC lacks is simple policy guidance on whether or not competition is a good idea. SENATOR KELLY asked if those opposed to SB 299 agree that APUC will have to hear 22 cases. MS. TINDALL responded one of the previous witnesses indicated the APUC would hear each case individually if a legislative policy was not established. MS. TINDALL remarked that although some negative impacts may result from a competitive environment, many safeguards are provided in federal and state laws to prevent that from occurring. She explained the universal service mandate requires that everyone have access to basic telephone service, and in Alaska that service includes long distance services. It requires telephone companies to subsidize the costs of universal service. With the exception of ATU, federal funds are provided to telephone companies in Alaska to provide those services. She explained SB 299 is very simple only because the federal act is so comprehensive. SENATOR KELLY requested a position paper from the APUC by Thursday, and adjourned the meeting at 3:00 p.m.