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July 9, 1999

Dissenting Statement
Commissioner Harold Furchtgott-Roth

Re: Low-Volume Long-Distance Users (CC Docket No. 99-249)

I respectfully dissent from this Notice of Inquiry regarding the impact of flat-rated and minimum usage charges on low-volume users. I write to express my ardent opposition to this inquiry because I believe that the mere suggestion of re-regulating a competitive market is antithetical to the Telecommunications Act of 1996. Moreover, the scope of this inquiry greatly exceeds what I believe is necessary to meet the stated goal of this proceeding and cannot be justified. Finally, I am concerned about the use of limited Commission resources on an exercise driven by questionable motives.

I. This Notice of Inquiry is Antithetical to the Telecommunications Act.

The Telecommunications Act of 1996 was landmark legislation. Historically, telecommunications markets were micromanaged by both federal and State regulation and were largely closed to competition. Throughout the Telecommunications Act's various statements of objectives, the concepts of competition and deregulation for telecommunications markets are often repeated. The message from Congress is clear: federal regulators must refrain from intruding in competitive markets.

The Commission has long recognized that the market for long distance services is substantially competitive.(1) In reclassifying AT&T as a non-dominant carrier, the Commission noted "intense rivalry" in the long distance market, and found that no long distance carrier had the ability to control prices in the market.(2) On numerous subsequent occasions, the Commission has acknowledged that the long distance market is substantially competitive.(3) Indeed, in announcing this inquiry to the press, the Commission acknowledged "the competitive nature of the long distance industry in this country."(4)

Despite the unambiguous mandate from Congress to refrain from regulating competitive markets, like the one for long distance services, the majority insists on suggesting the possibility of "regulatory intervention." Today's Notice of Inquiry is replete with suggestions of federal government intrusion into the competitive long distance market.(5) Inquiries about whether the pricing decisions made by market participants "are appropriate" or whether their charges "are justified" are vestiges of cost-based regulation. How can it be that the Commission must still ask "whether, and the extent to which, government intervention despite the availability of competitive choices may be in tension with the deregulatory emphasis of the Act."(6) Opening this type of inquiry will undoubtedly have a chilling effect in this competitive industry. I find it impossible to reconcile the mere suggestion of re-regulation of this market with the deregulatory objectives of the Telecommunications Act.

II. The Scope of this Inquiry Exceeds What is Necessary to Reach Its Stated Goal

If the majority's true concern is to protect low-volume users, the scope of this inquiry far exceeds what is necessary. There are certainly long distance carriers in the market today that offer service without flat-rated or minimum charges. In fact, in a recent press release Chairman Kennard made the entirely rational suggestion to consumers that, if they "see higher flat fees [on their long distance bills] without reduced per-minute rates, they may want to shop around for another long-distance company, or even consider not having a presubscribed long-distance company at all."(7) It seems the Chairman recognizes that consumers are well suited to help themselves in a competitive market. In any event, the Commission could satisfy its stated goal by simply considering whether to collect and to disseminate information regarding the flat-rated and minimum charging policies of each market participant. Make no mistake, I do not believe that this is the proper role of a government agency, nor do I believe that the Communications Act directs the Commission to take such action. Private entities are better suited to serve this function. I merely note that the inquiries in today's item go far beyond this narrow topic. This inquiry indicates that the majority will, at a minimum, consider a return to the methods of micro-management of pricing decisions that Congress has rejected.

III. The Inquiry Cannot Be Justified.

The majority justifies this inquiry on the emergence of a number of factors "it did not anticipate" resulting from its access and universal service reform proceedings. Specifically, the Commission cites as "significant developments:" (1) the decision of three competitive long distance providers to charge a flat, averaged, monthly PICC pass-through charge; (2) the decision of two competitive long distance providers to initiate monthly minimum usage charges for basis-rate customers; and (3) the decision of one competitive long distance provider to recover some of its universal service contribution through a flat charge.(8)

As an initial matter, I am deeply disturbed by the suggestion that a government agency should regulate based on any "anticipated factors" other than those which one would expect in a competitive environment.(9) The public should have full confidence that we, as regulators, have no preconceptions about the results of our decisions other than the belief that a competitive outcome is the best that can occur. The notion of unanticipated factors affecting regulatory action is, at its core, an archaic and anti-consumer concept that suggests a belief that federal bureaucrats, through omniscience and omnipotence, make better decisions than consumers in a competitive market. It is similar bureaucratic arrogance that leads some to believe that government can concoct models to consider every conceivable factor to reach a perfect outcome. When government says that a model can do as well as a market in terms of efficiency, the government is engaging in self-deception.

In any event, it is disingenuous to suggest that the decision of a participant in a competitive market to pass along its costs to its customers is "unanticipated." In fact, this was not unanticipated. For months, I have explained that, in a competitive market, prices are determined by costs. Competitive businesses take prices as given by costs, not by the wishes of outside spectators. Simple economics dictate that competitive businesses must pass along new costs, including new taxes, to their customers.(10) I certainly did not invent this idea. It is one that any college freshman taking a basic economics course could repeat. In fact, the Commission relied on this basic economic principle in touting that recent access charge reductions, i.e., reductions in the costs faced by participants in a competitive market, were likely to lower prices.(11) It seems that the Commission is comfortable with long distance carriers passing through their cost savings, but uncomfortable when those same carriers pass through their fixed costs and newly imposed taxes.

I support the Commission's regulatory reforms designed to eliminate implicit subsidies. Recovering non-traffic-sensitive costs on a usage-sensitive basis creates an implicit subsidy from high-volume users to low-volume users. I agree that these implicit subsidies have a disruptive effect on competition. To the extent the Commission's reforms remove this subsidy, we must now let competitive forces work. I do not believe that eliminating regulatory barriers to competition can ever be the impetus for further regulatory action by this agency. We must not intervene in a competitive market whether it be for the "protection" of consumers or for any other reason.

The majority maintains that its inquiry is designed to ensure that low-volume residential and single-line business consumers share in the benefits of universal service and access charge reform. Three members of this same majority, however, weeks ago raised the e-rate tax on these same customers' bills by $1 billion -- roughly $10 per household per year -- to pay for an excessive schools and libraries program. Where was their concern for consumers then?

IV. The Commission's True Motivation

This overly-broad inquiry leads me to question the motives of the Commission in adopting this item. First, I believe that the timing of this Notice is designed to coincide, at least approximately, with the decrease in access charges and the exorbitant increase in funding of the schools and libraries program. Moreover, I am deeply concerned that, yet again, the Commission has taken regulatory action for the purpose of distancing itself from the taxes that they established, and because they are angry with carriers who have informed consumers about the tax. I am concerned about the use of limited Commission resources on an exercise driven by questionable motives.

Timing of the Notice of Inquiry

The Commission has engaged in a public relations campaign to convince the Washington political establishment that massive increases in the e-rate tax could be offset by access charge reductions and that the American consumer need not ever know about either the access charge reduction or the increased e-rate tax. In this way, the Commission can claim that its new tax is not responsible for increased rates. The Commission's campaign, however, does not ring true for at least one set of consumers: low-volume users. I have repeatedly pointed out the fallacy in the connection between access charge reductions and increased universal service fund contributions; namely, there is no assurance that the consumers who benefit from access charge reductions will be the same consumers who will bear the new universal service burden. The issue should not be whether, despite massive tax increases that may offset decreases in federal access fees and charges, IXCs have no net differences in costs. The issue is whether, absent massive tax increases, consumers would be better off. Today's inquiry seeks to assuage those consumers from whom the Commission is unable to hide its e-rate tax increase.

Another Attempt to Conceal the E-rate Tax

From its inception, the Commission has attempted to conceal the e-rate tax from consumers. It has done so through a series of actions, both formal and informal, to coerce long distance companies into hiding the tax. First, it employed behind-the-scenes threats and pressure. When that was unsuccessful, the Commission made its threats public by adopting unconstitutional "truth-in-billing" rules ostensibly designed to penalize "deceptive" billing practices that, in fact, limit how long distance carriers may identify e-rate tax line items on their bills. Now, the Commission is unholstering its biggest threat of all: the power to re-regulate the long distance industry.

This story begins with the Commission's development of the schools and libraries program. In a May 1997 Order, the Commission "requir[ed] phone companies [to] make . . .[a universal service] 'contribution' for the social good of wiring schools and libraries to the internet. . . . [T]he companies will have to hand over $2.25 billion in extra charges for the wiring cause." New Phone Tax, Wall Street Journal, December 9, 1997.

In December of 1997, I first noted my concern that the Commission was pressuring carriers not to place line-items for these charges on their consumers' bills.(12) At the time, it was widely reported that the "Commission prefers that [universal service costs] be rolled into rates,"(13) and that the FCC was irate with companies that planned to pass this tax through to consumers:

The FCC is angry at companies that plan to disclose those costs to customers as a line item on the monthly bill. "They don't want us to call it a tax," [said one industry representative]. "But that's what it is."

A New Tax for the New Year, The Washington Post, December 2, 1997.

I objected to the Commission's efforts to hide this tax from consumers, making clear that "I do not share such a preference or endorse such efforts. . . . No carrier should have its billing information restricted or limited by the Commission."(14) Indeed, I believe that consumers have a right to know when they are paying federal charges; the Commission should not discourage companies from placing federal universal service charges on their bills. Line items for new taxes are a means of letting customers understand why rates are not lower than they would have been absent the new taxes. These line items are not a means of promoting "hidden rate increases," as some have called it. To the contrary, the only "hidden rate increases" here are those that result from obscured and unexplained taxes.

Despite the benefits of fully informing consumers about government-mandated charges, "[t]he administration, which has touted the [schools and libraries] program as the centerpiece of President Clinton's education goals, would rather that customers not know." Itemized list of phone fees hotly debated, USA Today December 15, 1997 at B-12. So, it was reported, "the FCC . . . had been pushing hard to get major long-distance carriers to agree not to put line-item charges on residential phone bills at least until July." FCC Postpones Ruling on Internet Connections, Washington Post, December 13, 1997 at F-9. These efforts were designed to "mask [the tax] for a while, to take some pressure off from the Hill." Id. For the first few months of the program, the Commission even "decided to reduce the [initial universal service] charges after the carriers said the fee could lead to higher rates and after AT&T and MCI threatened to specify the charge on the bills they send to customers." Fund to Aid Technology in Schools Facing Big FCC Cuts, New York Times, December 15, 1997 at D-1. Apparently, "the agency worried that if millions of Americans began seeing such fees on their bills, popular support for deregulating the telecommunications industry could begin to erode." Id. At this point, most large carriers began to place the line items only on bills for commercial customers, declining to specify the charges on bills for residential customers.

Last spring, the general issue of line items for schools and libraries "contributions" arose again when the Commission began to consider raising the funding level for the schools and libraries program. By then, many carriers had announced that they would recover these costs through separate line items on individual consumers, such as residential customers. Again, these announcements angered some at the Commission. See, e.g., Statement of Chairman William E. Kennard on AT&T Long Distance Announcement, May 28, 1998 ("AT&T's announcement is premature, unwarranted and inconsistent with their own public proposals to the FCC. This announcement suggests that AT&T will raise rates to pay for universal service."); "AT&T adding surcharges; FCC Furious," USA Today, May 29, 1998 at 2 ("The FCC is livid.").(15)

Immediately after carriers announced their intent to place line items on residential bills, the Commission announced its plan to initiate a so-called "truth-in-billing" proceeding. Schools, Libraries, Health Care Discounts Program Faces More Scrutiny, Washington Report, June 15, 1998 (Commissioners "said they plan to adopt a notice of proposed rulemaking to help clear up consumer confusion about new rates and fees attributed to the discount programs").

Even worse, in the view of some at the Commission, opponents of the tax were blaming not just the Commission for the imposition new consumer charges, but also the current Administration, which strongly supported the schools and libraries program. As one news magazine reported:

[The Vice President's] biggest high-tech achievement to date is a program to wire every classroom and library in the country. . . . But right now the program is under assault from congress as an out of control entitlement engineered by an out-of-control bureaucracy. Which does not do much for Gore's reputation as the architect of reinventing government. Even more ominous is another threat: starting this summer phone companies that were ordered to pay for the program are threatening to add a new charge to the long distance bills of residential consumers. Critics are already calling it the Gore Tax.

TIME, Karen Tumulty & John Dickerson, Gore's Costly High Wire Act, at 52, May, 25 1998.(16) Others even claimed the schools and libraries program had been initiated in order to enhance the chances of possible presidential candidates, arguing that it was

nothing less than a stealth campaign to enhance Gore's presidential prospects. "This was not to be a political cash-grant program so that Al Gore can run for President, [one Congressman] complain[ed]."

Id. at 55.

Toward the end of 1998, an investigation by the United States House of Representatives confirmed the Commission's attempt to prevent carriers from associating the federal government with these charges:

It is clear that the FCC pressured and threatened long distance carriers in an inappropriate manner from taking action regarding how long distance carriers would recover their contributions to universal service from their telephone subscribers. The FCC was apparently motivated to exert such pressure to fulfill the Administration's political agenda to connect every classroom in the United States to the Internet by the Year 2000, and to do so while hiding the costs of their agenda from the American public.

Hill Report Finds FCC Threats, political Acts Against AT&T and MCI, Communications Daily, November 30, 1998.

In the "Truth-in-Billing" proceeding, the Commission adopted "standardized labeling" requirements that, when fully implemented, will prohibit any line items that indicate that the universal service charge is federally-mandated or federally-imposed. As I explained at the time the rules were adopted, I believe they raise serious concerns under the First Amendment.(17)

In initiating this Notice of Inquiry, the majority has sent another message to the long distance industry. In paragraph 18, the Commission asks: "Are there measures we can take that do not require direct regulation of IXCs, but that would give this Commission greater control over the manner in which access charges and universal service assessments are passed on to consumers?" I am troubled by what appears to be another attempt to control the long distance companies' attempts to inform consumers about the e-rate tax.

At bottom, I fear that this agency has only opened this inquiry because many carriers went "against the FCC's wishes and itemiz[ed] the phone tax." New Phone Tax, Wall Street Journal, December 9, 1997. That is not a legitimate reason for regulation.

1. In 1991, the Commission found that certain business and toll-free services had become substantially competitive. See Competition in the Interexchange Marketplace, CC Docket No. 90-132, Report and Order, 6 FCC Rcd 5880 (1991). By 1995, the Commission had concluded that most major segments, and the vast majority, of long-distance services were subject to substantial competition. Motion of AT&T Corp. to be Reclassified as a Non-Dominant Carrier, Order, FCC 95-427, 11 FCC Rcd 3271 (1995).

2. Id. at para. 26, 72.

3. See, e.g., Report in Response to Senate Bill 1768 and Conference Report on H.R. 3579, 13 FCC Rcd 11810, Report to Congress, FCC No. 98-85 (1998)(Commission stating that, because long distance markets are substantially competitive, it would expect long distance companies to pass through access charge reductions to their customers.); see also Policy and Rules Concerning the Interstate, Interexchange Marketplace; Implementation of Section 254(g) of the Communications Act of 1934, as amended, CC Docket No. 96-61, Second Report and Order, 11 FCC Rcd 20730 (1996) recon. pending. (the development of a substantially competitive market for interstate interexchange services enables the Commission to seek to eliminate tariffs for non-dominant interexchange carriers); Regulatory Treatment of LEC Provision of Interexchange Services Originating in the LEC's Local Exchange Area, Second Report and Order, FCC No. 97-142 (1997) ("Because we previously have found that markets for long distance services are substantially competitive in most areas, marketplace forces should effectively deter carriers that face competition from engaging in the practices that Congress sought to address through the section 214 requirements.").

4. "FCC to Ensure that All Consumers Benefit from Competition," Commission Press Statement, July 16, 1999.

5. See, e.g., Low-Volume Long-Distance Users, Notice of Inquiry, CC Docket No. 99-249, at paras. 14 (whether conditions "warrant regulatory intervention"), 18 (what scope of regulatory intervention is warranted), 19 (whether the Commission can prohibit long distance carriers from recovering charges through flat charges), 21 (whether the Commission should require long distance carriers to maintain certain rate plans).

6. Id. at para. 18.

7. "FCC to Ensure that All Consumers Benefit from Competition," Commission Press Statement, July 16, 1999.

8. Low-Volume Long-Distance Users, Notice of Inquiry, CC Docket No. 99-249, at para. 12.

9. I explain below why these so-called unanticipated factors were entirely predictable given the competitive nature of the long distance market.

10. See, e.g., Dissenting Statement of Commissioner Harold Furchtgott-Roth, Federal-State Joint Board on Universal Service, FCC 98-120.

11. "Access Charges Cut -- Lower Long Distance Rates Should Follow," Commission Press Statement, June 29, 1999 ("'Consumers should be the ultimate beneficiaries of these reductions,' said [FCC] Chairman William E. Kennard.); see also Report in Response to Senate Bill 1768 and Conference Report on H.R. 3579 (Commission stating that, because long distance markets are substantially competitive, it would expect long distance companies to pass through access charge reductions to their customers).

12. Federal-State Joint Board on Universal Service, Third Order on Reconsideration, CC Docket No. 96-45, 12 FCC Rcd. 22801, 22814 (1997) (Dissenting Statement of Commissioner Furchtgott-Roth).

13. Monday December 8, Communications Daily.

14. Federal-State Joint Board on Universal Service, Third Order on Reconsideration, CC Docket No. 96-45, 12 FCC Rcd. 22801, 22814 (1997) (Dissenting Statement of Commissioner Furchtgott-Roth).

15. See also FCC Caught in Middle on Rate Rise, June 11, 1998 at C-3 ("The FCC had hoped that long distance carriers would absorb the costs of the program, . . . But AT&T Corp., MCI Communications Corp. and other carriers plan to levy new charges, . . . "). See generally, Some MCI Customers Seeing Surge in Phone Bills, Washington Post, January 31, 1998 at page H-3 ("FCC officials are upset about being blamed by MCI for the new charges. The agency maintains that the universal service fees are technically charged to local phone companies, . . . which are authorized to seek compensation from long distance carriers. It's up to MCI and other long-distance companies to decide how to pay, the FCC contends.").

16. See also, id. ("The blame inevitably finds its way to Gore, whose hands many see in virtually everything the FCC does."); A New Tax for the New Year, The Washington Post, December 2, 1997, ("The Internet in-the-schools idea was hatched by Vice President Gore and his friend Reed Hundt, the recently departed FCC chairman. They consistently tout the benefits of the program, but not its costs."); Senators tell FCC "Gore tax" too costly, The Washington Times, June 11, 1998 at B-9 ("Lawmakers said the FCC overreached its mandate by setting up a $2.25 billion fund to wire schools and libraries, which critics have dubbed the "Gore tax" because of Vice President Al Gore's vigorous support of the program. The issue came to a head this week after long-distance companies said they would start adding about $1 a month to consumers' bills to fund the program."); Phone Wars leave FCC in a Political Combat Zone, The New York Times, August 13, 1998 at D-1 ("When a dispute arose over the commission's plan to raise money to subsidize internet connections for schools and libraries, the fees were immediately labeled the "Gore tax" on Capital Hill.").

17. See Truth-in-Billing and Billing Format, CC Docket 98-170, First Report and Order and Further Notice of Proposed Rulemaking (Dissenting Statement of Commissioner Harold Furchtgott-Roth).