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MARCH 4, 1998

Thank you for inviting me here today to address USTA. It has always been a pleasure to work with USTA's staff including Mary McDermott and Roy Neel.

During the drafting of the Telecommunications Act of 1996, on behalf of Chairman Bliley I had the pleasure of working with numerous USTA staff and USTA members to craft many of the important sections of the Act, particularly universal service. I learned a lot from USTA and its members and its many friends on Capitol Hill.

What resonated most were stories of everyday Americans. America is filled with great communities. Some urban, some rural. We all have a lot of different characteristics. But we share a lot in common. We are all Americans. And, from time to time, we like to use a telephone.

USTA and its members worked hard on the Telecommunications Act. Your efforts were in large part on behalf of ordinary Americans. People who think that Act should lead to lower not higher phone rates. People who think that universal service means greater access, not people being priced off of the system with new taxes. People who believe that this great country can and will work.

As your Members leave Washington and go home to their communities around America, I hope that they will take at least three messages with them: telecommunications markets are changing rapidly; universal service needs a significant review; and that there is hope to correct these problems with Section 11 of the Act.

Telecommunications Markets Are Changing Rapidly

For the past fifteen years, all consumers had to know about telecommunications services was that they had a local phone company and a long-distance phone company. One did not compete with the other. There was not much else to know. There were not many other choices.

The simple world of the past is fast disappearing. In its place is a far more complex world with new and differing services, and with new and differing packages of services. The distinctions between local and long-distance phone companies is blurring slightly today, and may become completely blurred in the future. And other providers--new entrants, cable, terrestrial wireless, and satellite wireless--are all fighting for the same markets.

It is an exciting time to be a phone company. Some will say that the real wars for telephony are fought here in Washington. I don't believe that for a minute.

There is a simple paradigm that I have learned from economics. It says: "Demand creates supply; supply does not create demand."

Translating that into English, consumers are sovereign and they will dictate what services they want, and ultimately what prices they are willing to pay. The warfare in Washington regulation is about who will supply that demand. But at the end of the day, it is the consumer that must part with his or her hard-earned money. Thus, it is the consumer that decides.

This is not to say that the battles of Washington are unimportant. They are vitally important to individual businesses to see who will survive in the market.

But don't expect consumers to be patient or understanding of Washington warfare. Consumers want higher quality services at lower prices. Period. They don't have much patience for explanations about hidden taxes and charges that lead to higher prices and deter investment in the industry. And yet I do not have to tell you that there are many new fees and regulations coming from the FCC.

While regulation and taxes evolve, technology is not remaining constant. Yesterday, I spoke at a conference on broadband technology sponsored by the Economic Strategy Institute. There are a lot of new technologies rolling out to consumers. No one knows for sure how these and other technologies will evolve in the market.

What do all of these changes portend for the local telephone industry? Who knows? Your business strategy of yesterday may not be the same tomorrow. Yesterday's enemy may be tomorrow's ally, and vice versa.

But one factor will always remain constant, and that is where you have a distinct advantage. The constant factor is the sovereignty of the local consumer, and no one in the industry knows the local customer better than the USTA members. Your greatest asset is perhaps not a switch, or loop, or transport lines. Your greatest asset may well be the good will with a local consumer base. Value your consumers. Understand them. Try to meet their needs and wants, and you will prevail in the market, despite, and not because, of anything Washington may do.

Other companies may have whizz bang technologies. Other companies may have whizz bang business plans and marketing strategies. But if you are loyal to your customers, there will always be a place for you in the market.

Current Approaches to Universal Service Are Unsustainable

And you will need the support of your customer base more than ever in the future. Despite our best efforts, the FCC is not necessarily making your life any easier. The most obvious example is universal service.

I believe that the Commission continues down a path for universal service that cannot be sustained. I am concerned that we are implementing this new program without being fully aware of the effect on ratepayers. Many of you may have heard from your customers recently regarding their bills. I know that I have certainly received many complaints. And I don't blame consumers. Charges are going up, new line-items are appearing, and no one seems to be able to fully explain why. I believe the scheme that the FCC has put in place cannot succeed for following reasons.

1. TELECOMMUNICATIONS RATES WILL HAVE TO GO UP TO PAY FOR THE NEW SCHOOLS AND LIBRARIES AND RURAL HEALTH CARE PROGRAMS, AND WE CANNOT HIDE THAT FACT FROM CONSUMERS. Apparently, some believe that the new Universal Service Fund for Schools and Libraries can be funded entirely out of access charge reductions. But I have news for such folks, there is no pot of gold at the end of the access charge rainbow. To the extent that, dollar for dollar, we are reducing access charges and simultaneously increasing the universal service fund and contributions to the schools and libraries and rural health care corporations, then consumers will not see the benefit of lower long distance rates. Moreover, consumers will end up paying more somewhere. It does not matter whether we call those increased charges higher "slicks" (SLC -- subscriber line charges) or "pixies" (PICC -- presubscribed interexchange carrier charges) or simply higher cellular or long distance or local rates. To the extent that new social programs have been put in place and they are funded out of fees (a modern euphemism for taxes) on telecommunications revenues, that money must come from somewhere. There has to be upward pressure on some charge that consumers pay.

And there is.

When you go from Washington home to your customers, you will find some mighty angry Americans. And they should be. Washington has harmed them in three separate ways in the universal service section alone.

First, while completing action on Schools and Libraries, the Commission has failed to come to closure on the high cost issues. Some will say "Oh, that's a separate fund from schools and libraries, and it is all right to deal with it separately and later." The only problem is that statute does not specifically call for a separate fund. This has been a construction of the FCC.

So what is the big deal about being a year or two late on high cost issues. Most Americans don't live in high cost areas anyway. That's an easy remark to make in Washington. And if you listen closely, you'll hear it all of the time. Rural America just doesn't matter much here.

But the Americans who live in rural America do matter. And simply sweeping their problems under the rug won't make them go away.

The regulatory uncertainty about universal service in high cost areas is harmful to all Americans. It makes it hard for new competitive businesses to invest in high cost areas. Not good, if you want competition. And if you are an incumbent phone company in a high cost area, the uncertainty is more than an annoying inconvenience. It is a matter of economic viability.

It would be bad enough if the FCC had simply failed to address all universal service issues, but instead the Commission has addressed some but not others. The FCC has earmarked $2.25 billion for schools and libraries and a few hundred million for rural health care.

Now everyone likes schools and libraries and rural health care facilities. Through federal income and other taxes, Americans help finance tens of billions of dollars annually for federal education programs including some that go to provide infrastructure for wiring schools. And they pay hundreds of billions of dollars in state and local taxes to support schools. And a lot of that money goes for telecommunications services.

Now $2.25 billion is a small amount of total government support for education, but it is a staggering and large amount of federal money for direct universal service support. Universal service support that will not now be used for high cost areas.

Universal service support funds that will not--as required by statute--go only to carriers. Oh, you are the carriers. You should be getting all of the federal money, whether for schools and libraries or for high cost, but you won't be, at least not for schools and libraries. Well, let me tell you, you are being hoodwinked left and right on this universal service fund, and it's time that you stood up and told the FCC to start following the law, not reinventing it.

And your customers are being hoodwinked left and right. Access charges are coming down, but every penny is going to schools and libraries taxes. It is bad enough if you are a local phone company and you lose access charges. It's worse if your customers don't see any reduction in other rates such as long-distance rates.

Think about it: reduced access charges places pressure on you to raise local rates. Long-distance companies cannot lower rates because they have to shift all of the money to schools and libraries plus they must pay the new PICC. So there is actually pressure on long-distance rates to rise. What is in this universal service package for consumers?

Let me be clear: the dollar-for-dollar transfer of reduced access charges to schools and libraries is anti-consumer. There is nothing in it for the consumer. But that is precisely the secret deal that was cut in the middle of the night between the FCC and major long distance carriers.

In addition, the Commission has made a concerted effort to hide new fees and taxes from consumers -- increased prices will necessarily result form these new programs. Last December, I dissented from the Commission's Order setting the universal service contribution factors for the first six months of 1998 because of my concern that it was part of an agreement to keep interexchange carriers from placing any line item on their residential customers' bills. I was not a party to any such negotiations. I suspect that hundreds of millions of American consumers were not a party either. I am reluctant to support any new fees or taxes on consumers; I will never support any new fees or taxes negotiated in secret, without public notice and comment.

2. THE FCC APPEARS TO HAVE EXCEEDED ITS LEGAL AUTHORITY BY TAXING FOR GENERAL PURPOSES AND BY CREATING TWO PRIVATE CORPORATIONS TO ADMINISTER GOVERNMENT FUNCTIONS. Recently, there have been many Congressional concerns with respect to both the scale and scope of these new programs. Just last week the House Judiciary Committee held a hearing on whether the universal service charges are an unconstitutional tax, as the Constitution mandates that only Congress has such power. I am similarly concerned with the FCC's asserted authority to collect any fee -- whether its called a tax or not -- on intrastate services. In addition, on February 10, 1997 GAO reported to Senator Stevens that the FCC exceeded its statutory authority when it created the Schools and Libraries and Rural Health Care Corporations.

Such Congressional concerns were prompted in large part by the fact that the FCC largely disregarded Congress's primary concern -- keeping telephone rates affordable -- and focused its attention on a secondary goal relating to schools and libraries. The additional bureaucracy necessary to administer this new programs is astounding. In objecting to the December Universal Service Order, I noted that in the first quarter the Schools and Libraries and Rural Health Care Corporations "were each allocated more than twice as much money to administer certain aspects of those support mechanisms than is allocated to administer the substantially larger high cost fund." This disparity only continues to grow, with the Schools and Libraries Corporation (SLC) being allocated almost four times as much money for administrative expenses in the second quarter. Indeed, the SLC's administrative budget increases from $2.7 million to $4.4 million or by 65% in just one quarter. This change is the equivalent of an additional $18,000 every day for the next 90 days.

3. THE FCC'S ACTIONS MAY HAVE ENDANGERED THE INTEGRITY OF THE HIGH COST FUND. In addition, in their zeal to implement the schools and libraries program on January 1, 1998, despite specific Congressional requests that we delay commencement until the impact of our actions could be more fully assessed, the Commission has taken actions that has adversely impacted the high cost fund. Last Friday, the Common Carrier Bureau released a Public Notice announcing the proposed universal service contribution factors for the second quarter of 1998. In the Public Notice, the FCC fails to take into account the reality of uncollectibles.

Since the first of the year, USAC has had difficulty collecting all of its billed amounts for universal service. In a memorandum to the USAC Board of Directors dated February 24, 1998, Ed English, USAC Secretary and Treasurer estimated that, based on collections received through February 23, 1998, there would be a shortfall for the high cost fund distribution to be made last Friday, February 27, in excess of $10,000,000. This shortfall was primarily due to nonpayment and the Common Carrier Bureau's decision last December to reduce the estimate of uncollectibles to zero. USAC originally recommended, and the contribution factors initially set forth in the Common Carrier Bureau's November 13 Public Notice included, an adjustment for possible uncollectible contributions. Such a minor adjustment is reasonable for a new program. The final Order released December 16, 1997, however, included no adjustments for uncollectibles. Despite the fact that the first quarter has had total uncollectibles in excess of $12 million, the Bureau's Public Notice follows the December First Quarter Order that expressly "includ[ed] no adjustments for uncollectibles."

Why would the Commission continue with this fallacy of 0% uncollectibles? Because the reduction of uncollectibles to zero was simply a part of a larger scheme by the Commission to "reduce the [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. I am concerned that, in the Commission's zeal to implement the schools and libraries program on January 1, 1998, the Commission has taken actions that may have adversely affected the high cost fund.

In conclusion, I reiterate my desire that the Commission delay further implementation of the new universal service programs until we have had the opportunity to assess fully the effect that these new programs will have on consumers. I trust the Commission will use the Stevens Report as such an opportunity for review. Instead of attacking phone companies for passing along to consumers the very same charges that we have imposed, I recommend that we reevaluate the scope and mechanics of our new universal service system.

Work with the new FCC

Despite my concerns about universal service and other areas, I am still optimistic about the new FCC. Mistakes have been made on universal service, but there is still a good bunch of people there. Come work with us. Help us understand your problems.

It is of paramount importance that government agencies faithfully follow their enabling statutes. Businesses and individuals may reasonably be expected to try to get out from under the law. But not federal agencies.

There is now, for the first time, a federal statute that may require the FCC to consider the full costs of regulation. It is Section 11 which requires the FCC to conduct a biennial review of all telecommunications regulations beginning in 1998. It is difficult for me to understand how the Commission can review all such regulations without a framework that considers explicitly the costs of regulation.

If we are faithful to Section 11, I believe that we can move the FCC a step away from impeding the development of new technologies and a step closer to the concept of limited self-government on which our Nation was formed.

What is the future of local telephony? I do not know. But I look into an audience filled with people who do see that future. It is up to you, and not the federal government, to make wise investments, to innovate, to work hard. And it is up to you to urge the federal government, and the FCC in particular, to show restraint and to regulate wisely but not often.

The wisest government is a limited government, one that has faith in its businesses and its people, one that takes invasive action only when absolutely necessary. A limited government is not a sign of weakness; it is rather a sign of power, of wisdom, of rationality, and of enlightened leadership. It is that government that we need for our future, and it is that government that I will try to help you find, even here in Washington.