In The Matter of: ) ) EN BANC HEARING: ) ) CONSUMER ISSUES AND EDUCATION ) PAGES; 1 through 155 PLACE: Washington, D.C. DATE: October 29, 1998 FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In The Matter of: ) ) EN BANC HEARING: ) ) CONSUMER ISSUES AND EDUCATION ) ) Room 856 FCC Building 1919 M Street, N.W. Washington, D.C. Thursday, October 29, 1998 The parties met, pursuant to the notice, at 1:12 p.m. BEFORE: WILLIAM E. KENNARD Chairman FEDERAL COMMISSIONERS AND STATE JOINT BOARD: JULIA JOHNSON, Chairman SUSAN NESS, Commissioner LASKA SCHOENFELDER, Commissioner HAROLD FURCHGOTT-ROTH , Commissioner PATRICK M. WOODS III, Chairman MICHAEL POWELL, Commissioner MARTHA HOGERTY, Consumer Rep. GLORIA TRISTANI, Commissioner DAVID BAKER, Commissioner PANEL 1: MARK COOPER, Director of Research American Federation of America FRANK GUMPER, USAIC JOHN C. METTS, National Telephone Cooperative Association BILLY JACK GREGG, Director, Consumer Advocate Division, Public Service Commission of West Virginia PANEL 2: MICHAEL TRAVIESCO, Counsel representing Maryland consumers MICHELE FARQUHAR, Western Wireless BILL GILLIS, NARUC JOEL LUBIN, AT&T DAVE GILLES, Wisconsin DOJ DOROTHY ATTWOOD, Common Carrier Bureau FCC P R O C E E D I N G S CHAIRMAN KENNARD: Good afternoon, and welcome everybody to our En Banc Panel on Consumer Issues and Education. We have a very interesting and packed agenda for the afternoon, so I think we need to get started, and we're going to have to keep our schedule. We have our -- we have a timekeeper here, Ruth, are you going to do that for us today? Ruth Darcey is going to be our timekeeper and she is a very tough lady, so she's going to be enforcing our time deadlines strictly. I would like to welcome everyone here. We are going to have two panels today. The first panel will be on issues of affordability of basic telephone service. Obviously, this is a central goal of the FCC, and our colleagues in the states. It has been for many decades. And Congress, of course, reaffirmed that goal quite explicitly in the Telecommunications Act of 1996. We have been given the difficult task of implementing the extremely important Universal Service provisions in the 1996 Act. We are in the midst of that process. Commissioner Susan Ness and Chairman Julia Johnson have been co-chairing the Joint Board on Universal Service. They are -- they have a very busy November ahead. We're looking very much forward to the recommendations of the Joint Board. The first panel will address these affordability issues. We will have a second panel on consumer education issues, which, as you all know, have taken on renewed prominence as we have moved into more competitive markets in telecommunications. It requires more vigilance, in my view, not only on behalf of consumer, as there are more competitors out there vying for their dollars, but also those of us in government have to be more vigilant to make sure that issues like slamming and cramming are on our radar screens, and that we are actively protecting consumers. I'll tell you a little bit about how we plan to proceed today just from a procedural standpoint. I will welcome the other Commissioners here to make opening remarks. Then we will introduce the first panel. I will ask all of the panelists to introduce themselves and tell us your affiliation. Then I will ask each panelist to take no more than eight minutes for their presentation, and the timekeeper, Ms. Dancey, will indicate when two minutes remain, and I do implore the you be very mindful of the time. Then we're going to have some general Q and A's from the panelists. We are going to alternate federal commissioners and state commissioners. I have given all the commissioners a list of the order of questioning. There is no logic to it. It was pretty much at random, and we will begin with Chairman Johnson. CHAIRMAN JOHNSON: Opening statement? CHAIRMAN KENNARD: Opening statement, yes. CHAIRMAN JOHNSON: Thank you, Mr. Chairman, and Commissioners of both federal and state. I think this is a moment that we should all be very proud of, to have an opportunity to address these issues. As we attempt to implement the Telecommunications Act on both the state and federal level, one of the things that we keep hearing from customers is, as you try to transition for companies, remember us in the process. I've had the opportunity over the last year to hold about 45 public hearings. Some of them have dealt directly with the consumer issues, slamming and cramming. Others have dealt with fair and reasonable rates, and what should that mean, and Universal Service type issues for customers. Some of the messages are clear. Customers don't want to see competition for the sake of competition, and that they don't believe that Universal Service should mean higher local rates. Those concepts are seen as counter- intuitive. I think that we should be able to, from the comments of our panelists on both panels, have a better appreciation of those issues, determine how we're going to address those issues working together. To the extent that we have consumer education programs, I brought with me my director of consumer affairs, Bev DeMello, because we are interested in partnering with industry and the federal and state regulators to make sure that customers are more informed. We have learned a lot from the last time around. I think when we implemented some of the Universal Service programs, we, at the regulator stages and the companies, could have done a better job of educating and informing customers as to what would happen, and I think we have to remain cognizant of that process as we endeavor to implement whatever else might need to be implemented. As we hold these panels, and as we begin our deliberations as it relates to Universal Service, I am always reminded that we are becoming less economic regulators and more consumer educators, and I keep that in mind as we hear your comments on both affordability, I say that to the panelists, and on consumer education and how we are going to make customers better understand the new competitive markets in which we will be participating in. And with that, again I would like to thank you, Mr. Chairman, and Commissioner Ness for her involvement and her leadership on the Universal Service Joint Board, and we look forward to comments and deliberations. CHAIRMAN KENNARD: Thank you. Commissioner Ness. COMMISSIONER NESS: Thank you, Mr. Chairman. I just want to make two points. Point one is that the consumer is at the heart of everything that we do. And point two is that point one is as valid for state commissioners and state consumer advocates as it is for federal commissioners. So I'm glad to have this joint assembly of FCC commissioner and State Joint Board members so that we can explore all of the issues that we both are grappling with, and I look forward to the discussion today. Thank you. CHAIRMAN KENNARD: Thank you. Commissioner Schoenfelder. COMMISSIONER SCHOENFELDER: Thank you, Mr. Chairman, and thank you for having us here today. I am going to be very brief, and rather than just to repeat what Commissioner Johnson has said, what I'm going to do is invite you to come to NARUC the 8th of November, and listen to some of the same discussion as the states get into the discussion of what we can do for consumers also. So I hope that will take off from here and we can learn here and add to that. So I would like to invite you all to come to that. Thanks. CHAIRMAN KENNARD: Well, I'll be there. Commission Furchgott-Roth. COMMISSIONER FURCHGOTT-ROTH: Thank you, Mr. Chairman. I just would like to take a brief moment to welcome the panelists here, particularly on the first panel. Mr. Metts has come from Penasco Valley, in New Mexico, and I had the great pleasure of visiting Commissioner Tristani's home state in August and meeting with Mr. Metts and other folks from some of the small rural telecos in southeastern New Mexico. Mr. Gumper, it's always a pleasure to see you, and I particularly would like to welcome our consumer advocates, both from the State of West Virginia, and Mark Cooper, who does such a fine job for Consumer Federation. Consumer advocates have a rare position in our society of providing some sense of moral authority, if you will, on behalf of consumers. They have both the privilege and the responsibility of speaking on behalf of consumers for what the world might look like. We has commissioners, whether at the federal or the state level, have a different responsibility, and that is to interpret the law as it is written, and these two work together very well. I very much look forward to your comments from the perspective of consumers about how Universal Service should be implemented, and I hope very much to hear particularly your views about what agency has the specific legal authority to do precisely what you would think best in the consumer interest, whether that is the federal commission, the state commissions, or whether in fact there may not be the specific legal authority to do what you think best, and in some sense that might have to be left either for state legislators or for Congress. It is a great pleasure to be here on a panel with both federal and state commissioners because I think many of the issues will be addressed today may not necessarily lie in the federal jurisdiction, and we look forward to understanding better how these can be addressed at the state level as well. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Commissioner. Chairman Wood. CHAIRMAN WOOD: Thank you, Bill. I think all of us appreciate being up here with you all on these important issues. Just a little background, we in Texas are going through a Universal Service Fund restructuring that we anticipate being done in two months, and are going through a lot of these issues in an accelerated time frame as we're experiencing collectively here. And I think one of the things, and I was reading the testimony last night, believe it or not you are all more interesting than anything that was in C-SPAN or CNN. Parts of the world out there aren't as interested in the elections as maybe folks here are. But the reading did point out a few things from both panels that I would like you all to just muse over and help me understand more today is we do have a very subsidy rich industry we're talking about here with a lot of misallocated rates that for whatever purposes they are, they are. And in undoing that, which I think a competitive market will do and/or regulators that want to spur the development of a competitive market may want to do, a customer education effort is just real critical. I am more than willing to assume the customers, if you tell them the truth, they're going to maybe not like it, but at least accept and understand and move on to the next issue. I've got a litany of complaints from my customer protection unit that talk about the run around, that we get blamed for this, and then we blame so and so with that. We've even got one back from the FCC that said call the PEC, they regulate AT&T's rates, which made me kind of scratch. Joel, maybe we need to talk about that. (Laughter.) I'm going to assume as a given that the customers of Texas and the rest of the United States can handle the truth if we tell it to them in a clear way. And so I'm not scared of the fact that we've got some subsidies to undo. I can defend a Universal Service assessment if I know the money is going to the right place. But I think it's a collective effort that we've all got to take the pledge to do, and I look forward to maybe exploring with you all through both panels how to do that, because the pledge is pretty darn hard to write because nobody want to sign off on it just yet. But I think the only way to get to a real competitive industry that does deliver benefits to the customer is to make sure that we are telling a unified and uniform truthful story to the public about what we're up to. CHAIRMAN KENNARD: Thank you. Commissioner Powell. COMMISSIONER POWELL: I really had nothing to add to that. I would like to, however, formally associate myself with Commissioner Wood's remarks. I think that tee's up our challenge precisely, and I also thank both the Chairman and others for organizing this invaluable opportunity to meet with our state colleagues, and I welcome all of them, and very much look forward to hearing from the panel. Thank you. CHAIRMAN KENNARD: Thank you, Commissioner Martha Hagerty, our consumer representative MS. HAGERTY: Thank you. As I see our charge, and it always has been, is to preserve, I think the statute does say "preserve" Universal Service, and at the same time I think consumers have been promised during all this legislative debate that they would have lower prices and more services, or better services. I'm interested to hear what the consumers have to say about many of the proposals in this docket. Simply attempt to restructure rates, raise some rates, lower others, and in some cases I think there is a concern that what we call Universal Service rates, basic rates, are being proposed to be raised, I don't think that's what the Act envisioned. I would like to have that debate today. Secondly, with respect to consumer education, I think it's obviously very incumbent upon the regulators to address this issue. It's time that this issue be tee'd up. All of us who deal with consumers in our states are aware of the complete confusion that consumers are undergoing and their inability to make intelligent choices because they simply do not have the information in front of them. So I'll be very anxious to hear the panel today. CHAIRMAN KENNARD: Thank you. Commissioner Tristani. COMMISSIONER TRISTANI: Mr. Chairman, first of all, I want to welcome all my fellow commissioners and the consumer advocate, fellow commissioners from the states. I still have my heart in the states, as you well know. And I am delighted that we are having this hearing. Two things: Our first panel is entitled "Ensuring Affordability and Consumer Choice," and it sounds like we're sure that things are affordable right now, and that may be true for the vast majority of Americans, but I think we need to remember that our penetration rate, which is about 94 percent, is not across the board, and there are certain Americans that are very, very out and not connected, whether it be Native Americans in New Mexico, whether it be the 26 percent of households in my native island of Puerto Rico who do not have telephone service, whether it be many minorities in the inner cities that don't have telephone service. So my interest is not only ensuring that those American that are connected continue to have affordable service, but those that are not get connected. Now, some may say, oh, there may be other issues, there may be cultural issues, a variety of issues that we don't know that keep other Americans from being connected, that may be, but I think affordability probably is a big, big concern. Our second panel has to do with consumer education, and that's one I particularly welcome. Less we forget, we have a consumer cost center at the FCC. And, Mr. Chairman, I looked at our web page today. I wanted to know how many calls we had gotten on slamming and cramming through September 30th. And if my arithmetic is correct, because I had to add up several categories, 101,611. That's the people who know that we have a hot line to call. Those numbers alone tell us that we have to do everything, working together, the FCC and the states, consumer advocacy groups, any groups that can help us, to inform the public on what their rights are when they are deceived. Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you, Commissioner. Commissioner Baker. COMMISSIONER BAKER: Thank you, Mr. Chairman. It's, of course, a pleasure to be here. I will reserve comment other than just to, of course, thank the federal commission, my state counterparts, and, of course, the state and federal staffs, and, of course, today's panelists for efforts that they have put forth towards today and tomorrow's panels, and we're all very glad to participate in this process. I would like to make one comment that affordability is obviously important notion, and one which needs to be addressed, and one which needs to be preserved, but also part of the equation is the quality of service that consumers receive, and we need to be mindful of that in addressing the issues of cost, and realizing that consumers want more than just the cheapest product; they want the best value for their telecommunications dollar, and that's an equation which balances cost and quality. Thank you. CHAIRMAN KENNARD: Thank you. Now we will proceed with our panelists again. I will ask that you introduce yourselves, and I will also ask that you limit your remarks to eight minutes. We will go through the presentations of all the panelists and then we will have some questioning from the commissioners. Thank you. Mr. -- who is beginning here? Mr. Gregg. MR. GREGG: Thank you. My name is Billy Jack Gregg. I'm director of the Consumer Advocate Division of the Public Service Commission of West Virginia. I want to say good afternoon to all the commissioners, thank them for having us here today. I have arranged my statement as a response to each of the questions posed by the Commission in setting up this panel. The first question was, "Is the goal of affordable basic service being met?" Yes, current rates for basic service are affordable and becoming more affordable. Even before the advent of the Telecommunications Act of 1996, the general trend in rates was down. Why? Because transcending any changes in law and regulation, telecommunications continues to be a declining cost industry. Between 1992 and 1997, local rates held steady while general inflation rose by 15 percent. At the same time toll rates came down by 31 percent while use of the network increased by 61 percent, according to the Commission's most recent study of revenues in the telecommunications industry. In approaching the issues of Universal Service and access charge forum, the Commission and Joint Board must keep in mind that affordable rates are assumed by Americans as a given. Policies adopted to introduce competition into all area of telecommunications must not do damage to the level of affordability which has already been achieved. The second question: Are there policies the Joint Board should consider recommending to meet the goal of affordable service? The Commission and the Joint Board must remember that the ultimate goals of the Telecommunication Act of 1996 are lower prices and better services for all Americans. The means that we have chosen to achieve those goals is competition. However, some seem willing to sacrifice the ultimate goals of the Act and the affordability we have already achieved in an attempt jump start local service competition. Citing the wording of Section 254, which requires that Universal Service support be explicit and sufficient, they argue that basic rates must be raised to unaffordable levels, and that the federal Universal Service Fund must swell to $20 billion. I say to you most emphatically that the purpose of including the specific Universal Service guarantees in Section 254 of the Telecommunication Act was not to impose $50 a month basic service charges on rural customers, nor to impose a 20 percent Universal Service surcharge on all customers. On the contrary, the explicit goal of 254 is affordable service for all, and rates in rural areas that do not vary appreciably from those available in urban area. Furthermore, there is no language in Section 254 nor in any other part of the Act which requires that access charges be reduced and that Universal Service obligation be raised to pay for such reductions. Policies which the Joint Board should consider to meet the goal of affordability should include the following: First, do no harm. Rates are affordable now. The Telecommunications Act was passed to make rates even more affordable for everyone. Whatever you do don't make average consumers in this country worse off as a result of your decisions, which are supposed to maintain and enhance Universal Service. Second, let states take the lead in determining affordability. The cost of living is different in different states, and it stands to reason that affordability will also differ. Each state should be able to determine affordability according to its own standards and experience. Some states have already proposed rate benchmarks for their own purposes. For example, Nebraska has proposed an affordability benchmark of $22.00, including the subscriber line charge and other surcharges, while Wyoming has proposed $25.00, excluding the SLIC and other surcharges. Other states may propose different standards. Some states have rates based on measured rates. Others prohibit measured rates. Each state is different. The Commission should ensure that states continue to receive at least the level of federal Universal Service support they current receive, and let each state plot its own course in determining when and how it will reorganize internal subsidies and local rates, if any. If additional federal support is needed after competition actually begins at the local level, the issue can be addressed at that time with the benefit of actual data. Third, additional Universal Service support should not flow until competition actually develops. Competition is supposed to drive out the implicit subsidies in existing rates within each state. Great, let competition do it. Regulators shouldn't. Regulators are very bad at replicating the market. There is no harm in devising a Universal Service support system which can kick in if and when competition actually begins to erode revenues supporting the existing network to unacceptable levels. However, it would be the height of folly for regulators to attempt to wring out perceived implicit subsidies before competition begins. The only result will be insupportably high local rates and/or insupportably high Universal Service surcharges. Fourth, avoid mandatory surcharges, especially fixed per line surcharges. Fixed per line surcharges tend to endure regardless of changes in underlying cost. Witness the subscriber line charge. In spite of numerous reductions in access charges over the past few years and in spite of reductions in the underlying cost of telecommunications and in spite of the earnings of the companies which receive the SLIC, the SLIC has remained fixed, immune to changes in the surrounding environment. Fifth, be aware of the impact of the totality of your decision. In determining the affordability of basic service for consumers, it is the totality of rates that is important. Local service plus any surcharges are line items charges. You will have accomplished little by defining affordability as an arbitrary dollar figure if an excessive Universal Service surcharge must be added to the customer's bill to make the so-called affordable level achievable. The third question: To the extent that surcharges are imposed, are there policies that the Joint Board should recommend to ensure that rates remain affordable? As I've stated above, the real question is whether surcharges should be imposed at all. I emphasize again the Commission should not impose mandatory surcharges on end users. In fact, I would point out that some states have prohibited recovery of state Universal Service contributions through surcharges. However, if surcharges are imposed, the following policy should be followed to ensure that rates remain affordable: First, federal surcharges should apply only to services over which this Commission has jurisdiction; namely, interstate services. Second, surcharges on end users should not be mandator. Section 254(d) of the Telecommunications Act is very clear that every telecommunications carrier rather than every telecommunications customer must contribute to Universal Service support mechanisms. So far this Commission has followed this clear directive of the Act and has continued to impose Universal Service obligations on carriers, allowing them to recover those costs in any lawful manner. Third, the subscriber line charge should be reduced or eliminated. If the Commission is tying together the issues of Universal Service reform and access charge reductions, it must ensure that the subscriber line charge is also reduced. The SLIC was instituted in the mid-1980s as part and parcel of the imposition of the new access charge regime created after the break up of the Bell System. If it seems likely the Commission is going to reduce interstate access charges imposed on carriers as part of overall Universal Service reform, in fairness, the Commission must also reduce or eliminate the mandatory SLIC currently imposed on all end users. I thank you for allowing me to present my views here today and I'll be happy to entertain any questions. CHAIRMAN KENNARD: Thank you, Mr. Gregg. Mr. Gumper. MR. GUMPER: Thank you for inviting me to be here today. I thought you were going to go down the list. I wasn't quite ready. First of all, I think I would agree with some of the comments we have just heard. Yes, telephone service for the vast majority of Americans is affordable. I think that affordability provides both state and federal regulatory bodies the flexibility to address some of the policy issues without fear of in fact making phone service unaffordable. As a result of competition and as it develops, there may be a need for some increases in local rates and even the subscriber line charge. However, these types of increases will not reduce subscribership and they will not make basic telephone service unaffordable. So what's the problem? As Commission Tristani noted, there are areas, there are pockets where subscribership is still very low. For this segment of society, one of the actions that the Federal-State Joint Board took was to significantly enhance the Lifeline and Link-Up Programs. As a member of the USAC board, I'm happy to report that as of August 1998, the last month which we have data available, there were 5.1 million Lifeline participants. More importantly, the first eight months of this year 1.3 million households took advantage of the Link-Up Program to offset some of the initial connect charges for getting basic service. Currently, these programs are growing at an average rate of about two percent a month in terms of the demand on those two different funds. Jorge Schement has done extensive research work in telephone penetration. His most recent work indicates that it's not always clear what are the underlying causes of lower telephone penetration, particularly among different segments of society. I'd like to cite some figures from his study, and actually cite from his study in terms of data representing owner-occupied housing units, and I would just point out that in my comments those figures are cite are for owner- occupied housing units, not for the general population as a whole. As he points out, "Since those who own their own homes are most likely to have a telephone, the differences between the majority and minorities should be minimized. Therefore, owner housing units represent a strong test for the uniform existence of a telephone gap. "In California counties, where data is available, the differences between African-Americans and whites vary in the extreme. Yuba County has a gap of 37.24 percent, while nearby Sacramento County shows almost no difference. Furthermore, five of the counties measured indicate higher telephone penetration rates amongst African-Americans than whites. I think that kind of data indicates that the explanation as to why we have different penetration rates in different areas of society is not something that ia easily solved at a national level. Again, to quote from this research paper, "If we wish to solve the mystery of the telephone service gaps, we will have to look beyond the data that has guided us in the past. We must go beyond national data that will uncover a complex array of factors more particular to localities than to the country as a whole." I would state that this information indicates that the reasons that people do not have a telephone go far beyond price and affordability, and probably need to be addressed at a local level in terms of trying to design very specific programs if you're going to address those issues. Another reason for reduced telephone penetration is that the cost of wiring sparsely populated areas can be very prohibitive. We've been at this game, I might say, for a long time, this idea of trying to identify what the cost of Universal Service is in remote areas precedes the Telcom Act. The models that we are looking at now, including the more recent version that the FCC has put out, started back several years ago, and there is no question that when you look at those models it indicates that there are areas of the country that it is extremely expensive to deploy wire line facilities. I think what we've missed in the process, though, over these past few years is that wireless technology has probably become the more cost efficient way to serve the areas. One example I would give you is a subsidiary of Bell Atlantic Mobile, Southwestco Wireless, basically operates in Arizona serving many remote areas, including the Tohotum Indian Reservation, an area where, quite frankly, it's probably cost prohibitive to deploy wire line facilities. Another example I quote was Western Wireless in Antelope Valley Nevada. This is an area where basically they were able to provide service to 58 customers who lived there for a cost of $100,000 versus what would have been the wire line cost of $1.3 million. I would maintain that it is probably not in the best public interest to, in effect, subsidize or grant support levels to wire line companies in numbers that can exceed $100 a month when in fact you can get wireless alternative that gives you almost nationwide coverage for that same price. In closing, let me say that telephone service is a bargain and will remain affordable as local competition and technology develops. However, states and the FCC must address the implicit support in their rates that will not be viable with increasing competition, and I would add that that doesn't necessarily have to be done immediately, but as competition develops. Some states will not have the resources to solve their own high cost problems. For those states, and only those states, a small targeted federal fund can provide assistance to ensure that their rates remain affordable. The distribution of these funds within a state and the need for intrastate support program are more effectively addressed at the state and local levels. However, the Joint Board must continue to monitor these issues as we move forward to detect if additional policy intervention is warranted. Thank you for this opportunity, and will be glad to answer any questions. CHAIRMAN KENNARD: Thank you, Mr. Gumper. Mr. Cooper? MR. COOPER: Thank you, Mr. Chairman. My name is Mark Cooper. I am Director of Research at the Consumer Federation of America. I have also testified in about 40 states. At least two dozen of those on Universal Service, including Texas and Florida, which are represented on the Board. I have a project in New Mexico looking at low income people. The Joint Board and the Federal Communications Commission face a difficult task in the months ahead of lowering access charges to cost, expanding participation in the Lifeline Program, funding the schools' libraries, and help grow Health Care Program, and providing high cost support to rural areas and insular areas, all this while keeping rates just reasonable and affordable. However, the Joint Board and the FCC have already forced the conceptual framework to make this task manageable in the decisions that were laid down in 1996. They have firmly and soundly refused to change the fundamental principle, a simple idea that shared services should share the cost for the facilities they use. There is no legal, constitutional, economic or public policy reason to stop treating the loop as a shared cost between all the services that use it, the principle that was laid down 70 years ago by the Supreme Court. The 1996 Act reaffirmed that fundamental commitment in Section 254(k) where not only was a subsidy for competitive services forbidden, but also basic service was required to bear no more than, and could bear less than, a reasonable share of joint and common costs. If you accept that principle, we will have no difficulty preserving the affordability of service, and we have said that, CFA and its member groups, at the federal level and the state level. I recently testified to that, in fact, in Florida as well. The FCC and the Joint Board have determined that forward-looking economic costs are the only basis on which we can build an effectively competitive industry, efficient forward-looking economic costs, and I urge you to resist the tendencies to constantly build back in inefficiencies into your analysis under the threat or claim about stranded costs. The FCC has already adopted the principle that the unit of analysis for unbundling the network elements should be the same as the unit of analysis for calculating Universal Service. If we have a statewide average unbundled network element, we ought to have a statewide average estimate of Universal Service costs. The FCC and the Joint Board have adopted the fundamental principle that affordability is not just a question of are people wiling to pay more, but what is the burden. That is an absolutely crucial observation. We know you could double the telephone rates and most people would keep their phones. The market will bear a lot more. The simple fact of the matter is we're not supposed to be pricing up to what the market will bear. And there are some people who will not be able to bear that increase in costs. The fact that the telephone costs have been declining in real terms does not justify rate increases. Many consumer products, particularly those in the technology industries, have been declining in real terms. That's not a justification to increase peoples' prices. Now, we believe if you apply these principles you will have a manageable task, but there will still be a need for Universal Service Funds, and let me give you a few principles to apply, and specific principles we've advocated at the federal and state levels. First, as you have already done, you must treat the telephone network as a multi-product integrated entity. Include all the revenues from the services that use this network. Don't try and get it all from basic service, which is what some companies would like you to do. Second of all, all Universal Service programs should be funded from one source. This effort to split low income and high cost in school and libraries misses the fact that these are all Universal Service programs, all embraced by Congress and they should be funded in the same way. Third, I believe that all Universal Service programs should be funded from all telecommunications revenues, and, again, in your order you establish the fact that you had the authority to do that. It's folly to burden one sector with all of the burden of Universal Service costs. Universal Service benefits all classes of customers, all services and all geographic areas. Finally, the FCC has articulated the correct principle in how to collect funds. It has argued against line items, and we believe that this is required by the Act, it's practically necessary, and conceptually correct. Legally, the Act required telecommunications service providers to make the contribution for Universal Service. Line items on consumers' bills are not service provider's contribution. As a practical matter, the FCC has had a certain amount of difficulty of finding ways to ensure that federal rate cuts get passed through to residential and small business customers. If you impose a line item on peoples' bills, they will suffer a net increase because you've been unable to figure out how to make sure the little guy gets his share of the rate cuts. Conceptually, I don't believe that line items are appropriate. Now, let me make it clear. We firmly believe that consumers should get useful and correct information in their bills so that they can make effective economic choices. But a Universal Service line item is neither economically useful nor economically accurate. When you put a line item on someone's bill, there is nothing the consumer can do with that information. Every service provider charges them, so they can't avoid it. It cannot inform their consumption decision, and that's what economic decision-making is about. When you put a line item on their bill, the consumer has no way to accurately measure its value. Universal Service is a public good. The indirect value of ubiquity is an externality that consumers have difficulty evaluating. More importantly, those consumers who are the direct beneficiary of that Universal Service Fund would be completely uniformed if you tell them you're paying $2.00 for Universal Service, but you don't also tell them you're receiving $10.00 of subsidy. It is very difficult to portray that information. Now, if the purpose of putting the information on a consumer's bill is a policy purpose -- excuse me -- a political purpose, to tell them that the program exists, then be my guest. Once a year inform them that there is a Universal Service Fund. Here is what it's for, here is how it's paid, and here is how much it costs in the aggregate. That is useful political information. I don't think it has any place on a consumer's bill, but fine, put it there if you think you want to inform them. Thus, we believe that Universal Service can be achieved by a simple set of principles that the Joint Board and the FCC have already articulated. There is one way I can suggest that you can guarantee the little guy, the residential rate paper will get a benefit, and that is to reduce the subscriber line charge. I've said this a few times in the past. I will say it again. It's an idea whose time has come. Fifteen, approximately 15 years ago when we began to put this charge in place, we had an estimate of federal costs that were brought into the federal jurisdiction, and over those 15 years the cost of basic service has declined dramatically, but the subscriber line charge never has. Now is the time to ensure that rate payers get some of the benefit that was promised by this Act by reducing the subscriber line charge. You can also reduce other charges and raise your Universal Service Fund. We prefer that that fund be raised from service providers. That's what Congress thought, that's what is economically rational, and that is what we think will support this program and continue to advance Universal Service. This is a complex task as the Commission and the Joint Board have learned in the last couple of years. We look forward to working with you to build on the sound principles you've already laid down. Thank you. CHAIRMAN KENNARD: Thank you, Mr. Cooper. Mr. Metts. MR. METTS: Good afternoon, Mr. Chairman, Commissioners, Members of the Joint Board. I am John C. Metts, Chief Executive Officer and General Manger of Penasco Valley Telephone Cooperative, PVT, headquartered in Artesia, New Mexico. I am appearing today on behalf of the National Telephone Cooperative Association, NTCA, of which I am a member of the board of directors, representing Arizona, New Mexico, Oklahoma and Texas. NTCA represents approximately 500 small and rural telephone companies operating throughout the United States and in nine foreign countries. We appreciate the opportunity to appear before you to discuss the issue of affordability, which is among the most critical issues for rural telephone companies during the transition to the new competitive environment. PVT is a subscriber-owned cooperative which serves just over 3,000 access lines in six exchanges scattered over 4600 square miles in southeastern New Mexico. The largest community in our telephone service area is Mayhill, New Mexico, with a population of 300 people. Approximately 20 percent of our access lines serve businesses, the rest are residential. PVT services and technologies are state-of-the- art, with all digital switching, equal access, advanced calling features, and INSD capability. Some of our most remote subscribers are served by BEDRS Radio. Otherwise, we use a mixture of fiber and copper looped technology. In addition to POTs and advanced services, PVT offers interactive educational television to the schools, internet access, cellular and paging. PVT is beginning construction of PCS service and has obtained an LMDS license. Our basic service rate is $14.90 per month for residential, and $20.30 for business customers. PVT is typical of small rural telephone companies in the NTCA membership, except like most western countries, its subscriber density is much lower. I believe there is general agreement that basic telephone service today is generally affordable for most of the population. This agreement was reflected in the Joint Board's recommended decision and the Commission's report and order in the Universal Service proceeding. The Joint Board and the Commission also concluded correctly that affordability has both an absolute component and a relative component. I also are that subscribership is an important issue, but not the only measure of whether service is affordable. PVT, like most NTCA member companies, has a high level of subscribership. In addition to subscribership, regulators should consider affordability issues in the context of the other Universal Service principles in Section 254 of the Act. The first of which is that rate should be just, reasonable and affordable. The Act also establishes that rates for urban and rural areas must be reasonably comparable for similar services. Any comparison of rates must, as the report and order recognized, consider the vast differences in calling scope between urban and rural companies. PVT has an average of 500 access lines per exchange. However, with EAS to US West areas from three of these exchanges, the average subscriber in those exchanges has a calling scope of approximately 5,055 lines. For the other three exchanges, the local rate only provides access to 104, 458 and 1206 lines, respectively, and those exchanges calls, the school, doctors and county seats are toll calls. Even with EAS, rural subscribers necessarily use much more toll than urban subscribers to conduct their daily affairs. That's a fair comparison to both local service rates and the average intra-LATA toll bill. It's very important at this critical point in the implementation of the 1996 Act to pause for a moment to reflect on how it became to be that rural areas are so well served today, especially by rural telephone companies. The good service and affordable rates we now enjoy have not always been available to rural areas of this country and generally are still not in major portions of the world. Before making extensive changes in this successful system, it's important that the Joint Board and the Commission have a very degree of confidence on the replacement methodology. As Chairman Kennard so aptly said earlier this year, "Most important, we must make sure that the new Universal Service mechanisms work." To make a long story short, affordable quality service has been widely deployed since the Second World War in high cost, low density rural areas because of a combination of factors. First, in 1949, The Rural Electrification Act was amended to provide loans to telephone companies serving rural areas. Congress took this action in response to find the telephone subscribership in rural areas was very low and had in fact declined substantially since 1920. Around the same time, the FCC, working with the Joint Board, began to evolve the separation rules which in their present form allow for recovery of substantial portion of the cost of a rural company to be recovered through access charges and Universal Service support. For 1996, rural utility service borrowers obtained 64 percent of their revenues from these sources and only 27 percent from local service charges. The result is that local rates are affordable despite the much higher per subscriber cost for providing service. For those subscribers for whom the local rate is still too expensive, Lifeline and Link-Up Programs may make the difference. PVT participates in both state and federal assistance programs. The exception to the general availability of affordable telephone service is in those remote areas where potential subscribes of non-RUS borrowers are required to contribute several thousands of dollars in aid to construction charges in order to obtain service. For most families in remote areas, particularly on indian reservations, these charges effectively preclude subscription to service. The Commission's decision to fund only 25 percent of the Universal Service support necessarily means that in many high cost rural states the support will not meet the statutory criteria of sufficient and predictable, and that local rates will not be just, reasonable and affordable, nor comparable to urban rates. I understand that this decision is now being reconsidered, and I applaud the Chairman's statement last April that recognized that there are areas where it makes little sense to limit federal support to 25 percent. States which have mostly high cost areas cannot raise the 75 percent of the support within their borders except by extracting contributions from subscribers at a level that defeats the purpose of Universal Service support. The point has been well explained in the reconsider petitions of several states and the local exchange carrier associations. I would add, however, that this question needs to be addressed sooner rather than later as many states are actively considering state Universal Service funds and the unresolved 75/25 issues makes it almost impossible to understand what will be needed in the individual states. Third, continued affordability of local service is depended on recognition of the impacts of various aspects of the Commission's access reform orders. The two primary concerns are primary inter-exchange carrier charge, PICC, and the subscriber line charge. When the Commission first adopted the subscriber line charge, it was recognized by all that from the subscriber's perspective the subscriber line charge was added to the local service charge to determine the bottom line amount required for each month to maintain dial tone. However, at that time there was a more clearly identifiable pass-through of the reduced access charges by inter-exchange carriers in that there were corresponding toll rate reductions. This process maintained the essential character of local service charges as mandatory and toll as a discretionary expenditure. I thank you for the opportunity to be here today. I'll be glad to answer questions. CHAIRMAN KENNARD: Thank you very much, Mr. Metts. We'll now go to a question and answer period from the panel here. I'll ask each of the commissioners who are inclined to ask questions to limit their questioning to no more than a four-minute question and answer period per commissioner, and we'll go in the order that we gave our opening statements. I'll begin by asking just a couple of brief questions of the panel. Mr. Gumper, first of all, let me thank you and commend you for your service on the USAC board. You've been a very dedicated participant in that organization, and I just wanted to publicly commend you and thank you. And I was very interested to hear your report on the effectiveness of the Lifeline and Link-Up Programs as those programs have been expanded and made more effective. But I was having difficulty reconciling that with your position in your testimony that you believe that meeting the challenge of underserved areas is principally a local issue because it seems to me -- first of all, I agree with you that these issues of serving underserved areas are very complicated and they are made more complicated by issues of poverty and race and class, and these are not easy issues for us as a country. They never have been. But I part company with you when you say that these issues, as they pertain to affordable telephone service, should not be dealt with at the federal level, and I think Lifeline and Link-Up are good examples of how we've had a federal role and a matching state role that has been quite successful. And I'm just curious how you reconcile those two positions. MR. GUMPER: Let me be clear. What I meant by that was that the -- I think the federal program of Lifeline and Link-Up is out there, and obviously it has been expanded and it will help resolve some of the penetration issues. I think the question is do you need to do more in terms of telephone penetration other than what the program that you have already put in place. And the answer to that, I believe, would be no; that given the telephone penetration in terms of the socio-economic people we're talking about, what we're down to, and I think the study by Jorge really points that up, these variations go beyond the question of just affordability and price. The Lifeline and Link-Up Programs are there for those people that lack a telephone is a question of telephone price, they can take advantage of that. I would maintain, though, that there are still going to be people who for other reasons aren't going to want to have a telephone in their home. And I know that comes as a shock to some of us. And I know when I was a -- years ago I had a -- I used to commute to Rockland County and there was a working couple, and one day I offered to give them a ride home because he didn't have a car, and they were both -- had nice jobs, and as we were approaching their apartment, they said could I stop at the pay phone so they could make a call and make arrangements for a taxi the next morning. And when they got back in I said, "You don't have a phone at home." And they looked at me and said, "No, we are pestered by phones all day long on our jobs, and the last thing in the world we want in our house is a phone." Now, these were two well-to-do, you know, couples, could easily afford a phone. They didn't want one. So I think the problem we have to deal with is that there are going to be -- we're never going to get to zero percent, and that's why I think if one wants to go beyond the Lifeline and Link-Up, it's going to take a different type of emphasis to understand what it is that's driving people who don't take advantage of these programs not to have telephones in their homes. That's all. CHAIRMAN KENNARD: It seems to me that the class of people who don't have a telephone just because they don't want one but can otherwise afford it is a very, very small percentage of American, and not, frankly, one that, I agree with you, we shouldn't be terribly concerned about, that's a matter of a personal choice. But I don't think it's appropriate, though, for the class of people who don't have phone service for other reason, be it affordability or issues of poverty or education, that we should just abdicate the federal role altogether, because there are -- certainly most states will act responsibly in this matter. But there may be those states that don't, may not have the resource, and it seems to me that there should be a federal safety net of sorts to make sure that we can advance universal service to the extent possible. Mr. Cooper, you touched on an issue that we have been grappling with for quite some time at the Commission, and that is how we make sure that consumers get the benefits of savings in a declining cost industry. And I'm curious as to whether you have some more specific proposals or guidance that you can give us on ways that we as regulators and policy makers can ensure that consumers get the benefits of access charge reductions, for example, all classes of consumer, not just the more attractive high-end business customers. MR. COOPER: Well, the first answer and one that CFA has always embraced is that the consumer's best friend is effective competition. That is the best form of consumer protection. The difficulty is that we do not have effective competition in many telephone markets, and we particularly don't have it in the residential and local exchange and exchange access markets. So the first line of defense is something that this Commission, again, has been working on i terms of its local competition approach, and it's the 271 process, and that will take a long time. It's become quite clear that a 100-year-old monopoly may take 100 years to go away. Who knows? It's not going away so fast. That's the first line of defense. If that line of defense -- if that form of consumer protection is not going to work, then you have to look at the regulatory approaches. Our experience has been, CFA has not itself looked at the numbers, but the way I like to put it is that there has been enough finger pointing back and forth so that neither side has any credibility to demonstrate to the average consumer that they've been getting the benefits of the cost reductions that this Commission has ordered. My folks just don't believe it, and they want a better measure. We relied upon the subscriber line charge as a way for you to at the end of the day say, look, that number is on the bottom of your bill and it got smaller. That was the number put on in the 1980s. It grew to its current level by the mid-'80s, and it stayed there. And other numbers have been reduced by this Commission. Back in 1980, the split of the recovery of those costs in the federal jurisdiction was 50/50. Because of the last 10 years of reducing other charges and leaving that one alone, I think it's something like 80/20 today. That is, of those original costs, we're getting 80 percent of them from the end user and 20 in the usage charges. One way to go about this is get us back to the 50/50. Make that reduction. I know I write that check every month. And so if you lower that number, you can say we lowered that. Will other numbers go up? That's our fear, but at least you have this bottom line protection. It's extremely important that if you do it, you tell people you've done it because the cost of providing the service has gone done, which it demonstrably has. That means that people then can't run and say you've got to replace that money. There is nothing to replace. It's become less costly to provide service, and I think that's exactly what regulators should be doing. We support that in the access area. We support it in the subscriber line charge. Move prices to costs, and that's the one place you really do control that number. I understand you don't control a bunch of other numbers, although we wish you had retained control of some of them, but clearly that's one you have control over. CHAIRMAN KENNARD: Thank you, Mr. Cooper. Chairman Johnson. CHAIRMAN JOHNSON: Yes, let me follow up on that with Mr. Cooper and Mr. Gregg also providing an answer. So I guess it's your opinion then that if we were to look at access, if we assume that there is some Universal Service support in access, and I'm not certain if you agree with that or not, but let's just assume it for now, and you were to restructure that in some way. If we could ensure that there was a flow-through and so that minute of use would go down, even though we've restructured and put some of it on the end user's bill, if we can show that the bill will go down, not necessarily the local rate but their overall bill would go down, would that be a concept you would be supportive of? And maybe that's too hypothetical, but if you can answer that, that will be helpful. Then I want you to tell me how we can get those dollars to be flow-through so that we can have some minute of use benefit. MR. COOPER: Well, there is two difficulties. One, when you say the bill goes down, the problem is that you will only be able to tell me the average bill goes down because if you lower the per minute of use charges, it's clear that the people who use the most minutes gets the biggest cut, and the people who use a small number of minutes get a little cut and -- I mean, the numbers are proprietary. You ought to ask companies, but there is a substantial number of people who don't place a long distance call in a given month, so they get no reduction. So you have always got this problem of flowing through your per minute reduction to people in an equitable fashion, which is why I prefer this. I know my constituents pay that subscriber line charge every month. And so if you put a Universal Service dollar on their bill and take a subscriber line dollar off their bill, well, you haven't done much, you've changed the name, but at least I know my bill didn't go up. CHAIRMAN JOHNSON: Well, if that end user surcharge, it was a surcharge based upon revenue, that would at least be a little more equitable because -- MR. COOPER: Oh, absolutely. CHAIRMAN JOHNSON: -- the ones that use more minutes would pay more. MR. COOPER: If you force me to accept a line item on the bill, and I've said that in my testimony, I think it ought to be as a percentage of all the services sold. I think all the services benefit from ubiquity, and so if you make me accept the line item, then clearly I prefer a percentages of the total bill as opposed to identifying basic service. And think about it. The purpose of this program is to keep basic service affordable. Why then do it on a per line/per month basis which is, of course, attacking the affordability. Do it on a percentage of revenue basis. I'd much prefer that. If you give me a percentage of revenue basis, then the match between the high volume users who are getting the cuts in their per minute charges and paying the surcharge are clearly much better, and then you can say with much greater confidence that the two balance one another out. One thing is very important is when we look a these per minute surcharges, a lot of the benefit flow out to business customers, and we're all for business, but remember it's the business customers that frequently, certainly large businesses, are heavy users. They are the guys that have already been getting the cuts in the marketplace so far as we can tell. Now you're going to cut costs again. They capture it. So if you do a percentage of total bill, at least you're charging the people who appear to be getting the benefits of what competition there is. CHAIRMAN JOHNSON: Can you -- you said one other thing as to the general proposition of perhaps local rates may go up but bills would go down you said for the average customer. Do you know, or maybe Mr. Gumper may know, whether or not we have any information in the record that could kind of give us a demonstration of the usage, how many people use long distance, $10.00 a month, $5.00 a month? Is there a way to have that information to give me more information when I have to make these kind of hard decisions? MR. COOPER: Well, in Florida, where we have this ongoing proceeding, depending on how you calculate what goes up and down, but if you -- if you lower the cost -- the price of all the vertical services, that is, everything but basic and try and make that up on basic, three out of four people end up with higher bills, particularly because so much goes off to the business customers. Now, if you just hold it back and say we're only going to do local and long distance for residential customers, well, then, it's easier. But remember, in the State of Florida, and I just testified there, out of every dollar of rate rebalancing, 40 cents went out of the residential class and into the business class. It's very difficult to say the residential customer is going to be whole when that much goes between classes. This is just the arithmetic of rebalancing rates. Another 30 cents in Florida went to vertical services. Well, if that much is going to those kind of services, it's very difficult to tell the average residential rate payer who consumers are on vertical service, a small number of long distance calls, that their bill is going to be equal. But, again, this is information you can get from the companies -- CHAIRMAN JOHNSON: Okay. MR. COOPER: -- as you consider that decision. It will vary from state to state, and depending on which scenario you use about which rates are going up and which rates are going down. CHAIRMAN JOHNSON: Okay. MR. COOPER: But that's the question to ask. CHAIRMAN JOHNSON: Thank you. CHAIRMAN KENNARD: Thank you. Commissioner Ness. COMMISSIONER NESS: Thank you, and thank you, panel, for your interesting observations. We, in implementing the '96 Act, took a number of steps to enhance Lifeline and Link-Up, and one of those steps was to extend the benefits of Lifeline to all states whether or not the state was having matching funding. Can any of you -- does any of you have data to comment as to whether or not states have continued to fund into Lifeline where we have increased the amount of funding? In other words, are the states continuing to fund the program? Has it been successful? Or have some states seen the federal subsidy as a means to cut back on what they were providing in terms of service? Mr. Cooper, you look like you would like to answer that question. MR. COOPER: I spend a lot of time on the road doing Universal Service. I'll give you one example which was very distressing to me from the State of Oklahoma, which had previously -- had passed the statute which said there should be a -- the state should match 3.50 and get the 3.50, so we had a $7.00 discount. When the federal discount went to $5.20, if the state had continued the 3.50 match, then we would have gotten to the new 10.50. Some people interpreted the statute to suggest that, no, what the legislature meant in Oklahoma was that we really want the discount of $7.00, and what the state did was back down from 3.50 to "1.62 and a half cents or whatever the number was, to hit the ceiling at $7.000. That problem exists out there. COMMISSIONER NESS: May I assume its anomaly? MR. COOPER: I would not assume it's an anomaly. The $5.25, it was very easy for people to say let's take that as a Lifeline program. I assume that you folks have the ability to monitor. Very few states have finished the Universal Service, even the Lifeline part, because they have been become tied up in the cost issues. But there is a great deal of resistance to going to a 10.50 discount, which is obviously a very substantial discount. COMMISSIONER NESS: Mr. Gregg, you look like you wanted to comment. MR. GREGG: I can speak for my state, and we were very appreciative of the Commission's action. The most beneficial thing you did was to require that eligibility be based on income. Before a number of states had limited assistance for telephone rates to handicapped and aged individuals. By basing it on income, it you really opened the door. We have an overall state penetration rate in West Virginia of 94 percent, exactly the national average. However, we have 11 counties with very high unemployment that have penetration levels of 85 percent or less, and this is totally income-based basis for not being on the system. There is no geographical limitation whatsoever. The fact that you opened the door to eligibility based on income has allowed us to expand that program, and, in fact, we did expand it up to the maximum amount. The final funding of that from the state level is still up in the air, but we are fully committed to getting the maximum benefit that you appropriated. MR. GUMPER: May I just add something? COMMISSIONER NESS: Yes. MR. GUMPER: I believe that, and I will check into it and try to get it to the members here the information. I believe USAC, though, could provide you data as to what we are providing as support on an average line per state. And obviously if there is increased matching, you know, we can see what the states are doing, but I will see what information USAC could provide along those lines. COMMISSIONER NESS: It's an extremely important program, and I'm very anxious to ensure that that which we do at the federal level works for the states, and works most importantly for the consumers. MR. COOPER: Let me recommend one specific policy to you. COMMISSIONER NESS: Yes. MR. COOPER: As Billy mentioned, you changed the criteria and many states did not have -- you know, had other criteria. It's now time if a state doesn't change the criteria, to take the money back, cause we wrote a series of waivers to let the states avoid -- they said they needed time, and in a specific state we worked, we passed legislation to remove from the books the restrictive criteria, and then the governor vetoed, and said, "Don't worry, the FCC will keep giving us the money even though we still have the restriction." We're going into another state legislative cycle. This Commission, if you want people to take up this improvement in the program, you're going to have to make it clear that this is what you meant, and if you don't change your criteria, you're going to lose the federal support. As I said, I wouldn't do it tomorrow, but let's make it clear by, you know, three years after the original concept was laid out there, if you don't really want let low income people in without being also disabled or elderly, we're not going to put the money up. You have to back up that policy. COMMISSIONER NESS: Mr. Metts, you wanted to comment also. MR. METTS: Yes. New Mexico has had a low income telephone assistance program for over 10 years. We participate in that with our cooperative. We have 56 customers that avail themselves of that program alone with the federal. That's less than two percent of your customers, yet we know there are several more qualifying people that could qualify on an income basis. They don't take the service either because of pride or whatever. It's advertised to them. We notify them every year. So the fact of low income being at that big a consideration and people not taking telephone service, our statistics don't show that. COMMISSIONER NESS: Okay, thank you. My time is up. CHAIRMAN KENNARD: Thank you. Commissioner Schoenfelder. COMMISSIONER SCHOENFELDER: Mr. Gregg, I would like to have -- I think that you were answering Commissioner Johnson's question about this and I'm going to try -- I took notes, so I'm going to try to quote what you said. If I'm wrong, will you correct me, and then expand on this a little bit? I think you said if the Commission ties access reduction with Universal Service reform, then they should reduce or eliminate the SLIC. And I think that's the same thing Commissioner Johnson was talking about, and you didn't get a chance to answer and I'd like to have you just expand on that a little, please. MR. GREGG: I took her question to be more general, looking at the whole area of access charge reductions, for example. COMMISSIONER SCHOENFELDER: It could have been. MR. GREGG: And whether IXCs have actually flowed those through to end users. And I'll vary a little bit from what Mr. Cooper said. He said that we need competition in the local loop. I think if you look at the toll area, which is what we're concerned about, the access charge reductions went to the IXCs which provide toll, which is competitive. And this points out one of the failings of competitive market. While it does much good, in a competitive market where you're allowed to do the economically rational thing, you're going to put the money where it does you as an economic unit the most good. You're going to do -- first, you're going to keep it if you can. Secondly, you're going to pass it through to competitive computers, customers who will shop around and go elsewhere if you don't cut rates to them. And lastly, you're going to soak customers who don't make a choice, who are non-shopping customers, who are default customers. In fact, in West Virginia, in any one month half of the customers make no intra-LATA toll calls, and I'm sure this goes on to the interstate arena as well. You have a disparity. You have a number of customers -- a small number of customers that make a whole lot. You have a very large portion that make none or very little. They don't care, they don't know, they don't shop. They are still paying the same default rates they paid 10 years ago. We just put out a survey last month. We do an annual survey on long distance rates in West Virginia. In the last 10 years average toll rates have fallen 44 percent, and they've fallen 13 percent just in the last year after the advent of One Plus competition. However, the default rate that is charged to customers that do not choose has varied virtually none in the past 10 years. It is still exactly where it is, and you still have a large majority of customers that are still paying that rate. So if you want to pass through, you can't rely upon the competitive market. They're going to do the economically rational thing. I would cite to Commissioner Baker's statement. When they passed the Telecommunications Act of 1995, they mandated that certain companies reduce their intrastate access down to interstate levels. They also required that those access reductions be passed through to all customers on a proportionate basis, and that has happened. Access has gone down but customers have been guaranteed and, in fact, have received those access charge reductions on a proportionate basis, all customers. COMMISSIONER SCHOENFELDER: I have one quick question for Mr. Cooper, and it's a yes or no question. Honest. MR. COOPER: It's tough to get a yes or no from me. (Laughter.) COMMISSIONER SCHOENFELDER: But I think you said that the funds should be raised from providers, and not from the end user is what I was taking it for you to mean. Do you really believe that the provider will not pass that cost on to the consumer? MR. COOPER: Well, it gets -- COMMISSIONER SCHOENFELDER: Yes or no. (Laughter.) MR. COOPER: To the extent they think they can, they will. And if there are market forces that prevent them from doing so, they will not be able to, and that's a marketplace question just like any other cost of doing business. COMMISSIONER SCHOENFELDER: That's pretty close to a yes or no. Thank you. CHAIRMAN KENNARD: Chairman Wood has just informed us that the shuttle launch was successful today. We missed it. Discovery 25. So we will have, at least as we speak, we still have a full congressional delegation from the State of Ohio. Commissioner Furchgott-Roth. COMMISSIONER FURCHGOTT-ROTH: Thank you, Mr. Chairman. Mr. Metts, I always like people who put the number of children they have on their bio, and I'm very pleased to see that you have five children. (Laughter.) COMMISSIONER NESS: Something magical about that number. MR. METTS: We have close to the same. COMMISSIONER FURCHGOTT-ROTH: Yes. Mr. Metts, we on the Joint Board have before us some items that have been referred to us on high cost recovery for large telephone companies, and I know that you represent a small rural telephone company and I see some other folks from small rural community in the audience today. One possible solution would be to raise the size of the Universal Service Fund for large companies, and I just want to get your reaction. Do you think that's something that should be done before we look at small company issues or should be done in isolation from looking at the size of support for small companies? MR. METTS: Well, I don't know that I understand exactly where you're coming from. COMMISSIONER FURCHGOTT-ROTH: Well, let me try to rephrase it. MR. METTS: Okay. COMMISSIONER FURCHGOTT-ROTH: Could you explain, and I know cooperatives are sort of member-owned, could you explain to the members of your cooperative if you're told, well, this is the support we get from the federal government through Universal Service support, and it's going to stay that way for a little while. There's another telephone company somewhere else in the country, it's a very big company, and they just got so many millions of dollars more, but don't worry, our turn is coming a few years down the road. How would the members of your cooperative feel about that? MR. METTS: That would be extremely difficult. Every year at our annual meeting we explain the fact of what it costs us to provide service, and we also explain what kind of support we're getting from Universal Service Funds, high cost funds. Our local service revenue requirement is $66.00 a month. Now, disregarding what I've heard about cost of service going down and getting cheaper, that is not the case in rural America. It costs us $50,000 to put in a mile of fiber. Our average net depreciated investment per look is $7400. So we -- we have to have Universal Service Funds. Our local service rates would go from $14.00 to $70.00 without USF. So it's extremely important to us. And even though we continue to tell our members that some day this may change, and you will have to realize we provide you all these advance services, that you cannot continue with that rate. It's hard enough for them to understand why it would go away. it would be extremely hard to explain it went away to a bigger company. COMMISSIONER FURCHGOTT-ROTH: Thank you, Mr. Metts. Mr. Cooper, I appreciate your comments about why prices should in some sense reflect costs, and I appreciate your comments about if you reduce usage sensitive rates, that much of the benefit would go to consumers that use telephone services a lot, which may, in fact, be a lot of business customers. Is it not possible that one could get the benefits of reducing usage sensitive rates, which, of course, just penalize customers who want to use the phone and discourages them because they're having to pay something that's well above cost, is it possible to come up with a system of flat charges which, of course, can be paid both by long distance local companies in such a way that flat charges are higher for business customers and lower for residential customers? MR. COOPER: That sounds like the system we have today. The question of whether charges should be flat or fixed is a separate question from whether or not costs are above or below or they are subsidies. We supported the concept of a PICC in the sense that it made sense to recover a fixed cost for a facility that's being used by the long distance provider in a fixed fashion, and we did support it. It's become a bone of contention, but it makes economic sense to have those fixed charges to cover fixed costs. And if you did cost cause of analysis, you might well find that there -- as I said, when we first supported that, sometimes costs are not so fixed; that is, people decide how many fibers to put in there, how much to light, and it starts to look variable as the revenue opportunity is a variable revenue opportunity. But clearly, we supported the concept of recovering those fixed cost with fixed charges, and distinguishing between high and low volume users. COMMISSIONER FURCHGOTT-ROTH: Thank you, Mr. Chairman. CHAIRMAN KENNARD: Thank you. Chairman Wood? CHAIRMAN WOOD: Mr. Gregg, in your testimony you mentioned, actually in your written testimony, you mentioned about the totality of the bill shouldn't go up. in this age of, I think, migration back toward the one bill option, although hopefully from a number of different companies instead of just one or two, isn't the totality of the bill that we need to be thinking about, the whole telecommunications service bill? MR. GREGG: I think you need to focus primarily on the basic rate, rates that people have to pay to get access to the network. Every other type of usage that you make of that network tends to be discretionary to some extent, except for rural areas, as Mr. Metts stated, where toll calls are a necessity. CHAIRMAN WOOD: Right. MR. GREGG: But I believe that our charge is not to worry so much about vertical services, not to worry so much about advance service pricing. It's to make sure that basic service, the price, the rate that everyone of us, no matter what our economic standing is, has to pay to get on that network and to keep that network at the high value it current has, because 94 percent of our citizens are connected. So in that regard, I think the focus is on local rates. I think there are ways to address the toll issue through EAS, for example. There has been a movement throughout the nation to increase the value that a customer gets from his calling area, and, in fact, customers have shown that they are willing to pay more if they get more value. In fact, starting in 1988 and concluding in 1994, we instituted statewide EAS in our state. Every subscriber of every phone company has exactly the same calling area, and exactly the same calling options, and exactly the same rates. Obviously, some are supported more than others, but everybody is put on an equal footing and everybody has options to try to fit what they need with their income and their desires. CHAIRMAN WOOD: What's your basic -- what would the basic local rate plus SLIC, plus mandatory taxes and local fees be? In other words, if all you wanted was dial tone an no caller ID. MR. GREGG: 9.50. CHAIRMAN WOOD: With the SLIC included? MR. GREGG: With the SLIC. 9.50. CHAIRMAN WOOD: And what would be -- MR. GREGG: That is all measured though. Every call you make is measured. CHAIRMAN WOOD: And what is a per minute or per call? MR. GREGG: It's per minute, distance, time of day. It has all four dimensions. CHAIRMAN WOOD: It's like Chicago. Okay. Just like Chicago has. MR. GREGG: Just like Chicago. Then we have basically four different levels. You can buy a greater amount of prepaid flat service. CHAIRMAN WOOD: Right. MR. GREGG: $15.00. Your local change is all flat. Everything else is measured. CHAIRMAN WOOD: Fifteen plus nine? MR. GREGG: Fifteen plus the 3.50. CHAIRMAN WOOD: Okay. Okay. MR. GREGG: $22.00 plus the 3.50 for your home exchange, surrounding exchanges. CHAIRMAN WOOD: Okay. MR. GREGG: And then the rest measured. Twenty- nine bucks plus the 3.50, everything flat. CHAIRMAN WOOD: Let me ask the other three panelists. Mr. Gumper, in your testimony you compared it to the cost of the pizzas you got. I was comparing it to the cab ride I took from the Reagan Airport to here, and I don't know what affordability is. What is affordability since that's your panel? I mean, in dollars, what affordability of basic local service? Mr. Gregg gave a good range of what West Virginia is talking about. MR. GUMPER: Well, I think -- CHAIRMAN WOOD: You said 21 bucks for the pizzas? MR. GUMPER: The average -- okay, yeah, the average local service right now is $21.00, and that includes basically your surcharges and your taxes. The average total bill is $54.00. So you can see for the average customer their basic service represents about 40 percent of their total bill. You know, I think when you take a look at the penetration rates overall, it's obvious that telephone service is affordable. The vast majority of people in this country have it, and when you compare the prices of other goods and what has happened to those goods and services over the last 10, 15, 20 years, telephone service, particularly basic service, becomes even more affordable. So I would say I think a lot of states have gotten rates into the neighborhood of 20 - 25 dollars for basic service, and they have not seen penetration rates suffer. CHAIRMAN WOOD: In the co-op, Mr. Metts, you're right next to a lot of the folks I regulate, and I know your rates are probably maybe even a little higher than what they are. You said 14? MR. METTS: $14.90. CHAIRMAN WOOD: Four, and is that with the SLIC? MR. METTS: With the SLIC and 911 will be about $19.00. CHAIRMAN WOOD: Okay. And calling scope of how big? MR. METTS: Well, some exchange is 500 customers. Some exchange is 5,000, because we don't -- we don't provide service in the town where we're headquartered. That U.S. West. But we have one exchange has 104 customers and that's all they can call, and there is no doctors, there is no school, there is no medical facilities. They can call the volunteer fire department, and everything else is a toll call. CHAIRMAN WOOD: And your toll rate would be what per minute? MR. METTS: The toll rate? CHAIRMAN WOOD: Is it distance sensitive or is there an average number? MR. METTS: No, it's would be distance sensitive. CHAIRMAN WOOD: I'm just trying to get an idea of what the number -- MR. METTS: Twenty-five cents probably. CHAIRMAN WOOD: Okay. Mr. Cooper, what's affordable? MR. COOPER: In response to Julia Johnson's question, and it's something I did in Florida, this question of, well, compared to other things it's gotten real cheap, so therefore a big increase would be affordable. It depends on what you look at. Remember, this is an electronic-based, technology-based industry. If you compare it to computers, it's not gotten real cheap. Computers have gotten a lot cheaper. It's -- ironically since the breakup so has gasoline, so has shoes, so has TV, so has audio, so there is a bunch of stuff there that has gotten a lot less expensive, and it's not clear that that is a standard that you ought to apply. Now, if you put the -- cable rates have gone up more. So if you put us back to 1984, you can actually say that telephone costs less than cable, but that's an unregulated monopoly. That's exactly what we're trying to stay away from. But I will tell you the companies in Florida said, "Hey, look what cable rates have done." That's exactly the comparison we don't want. So the question is are rates affordable today? Yes. Could you double them without causing people to drop off the network? You probably could. Would some people drop off the network? Yes, they would. Would a lot of people end up with a higher bill, particularly my constituents? Yes, they would. So that affordability is a complex concept, and we don't think you ought to increase basic rates today going forward. The point was to start where we were and see if we could get a competitive market to lower those prices. CHAIRMAN WOOD: Thank you. CHAIRMAN KENNARD: Thank you. Commissioner Powell. COMMISSIONER POWELL: Thank you, Mr. Chairman. I have this set of concerns. If we were to be concerned solely in the administration of our functions with consumers getting the best deal possible, you might have a certain kind of system. But we have other obligations and events we are trying to help to foster the proper conditions for, not the least of which is a form of competition that will bring values, in the judgement of the Congress, to these consumers as well. And in light of that, I'm sort of struck by certain statements that I want to explore a little further, first with you, Mr. Cooper. You said something which, to some degree, knocked me over in the sense that affordability shouldn't have anything to do with what the market would bear. I'm not so sure I fully understand what you mean by that. It seems to me if it's unaffordable, I wouldn't be able to pay, but you seem to have a definition of affordability that would allow consumers to maintain subscribership but still as a matter of government policy should be kept below those levels. That seems to be extraordinarily intention with any kind of competitive market, no matter how you created it. If you had a notion that a market could produce rates that consumers or users would be willing to play but nonetheless the government would keep them below those rates as a matter of policy, and I would just like to hear you flush that statement out a little. MR. COOPER: Well, the answer, the simple answer is the following. That the market that you've described to me only has a demand side. That is, what you're saying is that we're going to price by looking at what the demand side of the market says. In point of fact, the magic of our capitalist system is the supply side of the market. So that a competitive marketplace, you're not only looking at what the consumer is willing to pay, you have to look at what your competitors are willing to charge. And so the real driving force in a competitive market, which we endorse, is on the supply side where people come in and say, "If he tries to put his price up," he looks at telephone service and he knows Cooper would pay twice as much for service, if he tries to double my rate, the supply side enters and said, "I don't have to let him do that. I can steal Cooper as my customer without raising his price." So that's the first part of the answer is that when we talk about a supply side, and we have commended the Commission for vigorously trying to get that supply side of the market. The second answer is that even on the demand side, and we've said this in our testimony, and I go back to the original Michigan petition on the demand side, clearly affordability is not an absolute concept. If you look in the dictionary today, the first definition you will get of affordability is a relative concept. It doesn't say "ability to pay." It says, "ability to pay without undue harm, burden," et cetera. So that our concept of affordability is, in fact, a relative concept. We do ask how much does it hurt, and that, we think, is the -- when Congress said affordable, they didn't point their finger to whether it was definition A or definition B. So I believe that both on the demand side and the supply side. COMMISSIONER POWELL: Well, that's a good point, but one of the things that concerns me is that in order to materialize or pump the supply side, to create those choices in the first place are going to require some level of price flexibility or some level of ability to respond to pricing in order to make it viable to enter and be that choice in the first place. And so, I mean, I don't really dispute your -- your focus is right to be concerned with both, but what I struggle with is the interaction of the two; that there are potentially subsidy distortions and distortions that could be justified if focused exclusively on, and Dave's point about quality and cost need to be considered, but if that's all you focused on, you could easily engineer a system in which those things were maximized, fearfully to the exclusion of potential for efficient entry, and that's just my caution. In the interest of time, let me move to another question, and I think maybe I'll direct to Mr. Gregg. I kind of clicked in late to the point of your discussion but the focus on basic rates, I think, was your core points, but you were discussing the general issue of passing savings through only to competitive customers and not to those who don't seem to switch from basic rates from month to month, et cetera. It seems to me part of our -- and this may even play into the question of line items and what values they do or don't serve, but it seems to me that in the exercise of how consumers are going to interact one has to be concerned about conditioning them to change the paradigm as well. That is, someone mentioned about consumers for the vast majority of the time that they have had an interaction with a phone see it as a guarantee level of affordability, a utility-like model. But as we introduce a competitive model, there is a fear to me, it seems to me, that the logical thing, if you are a producer, is to pass it through to competitive -- to your competitive customers. Now, I would be very concerned if there were true barriers to basic residential customers switching to more competitive alternatives, but I don't want to accept, I don't think, that if people won't choose options available to them, if there is information as to -- informed information available in the market for them to make those choices, just because they don't for whatever reasons, which would be difficult for us to determine, that we should nonetheless play to that lower common denominator. I'm somewhat surprised by this assertion because if you take an AT&T, they don't hide the 10 one-rate plan. My TV is bombarded with this. I get called with it all the time because they have learned that the switch stimulates demand and they get a benefit from people switching to some of these more competitive plans. Nonetheless, they still have a problem every month with people who will not switch from it. And at some point isn't it responsible to say that the policy shouldn't be geared to take care of a class of consumers that will not make those choices for whatever reason? MR. GREGG: Well, you are correct, but in spite of being bombarded every conceivable way, through radio, television, newspapers and actual phone calls to their homes, there is a vast majority of customers who simply will not and do not switch, do not care to get in the game at all. And this is probably true in terms of shopping for bread. I go to the corner grocery even though I know I'm paying 50 percent more rather than drive a couple more blocks to go to the big supermarket, and that's going to be true in any competitive market. I think my response was if the concern is we've reduced access $9 billion, we want to make sure the end users get $9 billion of savings. The only way you're going to actually be able to verify that is by some sort of prescriptive requirement. If you're not willing to do that, if you're willing to let the market work and let the players make economically rational decision, you're going to get what you've gotten, which is that the savings go to the competitive customers. Why would you in your right mind pass it through to customers who are going to pay whatever. COMMISSIONER POWELL: Um-hmm. Um-hmm. MR. GREGG: And the distinction, though, to get back to Mr. Cooper's perspective, is that while we do have a competitive market in toll, we still do not have a competitive market by any stretch of the imagination for local service, and that is why it would be unconscionable to let local service rates rise now. For example, one paradigm would be cap rates where they are. Rates are affordable right now. Cap them where they are. Let competition seek out the areas where they can provide service below that price, where the cost is low. If those internal subsidies that exist within states, those are not affected by the external subsidies that the federal government gives them. if those have to be recompensed by some sort of Universal Service Fund, that's the state's responsibility first. And if they need additional assistance, that is when I believe the federal government should kick in additional external subsidies. COMMISSIONER POWELL: Thank you. CHAIRMAN KENNARD: Ms. Hogerty. MS. HOGERTY: Yes, Mr. Gregg, I was interested in your suggestion. I believe that you suggested that perhaps the fund should be somewhere close to where it is today, and you have also suggested that implicit subsidies are something that you should let the competitive market deal with, and I think that's just what you were talking about with Commissioner Powell. Could you expand on that some more? MR. GREGG: Well, basically you've got -- MS. HOGERTY: And if you want to use competition as a standard, do you have some kind of criteria that could be used. MR. GREGG: Once again, going back to where we are now. Rates are affordable. We've got a high cost fund of 1.7 billion; Lifeline, a half a billion; schools and libraries, 1.3; and whatever the rural health care is going to end up being. So you're looking at basically about a 3 billion plus fund that's being recovered by approximately five percent surcharge by most long distance companies. I believe that for the high cost issue, the $1.7 billion, that fund right now is sufficient. The funds that Mr. Metts' phone company gets, the funds that the small rural telcos in my state get that keeps their rates affordable are flowing now. If you can guarantee that they will at least continue to flow at that level, I think that we in the states can deal with the internal subsidies that come about because of average rate, those flows of business to residential and urban to rural. Right now those flows are happening through average rates. We have an implicit Universal Service Fund. Unless and until competition begins to erode those internal implicit flows there is no need for any additional Universal Service funding. And if you look at the pace of local service competition developing, I believe it will be -- any losses, any revenue losses from beginning competition will be more than offset by access line growth and revenue growth of the incumbents. That's what we have seen so far. Even in areas where there has been the greatest competition growth, there still has been very healthy growth by the incumbent. MS. HOGERTY: So would you see the way this playing out is that the incumbents would come to their state regulators and say we need to start de-averaging our rates? MR. GREGG: Right, the state regulators are the ones that have set up whatever system exists in their particular state. And as I said in my statement, it varies wildly across the United States. They are the ones that know where the high cost areas area. They know them inherently. They are from those states. I tend to agree with Commissioner Furchgott-Roth that I don't think it's possible for people sitting in Washington constructing a wonderful machine to somehow magically figure out the cost in every sub grid of every census block in the United States. I just don't think it's possible. It's like trying to reach the horizon. You can never make an abstraction of reality reality. So for those reasons I believe that dealing with those implicit subsidies, those internal subsidies, should be left in the first case to the states. If and when we have real data that there is an additional need there to support affordability, then we can come to the federal government and see if we need any additional external subsidies. MS. HOGERTY: Mr. Gumper, I wanted to ask you about Lifeline and Link-Up. Do you know how many of those who are actually eligible for those services are taking them? MR. GREGG: No, I don't. MS. HOGERTY: Okay. MR. GREGG: I would estimate it's probably a fairly small percentage for a couple of reasons. One, obviously as it's already been alluded to, there is no question that in many parts of this country, particularly the more rural areas, not only in program like Lifeline and Link-Up, but the school lunch program and things like that, we know that people who are eligible for it many times prefer not to participate. The other thing I would point out is because the Joint Board expanded the Lifeline, Link-Up Program effective January 1st of this year, there were a lot of states that did not have a program prior to that, so they have implemented those programs, so there is obviously going to be some time required to ramp up those programs to a more appropriate participation rate since they are fairly new and there is going to be a need for consumer education in those states where they never had the program existing before. MS. HOGERTY: Mr. Metts, what kind of an education program do you have for Lifeline and Link-Up? MR. METTS: Well, there is a state program by the State Corporation Commission mandates that you do certain things for that program every year, and we send out mailers to the customer base and that type of thing. And they have to qualify, they have to go through State Human Services and be able to qualify for light, heat, Medicare, those types of things, but it's -- MS. HOGERTY: So it's an annual mailing -- MR. METTS: Yes. MS. HOGERTY: -- is the way you notify? MR. METTS: Yes. MS. HOGERTY: Okay. Don't you think that perhaps if the education effort were beefed up a little bit you might get a better subscription? MR. METTS: I do not know that. It is possible that it could, but I don't know that that would do it. MR. GREGG: In our state the Health and Human Services Department dispenses information about the telesystems program with every welfare recipient application. MS. HOGERTY: I don't know if -- do I have some more time? Mr. Cooper -- CHAIRMAN KENNARD: No. MS. HOGERTY: Am I out of time? CHAIRMAN KENNARD: You're out of time. MS. HOGERTY: Okay. CHAIRMAN KENNARD: If you have one more question, go ahead, Martha. MS. HOGERTY: That's okay. COMMISSIONER TRISTANI: Mr. Chairman, I have two questions and I'll try and be brief. CHAIRMAN KENNARD: Okay. COMMISSIONER TRISTANI: One is a follow up on Lifeline, Link-Up, and I will say being from New Mexico I am proud that our state was a little bit ahead of the curve with this program, with the requirements, so I know that it's a good program. Having said that, though, I'm troubled from some of the things I have heard today that there are some states that have not changed eligibility requirements, and so that alone tells me that there must be a lot of eligible people that aren't linked up because they can't apply. And may I ask, Mr. Cooper, what state that was where it was vetoed or -- MR. GUMPER: I believe that was the State of Minnesota. COMMISSIONER TRISTANI: Okay. MR. COOPER: And, again, it's a state I have been active in. But there is another answer here, is that the FCC identified a sensible approach, which was automatic enrollment. As you've just heard two people tell you that State Department of Health and Human Services gets a piece of paper back from a customer and then sends another piece of paper to the phone company. Instead of simply saying all these people are receiving food stamps, light, heat, et cetera, put them in the Lifeline Program, which is what the board recommended. Tremendous resistance. These are people who have already declared themselves to be in need and found to be in need. Why are we forcing them to fill out another piece of paper? And that answer to that is there is a lot of folks who have said they've gotten food stamps or they have gotten those programs, and have not come in for Lifeline. They don't know. We don't need the mailing. We just need an exchange of data tapes and all these folks will get that benefit. A perfectly good idea, applied in a couple of places. But to my knowledge, no other state since the Board and the FCC recommended that we adopt automatic enrollment, no other state has done so. COMMISSIONER TRISTANI: Okay. I'm going to go back to, and it relates to Lifeline, Link-Up, the class of people who aren't connected, six percent. Mr. Gumper, first of all, I want to thank you for sharing the study which you talked about, and I haven't had time to read through all of it, but I will tell you that it doesn't say income doesn't matter. It says there are a variety of issues, and I won't go into detail, but it keeps pointing back to income makes a difference. Certain minority groups like African-Americans and Latinos are more disconnected. Not surprising, or actually this statistic surprised me, but I guess it shouldn't have, single civilian female with children has the second lowest telephone penetration rate, 82.6 percent, exceeded only by the homeless. And I'm bringing up that statistic because you also said that you thought, and maybe I misunderstood you, you thought we'd reached this optimum, like 94 percent. the Commission shouldn't be doing more, and let me -- let me just go a little further. My question to you and the rest of the panel is have we reached an optimum? Is this something the FCC should be looking at? Should we be looking at in conjunction with the states? Do we know enough about the reasons for non-subscribership? MR. GUMPER: I would say, first of all, I don't think we know enough, and I think that was what Jorge's study really points out; that this is a very complex issue. Some of the variations, I would point out, and the reason why I quoted the statistics from California is because California happens to have a very aggressive low income program. COMMISSIONER TRISTANI: Um-hmm. MR. GUMPER: They have one of the highest penetration rates. I think New York and California today represent a big chunk of the Lifeline and Link-Up participants. And yet even in a state like California, which has a very aggressive program, and New York, as my testimony also quoted because he also has some statistics from New York, New York, Lifeline costs $1.00 a month. It's hard to believe that when you can get telephone service for $1.00 a month that affordability is a primary issue if you're talking about the price of basic telephone service. So the question then comes is why do you have such large variations in people who own their own homes, and those statistics are owned, so those people own their own homes, and yet we see variations where in some cases there is no variation in some counties. In other cases, it's 35 - 40 percent. I would say those kind of extreme variations in two states that have very aggressive Lifeline programs, and you can get telephone service at very, very cheap rates, then affordability is not the issue. Now, there may be places where it still is because, again, we have just started the Lifeline, Link-Up programs, and as Mark has indicated, obviously there has still been a lot of resistance in some areas to follow a norm. So I don't think you can just say we can wash our hands. As I said to the Chairman before, I think the current Lifeline and Link-Up programs that exist should address the issue of affordability. COMMISSIONER TRISTANI: If properly implemented. MR. GUMPER: Yes. COMMISSIONER TRISTANI: Now, let me just -- what do we do about Native American reservations, which as the Navajo, and the statistics are in here where I think it's 18 percent penetration? And, of course, I think distance has a lot to do with that. MR. GUMPER: I tried to allude, you know, in my remarks, because I think realistically in those areas where it is very, very expensive, there it's not so much a question of affordability, I don't believe. I think it's a question that it is cost prohibitive. And then the question is do you as a Joint Board recommend and adopt a program which basically provides large amounts of funding to wire line companies to deploy facilities to those very remote areas, or, in fact, do you look to a wireless solution. And I would say that given what has happened in the wireless market and the price structures that have been occurring more recently there -- you know, when this debate started three - four years ago wireless was probably not a very viable alternative. Today, the amount of minutes that people get in wireless packages and the price they can get it at, realizing that in some cases that package covers the entire United States, is it feasible or reasonable to subsidize wire line companies to the same level just to provide local usage where in fact someone can get five - six hundred minutes of nationwide use for the same amount of dollars? I would say it's not. MR. COOPER: I think if you look at people who own their own homes, you've excluded people who don't. And if you look at the median income of those two groups, you would find a dramatic difference. The simple fact of the matter is that the single most important determinant of telephone subscribership is income. If you look at six percent of people who don't have phones, you will discover that two-thirds of them, three- quarters of them have income below 200 percent of poverty. Simple observation. Now, that means that there are some people who have higher incomes who don't have telephones, and then you're going to ask yourself, but the big problem is income. The second question you will discover if you run the econometric models, it will always enter the analysis, language spoken at home. If you don't speak English at home, the phone is less valuable to you because everybody out there on the network speaks English primarily, so you've got less value to you. And so the language and cultural stuff will help to answer that. But all of those other factors get pretty small when it comes to -- you start from income. Now, Frank is right. After you -- after you've controlled for income, you've got all these other things that affect telephone subscribership, but I think the thing you're reacting to we sort of gave, and it's an impression I don't think he intended to give, he says income doesn't matter. He didn't say that. But there comes a point where if you look at the statistics, if you hit about $40,000 of household income, or 50, from there on up 98 percent of the people have phone service in every income group. Two percent of those folks don't, but there down you get down to, you know, 20 percent who don't have in the lowest income. So with respect to the question of affordability income definitely still matters, and the Lifeline Program is important, and it's targeted but it's not fully subscribed nor is the benefit 100 percent in most places as defined by the Joint Board and the FCC. COMMISSIONER TRISTANI: Is there anything else the FCC could be doing that it's not doing? MR. COOPER: Well, as I've said, we -- we thought the FCC did a terrific job in defining the program. We just don't have people buying into it, and we don't have people doing automatic enrollment. We are still fighting this business about how do we send paper around, educate and move it around. So the answer is that, as I said, make it clear that if they don't expand the eligibility, they're not going to get the money. You may have to lean harder on the question of -- five and a quarter is very attractive for states to take the money and run. There is a lot of people looked down and said, "That's a big discount, why do we need a match?" And you made it too easy to do that. So I think you've defined a great program. It just hasn't been taken up in the rest of the country, and then now you ask yourself how do we put some muscle behind getting people to adopt the program. CHAIRMAN KENNARD: Thank you. Commissioner Baker? COMMISSIONER BAKER: Thank you, Mr. Chairman. I'll base my questions on Mr. Cooper's testimony, but I will invite any of the panelists to respond. First, regarding line items, Mr. Cooper, you stated that in your opinion line items should not appear on consumer bills, correct? MR. COOPER: Yes. COMMISSIONER BAKER: Okay. But aren't line items consistent with the notion of making Universal Service support explicit? That is, consumers realize what portion of their bill goes to support high cost funding? MR. COOPER: Well, the word "explicit" appears in the statute, and in that section of the statute it talks about service provider contribution. It never says -- and so if a service provider is told here is how much your cost of Universal Service is, that is explicit to the service provider, and that's the way the provision was written. Could you have written a provision which said consumers should be told it cost them $2.00 a month? Congress could have written that. They said explicit, they said telecommunications service providers. And, in fact, if you tell them you are paying $2 million or whatever the number is and there is no other subsidy any place in any HUR playing -- paying, it is explicit to the telecommunications service provider, which is what that section of the Act says. MR. GUMPER: I'd like to respond to that for a second. COMMISSIONER BAKER: Yes, and I guess, Mr. Gumper, if I can anticipate your response because my follow-up question would be, I mean, can't we all reasonably anticipate that providers charged with an obligation of contributing to a support fund would in fact pass this along to consumers? MR. COOPER: We didn't say they couldn't pass it along, and they will try, and we'll see where they put it. Some might say -- one company might put in the bottom of the bill, which is what we saw in long distance, and another company might say, "Hey, we don't put that on your bill." And the consumer will start to figure out and they'll look at that. So essentially this is just like any other cost of business. Why don't they break out the CEO's salary on the bottom of the bill, or the unemployment insurance that they pay? Every company pays unemployment insurance for those bills. Do you see it on the bottom of the bill saying, "You see that, you're paying for unemployment insurance in the State of Georgia?" The answer is that each cost of business is recovered in the price sold to the customer and we don't separate out those things on the bottom of the bill. MR. GUMPER: Okay, let's though point out that in the telecommunications industry every telcom company, except for the local exchange carriers, has the flexibility to recover their contribution in any way, shape or form they desire. And I agree with you, most of them will put it as a line item in one shape or another on a customer's bill, and we've seen that happen as this past year has rolled out. The only exception are the local exchange carriers. We do not have the flexibility to just simply say we will recover those costs any which way we can. We have to be given permission of our regulators to recover those costs. And right now today the local exchange carriers recover our contribution and for Bell Atlantic's case it's about 215 million a year we put into the fund through our access charges which, quite frankly, we don't think is a very viable way to do that. And it's sort of a little bit of follow, you know, the nut under the cap because, you know, the long distance carriers in effect reimburse us through access charges for most of our contribution, and it probably would make a lot more sense for us not to put it in our access charges, but to put it on a line item on the bill. But the only way we can do that is if we're given the permission from the regulators. MR. GREGG: Mr. Baker, my preference would be to prohibit service charges altogether like Section 167(h) of the Georgia Telephone Competition Act. However, if you are going to impose surcharges, I believe that the most important thing is that they not be made mandatory. Right now we have virtually every company putting a surcharge of one type or the other. AT&T is 93 cents per month. Others are 4.9 percent, 5.2 percent. However, I believe if you do not make them mandatory, that the market will ultimately drive them out. If consumers do not like paying all these other extra charges that are on their bill, there is going to be somebody who is going to come up and fill a niche and says no hidden charges, 10 cents a minute, and when we say it you can believe it. We're not going to be like MCI. We're not going to be like AT&T and say 10 cents a minute, but what we really mean is 10 cents plus five percent. So I believe as long as you let -- if you're going to have surcharge -- I'd rather have it in the cost of overall rates, but if you're going to have surcharges or allow surcharges, allow them, don't mandate them, because if you mandate them it will be like the SLIC. It will stay there forever. COMMISSIONER BAKER: Okay, which leads into my next question. And again starting with Mr. Cooper's comments, you would favor a reduction or elimination of the SLIC; is that correct? MR. COOPER: Yes. COMMISSIONER BAKER: Okay. Squeezing the balloon at one end, which makes it bigger at the other, where does the balloon get bigger? Do the reductions in the SLIC translate into dollar increases in the high cost fund? MR. COOPER: We think the balloon ought to let some air out of it. (Laughter.) MR. COOPER: There is no doubt there is a lot of excess profits and other things that will make plenty of room for these funds without simply having to find them some place else. So there is no doubt, and we've been consistent in that. We think there is too much air in the balloon. MR. GREGG: Remember the SLIC supports incumbent local carriers, and the question of whether reductions in the SLIC are going to be sufficient to trigger basic rate increases, as you say, squeeze the balloon and it comes out, is once again a state issue. This is a federally imposed end user surcharge that basically affects the state performance of companies. Let the states judge it, and as Dr. Cooper said, there is probably a lot of air that can be let out without any adverse affect on anybody. MR. GUMPER: Just for the record, I will point out I don't think there is a lot of air. (Laughter.) MR. GUMPER: And also I've agreed with almost everything you've said, Billy, up to this point. (Laughter.) If you reduce the SLIC, the balloon is in the charges that the IXCs pay us because unless we were to change the separations rules, those are interstate revenues. And if you reduced the collection of the subscriber line charge, presumably it would mean an offset in interstate access charges either through a PICC or through a per minute kind of charge, not a local rate increase. MR. COOPER: I predicated on an efficiency finding and a cost finding that allows that air to get out, and in that I agree with Frank. It will stay in this jurisdiction and you really do have to base it upon a finding that the dollar figure has declined so that it doesn't just pop up someplace else. COMMISSIONER BAKER: Next question. Heretofore we have addressed cost of service by looking at either flat, that is, per line charges or per minute charges. That's been the traditional way. That's been the way we've done it up till now and that's the way we're going to do it for purposes of the order that will issue regarding high cost fund. But it's entirely conceivable, and some would say likely, that in the not too distant future there will be a new means of measuring service and that is "bit metering," to use an expression. In which case, conceivably voice gets very, very cheap. But laying that side, any thoughts as to how or whether we need to address that issue so that the current order that will issue will at least not be incompatible with a market that might exist in the very near future where bit metering at least supplements if not supplants the tradition division between flat line and permanent charges. MR. COOPER: Well, I'd be a big fan of bit metering because voice is very skinny and it doesn't take up a lot of space and it's very simple. But that is the fundamental premise of how I approach this. That is, the loop that connects everyone's house to a central office is capable of providing a tremendous amount of service, and it is critical and we have said this for years and years that capturing all of that growth to contribute to share the cost of this network is exactly the way you accomplish affordability. So that whether you want to measure bits, you will hear people argue that some bits are different, we suddenly learn if there are big streams and they behave differently, but the answer is absolutely, the amount of service provided over that loop should share all the costs of the loop, and that's a position that I've counted seven times since the Act was passed that this Commission has reaffirmed that fundamental concept. It's extremely important at both the federal and state level. CHAIRMAN KENNARD: Okay, I'm afraid we're going to have to wrap up. It's unfortunate because I think we were just getting warmed up there, but we are about 45 minutes behind schedule and we really need to get moving. We'll have a 15-minute break, reconvene at 3:30, and I did want to thank this great panel that we had to get us going. Thank you very much. (Applause.) (Whereupon, a recess was taken.) CHAIRMAN KENNARD: I think we should get going since we already falling behind schedule. Our second panel today is on consumer and education issues, and we will proceed the way we did with the earlier panel. I will ask each of the panelists to introduce themselves and give an eight-minute presentation. We have our trusty timekeeper here who will keep us on track, and then afterwards we will have an open session of questioning and answers for the panel. Our first panelist will be Michael Travieso. MR. TRAVIESO: Travieso. CHAIRMAN KENNARD: Travieso. Thank you. MR. TRAVIESO: Like the gas. CHAIRMAN KENNARD: Okay, great. Thank you. MR. TRAVIESO: Thank you, Mr. Chairman and Member of the Commission and the Board. My name is Mike Travieso. I am the Maryland people's counsel. My job is to represent the residential customers in the State of Maryland of all utility services, including telephone services. I would prefer not to actually read my testimony today. It's been submitted in written form and it's in the record. Instead, I'd like to pull the major points out of that testimony and perhaps make a few observations which are based somewhat on anecdotal information, but also I think are things that have been discussed in literature from the NNRI and the regulatory assistance project, and Barbara Alexander and others. First, I would say that many customers, telephone customers still do not understand the difference between long distance toll and local telephone service. Second, while most people probably know that they can switch long distance carrier, if they choose to. Few, if any, know that at some point in time in the near future they will have a choice of local exchange carriers. Most customers don't understand that the advertisements that you see for 1010 calling or for competitive long distance 10 cents a minute calling, which guarantees a savings, are based on what Billy Jack referred to this morning as the default service, and not on calling plans which a large percentage of customers actually have. Consumers of telephone service, in general, are not equipped to make intelligent choices. Making an intelligent choice is obviously an important component of a properly functioning competitive market. Customers do not understand their bills. You have a NOPR that you've issued on this -- more or less on this subject matter, and customers do not know which services are regulated and which services are not regulated. Most customers do not understand that state utility commissions cannot help them with problems with their long distance companies. They don't understand the jurisdictional split. And despite the reference, I guess it was Commissioner Tristani made to the 100,000 calls received by the FCC complaining about slamming, most people don't know what the FTC is, they don't know what the FCC is, and they don't know what the state public utility commissions are, nor do they know what they do. Dissipation rates and Lifeline and Link-Up programs are low because consumers do not know that these programs exist generally. The question is not how many participants are there in Lifeline or Link-Up programs. The question is what percentage of the eligible population actually participate. And it's clear to us that very many of these customers do not actually know that these programs exist. There is insufficient notice to consumers about the existence of these programs. I might add a footnote here that what I was going to say about that is that automatic enrollment is the obvious solution to that problem, but Mark Cooper has already said that, so I would only second that as a proposition that if you go to a social service agency and you are eligible for LIHEAP or whatever the state eligibility requirement is in the state law, that you be told that you can automatically enroll at that point in these kinds of programs and you would be enrolled unless you declined to enroll. What are some reasonable solutions to these problems as we move into the all market-based telecommunications service industry? I believe that federal and state regulators must play a major role in educating consumers. I believe unabashedly that government is good, for example, and that government can do good, so that we can use our agencies, state and federal agencies to provide information to consumers in ways that we probably haven't done in the past because we've had a regulated marketplace. There ought to be toll free hot lines to appropriate government agencies. Government agencies should have web pages which provide information to consumers. Government agencies can mandate that the bill be used as a way to inform consumers. For example, I believe that a bill should separately identify different providers that are providing services to that customer by name and by telephone number. This would be a very easy way to allow a customer to detect whether they've been slammed or not, and some states do not have those kind of requirements. And I'm sure if you tried to figure out from reading your telephone bills what services you get and how much you're being charged for them, many of you have probably had difficulty doing that. Those bills could tell consumers where to complain if they have particular problems with providers and which agencies have jurisdiction over which companies. We could require periodic bill inserts to explain about telecommunications deregulation and about customer rights along the lines of what's now required in the Truth and Lending Act, and the Telecommunications Disclosure and Dispute Resolution Act. We could have public service announcements sponsored by the FCC and/or state commissions. We could use the FCC and state commission staff to hold public forums. We could set up clearinghouses of information that could be shared amongst state agencies and then be made available to consumers where appropriate. We could create and/or staff up consumer resource centers within agencies. We must do more than just field telephone calls. We actually have to help solve the problems. I know in my state we have a consumer division of the Public Service Commission. It is the stepchild of the Public Service Commission. It is the second which gets the least attention, has the least amount of resources, has no access to staff counsel until very recently, is not seen as a good place to work, et cetera, et cetera. That has to be changed if we're going to move into a situation in which, in my belief, agencies are going to turn into more like consumer protection agencies and less like rate-making agencies as we deregulate all of the, or virtually all of the utility services except perhaps network services and gas and electric. We can provide consumer oriented information through brochures on things like how to evaluate a provider, how to compare prices, how to detect fraud and deceptive practices, what questions to ask a company soliciting your business, how and where to file a complaint, and things of this nature. I might indicate that it's not only government agencies that can and should be doing these things, but I believe government agencies ought to be doing these things. My own agency has hired a person, we are a little law firm, that's basically what we are. We've taken away one lawyer position and we've hired one public information position so that we can have a person during this time period who can arrange for our staff to go out and talk to the public. I've been on cable TV. I've been on public radio. I've been on public television, and I've gone around to the AARP. I've been all over the place trying to explain these things to the public. So I think that's a key and I would urge commission, federal and state, to sort of reexamine their traditional roles and to come to the conclusion that consumer education and consumer protection is going to be an extremely important role in the future. I appreciate the opportunity to be come and testify before you today. CHAIRMAN KENNARD: Thank you very much. We have a surprise guest today, Michele Farquhar on behalf of Western Wireless. MS. FARQUHAR: First, I would like to thank the Universal Service Joint Board for reaching out to the wireless industry for their thoughts on critical Universal Service issues, such as consumer education and affordability of basic telecom service. I also appreciate the opportunity to represent John Stanton, who is the chairman and CEO of Western Wireless, which offers cellular service in primarily rural areas. Consumer education is clearly a critical issue that needs to be addressed as we move towards a more competitive Universal Service market. Briefly, I'd like to highlight some of Western Wireless's Universal Service initiatives that are aimed at bringing the benefits of competition to consumers located in rural and high cost areas, and you can follow along with the handout that was passed around earlier. Western Wireless is already demonstrating its unique capabilities of itself and other wireless carriers serving approximately 50 customers in a very remote region of Nevada, which is unserved by any other local exchange service carrier. These customers are receiving local dial tone service through a new wireless local loop technology at a flat rate of $10.00 per month. The difference between this rate and Western Wireless's costs are recovered through a state rural improvement fund. To expand its own Universal Service offerings, Western Wireless recently filed petitions in 13 states, seeking designation as an eligible telecom carriers or ETC. As an ETC, Western Wireless intends to provide competitive local telephony service to consumers in rural and high cost areas. Western Wireless is also sponsoring a wireless cost model and is working with federal and state regulators to establish an affordable Universal Service system that is both competitively and technologically neutral. We also want to express our appreciation to the Joint Board for appointing a representative of Western Wireless to the Rural Task Force. Turning to the issue of consumer education, Western Wireless strongly believes that three principles should guide the development of a consumer education program. First, we should empower the consumer to decide which carrier best serves individual telecom needs and what services are included in the Universal Service offering provided, of course, that that service meets the basic definition of Universal Service. Second, we should educate consumers on the benefits of competition. And, lastly, we should eliminate any barriers to a competitive Universal Service system that would harm the public. In adopting Universal Service policies, the Joint Board should first ask whether the policy is in the consumers' interest. By focusing policy initiatives on the consumer, the public interest will thereby be served. The first principle is empowering the consumer. The consumer and not the regulators should be the decision- maker in the competitive environment. The Joint Board recommended and the FCC adopted a list of services that must be provided by all ETCs. Beyond these mandated services, the consumer should be empowered to decide who provides the service, how the service is provided, and what additional services are offered. The consumer should decide, for example, whether the service is mobile or fixed, whether unlimited local usage is included in the offering, whether the service should be for a large or a small local calling area, and whether other services and features are included in the offering. In other words, the Joint Board and the FCC need to work together to ensure that the Universal Service system is competitively and technologically neutral. To make sure consumers get the full range of choices, regulators must take care to avoid inadvertently creating pitfalls for new entrants, particularly wireless carriers. For example, the definitions of which services are supported should be broad enough in order to enable consumers to make their own choices about the type of Universal Service that they want and need. As long as all carriers get the same amount of support per month, no carrier would have any unfair advantage over others and consumers' choices would not be distorted by skewed regulations. The second principle is educating consumers on the benefits and pitfalls of competition. For many consumers, the establishment of a competitive Universal Service system will be the very first time that they've had a choice of local service providers. As a starting point for educating consumers on Universal Service offerings, the Universal Service provider is required to advertise the availability and rates of the services offered as a condition of being designated as an ETC. In addition, the Joint Board may want to encourage all ETCs to further education consumers about the comparative benefits of different services or technologies. For example, on CTIA's web site, it includes information about how to choose a wireless service and how to choose and use a wireless phone, as well as information and tips on driving safety, wireless fraud and disabilities access. It will also be important for regulators to inform consumers that they will benefit from the increased competitive choices for local telecom service. Indeed, regulators can cite to the positive experience of wireless subscribers with new competitive entry. Many wireless consumers have already experienced benefits of lower calling rates, more minutes of use, and higher quality service. The Joint Board and state commissions could sponsor public fora to educate consumers about the new competitive environment as well as new technology, such as wireless, and highlighting the benefits to consumers. Western Wireless recently testified at such a public hearing hosted by the State of Nebraska, which focused on consumer concerns about the size of local calling areas. The third principle is the elimination of barriers to a competitive Universal Service system. The most significant barrier to entry is the differing amounts of support available to different classes of carriers. How can a new entrant hope to compete if the incumbent -- against an incumbent if the incumbent is getting hundreds of dollars per line in subsidies while the new entrant can qualify only for a small fraction of that amount? Regulators must ensure that Universal Service support is fully portable; that is, that competitive carriers receive the same dollar amount of support as incumbents for each line that they serve. This basic principle should be applied for both implicit as well as explicit subsidies. For example, the FCC has stated that rural telephone companies will continue to receive subsidies under the historic system until the year 2001. Western would prefer to see that the new forward-looking Universal Service system implemented much sooner. But if that is not possible, regulators could consider at least distributing Universal Service support to new competitive entrants based on a forward-looking cost model. This support would roughly match the implicit subsidies that the rural telecos are now receiving, and this would ensure that all Americans, including consumers in rural areas, have access to the same array of competitive options as in urban areas. More broadly, the FCC and the states must work hard to eliminate all implicit subsidies, such as inflated access charges and inequities in the phone companies' rate structure as rapidly as possible. And in the meantime, regulators should try to level the playing field by giving new entrants access to some of the revenue flow and corresponding explicit subsidies that the incumbents are now receiving. Even the explicit Universal Service support mechanism need to be revised to ensure full portability of subsidies. Western Wireless filed a petition two weeks ago with the FCC expressing concerns about the FCC's current Universal Service distribution rules which impose a delay of as long as two years on a new entrant's ability to receive explicit report and distribute funding to new entrants based on data and line counts that may be as long as two years old. Similarly, some state commissions are not providing the right among of explicit intrastate Universal Service Funds to incumbents and new entrants. Unfortunately, the Kansas Commission did just that. While we have asked the FCC to preempt this aspect of the Kansas Universal Service system and policy, we're also working directly with Kansas and other state commissions to remedy these problems. In closing, I'd like to quote from a recent speech by Chairman Kennard before an International Telecom Regulator Group at the ITU plenipot where he stated that, "Universal Service rules also should not unfairly advantage or disadvantage one technology over another. Wired telecommunication services may make sense in some places, while wireless may make sense in others. Our objective should be to create an environment where such distinctions are of no great consequence to the consumers." Thank you very much. CHAIRMAN KENNARD: Thank you very much, Michele. Commissioner Gillis. COMMISSIONER. GILLIS: Thank you, Mr. Chairman. I am Bill Gillis, from -- commissioner from the State of Washington. I am a member of the NARUC Communications Committee. I am vice-chair of the NARUC Ad Hoc Consumer Affairs Committee and I chair the Rural Task Force. In thinking about our working title for my remarks, I thought about a couple of things. One of them I was thinking of a title of, gee, it's really lonely being a regulator, or why don't my friends call me anymore. (Laughter.) Back in the good-old days of competitive reforms, we could always count on consumers being in our hearing room and supporting us when we're working on competitive reforms, but that support has dwindled considerably in recent times. In my own state, for example, we had a hearing on the final rule for our state access reform rule, and nobody, not one person stood up and said we were doing the right thing, and that's not too easy. Where have the consumers gone? And it's something that we do, it's pro-competitive, it's something that we're doing for consumers. Well, what we hear in hearings and really talking to people one on one, what we're hearing is that the consumer is saying that we see the cost but we don't see the benefits. Is competition ever going to come to the residential and small business customers? We don't think so. You know, where they are seeing competition, primarily in the long distance realm, they are saying it's a hassle, we don't like marketing phone calls in the evening, we're getting charged for services we didn't subscribe to, and so forth, and we're not so sure about this competition thing. And it's that backdrop that makes it hard to explain Universal Service to consumers, and we try to explain to them, well, we need to take these implicit subsidies and make them explicit, so we aren't forced to make a choice between competition and Universal Service. We shouldn't be forced to make that choice. But they say, well, we don't want this competition thing anyway. We're not so sure about that, and besides isn't that a new tax of some sort people are talking about, and what's in it for me anyway? And the bottom line I get from that as a state regulator is we aren't doing a very good job of consumer education. We need to make our competitive policy more consumer friendly. We need to find out a way to explain it to people. Chairman Woods in his opening comment summarized in one sentence what I struggled to -- struggled around to say, is that we need to tell the consumers the truth. It's our burden to explain to them what we're doing and why we're doing it, and we need to be accountable. So where do we start? Well, one area we start is recognizing consumer expectations. From the standpoint of your work, the FCC and the Joint Board, I think the most important expectations I hear from my consumers is that they should not be made worse off as a result of competition. That's the bottom line from their perspective. And to me, that is the fundamental goal of Universal Service, is making sure that to the best of our possible ability to be able to look them in the eye and saying we are doing everything we can to make sure that no citizen, no business in this nation is going to be worse off as a result of competition. Hopefully, a lot of people are going to be made better off. And, you know, we need to really resist people who characterize Universal Service as a new social program, social welfare program of some sort. It's not. The bottom line of Universal Service is it's our mechanism to make sure that the benefits of competition are distributed nationwide to everybody and not just to those that happened to be lucky enough early in the competitive reforms to be able to have a choice. It distributes benefits evenly across the country and we owe that to the customers. Preparing consumers for change, state utility commissioners and NARUC have been very active in recognizing that we need to -- we need to do better jobs at consumer outreach, education and protection. I enclosed with my pre- filed remarks a copy of the White Paper that was drafted by the Ad Hoc Committee on Consumer Affairs and the Communications Committee jointly, and some various principals that were in that, and I'm not going to go into those now. The one principle that I did want to mention though comes from another NARUC resolution which did indicate that the content of bill should be accurate, if nothing else. Chairman Woods commented about telling the truth. And what we've done in our state goes beyond the NARUC resolution. I don't mean this to be NARUC's position, but we've taken that a bit farther, and we decided that that mean in the context of Universal Service full disclosure. In our draft Universal Service rule, what we've done is for companies that would receive Universal Service Funds they would have two choices. One, no disclosure, including no disclosure of percent of customer payment contributed to it by the carrier, or full disclosure. And full disclosure means the amount of monthly support the carrier receives from the fund, the amount of carrier contribution, the amount of support per line received by the carrier, and the customer's exchange, and a recurring statement of the carrier's toll and per line reduction ordered under a different section of our rule. In other words, tell them everything. Don't mess around with it. And that's our suggestion, and I am speaking for myself, not NARUC in this regard, I would recommend that to you at the federal level is that that's something to think about, is just require full disclosure. Final topic is I was asked to comment on the potential role of NARUC as a clearinghouse of information on consumer issues to help you at the FCC in getting a better understanding of consumer needs. And I think that's a great idea. It's very consistent with what we're trying to do anyway. The Ad Hoc Committee on Consumer Affairs, which I am vice-chair of, was established by NARUC for the purpose of helping us, the states, understand and share among ourselves what are the different options for reaching out to consumers for consumer protection, consumer education. And we're developing a sharing arrangements to get a better understanding of what consumers want in individual states. The ad hoc committee just completed its two years work plan, and one element of that plan is to do a better job of communicating between states and federal agencies on consumer issues, so that's just right on target. And so my recommendation is, and actually I'm looking at Commissioner Schoenfelder because she chairs the policy subgroup on consumer issues for the Communications Committee, but I think we ought to just do it. We'll just figure out a way to make it work. If our colleagues at the FCC want that relationship, it's something that I think we can easily accommodate. So to summarize, the bottom line for me is I'm a believer in the '96 Act. I think that it's a well written document. It's something that promises good things for America, and I want to see both competition and Universal Service. I don't want to make a choice between Universal Service and competition. I want them both. I think we can do that, but we're not going to get there if we don't have the support of consumers. At least in my state, we've lost it, and I think that's true nationally, is that consumers for a variety of reasons are doubting whether competitive forms make any sense for them, particularly residential and small business consumers. We need to step back. We need to make sure that our competitive policies are consumer friendly. We need to be able to explain them to consumers in a very truthful fashion, and I would also comment that we need to have a Universal Service Fund that is sufficient in size and administered in a way that we can truly look consumers in the eye and say that we haven't made you worse off. At least we've done our best to make sure every citizen of business in this nation is at least as well off after these reforms than they were before they happened. Thank yo for this opportunity to comment. I look forward to answering questions later. CHAIRMAN KENNARD: Thank you. Mr. Lubin. MR. LUBIN: My name is Joel Lubin. I work for AT&T. I have the good fortune of working on these interesting and complex issues. Thank you for giving me the opportunity to speak before you today regarding issues of educating the consumer in the telecommunications marketplace. AT&T supports the Commission's objective of eliminating customer confusion and better educating consumers about telecommunications issues, in particular, Universal Service. Let me also say that in a competitive long distance market, AT&T has every incentive to ensure that its customers fully understand its offers and charges associated with these offers. If our customers are confused, they have choice. We are in the business to win customers and keep them satisfied, not to have them leave because they are confused. For this reason, we provide educational information when new charges are introduced or if charges change through bill messages or bill inserts. In the case of the charges that we have imposed to recover our Universal Service expenses, we work closely with regulators and other stakeholders to ensure that our messages to our customers were clear and complete. Our bills include an 800 number for customers to call if they have questions about their bill. And here again, it's in our interest to ensure that our bills are clear and understandable, both because it's what our customers want and deserve, and because it minimizes our costs by reducing the number of calls to our customer care 800 number. We believe that we have taken extraordinary steps to achieve this goal given the existing circumstances surrounding Universal Service. However, some of the customer confusion over USF implementation is caused by carriers doing different things. This can be significantly mitigated if all carriers assess end users for this expense in a similar manner. And it is inevitable that all carriers in a competitive marketplace will recover this expense from their customers because it is an external cost that is beyond our control and cannot merely be competed away. Under the existing rule, carriers are assessed USF based on the previous year's revenues and have complete discretion over the manner in which they recover the assessment as part of their current year's cost. Unfortunately, this means that some carriers who have less revenue in '98 relative to '97 will have a collection rate that is literally higher than the assessment rate. Some seek to recover their assessments through fixed monthly charges while others recover it through a percentage assessment. Some seek to recover their assessments from interstate services only, while others recover it from all services. The FCC has allowed the ILECs to recover their obligation from the inter-exchange carrier's access charges, known as ILEC flow-back. That's what you heard Frank Gumper talk about in the previous panel. That's raising the cost of providing LD service. Some IXCs recover their ILEC flow-back portion from their nationwide average toll rates, while others include it in their end user USF recovery charges, thus raising the USF line item on the bill. AT&T has decided to charge 93 cents per month to each of its residential accounts and a 4.1 percent surcharge to its business customers, interstate revenues. Given that each carrier has its own set of uncollectibles that it must account for, it is not surprising that each would charge their customer a different rate under the Universal Service banner. This has resulted in needless customer confusion. Competitive neutrality is enabled when all carriers are required to use the same assessment and collection rate applicable to all end user revenues. With simultaneous assessment and recover of the carriers' Universal Service obligation and no discretion on the part of the carrier as to how the recovery will be made as between different classes of customers, the end user surcharge approach removes the potential kind of gamesmanship over USF recovery that inevitably fosters customer confusion, dissatisfaction with the entire system. Such an approach applied fairly and uniformly to all customers will ultimately lead to customer acceptance, if not approval, and serve to strengthen our universal support mechanism. An alternative revenue base surcharge, the Commission could require both assessment and recovery from an interstate service providers by an end user per line charge. That is to say the carrier owes what it collects from the subscriber based on the new assessment rate that the carrier does not set but USF sets under the direction of the regulator. Here in this example, the denominator of the factor would be calculated by the administrator based on total lines, including primary line, non-primary, wireless lines, business lines, paging lines. A per line charge has the additional benefit of solving the internet assessment controversy with a per line charge to the customer line itself is assessed for the Universal Service, not the services provided over the line. The Commission can also decide to enforce public policy objectives by varying the per line factor by customer type. For example, it could decide among a number of options to cap the customer per line assessment at a dollar, cap paging at a quarter, exempt Lifeline customers from any assessment at all, and have the business per line charge make up the difference. Through the common USF factor, all carriers would be charging the respective customers uniformly. Thus, all customers within the same segment would be charged the same amount regardless of their service provider. Whether the Commission implements a revenue or a per line surcharge, the anti-competitive ILEC flow-back issue would be eliminated. All carriers, including the ILECs, will be assessing and collecting their obligations simultaneously from their retail customers. This also eliminates the possibility of carriers gaming the process. From the customer's perspective, the USF charge would be clear, unambiguous and consistently labeled, eliminating significant amount of confusion on the topic. Thank you for your time. I look forward to answering your questions. Thank you. CHAIRMAN KENNARD: Thank you. Mr. Gilles. MR. GILLES: My name is Dave Gilles. I'm an assistant attorney general in the Wisconsin Department of Justice. I have worked in the Office of Consumer Protection in Wisconsin, Department of Justice, for long enough to remember when consumer -- the very infrequent consumer complaints about telephone services were routinely and quickly resolved by an industry that was subject to very comprehensive regulation on the federal and state level. That is not the case today. During the last four years, I've had the occasion to handle six cases against companies that were engaged in slamming or cramming practices, and the resources devoted by our office and my counterparts in other states have increased dramatically over time. Today, I would like to address two issues. I would like to outline consumer education efforts that have been undertaken in Wisconsin to try and improve consumer understanding in this industry. And secondly, I would like to provide you with some observation that I have as a person involved in enforcement and enforcing deceptive practice issues about what it is about this industry that creates the climate for this fraud. Turning to the first point, Wisconsin has undertaken two approaches to deal with consumer education concerning telecommunication services. The Wisconsin attorney general, in 1996, petitioned the Wisconsin Public Service Commission to undertake steps to promote consumer education issues and other consumer safeguards. And as a result of that, last March the Public Service Commission, which had worked closely with other state agencies, announced a four-part consumer education program that consisted of primarily the development of a buyer's guide to telecommunication services, as well as specific information pieces dealing with particular issues. Now, this printed materials -- the printed materials were coupled with television and radio public service announcements which announced their availability. In addition, distribution was coordinated through libraries and community groups, and, finally, there was online access to it through the web site for the Public Service Commission. As best we can determine, it's been successful, although the distribution has been limited. The reports are being revised because at the time they were prepared "cramming" hadn't become a term of art in this business. The second aspect of consumer protection education that's been undertaken in Wisconsin, in contrast to this generic approach, has been a pilot program that the Commission approved for Ameritech to undertake with regard to consumers who were having difficulty in paying bills. It was a program that's become known as "Telcap," and was focused on persons who appeared not to have the resources to pay for basic local phone service. Specific Ameritech personnel were trained in providing information about Lifeline and other resources that would be available to people in the situation, and according to the reports, this has been effective in lowering the number of disconnections that are occurring in the pilot program. I'd be happy to provide more information regarding either of those programs to you. Turning to the second point, I would very much like say that as a result of the consumer education efforts, I don't have as much to do, but that's no the case. We have begun three actions this year, and these are very time consuming and we continue to get lots of complaints. There are three things that, I think, give rise to this, at least, and the first is in the deregulated industry telecommunication services with lower barrier to entry, it provides a very attractive place for people who are not interested in delivering what consumers think they are buying. The opportunity to use the telephone system to collect for fraudulent practices is one that has not missed people who used to have to go door to door to sell their subscriptions. Let me tell you a couple situations that I have encountered. In 1995, we brought an action against a company that was using a prize promotion to sell subscription service to calling card customers. This is before the term "cramming" had been coined. As a result of setting these boxes out at our state fairs, this company enrolled 4,000 people in Wisconsin that failed to check off after the fine print that by entering the contest they also agreed to a $5.00 monthly calling card subscription. So this was in addition to their dial 1 plus. So a few people complained to us and after we filed an action against the company, and determined that after the promotion had run 4,000 people were signed up. About 10 months later 2,000 people continued to pay $5.00 a month without ever making a long distance call with the calling card. Now, the company assured us that they had sent a welcome package that contained the plastic card with the number, but we all -- at least my belief is that most of those are regarded as solicitations and get accorded the same treatment that your invitations to subscribe for another credit card get. And so what we had was, after eight months you had 2,000 people continuing to pay this $5.00 a month charge. Now, in the settlement discussions with the company, I sat across the table from the president, and I said, "Well, your primary business is selling long distance service, right?" He agreed. I said, "That means that when someone isn't using your card to make calls, you aren't making money. You aren't doing your business." He said, "That's true." I said, "What do you do to let people know about your service?" "Well, we contact them once a month. "How do you do that? "On the bill it says services $5.00." That was how he contacted their people. Two other points in terms of the marketplace. Information about what services are has to be clear, accurate and not misleading. The notion of unbundling services and creating the impression that somehow these unbundled components are being used to pay a specific tax, are being used for some purpose that's not clear from the description of it, gives rise to concern from someone who has been involved in prosecuting deceptive advertising cases. It creates -- it creates a concern if the money that's collected is not obligated to go to the source that's designated and referenced. For example, in one case involving a cruise line that was unbundling service, all cruise lines had to pay some sort of tax based on usage. What this cruise line did that we prosecuted it unbundled the tax that it had to pay and told people after they signed up for the cruise, besides that, you have to pay a $40.00 tax," and people paid it thinking this was part of the price of admission, like sales tax. In fact, it wasn't. Now, in conclusion, I think that what has to be done is we have to continue with consumer education efforts. Secondly, that the Commission, as well as other enforcement agencies, have to take action to apply established consumer protection principles to bring incentives in the marketplace that would discourage fraud, and to implement those principles in this new competitive market. Finally, I would like to acknowledge and appreciate your efforts in pursuing these matters, and thank you for the opportunity to share these views today. CHAIRMAN KENNARD: Thank you very much, Mr. Gilles. Dorothy Attwood. MS. ATTWOOD: Thank you. I'm Dorothy Attwood. I am Chief of the Enforcement Division in the Common Carrier Bureau. I've seen half of you regularly, but I'm very pleased today to participate in this panel, and even more pleased that this focus on consumer education and protection by the Joint Board will help foster the key cooperative effort on this issue. As the Commission and this Board has recognized, consumer protection, education and enforcement have played an increasingly important role as we move into a deregulated environment. Moreover, like other issues for which we may share different visions, on this issue of consumer protection and education and enforcements, the interests of the states and the FCC are aligned. In fact, our interests are not just shared, but borrowing from the popular jargon of today, I think we could say that we're co-dependent on each other, because for every consumer call, letter, e-mail or complaint that the state receives, the odds are the Commission received them as well. Moreover, the odds are that you probably in the state hear about when the Commission treats consumers well or perhaps not so well, and we certain hear about your job performance as well. This all means that our collective performance to consumers as government entities is intricately linked. Now, the good side of our co-dependence is that for many issues, for every consumer whose concern, confusion or complaint we resolve, we both benefit, and importantly because we share the consumer, the consumer also benefits for each of our actions. Similarly, when either state or the FCC brings successful enforcement action against a carrier that is shirking the law, we all benefit from the message that it sends to the industry generally. And again, most importantly, our shared consumer benefits as we collectively ferret out those carriers that can play by the rules and those carriers that cannot. At its core, our co-dependence means that a victory for one is a victory for all. It also means that through cultivating our shared goal of consumer protection, we can make even greater gains in ensuring that the marketplace is full of informed consumer choice and not confusing, misleading or fraudulent carrier conduct. Some of the specific ways we can build this cooperative effort, in our view, is through actively seeking to avoid jurisdictional divide. We need to work together so carriers can't exploit the boundaries and work to create a seamless consumer protection network. For example, the Common Carrier Bureau recently provided the State of Wisconsin, which -- Mr. Gilles, in fact, with an informal staff opinion regarding the preemptive effect of the federal anti-slamming provision in Section 258 of the Act in relation to certain state laws, Wisconsin state laws prohibiting unfair and deceptive practices. Wisconsin had come to us for this letter in connection with a suit brought by a carrier under state law, and the carrier had claimed that the state had no authority to proceed against it because federal law preempted. In this letter, and it's in your materials, we concluded that the Wisconsin statutes at issue didn't obstruct the Commission's objective at all, but rather, although utilizing different means to do so, both the Commission and the state laws served to protect -- prevent slamming and were not incompatible. We issued a similar letter to the State of California and also to Vermont earlier in years past, and have been told by both those states that they have been extremely effective in litigation, in working toward not creating a divide on jurisdictional grounds. The bottom line here is that when it comes to consumer protection, the more cops on the beat the better. Moreover, through utilizing all of the consistent state and federal laws and resources, we maximize our potential to shut down or at least rein in disreputable businesses. As we all know, Al Capone ultimately went to prison for tax evasion. So at least in this one instance I think we all agreed that the Tax Code served the public's interest. Another way we can work together is through improving our coordination of federal and state enforcement actions against common problem carriers. Specifically, we're actively working here at the FCC to enhance our data collection and mining of information that we receive from consumers by way of written complaints, e-mails and calls. The sooner we can understand and analyze what consumers are telling us, the sooner we can act on emerging problems. While we improve this ability at the FCC, we need also to work on making sure this information is available as a shared resource for the states. We each see a piece of the problem, but together the telescope range geometrically increases. Moreover, such coordination helps to leverage all of our limited resources, to get the most bank for the public's buck. Indeed, Commission Johnson visited our shop yesterday with her consumer protection folks, and gave us some very useful information about what Florida is doing, and it was very gratifying to see a publication that Florida apparently issues, I guess on a monthly basis, called "Consumer Activity Report." If you look on it, there is a listing of the apparent slamming infractions. And we looked at that and we saw that of the top four who have -- consumers have complained against these certain carriers, of those top four, three of them the Commission today at least has taken action against. Several months ago we took action against Al American Telephone, which is on the top of your list. Today, the Commission adopted two over a million dollar notice of apparent liability against two other carriers on your list. And so when we help enforcement actions against companies, it's gratifying to see that the Florida consumers are also clearly directly impacted. Another way we can improve our coordination about emerging problems is to seek a coordinated -- is seek to coordinate joint consumer alerts about fraudulent schemes that help -- and therefore we can help each other spread the word, and help consumers that way. Finally, we need to think proactively about not just how to manage the complaints that we all receive and pool our equally scarce resources, but how to ultimately reduce these complaints. Swift and strong enforcement action are a part, but giving consumers appropriate tools to protect themselves is absolutely vital. And on this basis the Commission recently adopted a truth in billing notice of proposed rule-making. We sought comment on ways that information could be provided to consumers about the services being billed by carriers. Last Friday, the Bureau held a forum where state representatives were participant, and to discuss some of the recommendations raised in that NPRM, and through this effort of working toward clarifying consumer information and understanding of their charges, we work to minimize consumer confusion and carrier fraud, and ultimately we arm consumers with the best weapons that they can have in the new marketplace and that is clear information. We look forward to working with the states closely on this effort, and I just remind you that comments are due November 10th, and we look forward to getting them in. Other proactive measures should include web link- ups so that other relevant federal and state agencies and enforcement bodies can be reached by consumers in a single try. Finally, I look forward to learning from states about the techniques that have proved effective in providing consumers real measures of protection and education, and I welcome this dialogue today and in the future. CHAIRMAN KENNARD: Thank you, Dorothy. Good job. We're now in the question and answer period of our panel, and rather than go seriatim, as I mentioned earlier, I'll first invite the commissioners here to explore with the panelists any particular issues that were raised or any other issues that might be on your mind. I did want to echo one thing that Dorothy Attwood said about our truth in billing notice. That notice was inspired, in part, by the very excellent paper that NARUC put out on consumer education, and I think that that effort itself is a good example of state governments and state commissioners working together with the federal government and federal commissioners to solve a very difficult problem for consumers. So I also would like to invite you all to focus on that proceeding and to file your comments or to give us your views in any way possible. With that, do we have any questions from the bench? Chairman Johnson? CHAIRMAN JOHNSON: Yes, I have a question for Mr. Lubin. Making sure that I understand your analysis because I got your pre-filed a little late, but you're suggesting that we as regulators would require or mandate that there be an end user line item charge on the bill; that that somehow would help with the flow-through issue? I didn't follow your argument or your position, so could you please explain? MR. LUBIN: Yes, Ms. Chairman. What we are describing is that whatever the assessment mechanism is that is finally implemented from USAC and if it's a percentage of revenue, if it's a line, whatever it turns out to be, and let me for the moment, let's just pick a revenue assessment, and it turn out to be 3.25 percent, then all carriers would put on their bill 3.25 percent. They wouldn't raise it. They wouldn't lower it. They would put 3.25 percent. And by virtue of all carriers who have an assessment paying in to the Fund, meaning collecting the money from the retail user, by doing that the local company, if they have an assessment and it turned out to be 3.1 percent or whatever it turned out, they would collect it the same way, pay it to the administrator, and thus eliminate the problem that Frank Gumper talked about on the previous panel. So when I said it would eliminate the flow-back, of which there is approximately $800 million today, that the LECs pay that's buried in access fees, by literally having an assessment and collection to be the same for all carriers who are being assessed the value, yes, it would eliminate the flow-back. CHAIRMAN JOHNSON: What if a company didn't want to assess -- MR. LUBIN: Ah, excellent question. CHAIRMAN JOHNSON: -- or collect? Or collect really. MR. LUBIN: Right. CHAIRMAN JOHNSON: If they didn't want to collect it from their customers -- MR. LUBIN: Right. CHAIRMAN JOHNSON: -- there would be a governmental mandate that they have to collect this money even though they don't want to? MR. LUBIN: A couple of thoughts, and maybe there are other ways -- variations, but the thought that I would have is the obligation is still there on that carrier. Now, maybe the carrier comes along and says, "You know what, I don't want to do it." I would suggest that they still have that as a line item on the bill, and literally waive the charge. And when I say "waive the charge," is if somebody says, "You know what, I don't want to do this, and for the next six months or the next two years or the next 10 years I'm going to waive it," they waive it. However, they still have the obligation, if it was 3.1 percent, to collect the 3.1 percent and hand it to USAC. They just elect to waive it. And the reason I highlight that is you eliminate the problem associated with each carrier having let's say a different collectable rate, or last year's revenues are different than this year's revenues. And, in fact, if this individual is a customer of mine and that individual left me and went to another carrier, I no longer would have the obligation to pay the 3.1 percent. The other carrier would have the obligation. So, yes, from my point of view, if you had the assessment and the collection to be the same as defined by the USAC, and that if a carrier didn't want to do it, and wanted to use that as some vehicle to win a customer, they can effectively waive it, but they still have to pay theoretically that number to USAC. CHAIRMAN KENNARD: Mr. Lubin, what would you do about carriers that don't send out a monthly bill, that don't have presubscribed customer or dial-around customers, phone cards? MR. LUBIN: You'll get a couple answers. I mean, first of all, if it's a percentage of revenue, my view is you do the same thing. CHAIRMAN KENNARD: Um-hmm. MR. LUBIN: Because if they don't send a bill, they don't get revenue. So if it's a percent of revenue, it's not an issue. If it were a line charge, which is hypothetically another way, then you have to ask the question who is the assessor of the line charge. CHAIRMAN KENNARD: Um-hmm. MR. LUBIN: And we can have a discussion of that, and if you want, I'll give you my answer right now, but to me -- CHAIRMAN KENNARD: Go ahead. MR. LUBIN: My answer of the line charge is the local company for residents would have the line charge. And so the dial-around issue is not an issue. For 800 or whoever has the customer, if it's a private line business, whatever, let's say I have the relationship, then I put that per line charge on the bill, and I collect it and I had it off to USAC. I would also suggest to you that if it were this way, and again I'm not trying to be arguing that per line is the right approach, I'm just trying to lay out, hey, there is two different ways of going about it. Each one has different attributes, and you've got to figure out which attributes you find most compelling in terms of public policy. But the other point I was going to make to you is if the LEC were the collector on the -- on the residential line or the local line, for that matter, you have the most efficient collection mechanism; the lowest of collectable rate, the least customer confusion because of all billing information that goes back and forth to various vendors. And by the way, I'm not saying this to try to put the burden on the LEC because I expect -- I hope to be a LEC as well, but I am looking for what is the most efficient from my point of view rational way if you went down the per line basis. The alternative is you don't go down the per line basis. CHAIRMAN KENNARD: Thank you. MR. LUBIN: Yes. CHAIRMAN KENNARD: Chairman Wood? CHAIRMAN WOOD: Commissioner Gillis, welcome. If you could do it over again, how would you do it so that your customers would be -- I mean, specifically, what would had not done that you all did do or what would you do that you all forgot to do? COMMISSIONER GILLIS: So I still have friends, you mean? CHAIRMAN WOOD: So they call you back. COMMISSIONER GILLIS: Well, it's hard to say what we would do over. It's probably easier to talk about what we should be doing on a going forward basis. But I think what we have not done well is make the case to customer of why these competitive reforms are in their interest as customers beyond just telling them, well, it's the law. I mean, that's -- I've tried that. That's a regulator's cop-out, and say -- hold up the Act and say, "Well, I know, but it's the law." Actually, I agree with the law. I think that the '96 Act is right on target and what we should be doing. So that is just probably a cop-out. But I think the best we can do and what we need to do more of is to present the case to consumers of why these competitive reforms are needed. We also need to, and what we could do better, I think, is be more sensitive in the way we design our competitive reform, to make sure they are consumer friendly; that we do -- just to pick on one -- do our best to make sure that we can prevent customers from being billed for services they didn't subscribe to, those kind of things; make it easy for customers to make choices as much as we can. But there is always this tough balancing act. That's my biggest problem in doing this as a regulator. It's -- we can't always do everything that makes it easy for consumers or protecting consumers exactly to the extent that it provides a barrier to entry, and we always need to weigh those things. But it's a long waffley answer, Chairman Wood. I don't really know, but I know that we aren't doing it well enough at the moment. COMMISSIONER SCHOENFELDER: May I? CHAIRMAN KENNARD: Please. COMMISSIONER SCHOENFELDER: I would like to follow up with Commissioner Gillis just a little bit. He and I worked together on a few interesting consumer issues, and this is more of a comment, but I guess I would invite anyone on the panel to comment on what I have to say. He said something about we need to tell our consumers the truth, and that is absolutely imperative that we do that. I can't emphasize that enough. We have to be believable. And one of the things that's frustrating to me is I listen to Michael say that we need to do this, this and this, and everything he said we do at my commission. I've done it. In addition to that, I've written a weekly news column. I've done all kinds of interesting things. Now, we have a saying in my state that you can lead a horse to water, but you can't make him drink, and sometimes that's where I'm at. Sometimes I think I become so frustrated in trying to educate the consumer about what's happening in this industry that I wonder want to do next. And we've stolen things from Commissioner Johnson's commission. We've stolen ideas of how to do things because she has a large consumer education group and we don't. CHAIRMAN JOHNSON: Do you want to give them back? COMMISSIONER SCHOENFELDER: No. (Laughter.) We just take her idea. We have done all sorts of things to educate our consumers. We have put on workshops. We have done those things. First of all, I have a couple observations that I think might be driving this, and one of them is that we need to -- government by its own nature, and we do great things as government, and by the way, I'm an elected commissioner, which means that my constituents call me up with slamming complaints, and we do solve those on the state level before anybody ever questions the jurisdiction. We just take care of them. MR. TRAVIESO: Good for you. COMMISSIONER SCHOENFELDER: We did that and many states do by the way. We just don't refer them to the federal jurisdiction unless there is a major jurisdictional problem and someone raises that issue. But one of the things I think that is happening is that we need quicker responses to the developments in the marketplace. The amount -- a number of people who are performing in the marketplace right now are more than what there are regulators. So we need help from consumer groups. We need help from anyone who will help us inform people. But most of all, we need help from the citizens of this country to better inform themselves. And is that handing it back and saying, well, I'm not accepting my responsibility? I don't think so. But I think that we have to do some of that. And then my other observation is competition is just plain messy, and that's difficult, and this is an area where consumers have never had to deal with competition before, and so they are not used to it, so they take additional education and additional understanding on our part. I think some companies can help. Rather than just slam them, educate them a little bit if you'd like to keep them as consumers. But I'll shut up with that and ask someone to respond to those terrible outlandish observations. MR. TRAVIESO: Well, at the risk of responding in kind, I would actually agree with almost everything you've said. I don't think anyone can advocate that we have to -- once we've done everything we can to provide the information to the consumers, that we then have to sort of follow them a round somehow and make sure that they use that information, and I don't think anyone is advocating that. But I think they are advocating, certainly I'm advocating that it's extremely important to use every resource available to provide the information to the consumer, and then it's up to the consumer, presumably reasonably well informed consumer, to make whatever choice that consumer wants. And if the consumer chooses to remain with X company, their incumbent local carrier, and pay more than they might pay by switching to a competitor, that's their choice, and I don't have any problem with that. But I'd like to respond to one other point, and that is that the concept that commissions should go tell consumers that competition -- that the reforms that are occurring are good and are going to save them money, or are going to benefit them while at the same time -- we've had some panelists say things like we're going to have to rebalance the rates, their are implicit subsidies in residential rates, we can't have average rates anymore, we have to send price signals, rates are going to go up. How do you propose to go tell consumers in your areas that competition is good for them and they're going to benefit from it and at the same time allow the market, which is what, you know, the market will do, to charge more for services than are already charged in places where it costs more to provide those services, and where we haven't built in maybe a necessary Universal Service, portable Universal Service Fund that will make up the difference? So I would have -- I would be reluctant to encourage commissioners to actually proslatize. I think what commissioners ought to do is to explain that we're moving from a regulated system to a competitive system and there are risks and benefits, and here they are, and here is a way for you all to evaluate your choices. COMMISSIONER SCHOENFELDER: Can you simplify that enough so that the average American who does not want to understand this network completely can understand it? MR. TRAVIESO: I think you can. You can use an analogy to a gasoline station. You know, we don't regulate what gasoline stations charge, and there is competition, and you can drive three block and pay $1.20 a gallon or you can go -- ride around for a long time and find a station that pays $1.09. And customers would understand that if there was one gas station and one rate, that's what they would pay. And if there wasn't, and there was competition, they might pay more or less, depending on where they go. And you have a lot of -- I mean, there are many services, all services basically, except for what's left over now is the regulated service, are competitive service. People just have to understand that they're not guaranteed any longer a rate. They're going to pay a market rate and it may be more or less. That's what I don't think customers are hearing. They are hearing from all -- from both the incumbents and the competitors that competition is great and they are all going to save money, and I Just don't think that's the truth, to speak in Commissioner Wood's terms. I don't think that is the truth. COMMISSIONER TRISTANI: Can i interject to the last -- CHAIRMAN KENNARD: Sure. Sure. COMMISSIONER TRISTANI: Can you hear me? And I've got to make a statement because I think we're talking about two kinds of consumer education. We're talking about consumer education about the changing landscape, but we're also talking about consumer education, about consumer protection. And I think it's really important to distinguish that. I also think it's important to distinguish that state commissions have varying resources, and we know that well, and that there may be some state commissions out there that do no consumer education whatsoever. And I can tell you because I was on the New Mexico State Corporation Commission about a year ago, that we were one of those commissions. We had no resources, so we were not doing that. I hope that the commission can do that now, but we were not. So many states are much further along than others. Many states have good consumer advocates, people's council. Many states do not have those resources or they are very limited. In our state, the attorney general handle those kind of issues, and at that time they chose to devote their resources to the electric utilities, hardly anything to do with telephones. Getting back to the two kinds of consumer education, I think it's extremely difficult, and you used the gasoline analogy, but I think it's very difficult to explain the changing landscape. I have trouble understanding it, so it's hard to explain. But I think it's easier to explain consumer protections and the things you can do and ought to be able to do when you're slammed, when you're crammed, when deceptive practices are used, and I think we need to distinguish between the both, and I know you can't make the horse drink the water, but I think it's the obligation to -- almost if you have to give it to them with you hand, you have to do that. And there are also different kinds of consumers, and the elderly are more prone to be the prey of the deceptive practices, and, you know, it's hard, and so we can't just say it's all one group of consumers and one kind of problem. And what I do want to ask after all of that long introduction is several of you talked about how well or how good it is to work together, the state commissions or the state council with FCC and et cetera, et cetera, and I know we're doing a lot of good efforts there. But I know there is not a formal process. And my question would be to any of you, what would be the best way to get a formal process going where we make sure that we're telling each other about the particular bad players, we make sure we're giving the same information to consumers? Could anyone address that question? How should we start? COMMISSIONER GILLIS: I can take a start at that. Specifically, we're having a NARUC meeting in Orlando next week. COMMISSIONER TRISTANI: Oh, okay. COMMISSIONER GILLIS: And Commissioner Schoenfelder is organizing a panel with part of the Communications Committee just on this topic. I can speak personally that I would be -- I will bring that request back to the Ad Hoc Consumer Affairs Committee, which I think is the key entity that should be involved with that, and I think that from NARUC's perspective it's a reasonable request, and it's more a matter of having the right contact within the FCC that you can tell us who that is that we can work with, and we'll plug in, and use some processes that really are pretty far along within the work of the Consumer Affairs Committee at this point. So I think we just need to make it into a project is my opinion, and we need a person, we can identify some people with NARUC and just do it. MS. ATTWOOD: Well, I guess I am that person. I wanted to say that there also are actually -- well, there are informal, they are more routinized mechanism that at least we've been talking to states. There is the National Association of Attorney General, the NAAG group, and they have conference calls. We're usually on them at least every month where we talk about these issues, potential problem areas, and we are making a concerted effort in our division through the FCC to actually have specific state contacts for each person that we have a routine that we can call and talk about what we're doing and what they're doing. COMMISSIONER TRISTANI: I guess I'm going further than that, thinking there ought to be a plan where let's say we're going to do so many forums across the country. I"m thinking out loud here but together. MS. ATTWOOD: Yes, I agree. MS. HOGERTY: Can I make an observation? With all due respects to everybody in this room, it seems that there for some time has been a lot of talk about this, and very little is being done. I think the notion of the federal and the state regulator, or all entities cooperating in this effort makes sense. But I think Michael made a very good point that in most commissions, and there may be some exceptions, they have maybe a consumer protection division who is treated as a stepchild, who simply does nothing but answer calls. That isn't doing the job. Consumers need to be educated so they can make intelligent choices. It has to be explained to them what the market is turning into, and the fact that, as Michael pointed out, the people still don't -- many don't know the difference between a toll call and a local call suggests a huge amount of confusion among consumers. They have to know where to complain. There has to be some kind of remedy for things like slamming. I mean, they can complain. The regulators can go and give penalties. That does absolutely nothing for the consumer who has been put through this treatment, they've have been slammed. They don't get their money back. You can file all the penalty actions you want to. It's a very small sanction as far as stopping these companies from taking advantage of consumers. And as long as consumers know that this is going to happen, that may be one reason why they do not go out and use the competitive market, because they do not want to take a chance of dealing with some kind of a fly by night, or someone who is going to take advantage of them. I see some very good discussion going. I don't see anything happening. That is just my observation. CHAIRMAN KENNARD: Mr. Lubin, I noted recently AT&T inaugurated a new rate plan for its basic schedule customers and it increased the monthly rate to $3.00 per month for some classes of consumers. I'm curious about what your company did to educate consumers about why you were doing that, what they were being asked to pay for, what has been the reaction from these consumers, what has been the churn rate among these classes of consumers. If you can just give us some sense of the reaction to that, I think it would be helpful to us. MR. LUBIN: First of all, as you're probably aware, the minimum monthly $3.00, as I understand it, was for new customers, not for let's say all of the existing customers. Unfortunately, I am not that knowledgeable in terms of answering all the questions you have tee'd up, and I'll be glad to seek answers to your questions. But at least the feedback that I've been getting is not a lot of calls coming in, but I should probably stop because I'm just not that intimately familiar with the answers to the questions your posing. CHAIRMAN KENNARD: I would be interested in learning more about that. MR. LUBIN: Okay. COMMISSIONER NESS: Mr. Lubin, your basic proposal about requiring mandating that there be charges on a bill at a specific percentage, the Communications Act requires that every telecommunications carrier that provides intrastate -- telecommunications services, intrastate telecommunications services shall contribute on an equitable and nondiscriminatory basis. In your view, do the local exchange carriers provide intrastate services? MR. LUBIN: Yes. COMMISSIONER NESS: How would they be addressing the requirement that they pay into the Universal Service Fund? MR. LUBIN: Assuming the assessment factor were percentage, whatever that percentage is -- COMMISSIONER NESS: Their customer, as I recall, would be -- would be the interstate carrier, they're providing access to the intestate carrier. MR. LUBIN: Right, but they also provide an interstate SLIC to the end user. So my understanding, if the assessment on interstate revenues, let's just say it was 3.14 percent or something like that, their obligation is 3.14 percent on interstate retail revenues, which would include the interstate subscriber line charge. They also have private line or special access lines that are bought by the end user. And so they are assessed on the interstate retail revenue which, from my point of view, unfortunately, then comes back, roughly 93 percent of it, comes back in the form of access. plus the schools/libraries which is assessed on inter and intra, the same thing occurs there as well. COMMISSIONER NESS: So, again, again are they then taking those revenues and assessing an end user charge on a consumer or are they assessing a charge on the interstate carrier? MR. LUBIN: Under what I would -- COMMISSIONER NESS: Under your plan. MR. LUBIN: What I was suggesting is whatever the assessment rate is, and the example if it was 3.1 or 3 percent on interstate revenue, it would apply 3.1 percent on interstate retail revenues. What is that? That would be the intestate SLIC. That would be all of the retail, private line or special access lines they sell directly to the end user. It would exclude access as it currently does. COMMISSIONER NESS: Thank you. MR. LUBIN: You're welcome. CHAIRMAN KENNARD: Commissioner Baker. COMMISSIONER BAKER: Thank you. To the panel, would anyone care to address the notion of how would we, how will we optimize as opposed to merely maximize the level of information that consumers get? And what I'm getting at is you take a bottle of cold medicine say, and inside that packet there is a little leaflet printed on tissue paper in about two point type, with about 10 pages of medicalese, legalese. There is a pretty good argument to be made that that is too much information to be useful to most consumers. At the other extreme, getting back to telecom, a one-line bill with one charge for "phone service" would obviously be insufficient. How do we optimize the level of information? I heard some of the panelists mention plain English as being one means, but can we expound on that a little bit? MR. GILLES: I would like to respond to your question because, you know, phone service and the rates that we pay are not that dissimilar to credit, are not that dissimilar to rates involved in leasing vehicles, or something like that. So there are places in the other markets that can be looked at as to how regulatory agencies have approached problems, particularly if you look in the area of consumer credit with truth in lending coming out. Before truth in lending you had all sorts of terms out there for what you were going to pay on time for merchandise, $20.00 a week forever or something like that. People didn't disclose back-end charges in transaction. There were all sorts of extra things after you got the merchandise that you had to pay. And what we had with truth in lending was by definition you identified what the selling price is going to be, what the finance charge was, how many payments and so forth. Now, if you study the history of truth in lending over time, it -- the amount of disclosures has changed because at first you had limited disclosure and people thought more was better. Then we came to the point that it was information overload, and we tapered back truth in lending, so there has been a process at work though in that area in terms of how do you define a rate so that people can compare what the price of the service, what the price of credit is; that it would be worthwhile for the Commission to investigate, particularly in terms of the truth in billing requirement. So, now, the more practical aspect of your question relates to, well, how is this going to work. I mean, we can each in the state's attorney general, we've discussed at length how can we -- how can we -- we think some of these ads about long distance rates are deceptive, how can we approach this problem, how can we make sure that people are able to take this information and compare it. Recently, the Federal Reserve Board revised truth in leasing, and they went through a very long rule-making process. The Federal Reserve Board relied on its own initiative, it wasn't structured by industry, but it had input of everyone involved in that process, relied on standard techniques in terms of focus groups, in terms of surveying people as to what their take-away was, if you will, from a particular disclosure and to see if it was useful information or not. So they brought the principles that are out there in industry and marketing, and how do you make information and how do you make certain that this information is going to be useful and helpful to bear on that process. Now, those are two items, I think, that could be considered in trying to identify what has to be disclosed in terms of the rate. MR. TRAVIESO: I have a quick response to that also, another source of information that can be helpful. There are probably eight or nine states that have already gone through an education process, a consumer education process in the electric restructuring that is going on in a number of states. And they have actually -- all of those states have issued RFPs to hire consultants to help them figure out how to explain, you know, to Joe Six- Pack, how to pick an electric company. And they have more or less success, but there is a body of information which exists already because of that process which resides, typically resides at a state commission or may reside with consultants who have written articles about it to assist other commissions like mine, which is in the round table process right now trying to figure out how to do this on the electric side, which is a whole another problem. But there is a body of information and they actually have focus group information. They have done some of the things that have been talked about, trying to evaluate the success or failure of particular kinds of approaches, and there are many different approaches that have been used, and many different kinds of ad that you see if you happen to be in one of those states. So that's another place to go and try to see if you can learn something from that process. MS. FARQUHAR: I also have a comment from the new technology or wireless perspective, that they also have a huge consumer education hurtle to overcome, to convince consumers, once they get over the regulatory hurtle, to adopt a new technology. In fact, some of you may have seen the Teligent truck that's driving in front of the FCC and downtown D.C. and around downtown today, trying to get people to switch to this new fixed, broad-band wireless service here in Washington, and os they are expecting to have to do a huge consumer education, and we'll actually need state regulatory help to highlight the benefits of some of these new technologies. CHAIRMAN KENNARD: Thank you. I think we need to wrap up. I'm going to at this time invite the commissioners to offer any closing comments if they have any statements? Okay, hearing none, I will thank our panelists for a very enlightening afternoon, and also I'd like to thank some people who made this possible today, the organizers of this event: Lori Wright, Matthew Vitalie, Sheryl Todd, Astrid Carlson and Tom Power. Thank you all very much for participating. (Applause.) (Whereupon, at 5:06 p.m., the meeting was concluded.) // // // // // // // // // REPORTER'S CERTIFICATE FCC DOCKET NO.: N/A CASE TITLE: CONSUMER ISSUES AND EDUCATION HEARING DATE: October 29, 1998 LOCATION: Washington, DC I hereby certify that the proceedings and evidence are contained fully and accurately on the tapes and notes reported by me at the hearing in the above case before the Federal Communications Commission. Date: __________ _Joel Rosenthal______________ Official Reporter Heritage Reporting Corporation 1220 "L" Street, N.W. Washington, D.C. 20005 TRANSCRIBER'S CERTIFICATE I hereby certify that the proceedings and evidence were fully and accurately transcribed from the tapes and notes provided by the above named reporter in the above case before the Federal Communications Commission. Date: __________ ______________________________ Official Transcriber Heritage Reporting Corporation PROOFREADER'S CERTIFICATE I hereby certify that the transcript of the proceedings and evidence in the above referenced case that was held before the Federal Communications Commission was proofread on the date specified below. Date: __________ ______________________________ Official Proofreader Heritage Reporting Corporation