Text Version

Remarks of Commissioner Rachelle Chong
at Western Rural Telephone Association
1997 Semi-Annual Fall Convention
Bloomington, Minnesota

September 30, 1997

"The Times They Are A-Changin'"

Good morning. I don't often get to the middle of America. In fact I am more of a coast person having lived in San Francisco and Washington, D.C. Upon reflection, there's nothing wrong with the middle. After all, what would jelly doughnuts and the rings of Saturn be without the middles!

This is my first visit to the state of Minnesota -- the Land of Ten Thousand Lakes. I come from the FCC -- the Land of Ten Thousand Page Decisions. I come bearing a hint from Heloise: Another great use for our hefty interconnection order is as a door stop!

Now I appreciate that WRTA gave me an excuse to visit Minnesota. I did a little research before I came, and you really must admire the independent spirit of Minnesotans. They have proudly picked as their state bird -- the loon! And the University of Minnesota team is known as -- the "Golden Gophers!" This is a state with a sense of humor!

Most of you know that this is my first WRTA convention. When I got Sam's invite, I said to my staff, "Why in the world would these nice folks be meeting in Bloomington, Minnesota?!" My staff looked at me like I had just fallen off the back of a farm truck, and said, "Because of the Mall of America, boss!" It then became crystal clear to me that this is no business meeting; this is a shopping trip cleverly disguised as a business meeting!

So I said yes to the invite, only to find out that my speech was scheduled at the exact same time as the Mall of America tour! For those of you who have managed to "just say no" to the Mall of America tour and instead stayed to hear a Washington regulator speak about enthralling topics like access charge reform and separations, I humbly thank you.

All kidding aside, this is likely to be my last speech as an FCC Commissioner. Right now in Washington, the Senate has begun confirmation hearings on three of the four new FCC nominees. Assuming the hearings go smoothly, I expect that the four new Commissioners will take their seats sometime in October or early November.

I'm told there have never been so many new Commissioners at once. This can be a challenge, as well as an opportunity, for your industry. You'll have a chance to educate the new Commissioners about what it's like to be rural telephone carriers, with higher than average costs and small customer bases. During my tenure, I have always found that straightforward industry input has helped me when making complex common carrier decisions.

In addition to changes in the Commissioner ranks, the whole telecommunications industry is undergoing tremendous changes. Bob Dylan put it best when he said, "The times they are a-changin'."

Without question, the 1996 Telecommunications Act has dramatically altered the telecommunications landscape by mandating competition and deregulation. You don't need a crystal ball to know that things will never be the same in the industry again. The only thing I am certain about is that change is going to be a constant for a while.

It's human nature that lots of changes make people nervous. I guess we like to cling to what we know and are used to. From the many rural carriers who have lobbied me and my advisors, I know the Act has made many of you nervous because of the many significant changes to the universal service, interconnection and access charge systems.

Perhaps you are worried that these changes will result in the demise of your companies. Maybe you think that your business will be run roughshod by the new rules that have been wrought by the Act. Or maybe you just plain disagree with the Act's premise that competition should be introduced in all markets, including rural markets.

Despite my lame duck status, I have come to Minnesota to urge you to have a positive outlook about the Act. Please think of the Act as the beginning of an era in which many new opportunities will present itself. Changes can be transforming -- caterpillars can become butterflies, and maybe even pigs can fly.

The good news is that Congress explicitly recognized that small and rural carriers face unique circumstances that warrant some special regulatory treatment. At the Commission, we have followed Congress' directive and factored in the unique characteristics of small and rural carriers in our rulemaking proceedings implementing the 1996 Act. And although we have done a large part of the "heavy lifting" on the major provisions of the 1996 Act -- namely, universal service, access reform and interconnection -- the Commission purposely deferred taking action to apply the majority of these provisions immediately to rural carriers.

We took this "go slow" course of action, because it would have been a disservice to your industry to simply lump you in with the Ameritechs and U S WESTs of the world.

What we determined was that we needed more time and information to fully understand and appreciate the realities of your businesses. We also decided, as a general matter, that you too needed time to get ready for competition. I guess you could say "time is on your side." But that's a different song . . .

Let me now talk a bit about Universal Service. For the first time, the 1996 Act codifies the FCC's policy of trying to achieve universal telephone service. Our goal is to give every U.S. citizen affordable access to a basic telephone in their home, particularly in rural and high cost areas.

Over the past 18 months, the FCC has worked closely with our State colleagues through the Joint Board process to find a sensible transition away from our past system of universal service. The old universal service system relied on a patchwork quilt of both implicit and explicit subsidies at the federal and state level. We listened very hard to each other and ultimately agreed that many changes were necessary.

Our new federal universal service system will be harmonious with the "procompetitive, de-regulatory national policy framework" mandated by the 1996 Act, because, for the first time, competitors to local telephone companies will be allowed to receive universal service support if they provide it. In addition, a broader pool of telecommunications providers will be paying into the fund, so that the collection of universal service monies is more equitable and competitively neutral. Finally, we eliminated the implicit subsidies of our current system and made it more pro-competitive.

Balanced against this task, the Act mandated that we must also raise funds to implement some social programs. These include discounting telecommunications services to eligible schools and libraries, providing rural health care providers with rates comparable to urban areas, and enhancing access to the telephone network by low income consumers and those living in rural, insular and high cost areas. In addition, we are also charged with ensuring that consumers receive quality services at just, reasonable and affordable rates.

In our universal service decision last May, we did the best we could to achieve all of these goals. We identified the services to be supported by the federal universal service support mechanisms and established a time frame for implementation. As I mentioned before, we also did something very special for the rural carriers: we gave you the gift of more time. The FCC did not follow the Joint Board recommendation on support for small rural telephone companies, but instead, decided to continue to fully support all telephone lines, both business and residential, for the next three years.

The Commission also determined that rural carriers should transition to a forward-looking cost methodology, but we agreed that you should not do so immediately. This means carriers serving rural and insular areas will be required to calculate support based on forward-looking economic costs only at such time as a suitable method for application to rural carriers is developed and validated. We are going to develop the proxy model for non-rural carriers first, and then we will turn to development of a methodology for the rural carriers.

In the meantime, rural carriers will continue to receive support based on their embedded cost using the current mechanisms with some modifications. So, in sum, as your colleague Dr. Steven Sanders so eloquently put it, small companies "ducked the bullet" for the immediate future.

The reason we gave you extra transition time was that we recognized that all carriers are not alike: Baca Valley Telephone is not the same as Southwestern Bell. They differ in several respects including size, geographic location, and customer base. They may also differ in many other ways that the Commission doesn't even fully understand.

That is why we determined that a special task force should be created to study the unique issues facing rural carriers. The Joint Board recently released a Public Notice establishing a Rural Task Force to study the use of a forward looking economic cost model for rural carriers.

The Rural Task Force will have 3 subgroups focusing on platform design, input values and the timing of the transition. It will be composed of 17 members representing a broad cross-section of industry members, consumer advocates, and state regulators. This group will present its findings to the Joint Board, which will, in turn, file a report with the Commission evaluating the Task Force's recommendations. The members of the Task Force have not yet been named; the Notice seeks nominations for those with the time and expertise to serve. I encourage WRTA to submit the names of qualified candidates to the Joint Board for appointment to the Rural Task Force and to remain involved in the work of establishing cost proxy models for rural carriers.

Having spent some time talking to you, I know that there are those who disagree with some of the FCC's policies adopted in the Universal Service decision, in particular, the use of forward-looking cost methodologies and the decision to provide federal support for 25% of the difference between proxy costs and a revenue-based benchmark. While the Universal Service Order did not apply these principles directly to rural carriers, your fear is that they will be applied to rural carriers when the transition period expires. With the new Commission coming in, I cannot predict what the outcome will be on these issues, but I can offer you some advice on how to approach the problem.

I suggest that you advocate positions on these issues in the most constructive ways possible with the new Commissioners. Don't just tell them that rural telcos are unique, competition is never going to come to rural areas, and that only an embedded cost methodology is acceptable to you. I doubt this line of argument will get you very far. I suggest you be willing to work cooperatively with the staff and Commissioners to negotiate an end result that will be palatable for everyone involved, even if it was not your "best case scenario." Back up your assertions with facts and data: if some rural carriers face unique circumstances because of their size, geographic location, remoteness or customer base, show the Commission the numbers to prove it. Use the gift of time that the Commission gave you wisely, and you will reap the rewards for many years to come.

I caution you, however, not to carry the "unique" circumstances argument too far. If you try to translate "exceptions" for rural carriers into outright insulation against all competition, your arguments will likely fall on deaf ears.

As a case in point, I call your attention to the Commission's recent preemption decision involving a provision in the Wyoming Telecommunications Act of 1995. This provision, known as the "rural incumbent protection" provision, allows an incumbent rural LEC to essentially veto the application of a competitor in its service area until the year 2005. The Commission determined that this provision created a barrier to entry under section 253 of the 1996 Act, and we preempted Wyoming from enforcing this law. The FCC also found that this provision was not competitively neutral because it favors certain incumbent LECs over all potential new entrants. It also allowed these incumbents, entirely at their own discretion, to determine if and when they will face competition until at least January 2005.

What I hope you will draw from this case is the fact that Congress made clear in Section 253 of the Act that all markets should be open to competition, including rural markets. The FCC is determined to enforce this law, but we are doing so only in what we consider to be egregious cases. While there are some good reasons why the transition from a monopoly market to a competitive one needs to occur more slowly for rural carriers, there is no question that Congress clearly envisioned that the benefits of competition should be spread across this great country. It did not want rural America left out of the Information revolution.

It is our goal to enure that, through the steps we have taken in the Universal Service proceeding, rural consumers will continue to receive quality service at affordable rates. I know that the next Commission would like to hear from you as to whether you think these rules will deliver to rural carriers the right incentives to use the most efficient technology available. I am sure that the new Commission will be more than willing to work with you to resolve any differences of opinion you may have on universal service issues. But again, I encourage you to be flexible and solution-oriented in your approach to these issues.

Now let's move on to Access Charges. Once again, "the times they are a-changin'." The Commission's access charge system has been a constant landmark in the regulatory landscape during the past decade. Charges imposed by this regime were unduly high, however, because they were part of the funding mechanism for our patchwork quilt system of universal service funding.

With the passage of the 1996 Act, the days of the old access charge regime became numbered. The 1996 Act directed the Commission to create a universal service program that makes sense in a competitive marketplace. Because the access and universal system regimes are intertwined, the FCC decided it was necessary to overhaul the access charge scheme in concert with the new universal service system. Although controversial, I still believe that the decisions we made in the Access Charge and Price Cap proceedings were the right ones. While some parties pushed for immediate, drastic cuts in access charges, we chose a more measured approach for the transitional period.

I guess you could say you "ducked the bullet" here too, because the Commission applied our changes to the access charge rules only to price cap incumbent LECs. We did this because we assumed that small and rural LECs will most likely not experience competition as quickly as larger incumbent LECs because, for the most part, the high cost/low margin areas served by the rural LECs are unlikely to be the immediate targets for new entrants. We recognized that small and rural rate-of-return LECs face different circumstances and that some of these carriers may now have, or may soon receive, bona fide interconnection requests. For all these reasons, we decided that a separate proceeding for small and rural rate-of-return LECs will provide us with the opportunity to conduct a comprehensive review of the circumstances and issues unique to these carriers.

The Commission staff is presently working on fulfilling this promise. I expect that a Notice of Proposed Rulemaking on access charge reform for rate-of-return companies will be forthcoming soon. The exact schedule will be up to the new Chairman. Because access charges is an important issue for WRTA members, I urge WRTA to stay active in this proceeding.

Moving on to my final topic, I would like to turn briefly to the scintillating issue of Separations Reform. While separations reform is not quite as exciting as that log chute ride over in the Mall of America, we all know that jurisdictional separations is yet another piece of the pre-1996 Act puzzle that the Commission must find a way to fit into the post-1996 Act competitive world.

Last August, the Separations Joint Board, of which I am a member, held a public forum on separations reform in Washington. This forum marked the beginning of a new dialogue on separations. It was a very productive meeting, as we felt our way through the separations forest under the new light of the 1996 Act.

At the forum, we heard conflicting views from diverse members of the industry on whether we should keep the existing separations rules, modify them, or completely do away with them. While there were no clear answers, it is my view that the forum gave the topic some needed momentum. It looks like the Commission will soon issue a Notice of Proposed Rulemaking on separations seeking comment on these issues. It will then be up to the next Commission to conduct an extensive examination of the existing separations process to see if it still makes sense in this new pro-competitive, deregulatory environment. Given that the existing separations procedures were formulated in the 1930's, we can all agree that times have changed since then.

In closing, although the times may be a-changin', I sincerely believe that these changes will be for the better. There are many new opportunities for you, including in areas like video, wireless, the internet and data. You can choose to resist the changes that are inevitable, or you can choose to play the game and come out a winner. I hope that you will embrace these opportunities, and make your future even better than the past. To quote Bob Dylan again:
Thank you very much for your kind attention.