July 20, 1999

Re: Notice of Inquiry, Low-Volume Long-Distance Users (CC Docket No. 99-XXX).

I write separately, both to express the degree to which I support this Notice and to highlight some important concerns I believe we should always bear in mind as we study this and similar issues related to the consumer impact of our procompetitive reforms.

To the extent this Notice stands for the proposition that we should be conscious of the impact of our reforms on consumers, I vigorously support it. The 1996 Act reflects Congress' fundamental judgment that markets are more likely than traditional regulation to enhance consumer welfare. To effect this transition to competitive markets, we must impose requirements designed to eliminate the vestiges of the old monopoly system and its tangled web of implicit subsidies. Yet, try as we might, we regulators can never impose these requirements in a way that leads to fully predictable results for consumers. Thus, it is prudent that we monitor the impact of our reforms on consumers in an effort to ensure that such impacts are not inconsistent with the goals of the reforms or the Act more generally.

As we monitor these impacts, however, we must continue to resist the temptation to substitute politics for policy. That is, we must remain aware that some of our procompetitive reforms may arouse passions in the public not so much because they "harm" consumers in any legitimate sense, but simply because these reforms involve change. One way that we can stay vigilant in this regard is to keep always in the backs of our minds two critical questions: (1) are these reforms necessary to promote competition; and (2) are these reforms fair? I look forward to examining these and related questions in the context of this proceeding. Even at this early stage, however, I firmly believe in the possibility that we can answer both of these questions resoundingly in the affirmative, while remaining true to our core mission of delivering on the Act's promise of competition for all consumers. I begin to explore the bases for this strong belief below.

I. Access Charge and Universal Service Reforms Are Necessary to Promote Competition

So, are our access charge and universal service reforms necessary to promote competition? This question has been asked, answered and affirmed repeatedly by this Commission and our predecessors, and I see no evidence on the horizon that would undermine that fundamental judgment. This is not a subjective or ideological preference but a conclusion borne of economics.

I applaud the Commission's stated commitment to reforming universal service to make those subsidies more explicit and portable. This reform will encourage new entrants to compete more vigorously for many consumers by undermining the advantage incumbent LECs have traditionally enjoyed by virtue of their exclusive access to implicit universal service subsidies.

Similarly, I applaud the Commission's ongoing recognition that in order to create incentives for economically efficient entry by competing exchange access providers, we will need to allow access charges to more properly reflect the manner in which access costs are incurred. Thus, costs that increase the longer one is on the phone might properly be recovered through per minute pricing. Moreover, costs that remain about the same, regardless of how many calls one makes, or how long any one call is, should be recovered by flat charges. As the Notice indicates, however, the artificially high per minute long distance rates resulting from traditional subsidies of low volume consumers distorted competitive entry. Competitors realized that high volume consumers and businesses were paying rates well above cost and thus seized on the opportunity to serve them and thereby maximize profits. Conversely, competitors have been slow to embrace low volume residential customers under the old system, because these firms are less likely to be able to recoup the costs of serving those customers, relative to serving high volume customers. High per minute long distance rates also have discouraged all consumers from using this valuable service. Our access charge reforms sought to correct these problems by ensuring that flat costs are recovered through flat fees and per minute costs through per minute fees.

Thus, both our access charge and universal service reforms are necessary to promote competition because they remove policies that tend to make some customers, particularly low volume customers, unattractive prospects for new entrants. Without these reforms, all consumers, including low volume consumers, would be much less likely to receive the benefits of competition.

II. Access Charge and Universal Service Reforms Do Not Appear to Be Unfair to Consumers

A. Low Volume Consumers as a Protected Class

Next we must ask whether our access charge and universal service reforms are fair to consumers. But what does it mean to be "fair" with respect to these reforms?

Of course, some suggest (as, regrettably, the focus of this item appears to) that because of some impediment or dysfunction suffered by low volume consumers, it is unfair to deny those consumers the benefit of being subsidized by their higher volume friends and neighbors. This notion is both untested and analytically weak.

Although I support watching to see if there are unanticipated impacts of our reforms, I worry that this Notice almost prejudges the issue whether "low volume consumers" constitute some type of protected class. As a threshold matter, a bit of caution is in order about whom such consumers may be. One might be misled to believe that low volume consumers are poor, elderly or rural individuals. In some cases yes, but by no means does low volume necessarily correlate with these groupings for which the government often accepts some social responsibility. Low volume simply means less long distance calling. Thus, wealthy parents whose kids and family live locally may be low volume consumers. Similarly, businesses that operate only locally are low volume with respect to long distance calling, as are high tech-types who use e-mail and Internet communications (via their local ISP) instead of the phone. Conversely, there may be sympathetic high volume consumers who may seem equally deserving of special consideration (e.g., poor immigrant families who make numerous long distance calls home to their families, rural customers isolated by distance and geography, working class families who are struggling to pay for their kids' college and stay in touch with them at the same time).

But even if we later determine that low volume consumers include constituencies for which government sometimes expresses sympathy, there is little evidence to suggest that low volume consumers are trapped in that status. To the contrary, the long distance industry constantly bombards all consumers with competitive pricing options through the mass media. Some of these options may ameliorate the impact of flat charges on consumers. In light of such competitive choices, it would seem over-regulatory - and, indeed, paternalistic - to take steps to minimize impacts on consumers before at least attempting to educate them on how they may protect themselves in the marketplace. For example, customers can make use of dial around services that allow the customer to by pass the costs charged by a presubscribed carrier. In addition, customers can switch to rate plans that offer greater value through lower long distance rates. In sum, I am not yet persuaded that the competitive choices available to consumers are insufficient to afford them adequate opportunity to protect themselves against the potential harms described in the Notice.⁽¹⁾

I believe we must continue to resist the temptation to favor certain consumers over others unless there is a well-documented and compelling reason to do so. Rather, we must look beyond poorly defined groups of consumers to assess the impact of our reforms on all consumers. We also must recognize that, in the competitive paradigm, our primary role as regulators is to ensure that anticompetitive behavior, fraud and other competitive abuses do not hinder consumers' freedom to obtain services in the marketplace. At this early stage of the proceeding, I would note only that many of the potential impacts on consumers addressed in the Notice do not implicate this primary role.

B. The Fairness of Cost-Causative Rates and Removing Implicit Subsidies Among Consumers

I also question whether our reforms have resulted in low volume consumers paying more than their fair share of network costs as part of their long distance service. Some significant portion of the cost of serving a customer is the cost of having a telephone line to one's home--one that is always available and highly reliable. This cost generally does not vary no matter how much the customer uses his line. Both a customer's local company and its long distance company use that "common line" to provide that customer service. Consequently, some portion of the common line's cost is attributable to each carrier and will be reflected in the customer's bill. We traditionally have allowed carriers to recover these flat costs through per minute charges, which had the effect of inflating the rates of consumers who make many long distance calls. By ensuring that flat costs are recovered through flat fees and that per minute costs are recovered through per minute fees, however, our access charge reforms arguably have made the rate structure more fair by making consumers more responsible for the costs they cause, including the flat cost of having a common line.

Further, as indicated, our access charge reforms were designed to correct implicit subsidy flows from high volume to low volume users that artificially made the price of long distance service more expensive and impeded the development of competitive choices for all consumers. In that sense, flat charges on consumers' long distance bills may represent the price consumers should pay for adoption of a more procompetitive rate structure. This is an especially important and ironic point for low volume consumers, as the very implicit subsidies that were designed to favor them under the old system also made them less attractive to competitors and thus doomed them to fewer opportunities for competitive choice. Thus, to the extent that access charge and similar reforms help promote competition for all consumers, including low volume consumers, it is difficult to conclude that these reforms are somehow unfair. It also does not seem unfair to free high volume consumers from the burden of subsidizing low volume consumers.

C. The Difference Between Consumer "Value" and "Harm"

This is not to say that high and low volume customers facing similar common line costs obtain the same value in exchange for paying those costs. Flat rates have one inherent characteristic. If the rate is flat, you will get more value from your service if you use it a lot. For example, Internet service is now almost universally priced as a flat rate--e.g., $19.95 per month for unlimited use is common. If I subscribe to this service and only "surf the Net" 2 hours a week, I will get less value out of the service than my retired neighbor who spends 100 hours a week on the Net planning his next trip to some exotic destination. It would be a mistake, however, to say that I am "harmed" because I am a "low volume" user. I have the same potential to get as much value from my service as my neighbor if I chose or needed to do so. Moreover, I assure you that my ISP is making up for my relative lack of use through my neighbor's extensive use. Thus, we should not confuse consumer "value" with "harm."

D. Managing Consumer Expectations Developed Under Monopoly

One final note on fairness: some will urge us to define fairness based on what consumers came to expect under the old monopoly system of implicit subsidies. Consumers have been conditioned to believe that they should only have to pay long distance carriers for the time they are on the phone, i.e., solely through per minute charges. Indeed, the government bears much responsibility for that expectation, given the manner and method by which it regulated cost recovery. Some will urge us to find the effects of our reforms fair only to the extent that these expectations remain satisfied. But consumers' expectations that they would not be charged flat rates developed not because the traditional pricing structure was inherently fair or reflective of the underlying cost of service, but simply by virtue of rules developed in a largely monopolistic environment. Thus, in assessing whether the impact of our procompetitive reforms on consumers is fair, we must look beyond consumers' own expectations regarding how they obtained service under the old monopoly regime. It takes some courage to do so, but such a transition is clearly required if there is to be any hope of effecting Congress' vision of competition and its recognition that implicit subsidies are anathema to that vision.

III. Conclusion: A Plea for Avoiding Re-Regulation of Competitive Markets

Thus, there may be many reasons to conclude that our access charge and universal service reforms are both necessary to promote competition and fair to consumers. In particular, we must recognize that it may be impossible to achieve any economically efficient price structure (or free high volume consumers from the burden of subsidizing low volume consumers) if we step in and regulate to "protect" low volume consumers from the impact of flat charges. This looming impossibility makes it especially disturbing to suggest, as some of the questions in the Notice do, that regulation of rates is the solution.⁽²⁾

The long distance industry is highly competitive and has created greater choice and value for all consumers. Further, overall long distance rates have continued to decline, as the Notice properly indicates. This increasingly competitive environment has been spurred on, in recent years, by the previous Commission's wise decision to declare these companies nondominant, thereby freeing them from some of our more burdensome, demand-stifling, innovation-sapping regulations.

I remain open to analyzing and addressing any significant and inequitable consumer effects of our reforms through regulatory means in the event (which, at present, I find unlikely) that these impacts cannot be addressed through market-based approaches. I would urge only, in evaluating the options before us, that we be hesitant to sacrifice the very procompetitive reforms that I continue to believe will result in greater consumer welfare than our regulations ever could.

1.

¹ And even if we must resort to additional regulation, I would submit that we should first attempt measures that do not amount to direct regulation of a competitive industry, such as requiring LECs to bill the PICC directly to end users. In any event, I feel strongly that we should be cautious about imposing new regulation on long distance or other carriers, recognizing that any such requirements may weaken the vigor of competition in the telecom industry.

2.

² Specifically, I am uncomfortable with the extent to which the Notice seeks comment on whether the Commission should mandate certain retail rate structures or constrain the manner in which long distance carriers recover universal service and access charge contributions. At the very least, requests for such comment seem premature.