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Introduction to Telecommunications Policy

October 10, 1999

Aspen, Colorado

Glenn H. Brown

gbrown@mcleanbrown.com

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Agenda

1.The Policy Makers

2.The Telecommunications Act of 1996

3.Regulatory Issues Facing Rural America

4.Keys to Effective Advocacy

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The Policy Makers

• In This Section We Will Examine:– The Major Telecom Regulatory Bodies

• Federal Communications Commission (FCC)• State Regulatory Commissions• Federal/State Joint Boards

– The Role of Other Governmental Bodies• United States Congress• Local and Municipal Government• The Courts

– How/When to Get Involved

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Federal Communications Commission

• Established by the Communications Act of 1934• Five Commissioners

– Appointed by the President and Confirmed by the Senate– No More Than 3 From The Same Political Party– Five Year Terms– President Designates Chairman

• Six Bureaus– Organized by Function– Handle Day-to-Day Responsibilities

• Total Staff of 1755 (Per 1997 Annual Report)– Highly Qualified– Generally Lawyers, Accounts & Economists

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COMMON CARRIER BUREAU• Accounting Policy Division

– Oversees Universal Service Funding• Accounting Safeguards Division

– Oversees Audits and Cost Accounting Rules• Network Services Division

– Oversees Numbering, Network Reliability, TRS and Hearing Aid Compatibility

• Enforcement Division– Handles Consumer Protection, Complaints and Merger/Acquisition

• Industry Analysis Division– Collects and Distributes Data on the Telecom Industry

• Competitive Pricing Division– Develops Pricing Policies for Interstate Services and Interconnection

• Policy and Program Planning Division– Develops Rules and Regulatory Programs to Facilitate Competition

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Levels of Entry at FCC

• Commissioner Level– Commissioner– Legal Advisor

• Bureau Level– Bureau Chief– Bureau Deputy Chief

• Division– Division Chief/Deputy Chief– Working Staff

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How the FCC Works

• Telecom Rules in Code of Federal Regulations (CFR) Title 47• FCC Processes to Make and/or Modify Rules

– Notice of Inquiry (NOI)• FCC Considering Possible Action • Requests Input From Interested Parties• Written Comments, Reply Comments and Ex-Parte Presentations

– Notice of Proposed Rulemaking (NPRM)• FCC Proposing Additions or Changes to Rules• Written Comments, Reply Comments and Ex-Parte Presentations

– Requests for Public Comment• Requests Comment on Proposals and/or Papers Presented to

Commission

• FCC Processes to Enforce Rules

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When/How to Work With the FCC

• Before Visiting With Commissioners or Bureau Chief be Sure Issue is “On the Radar Screen”

• Work With the Lower Level Staff First• Best Time to Present Views is Before Issue is Put Out For

Comment– Opportunity to Shape the Notice– Ex-Parte Filings Not Required

• File Complete and Informative Comments and Replies– Use Facts and Data

• Make Ex-Parte Contacts to Reinforce Your Advocacy– Support Your Position– Address the Issues Presented by Other Parties– Form Coalitions When Possible

• Contacts Prohibited During “Sunshine” Period

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State Regulatory Commissions

All 50 States and DC Have Commissions– From 3 to 7 Commissioners– Commissioner Selection

• 39 States Appointed• 12 States Elected

– Staff Size From 11 (RI) to 800 (CA)

– Varied Responsibilities Including Telecom, Electricity, Gas, Water, Taxi Cabs, Insurance, etc.

– Varied Rules and Procedures

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State CommissionsSTATE NUMBER TYPE STAFF STATE NUMBER TYPE STAFF

Alabama 3 Elected 140 Montana 5 Elected 43Alaska 5 Appointed 42 Nebraska 5 Elected 42

Arizona 3 Elected 250 Nevada 3 Appointed 88Arkansas 3 Appointed 101 New Hampshire 3 Appointed 78

California 5 Appointed 800 New Jersey 3 Appointed 289Colorado 3 Appointed 93 New Mexico 5 Appointed NA

Connecticut 5 Appointed 156 New York 5 Appointed 700Delaware 5 Appointed 26 North Carolina 7 Appointed 139

District of Columbia 3 Appointed 57 North Dakota 3 Elected 43Florida 5 Appointed 370 Ohio 5 Appointed 370

Georgia 5 Elected 148 Oklahoma 3 Elected 460Hawaii 3 Appointed 31 Oregon 3 Appointed 109

Idaho 3 Appointed 55 Pennsylvania 5 Appointed 538Illinois 5 Appointed 300 Rhode Island 3 Appointed 11

Indiana 5 Appointed 85 South Carolina 7 Elected 72Iowa 3 Appointed 75 South Dakota 3 Elected 23

Kansas 3 Appointed 213 Tennessee 3 Elected 253Kentucky 3 Appointed 121 Texas 3 Appointed 245

Louisiana 5 Elected 85 Utah 3 Appointed 15Maine 3 Appointed 65 Vermont 3 Appointed 23

Maryland 5 Appointed 128 Virginia 3 Appointed 550Massachusetts 5 Appointed 134 Washington 3 Appointed 156

Michigan 3 Appointed 150 West Virginia 3 Appointed 235Minnesota 5 Appointed 43 Wisconsin 3 Appointed 180

Mississippi 3 Elected 145 Wyoming 3 Appointed 29

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Major Differences

FCC State PUCs

Responsibilities Interstate Services Intrastate Services

Operating Mode Paper Proceedings Live Hearings

Staff Resources Significant Generally Less

Major Issues Local Service RatesLocal CompetitionUniversal Service

Access RatesLocal Competition

Advocacy Individual Parties Coalitions

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The Joint Board Process

• For Issues That Cross Jurisdictional Boundaries– Jurisdictional Separations– Universal Service

• Makeup of Joint Board– Three Federal Commissioners– Four State Regulators– (Universal Service Joint Board Includes a Public Advocate)

• Joint Board Recommends, FCC Decides• Mixed History

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The Role of Congress

• Congress Oversees the FCC and Approves Its Budget

• Congress Passed The Telecommunications Act of 1996– Directed the Introduction of Local Competition– Mandated Universal Service Protection– Called For Eventual Deregulation

• Senators and Representatives are not Shy!– In 1998 Chairman Kennard Received Over 1800 Letters

From Congress

• Politics Often Gets Involved

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Congressional Committees

• United States Senate– Commerce, Science & Transportation Committee

• John McCain (R - AZ), Chairman• Ernest F. Hollings (D - SC), Ranking Member

– Communications Subcommittee• Conrad Burns (R - MT), Chairman• Ernest F. Hollings (D -SC), Ranking Member

– The “Farm Team”• House of Representatives

– Committee on Commerce• Tom Bliley (R - VA), Chairman• John D. Dingell (D - MI), Ranking Member

– Subcommittee on Telecommunications• W. J. “Billy” Tauzin (R - LA), Chairman)• Edward J. Markey (D - MA), Ranking Member

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The Role of Local Government

• Traditionally Telecom Regulated at State and Federal Level

• Industry is Changing and Converging – Digital revolution blurs boundaries between telecom, cable

and Internet– Wireless services growing geometrically

• Local Governments Becoming More Involved– Cable regulation has traditionally been local– Local zoning issues with tower siting– Sales tax issues with e-commerce

• Will Federal Government Preempt?

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The Role of the Courts

• Fish ‘Gotta Swim, Birds ‘Gotta Fly and Lawyers ‘Gotta Sue

• On Major Telecom Issues the Stakes are so High Than no Matter Who Wins - The Other Guy Takes it to Court

• If a Court Overturns the FCC on an Issue, it is Remanded Back to the FCC for Reconsideration

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1996 Telecom ActMajor Objectives• Open Local Telephone Markets To Competition• Incumbent Local Exchange Carriers (LECs) Must Open Their

Networks To Competitors:– Interconnection– Wholesale Provisioning Of Services– Unbundled Network Elements

• RBOCs May Enter Long Distance Markets Upon Meeting A 14-point “Checklist”

• FCC Must Provide For The Provision Of Universal Service– Rural, Insular & High Cost Areas– Schools And Libraries– Rural Health Care

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1996 Telecom Act

Section 254(b) - Universal Service

(1) Quality and RatesQuality services should be available at just, reasonable

and affordable prices

(2) Access to Advanced ServicesAccess to advanced telecommunications and information

services should be provided in all regions of the Nation

(3) Access in Rural and High Cost AreasConsumers in all regions of the Nation should have access

to services (including advanced services) at rates that are reasonably comparable to those in urban areas

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1996 Telecom Act

Section 254(b) - Universal Service(4) Equitable and Non-Discriminatory

ContributionsAll telecommunications providers should contribute to the

preservation and advancement of universal service

(5) Specific and Predictable Support MechanismsThere should be specific, predictable and sufficient Federal and

State mechanisms to preserve and advance universal service

(6) Access to Advanced Services for Schools, Health Care and Libraries

Elementary and secondary schools and classrooms, health care providers, and libraries should have access to advanced services.

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1996 Telecom Act

Other Major Provisions– Creates a Federal/State Joint Board to recommend universal

service solutions to the FCC (254(a))• Recommendation due November 8, 1996• FCC to act on recommendations by May 8, 1997

– Defines “Eligible Telecommunications Carriers” (ETC) for receipt of universal service funds (214(e))

– Differentiates between “Rural” LECs and “Non-Rural” LECs• Based on size (I.e. < 100,000 lines) and area served (3(37))• Different market opening requirements (251(f))• NRLECS shall have multiple ETCs (214(e)(2))

– States that any Federal universal service support “should be explicit” (254(e))

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Major Regulatory Issues For Rural America

• Universal Service

• Access Reform/Rate Rebalancing

• Local Competition

• Broadband Development

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UNIVERSAL SERVICE PROBLEM

• Goal of Low Basic Service Prices• High Degree of Rate Averaging• Two Sources of Historical Universal

Service Subsidy1. Explicit About $1B2. Implicit $5B - $19B

Toll/Access to Local Business to Residence

Urban to Rural• Telecom Act of 1996 Changed Everything

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THE 1st FCC’s DECISION• Issued May 8, 1997• Schools and Libraries

– $2.25B Fund– Funding Based on State and Interstate Revenues– Sliding Scale of Discounts

• Rural, Insular and High Cost Areas– Funding 75% States / 25% Federal– “Non-Rural” Telephone Companies

• Support = Forward-Looking Cost - Benchmark• 14 Month Process to Select Proxy Cost Model

– “Rural” Telephone Companies• Continue Present Mechanisms• Transition to Forward-Looking Mechanism Beginning in 2001

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Major Problems

• Many Rural States Can’t Afford to Pay 75% of High-Cost Need– Key variable is the ratio of low-cost to high-cost customers

• Proxy Models– Widely divergent positions– Accuracy of Model for small areas

• Inherent Tensions Between the Players– High-cost states vs. low cost states– Local service providers vs. other telecom providers

• Who Will Pay For Universal Service? How?

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Non-Rural LECs "Common Inputs" (4.5B Fund)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

WY ID MT MS SD WV NE ND VT OK MO ME NM AL KS MN AR KY TX AZ LA WA IN NH CO

ST USF % 75/25 NATIONAL FUND %

Note: This chart assumes a fund size of $4.5B derived from using FCC “common inputs” in the BCPM3 model.The actual fund size will be determined after completion of further proceedings to finalize model inputs.

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Non-Rural LECs FCC "Common Inputs ($4.5B Fund)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

VA WI TN NV IA NC OR SC GA UT MI IL OH DE PA HI CA FL MD NY CT RI MA PR AK NJ DC

ST USF % 75/25 NATIONAL FUND %

Note: This chart assumes a fund size of $4.5B derived from using FCC “common inputs” in the BCPM3 model.The actual fund size will be determined after completion of further proceedings to finalize model inputs.

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Ratio of $100/mo+ Customers to Total

State Total Lines Lines Over $100/mo Ratio State Total Lines Lines Over $100/mo Ratio

SD 255,527 12,796 20 IL 7,378,715 39,768 186

MT 311,085 13,136 24 UT 935,397 4,311 217ND 235,548 9,079 26 VT 331,470 1,501 221

WY 221,982 7,902 28 GA 3,881,849 14,888 261NE 792,539 25,861 31 SC 1,502,650 5,374 280

MS 1,185,210 34,457 34 NH 724,804 2,320 312ID 578,972 16,549 35 MI 5,755,154 17,117 336

AR 848,296 18,652 45 IN 3,168,932 8,366 379MO 2,881,496 57,617 50 VA 4,029,810 9,352 431

OK 1,585,379 31,375 51 TN 2,713,895 6,215 437NM 725,499 13,737 53 CA 20,521,641 45,775 448

MN 2,352,496 43,453 54 NC 3,950,135 6,827 579KS 1,222,537 22,371 55 AK 149,078 224 666

WV 776,326 13,790 56 FL 9,479,041 12,555 755IA 995,730 16,129 62 OH 6,267,407 7,952 788

AZ 2,225,122 32,992 67 PA 7,258,883 7,755 936TX 10,449,569 116,281 90 HI 704,179 540 1,304

AL 2,101,681 22,103 95 NY 11,702,236 7,205 1,624WA 3,044,486 29,465 103 MD 3,367,642 910 3,701

LA 2,161,959 17,123 126 DE 509,854 95 5,367CO 2,270,706 17,160 132 MA 4,272,096 591 7,229

OR 1,376,480 8,962 154 RI 643,137 77 8,352ME 651,597 4,094 159 NJ 5,887,531 191 30,825

WI 2,650,099 16,074 165 CT 1,991,162 64 31,112NV 937,114 5,458 172 DC 520,361 -

KY 1,672,422 9,235 181 TOTAL 152,156,917 815,824 187

Source: BCPM3 with FCC Common Inputs

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Proxy Cost Models

• The Original Contenders– BCPM BellSouth, Sprint, U S WEST ($4.5B - $9B NRLEC)– HAI AT&T, MCI ($3B - $4.5B NRLEC)– HCPM FCC Staff

• Major Model Issues– Network Design - “Engineer-in-a-Box”– Customer Location– Input Values– Accuracy for Small Geographic Areas– Who Needs Reality?

• Current Status– FCC finalizing “synthesis model” and inputs for non-rural LECs– Rural Task Force to address model issues for rural LECs

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Reconsideration of 1st Decision• April, 1998 - FCC Reports to Congress

– Will reconsider 75/25 funding• July, 1998 - FCC Refers Issues to Joint Board

– Alternatives to 75/25 funding– Report due 11/23/98– Delays “non-rural” LEC funding to 7/1/99

• October 30, 1998 - Joint Board 2nd Recommendation– Some states will require additional federal support– Two-pronged test for support

1. Forward-looking costs >> national average2. Inability to cover high-cost problem internally

– Fund not “significantly larger” than present (ie. $125M for NRLECs)– Uses statewide averages of cost

• Continues urban-to-rural implicit subsidies• Joint board may revisit if “competition threatens affordability”

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The 2nd FCC Decision

• Issued May 28, 1999• Delays “Non-Rural” Explicit Fund Until 1/1/00• 75/25 Funding Plan is Rejected• Fund Covers State-Wide Average Costs over “Benchmark”

– Uses “Synthesis Model”– Asks for input on what the benchmark should be

• State Must Provide $X/Line of the Support– Provides more funding to needy states– Asks for input on what the per-line amount should be

• Fund “Not Significantly Larger” Than Present ($125M)

• Recipients “Held Harmless” for Current Level of Support

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Problems With 2nd FCC Decision

• Political Tensions Within the System– Low-cost states vs. high-cost states– Local service providers vs. other telecom providers

• Averaging Perpetuates Implicit Support– High margin urban customers vulnerable to competition– System will be slow to react in crisis

• Creates “Two-Tier” System for Rural Consumers– “Rural” Companies

• Support at 115% of embedded cost– “Non-Rural” Companies

• Support no larger than present• Must rely on implicit subsidies

• Perpetuates the Status Quo– No more support than present ($125M)– No one gets less than present

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Additional Problems• Funding and the Models

– $125M falls far short of requirements• HAI w/Defaults $3 Billion• BCPM w/Defaults $9 Billion• Either w/FCC “Common” $4.5 Billion

– Output very sensitive to inputs and platform (see above)– FCC’s “Synthesis” model still not finalized– If model is delayed, so is funding

• “Non-Rural” vs. “Rural” Issues– “Non-rural” must be funded at least 115%– Forward-looking vs. Embedded

• Averaging is Fundamentally Incompatible With Competition– False entry signals in over-priced areas

– False protection for high-cost rural customers

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Additional Problems(Continued)

• A Fund That is Too Small Will Harm Rural America– Increased reliance on vulnerable access charges

– Investment and advanced services drawn to urban areas

– Rural consumers become “have-nots”

• Advanced Services Will Come Fastest by Letting Markets Work– Provide sufficient funding to rural areas

– Relax rules that prevent incumbents from delivering services• Inter-LATA restrictions• Unnecessary unbundling and separate subsidiary rules

• Universal Service Fills the Gaps– Fully competitive market delivers advanced services to most

– Universal service fund fills the gaps

– The greater the role of markets, the smaller the fund

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Schools, Libraries & Rural Health Care

• Initial FCC Decision Set Funding Targets– Schools & Libraries $2.25B

– Rural Health Care $0.40B

• Sliding Scale For S&L Discounts– Rural vs. Non-Rural

– Relative Poverty Levels

• Funding Phased In Over Time

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Access Reform/Rate Rebalancing

• The “Flip-Side” of Universal Service• As Explicit Support is Increased Rates are Reduced

to Remove Implicit Support• If Sufficient Explicit Support is not Provided:

– Implicit support remains in rates– Competition erodes implicit support– Pressure for rural rate increases

• Implicit Support Distorts Competitive Markets– False entry signals in low-cost markets– No incentives for competition in rural markets

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Broadband Development

• Exciting Technology Developments for Delivery– DSL– Cable Modems– Wireless?– Other?

• What Role Should Universal Service Funding Play?

• Should Narrowband Regulatory Model be Applied?

• Should Competitive Markets be Allowed to Work?

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What Can Concerned Citizens Do?• Get Informed and Get Involved • Contact The Following:

– Your State Public Service Commission

– The Federal Communications Commission (FCC)

– The Federal/State Joint Board

– Your Congressional Delegation

• Major Message Points:– Universal service is a national priority

– A sufficient federal fund must be established for high-cost areas

– Advanced services will come to rural America through a combination of targeted supports and free market incentives

– Markets must be allowed to function!

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Keys to Effective Advocacy

1. Regulators Are People Too

2. Work The Staff First

3. Use Your Time Wisely

4. Listen As Much As You Talk

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Keys to Effective Advocacy

5. It’s The Public Interest, Stupid

6. Know Who Supports You – Who Opposes You

7. Acknowledge Other Points Of View

8. Address Holes In Your Argument

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Keys to Effective Advocacy

9. No Surprises – No Threats

10. Use Facts and Data

11. Keep Your Commitments

12. It Ain’t Over ‘Til Its Over