Telecom and Technology Issues Affecting State Utility Commissions

2. Telecom and Technology Issues Affecting State Utility Commissions Bob Rowe Montana Public Service Commission browe@state.mt.us Fall 1999 The views expressed are not those of the Montana PSC, NARUC or the Telecommunications Committee. They are not intended as comment on any proceeding before the MPSC.

3. Introduction • Part I - Overview of Telecommunications Act issues affecting NARUC and state public service commissions. • Part II - Universal service, economic development and community development • Part III - Advanced telecom capability incentives in the Telecom Act of 1996.

4. Part I - Overview of telecom issues • Review TelAct purposes, progress toward competition, and possible future market structures. • Explain NARUC and State commission responses to changing environments. • Suggest further appropriate responses.

5. ? Question: “The 1996 Telecommunications Act - Will Promises to Customers Be Realized?” Short Answer: “It’s up to all of us to ensure they are!”

6. What are the express promises set forth in the Act? “To provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition, and for other purposes.” Conference Report • Open markets • Support introduction of advanced services • Maintain universal service - and - let’s not forget - • Consumer protection

7. “It’s the worst possible Telecommunications Act - except for all of the others!” • Winston Churchill, Telecommunications Expert • Congress largely got it right. • Growing number (small%) are beginning to switch, using multiple services. • As always, it will take years for the dust - and litigation - to settle.

8. Changing network structure? • Current parallel networks (wire, wireless, cable, broadcast, private). • Moving to a “linchpin network” with LEC wireline as the hub for all other networks. • Goal: “Network of networks” with all interconnected equally with one another. • Nightmare: A balkanized set of networks, with investment/innovation going to networks serving fewer customers, traditional public network serving the remainder.

9. What’s a nice regulator to do? • Define goals that can be achieved in changing circumstances. • Develop ways to assess and understand changing circumstances. • Develop strategies that make sense across a range of probable futures.

10. More (nice) regulatory responses • Scenario planning is “a tool for ordering one’s perceptions about alternative future environments in which one’s decisions might be played out.” - Peter Schwartz • Be willing to rethink what we do now, e.g., use forbearance authority (“letting go”), changing focus • Question: Do federal and state telecom law allow/encourage this now?

11. Commission restructuring • 1995/1998 NRRI Summits. • Organization Transformation: Ensuring the Relevance of Public Utility Commissions (February 1998). • Missions: • Core customer protection. • Social goals still important, harder to achieve. • Service quality more important. • Foster customer-driven environment. • Consumer education, often in cooperation with other entities.

12. Commissionrestructuring (continued) • Strategies • Market analysis - competitive services, monopoly, emerging, anticompetitive practices. • ADR, structured negotiation, flexibility. • Outreach, workshops, collaboratives. • Stranded cost issues (esp. energy).

13. TelAct - State commission duties • Interconnection • Prices • Terms • Facilities • Enforcement • Advanced services • Promoting competition • Maintaining and advancing universal service • Antithesis of competition, or basis for some competition? • ED/CD opportunities and approaches • Protecting customers of monopoly and competitive services • Traditional methods still useful • New methods required

14. Telecom priorities • Competition • Universal service • Consumer protection • Advanced technology

15. NARUC Telecommunications Committee/Staff Subcommittee • Strong consumer focus. Pro-competition. Forward-looking. But - even our mothers find us dull. • Policy groups • Technology • Regulatory methodologies • Federal legislation • Consumer issues • International • Joint Boards • Separations • Universal Service • Web page includes work plan: www.puc.state.tx.us/naruc

16. Recent resolutions • 20 - 30 telecom resolutions per year. • Available at www.naruc.org. • Consumer protection - Slamming, “no surprises” disclosure, service quality reporting, state enforcement. • Universal service - high cost fund principles, local rate support, voice grade definition, schools and libraries, USAC organization, rural health care.

17. More resolutions • Section 271, template, collaboratives, third party testing, regional coordination • Section 706, federal-state joint conference • OSS • Collocation • Best Practices project • Telecom mergers • IOWA v. FCC implementation • Audits, reports, ARMIS, federal-state coordination on reporting simplification

18. More resolutionsContinued • Endorsing federal-state “Magna Carta” • Reciprocal compensation • Numbering • Dialing parity • Y2K • Building access • Separations

19. Deliverable products • Local Competition Work Group Reports (1996). • “Policies on Pricing and Universal Service for Internet Traffic on the PST” (1998) (www.nrri.ohio-state.edu). • Section 271 Checklist Template (July, 1998).

20. More goods and services • Consumer education templates (www.naruc.org) Also, Compendium of Resources on Consumer Education (NRRI, July 1998). • “No Surprises” report (July 1998). • Year 2000 template (www.naruc.org). • “Best Practices” project. Form at www.nrri.ohio-state.edu.

21. Old and new views • “Where have all the rate cases gone, long time passing . . .” • And, gosh, why are we so busy? • Old: Ratepayer v. shareholder. • New: Shareholder v. shareholder to benefit customer? • Old: POTS above all! • New: Broad access to affordable PANS? • But: 254(k) prohibition of cross subsidy.

22. Procedural framework for state-federal cooperation • Need for federal/state cooperation within “cooperative federalist” TelAct scheme. • FCC-state Magna Carta, proposed by Chairman Kennard, jointly developed, adopted by NARUC in February, 1998. • General approach. • Specific practices. • To be applied to issues determined by the state and federal partners.

23. General approach • State and federal agencies possess complementary strengths. Work together to take full advantage of these. • Both federal and state proceedings are fact-based and both are able to analyze and act on complex records.

24. General approach (continued) • Statesare close to local markets and have developed methods for evaluating the structure of those markets. States are close to customers. States also benefit from experience with multiple industry restructurings - including natural gas , telecommunications and electricity.

25. General approach (continued) • Federal agencies possess both national and global perspectives. • Federal actions affecting states should be undertaken in the most flexible, least prescriptive way possible. In areas where national standards are appropriate, federal agencies will strive to implement them in a way that encourages State input to the fullest extent possible.

26. Part II - Universal Service/ED, CD • Summarize state interests, including rural interests. • Suggest strategies. • Encourage an economic development/community development approach.

27. Advance universal service • Political, economic and social dimensions of universal service concerns. • Participate in state proceedings/FCC proceedings • State Universal Service Funding and Policy (NNRI, September 1998) • Work directly with under-served communities • Losing Ground Bit by Bit (Benton Foundation, 1998), www.benton.org/Library/Low-Income • Falling Through the Net II (NTIA, 1999) www.ntia.doc.gov/ntiahome/net2/falling.html

28. Universal service (continued) • Multiple, overlapping factors (age, income, housing type, geography-local factors) • Ethnicity an overlapping factor with many others • Radios/TVs involve simple purchase of goods (possibly used). Telephone gap may persist longer because it’s a more complex service transaction. • Jorge Schement, The Persistent Gap in Telecommunications (Penn State, unpublished)

29. State interests in advanced telecom • Infrastructure critical (E.g., Competitive Advantage of Nations, Micheal Porter). • Replace input-specific focus on “comparative advantage” with concern for interrelationship of infrastructure, skills, institutions, attributes of a competitive environment. • Government (national, state, local) has a role to play in helping create comparative advantages. • Telecom essential input under either import-export or local value model. • Convergence of telecom, computing and content - do traditional activities better, do new things as well.

30. Rural Interests • Rural America tends to be poor America. • ‘97 per capita non-metro income - $19,089; metro - $26,840, 40% higher than rural. • Like everyone, rural customers want “smaller, faster, cheaper, better” service. • Advanced services often not deployed as quickly without targeted efforts. • Rural cooperative deployment a success of high cost fund, RUS, coop commitment to their communities.

31. Rural Interests Continued • Advanced services may be relatively more important in rural areas. • Overcome distance and disaggregation. • Telecom a crucial intermediate (combination) good in other ED/CD efforts. • Telecom Act provides means to address rural concerns (universal service, etc.), but outcomes not yet known.

32. State strategies • Strategies • Ratemaking - Flat rates, EAS, AFORS, Performance standards • Market-oriented, community-based solutions, such as aggregation. • Schools and libraries, rural health care programs. • Procurement - Public purchases of telecom service from private providers will inevitably help shape markets. Do those public purchases help build a more robust public network?

33. State strategies Continued • Requiring state agencies to go on-line creates instant market. • Regulatory challenge - promoting an innovative environment • Don’t forget related issue of creating right environment for e-commerce (contract, tax, consumer protection, privacy, etc.).

34. State strategiesContinued • Allowing universal service recipients to build to a higher standard and be compensated for doing so. Raising the ceiling, but not the floor. But - are the standards competitively neutral? • Setting network standards. Wisconsin does this. But - requiring a certain higher level of performance implies a willingness to pay for that level.

35. State strategiesContinued • Last resort, public provision of services, if it becomes clear that the other approaches will not work. • Some states/localities use, most reluctant. • May thwart private development. • May bet on wrong technology horse.

36. National Telephone Cooperative Association survey (9-99) • 412 NTCA members responded (of 500+) • 30% or more offer ISDN, DSL or fractional T1 in at least parts of their marketplace. • What would help deployment? • Universal service support - 60%. • Low cost loans - 24% • Rural-oriented technical standards- 32% • 97% offer dial-up Internet, up to 56k speed. • 81% offer Internet to over 75% of their marketplace. • Less than 20% of potential customers take dial-up Internet, and less than 1% take wide-band.

37. Community/economic development & universal service • State commissions should consider CD/ED focus to their work, supplementing other roles (e.g. consumer protection, market power concerns). • New goals. • New procedures. • New partners.

38. Elements of a CD/ED approach • Shared vision. • Community inventory. • Aggregate demand - “anchor tenants.” • Consumer-driven, not technology-driven goals. • Maintain flexibility. • Standard setting. • Develop and use community resources - “light the fiber with bright ideas.” • State commissions may become sources of information, assistance and dispute mediation.

39. Part III- Advanced telecom capability incentives in the Telecom Act of 1996. • Review Section 706. • Relationship between universal service and advanced telecom capabilities. • Suggest Federal-State Joint Conference (Task Force) on Access to Advanced Telecommunications Capabilities.

40. Government policy goals • Development of competitive markets • Use of de-/lesser/non-regulation • Ubiquitous infrastructure • Encourage technological innovation • Affordable access for essential institutions • Universal service • Basic/essential service • Rural issues

41. Advanced Telecommunications Capability (ATC) is defined: • high-speed, switched, broadband telecom capability that enables users to: • originate and receive • high-quality telecommunications • using any technology: voice, data, graphics or video. • without regard to any transmission media or technology

42. S. 706, Subsection A: • The FCC and states shall encourage the deployment of ATC: • reasonable and timely basis. • to all Americans. • utilizing: • price cap regulation. • regulatory forbearance. • measures that promote local competition. • other regulatory methods that remove infrastructure investment barriers.

43. S. 706, Subsection B The FCC shall initiate a notice of inquiry: • within 30 months of the Act. • regularly thereafter. • concerning the availability of ATC to all Americans. • complete the inquiry within 180 days.

44. S. 706, Subsection B • In the inquiry, the Commission shall determine whether ATC is being deployed: • to all Americans • in a reasonable and timely fashion. • FCC January ‘99 report generally concluded deployment was “reasonable and timely.”

45. S. 706, Subsection B • If the Commission’s determination is negative it shall take immediate action to: • accelerate deployment of such capability • remove barriers to infrastructure investment and • promote competition in the telecommunications market.

46. Universal service considerations • Section 254 focuses on providing support for services. Section 706 focuses on removing barriers to advanced services. • Will all loops be conditioned to be xDSL ready? • Will providers install backbone access points beyond the major markets? • Will data services be available to everyone at reasonable prices in a timely manner?

47. Universal service discussion: 1) Goal of ATC for all Americans is reflected in Telecom Act. • In Information Age, ATCs are the coin of the realm • Want ATC for all for the purpose of vertical equity • Want ATC for economic development (U.S. vis a vis the world as well as individual state strategies) • Is ATC a “merit good”? • Do societal benefits exceed the total costs of the undertaking?

48. Universal service discussion: 2) S. 706 does not give direction re: who builds it, what technology, and how soon.a) Market mechanismsb) Technology and provider neutralc) Review in 3 years, but does not set a deadline by which Internet infrastructure must be deployedd) Goal of hooking up all schools and libraries by 2000 suggests that hooking up everybody to Internet would occur sometime after that.e) Different goals for access and subscription?

49. Universal service discussion: 3) At some point, Internet access might fall under the evolving definition of universal service. • How close are we to that now? • When are we likely to get there? • How much influence would designation as basic service have on the diffusion of Internet capabilities? • How can we apply the experience gained in NTIA experiments in wiring the schools and libraries to Internet access in low income and rural communities?

50. Universal service discussion: 4) S. 254(b)(3) declares that access to “advanced telecommunications and information services” in rural and high cost areas should be: • reasonably comparable to urban services • priced reasonably comparable to urban services and prices. • “comparable” and “affordable” can be different.