July 20, 1999

**SEPARATE STATEMENT OF COMMISSIONER MICHAEL K. POWELL, CONCURRING**

*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]: 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]: 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.