In The Matter of:             )  
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EN BANC HEARING:              )  
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CONSUMER ISSUES AND EDUCATION )  
     

     
























PAGES;   1 through 155

PLACE:   Washington, D.C.

DATE:    October 29, 1998                   FEDERAL COMMUNICATIONS COMMISSION
                        Washington, D.C.  20554
     
     
     
     In The Matter of:                 )  
                    )
     EN BANC HEARING:                  )  
                    )
     CONSUMER ISSUES AND EDUCATION     )  
                    )
     
     
                    Room 856
                    FCC Building
                    1919 M Street, N.W.
                    Washington, D.C.
       
                    Thursday,
                    October 29, 1998
     
               The parties met, pursuant to the notice, at
     
     1:12 p.m.
     
               BEFORE:  WILLIAM E. KENNARD
                        Chairman
     
     
     
               FEDERAL COMMISSIONERS AND STATE JOINT BOARD:
     
                       JULIA JOHNSON, Chairman
                       SUSAN NESS, Commissioner
                       LASKA SCHOENFELDER, Commissioner
                       HAROLD FURCHGOTT-ROTH
               , Commissioner
                       PATRICK M. WOODS III, Chairman
                       MICHAEL POWELL, Commissioner
                       MARTHA HOGERTY, Consumer Rep.
                      GLORIA TRISTANI, Commissioner
                      DAVID BAKER, Commissioner
     
     
     
     
     
     
     
                    PANEL 1:
     
                       MARK COOPER, Director of Research
                          American Federation of America
                       FRANK GUMPER, USAIC
                       JOHN C. METTS, National Telephone     
                          Cooperative Association
                       BILLY JACK GREGG, Director, Consumer
                          Advocate Division, Public Service
                          Commission of West Virginia
     
     
     
               PANEL 2:
                      
                       MICHAEL TRAVIESCO, Counsel representing
                          Maryland consumers
                       MICHELE FARQUHAR, Western Wireless
                       BILL GILLIS, NARUC
                       JOEL LUBIN, AT&T
                       DAVE GILLES, Wisconsin DOJ
                       DOROTHY ATTWOOD, Common Carrier Bureau
                          FCC 
     
     
     
     
     
     
                                       P R O C E E D I N G S
                   CHAIRMAN KENNARD:  Good afternoon, and welcome
     everybody to our En Banc Panel on Consumer Issues and
     Education.  We have a very interesting and packed agenda for
     the afternoon, so I think we need to get started, and we're
     going to have to keep our schedule.
                   We have our -- we have a timekeeper here, Ruth,
     are you going to do that for us today?  Ruth Darcey is going
     to be our timekeeper and she is a very tough lady, so she's
     going to be enforcing our time deadlines strictly.  
                   I would like to welcome everyone here.  We are
     going to have two panels today.  The first panel will be on
     issues of affordability of basic telephone service. 
     Obviously, this is a central goal of the FCC, and our
     colleagues in the states.  It has been for many decades. 
     And Congress, of course, reaffirmed that goal quite
     explicitly in the Telecommunications Act of 1996.  
                   We have been given the difficult task of
     implementing the extremely important Universal Service
     provisions in the 1996 Act.  We are in the midst of that
     process.  Commissioner Susan Ness and Chairman Julia Johnson
     have been co-chairing the Joint Board on Universal Service.  
     They are -- they have a very busy November ahead.  We're
     looking very much forward to the recommendations of the
     Joint Board.  
                   The first panel will address these affordability
     issues.  We will have a second panel on consumer education
     issues, which, as you all know, have taken on renewed
     prominence as we have moved into more competitive markets in
     telecommunications.  It requires more vigilance, in my view,
     not only on behalf of consumer, as there are more
     competitors out there vying for their dollars, but also
     those of us in government have to be more vigilant to make
     sure that issues like slamming and cramming are on our radar
     screens, and that we are actively protecting consumers.
                   I'll tell you a little bit about how we plan to
     proceed today just from a procedural standpoint.  
                   I will welcome the other Commissioners here to
     make opening remarks.  Then we will introduce the first
     panel.  I will ask all of the panelists to introduce
     themselves and tell us your affiliation.  Then I will ask
     each panelist to take no more than eight minutes for their
     presentation, and the timekeeper, Ms. Dancey, will indicate
     when two minutes remain, and I do implore the you be very
     mindful of the time.  Then we're going to have some general
     Q and A's from the panelists.  
                   We are going to alternate federal commissioners
     and state commissioners.  I have given all the commissioners
     a list of the order of questioning.  There is no logic to
     it.  It was pretty much at random, and we will begin with
     Chairman Johnson.
                   CHAIRMAN JOHNSON:  Opening statement?
                   CHAIRMAN KENNARD:  Opening statement, yes.  
                   CHAIRMAN JOHNSON:  Thank you, Mr. Chairman, and
     Commissioners of both federal and state.  I think this is a
     moment that we should all be very proud of, to have an
     opportunity to address these issues.
                   As we attempt to implement the Telecommunications
     Act on both the state and federal level, one of the things
     that we keep hearing from customers is, as you try to
     transition for companies, remember us in the process.  I've
     had the opportunity over the last year to hold about 45
     public hearings.  Some of them have dealt directly with the
     consumer issues, slamming and cramming.  Others have dealt
     with fair and reasonable rates, and what should that mean,
     and Universal Service type issues for customers.
                   Some of the messages are clear.  Customers don't
     want to see competition for the sake of competition, and
     that they don't believe that Universal Service should mean
     higher local rates.  Those concepts are seen as counter-
     intuitive.
                   I think that we should be able to, from the
     comments of our panelists on both panels, have a better
     appreciation of those issues, determine how we're going to
     address those issues working together.  To the extent that
     we have consumer education programs, I brought with me my
     director of consumer affairs, Bev DeMello, because we are
     interested in partnering with industry and the federal and
     state regulators to make sure that customers are more
     informed.  
                   We have learned a lot from the last time around. I
     think when we implemented some of the Universal Service
     programs, we, at the regulator stages and the companies,
     could have done a better job of educating and informing
     customers as to what would happen, and I think we have to
     remain cognizant of that process as we endeavor to implement
     whatever else might need to be implemented.  
                   As we hold these panels, and as we begin our
     deliberations as it relates to Universal Service, I am
     always reminded that we are becoming less economic
     regulators and more consumer educators, and I keep that in
     mind as we hear your comments on both affordability, I say
     that to the panelists, and on consumer education and how we
     are going to make customers better understand the new
     competitive markets in which we will be participating in.
                   And with that, again I would like to thank you,
     Mr. Chairman, and Commissioner Ness for her involvement and
     her leadership on the Universal Service Joint Board, and we 
     look forward to comments and deliberations.
                   CHAIRMAN KENNARD:  Thank you.  
                   Commissioner Ness.
                   COMMISSIONER NESS:  Thank you, Mr. Chairman.
                   I just want to make two points.  Point one is that
     the consumer is at the heart of everything that we do.  And
     point two is that point one is as valid for state
     commissioners and state consumer advocates as it is for
     federal commissioners. 
                   So I'm glad to have this joint assembly of FCC
     commissioner and State Joint Board members so that we can
     explore all of the issues that we both are grappling with,
     and I look forward to the discussion today.
                   Thank you.  
                   CHAIRMAN KENNARD:  Thank you.
                   Commissioner Schoenfelder.
                   COMMISSIONER SCHOENFELDER:  Thank you, Mr.
     Chairman, and thank you for having us here today.
                   I am going to be very brief, and rather than just
     to repeat what Commissioner Johnson has said, what I'm going
     to do is invite you to come to NARUC the 8th of November,
     and listen to some of the same discussion as the states get
     into the discussion of what we can do for consumers also. 
     So I hope that will take off from here and we can learn here
     and add to that.  So I would like to invite you all to come
     to that. 
                   Thanks. 
                   CHAIRMAN KENNARD:  Well, I'll be there.
                   Commission Furchgott-Roth.
                   COMMISSIONER FURCHGOTT-ROTH:  Thank you, Mr. 
     Chairman.
                   I just would like to take a brief moment to
     welcome the panelists here, particularly on the first panel. 
     Mr. Metts has come from Penasco Valley, in New Mexico, and I 
     had the great pleasure of visiting Commissioner Tristani's
     home state in August and meeting with Mr. Metts and other
     folks from some of the small rural telecos in southeastern
     New Mexico.  Mr. Gumper, it's always a pleasure to see you,
     and I particularly would like to welcome our consumer
     advocates, both from the State of West Virginia, and Mark
     Cooper, who does such a fine job for Consumer Federation.
                   Consumer advocates have a rare position in our
     society of providing some sense of moral authority, if you
     will, on behalf of consumers.  They have both the privilege
     and the responsibility of speaking on behalf of consumers
     for what the world might look like.  
                   We has commissioners, whether at the federal or
     the state level, have a different responsibility, and that
     is to interpret the law as it is written, and these two work
     together very well.  
                   I very much look forward to your comments from the
     perspective of consumers about how Universal Service should
     be implemented, and I hope very much to hear particularly
     your views about what agency has the specific legal
     authority to do precisely what you would think best in the
     consumer interest, whether that is the federal commission,
     the state commissions, or whether in fact there may not be
     the specific legal authority to do what you think best, and
     in some sense that might have to be left either for state
     legislators or for Congress.
                   It is a great pleasure to be here on a panel with
     both federal and state commissioners because I think many of
     the issues will be addressed today may not necessarily lie
     in the federal jurisdiction, and we look forward to
     understanding better how these can be addressed at the state
     level as well.
                   Thank you, Mr. Chairman.  
                   CHAIRMAN KENNARD:  Thank you, Commissioner.
                   Chairman Wood.  
                   CHAIRMAN WOOD:  Thank you, Bill.  
                   I think all of us appreciate being up here with
     you all on these important issues.  
                   Just a little background, we in Texas are going
     through a Universal Service Fund restructuring that we
     anticipate being done in two months, and are going through a
     lot of these issues in an accelerated time frame as we're
     experiencing collectively here.  
                   And I think one of the things, and I was reading
     the testimony last night, believe it or not you are all more
     interesting than anything that was in C-SPAN or CNN.  Parts
     of the world out there aren't as interested in the elections
     as maybe folks here are.  
                   But the reading did point out a few things from
     both panels that I would like you all to just muse over and
     help me understand more today is we do have a very subsidy
     rich industry we're talking about here with a lot of
     misallocated rates that for whatever purposes they are, they
     are.  And in undoing that, which I think a competitive
     market will do and/or regulators that want to spur the
     development of a competitive market may want to do, a
     customer education effort is just real critical.
                   I am more than willing to assume the customers, if
     you tell them the truth, they're going to maybe not like it,
     but at least accept and understand and move on to the next
     issue.
                   I've got a litany of complaints from my customer
     protection unit that talk about the run around, that we get
     blamed for this, and then we blame so and so with that.
     We've even got one back from the FCC that said call the PEC,
     they regulate AT&T's rates, which made me kind of scratch. 
     Joel, maybe we need to talk about that.
                   (Laughter.)
                   I'm going to assume as a given that the customers
     of Texas and the rest of the United States can handle the
     truth if we tell it to them in a clear way.  And so I'm not
     scared of the fact that we've got some subsidies to undo.  I
     can defend a Universal Service assessment if I know the
     money is going to the right place.  But I think it's a
     collective effort that we've all got to take the pledge to
     do, and I look forward to maybe exploring with you all
     through both panels how to do that, because the pledge is
     pretty darn hard to write because nobody want to sign off on
     it just yet.  
                   But I think the only way to get to a real
     competitive industry that does deliver benefits to the
     customer is to make sure that we are telling a unified and
     uniform truthful story to the public about what we're up to.
                   CHAIRMAN KENNARD:  Thank you.
                   Commissioner Powell.
                   COMMISSIONER POWELL:  I really had nothing to add
     to that.  I would like to, however, formally associate
     myself with Commissioner Wood's remarks.  I think that tee's
     up our challenge precisely, and I also thank both the
     Chairman and others for organizing this invaluable
     opportunity to meet with our state colleagues, and I welcome
     all of them, and very much look forward to hearing from the
     panel.
                   Thank you.
                   CHAIRMAN KENNARD:  Thank you, Commissioner
                   Martha Hagerty, our consumer representative
                   MS. HAGERTY:  Thank you.
                   As I see our charge, and it always has been, is to
     preserve, I think the statute does say "preserve" Universal
     Service, and at the same time I think consumers have been
     promised during all this legislative debate that they would
     have lower prices and more services, or better services.
                   I'm interested to hear what the consumers have to
     say about many of the proposals in this docket.  Simply
     attempt to restructure rates, raise some rates, lower
     others, and in some cases I think there is a concern that
     what we call Universal Service rates, basic rates, are being
     proposed to be raised, I don't think that's what the Act
     envisioned.  I would like to have that debate today.
                   Secondly, with respect to consumer education, I
     think it's obviously very incumbent upon the regulators to
     address this issue.  It's time that this issue be tee'd up. 
     All of us who deal with consumers in our states are aware of
     the complete confusion that consumers are undergoing and
     their inability to make intelligent choices because they
     simply do not have the information in front of them.   So
     I'll be very anxious to hear the panel today.  
                   CHAIRMAN KENNARD:  Thank you.
                   Commissioner Tristani.
                   COMMISSIONER TRISTANI:  Mr. Chairman, first of
     all, I want to welcome all my fellow commissioners and the
     consumer advocate, fellow commissioners from the states.  I
     still have my heart in the states, as you well know.  And I
     am delighted that we are having this hearing.
                   Two things:  Our first panel is entitled "Ensuring
     Affordability and Consumer Choice," and it sounds like we're
     sure that things are affordable right now, and that may be
     true for the vast majority of Americans, but I think we need
     to remember that our penetration rate, which is about 94
     percent, is not across the board, and there are certain
     Americans that are very, very out and not connected, whether
     it be Native Americans in New Mexico, whether it be the 26
     percent of households in my native island of Puerto Rico who
     do not have telephone service, whether it be many minorities
     in the inner cities that don't have telephone service.
                   So my interest is not only ensuring that those
     American that are connected continue to have affordable
     service, but those that are not get connected.
                   Now, some may say, oh, there may be other issues,
     there may be cultural issues, a variety of issues that we
     don't know that keep other Americans from being connected,
     that may be, but I think affordability probably is a big,
     big concern.
                   Our second panel has to do with consumer
     education, and that's one I particularly welcome.  Less we
     forget, we have a consumer cost center at the FCC.  And, Mr.
     Chairman, I looked at our web page today.  I wanted to know
     how many calls we had gotten on slamming and cramming
     through September 30th.  And if my arithmetic is correct,
     because I had to add up several categories, 101,611.  That's
     the people who know that we have a hot line to call.  Those
     numbers alone tell us that we have to do everything, working
     together, the FCC and the states, consumer advocacy groups,
     any groups that can help us, to inform the public on what
     their rights are when they are deceived.
                   Thank you, Mr. Chairman.
                   CHAIRMAN KENNARD:  Thank you, Commissioner.
                   Commissioner Baker.
                   COMMISSIONER BAKER:  Thank you, Mr. Chairman. 
     It's, of course, a pleasure to be here.  I will reserve
     comment other than just to, of course, thank the federal
     commission, my state counterparts, and, of course, the state
     and federal staffs, and, of course, today's panelists for
     efforts that they have put forth towards today and
     tomorrow's panels, and we're all very glad to participate in
     this process.  
                   I would like to make one comment that
     affordability is obviously important notion, and one which
     needs to be addressed, and one which needs to be preserved,
     but also part of the equation is the quality of service that
     consumers receive, and we need to be mindful of that in
     addressing the issues of cost, and realizing that consumers
     want more than just the cheapest product; they want the best
     value for their telecommunications dollar, and that's an
     equation which balances cost and quality.
                   Thank you.
                   CHAIRMAN KENNARD:  Thank you.  
                   Now we will proceed with our panelists again.  I
     will ask that you introduce yourselves, and I will also ask
     that you limit your remarks to eight minutes.  We will go
     through the presentations of all the panelists and then we
     will have some questioning from the commissioners.  
              Thank you. 
                   Mr. -- who is beginning here?  Mr. Gregg.
                   MR. GREGG:  Thank you.  My name is Billy Jack
     Gregg.  I'm director of the Consumer Advocate Division of
     the Public Service Commission of West Virginia.
                   I want to say good afternoon to all the
     commissioners, thank them for having us here today.
                   I have arranged my statement as a response to each
     of the questions posed by the Commission in setting up this
     panel.  
                   The first question was, "Is the goal of affordable
     basic service being met?"   
                   Yes, current rates for basic service are
     affordable and becoming more affordable.  Even before the
     advent of the Telecommunications Act of 1996, the general
     trend in rates was down.  Why?  Because transcending any
     changes in law and regulation, telecommunications continues
     to be a declining cost industry.  Between 1992 and 1997,
     local rates held steady while general inflation rose by 15
     percent.  At the same time toll rates came down by 31
     percent while use of the network increased by 61 percent,
     according to the Commission's most recent study of revenues
     in the telecommunications industry.
                   In approaching the issues of Universal Service and
     access charge forum, the Commission and Joint Board must
     keep in mind that affordable rates are assumed by Americans
     as a given.  Policies adopted to introduce competition into
     all area of telecommunications must not do damage to the
     level of affordability which has already been achieved. 
                   The second question:  Are there policies the Joint
     Board should consider recommending to meet the goal of
     affordable service?
                   The Commission and the Joint Board must remember
     that the ultimate goals of the Telecommunication Act of 1996
     are lower prices and better services for all Americans.  The
     means that we have chosen to achieve those goals is
     competition.  However, some seem willing to sacrifice the
     ultimate goals of the Act and the affordability we have
     already achieved in an attempt jump start local service
     competition.
                   Citing the wording of Section 254, which requires
     that Universal Service support be explicit and sufficient,
     they argue that basic rates must be raised to unaffordable
     levels, and that the federal Universal Service Fund must
     swell to $20 billion.
                   I say to you most emphatically that the purpose of
     including the specific Universal Service guarantees in
     Section 254 of the Telecommunication Act was not to impose
     $50 a month basic service charges on rural customers, nor to
     impose a 20 percent Universal Service surcharge on all
     customers.  
                   On the contrary, the explicit goal of 254 is
     affordable service for all, and rates in rural areas that do
     not vary appreciably from those available in urban area.
                   Furthermore, there is no language in Section 254
     nor in any other part of the Act which requires that access
     charges be reduced and that Universal Service obligation be
     raised to pay for such reductions.
                   Policies which the Joint Board should consider to
     meet the goal of affordability should include the following:
                   First, do no harm.  Rates are affordable now.  The
     Telecommunications Act was passed to make rates even more
     affordable for everyone.  Whatever you do don't make average
     consumers in this country worse off as a result of your
     decisions, which are supposed to maintain and enhance
     Universal Service.  
                   Second, let states take the lead in determining
     affordability.  The cost of living is different in different
     states, and it stands to reason that affordability will also
     differ.  Each state should be able to determine
     affordability according to its own standards and experience. 
                   Some states have already proposed rate benchmarks
     for their own purposes.  For example, Nebraska has proposed
     an affordability benchmark of $22.00, including the
     subscriber line charge and other surcharges, while Wyoming
     has proposed $25.00, excluding the SLIC and other
     surcharges.  Other states may propose different standards. 
     Some states have rates based on measured rates.  Others
     prohibit measured rates.  Each state is different.
                   The Commission should ensure that states continue
     to receive at least the level of federal Universal Service
     support they current receive, and let each state plot its
     own course in determining when and how it will reorganize
     internal subsidies and local rates, if any.  If additional
     federal support is needed after competition actually begins
     at the local level, the issue can be addressed at that time
     with the benefit of actual data.
                   Third, additional Universal Service support should
     not flow until competition actually develops.  Competition
     is supposed to drive out the implicit subsidies in existing
     rates within each state.  Great, let competition do it. 
     Regulators shouldn't.  Regulators are very bad at
     replicating the market.  There is no harm in devising a
     Universal Service support system which can kick in if and
     when competition actually begins to erode revenues
     supporting the existing network to unacceptable levels.
                   However, it would be the height of folly for
     regulators to attempt to wring out perceived implicit
     subsidies before competition begins.  The only result will
     be insupportably high local rates and/or insupportably high
     Universal Service surcharges.
                   Fourth, avoid mandatory surcharges, especially
     fixed per line surcharges.  Fixed per line surcharges tend
     to endure regardless of changes in underlying cost.  Witness
     the subscriber line charge.  In spite of numerous reductions
     in access charges over the past few years and in spite of
     reductions in the underlying cost of telecommunications and
     in spite of the earnings of the companies which receive the
     SLIC, the SLIC has remained fixed, immune to changes in the
     surrounding environment.
                   Fifth, be aware of the impact of the totality of
     your decision.  In determining the affordability of basic
     service for consumers, it is the totality of rates that is
     important.  Local service plus any surcharges are line items
     charges.  You will have accomplished little by defining
     affordability as an arbitrary dollar figure if an excessive
     Universal Service surcharge must be added to the customer's
     bill to make the so-called affordable level achievable.
                   The third question:  To the extent that surcharges
     are imposed, are there policies that the Joint Board should
     recommend to ensure that rates remain affordable?
                   As I've stated above, the real question is whether
     surcharges should be imposed at all.  I emphasize again the
     Commission should not impose mandatory surcharges on end
     users.  In fact, I would point out that some states have
     prohibited recovery of state Universal Service contributions
     through surcharges.  
                   However, if surcharges are imposed, the following
     policy should be followed to ensure that rates remain
     affordable:
                   First, federal surcharges should apply only to
     services over which this Commission has jurisdiction;
     namely, interstate services.
                   Second, surcharges on end users should not be
     mandator.  Section 254(d) of the Telecommunications Act is
     very clear that every telecommunications carrier rather than
     every telecommunications customer must contribute to
     Universal Service support mechanisms.  So far this
     Commission has followed this clear directive of the Act and
     has continued to impose Universal Service obligations on
     carriers, allowing them to recover those costs in any lawful
     manner.
                   Third, the subscriber line charge should be
     reduced or eliminated.  If the Commission is tying together
     the issues of Universal Service reform and access charge
     reductions, it must ensure that the subscriber line charge
     is also reduced.  The SLIC was instituted in the mid-1980s
     as part and parcel of the imposition of the new access
     charge regime created after the break up of the Bell System. 
     If it seems likely the Commission is going to reduce
     interstate access charges imposed on carriers as part of
     overall Universal Service reform, in fairness, the
     Commission must also reduce or eliminate the mandatory SLIC
     currently imposed on all end users.
                   I thank you for allowing me to present my views
     here today and I'll be happy to entertain any questions.
                   CHAIRMAN KENNARD:  Thank you, Mr. Gregg.
                   Mr. Gumper.
                   MR. GUMPER:  Thank you for inviting me to be here
     today.  I thought you were going to go down the list.  I
     wasn't quite ready.
                   First of all, I think I would agree with some of
     the comments we have just heard.  Yes, telephone service for
     the vast majority of Americans is affordable.  I think that
     affordability provides both state and federal regulatory
     bodies the flexibility to address some of the policy issues
     without fear of in fact making phone service unaffordable.
                   As a result of competition and as it develops,
     there may be a need for some increases in local rates and
     even the subscriber line charge.  However, these types of
     increases will not reduce subscribership and they will not
     make basic telephone service unaffordable.
                   So what's the problem?
                   As Commission Tristani noted, there are areas,
     there are pockets where subscribership is still very low. 
     For this segment of society, one of the actions that the
     Federal-State Joint Board took was to significantly enhance
     the Lifeline and Link-Up Programs.
                   As a member of the USAC board, I'm happy to report
     that as of August 1998, the last month which we have data
     available, there were 5.1 million Lifeline participants. 
     More importantly, the first eight months of this year 1.3
     million households took advantage of the Link-Up Program to
     offset some of the initial connect charges for getting basic
     service.  Currently, these programs are growing at an
     average rate of about two percent a month in terms of the
     demand on those two different funds.
                   Jorge Schement has done extensive research work in
     telephone penetration.  His most recent work indicates that
     it's not always clear what are the underlying causes of
     lower telephone penetration, particularly among different
     segments of society.  
                   I'd like to cite some figures from his study, and
     actually cite from his study in terms of data representing
     owner-occupied housing units, and I would just point out
     that in my comments those figures are cite are for owner-
     occupied housing units, not for the general population as a
     whole.
                   As he points out, "Since those who own their own
     homes are most likely to have a telephone, the differences
     between the majority and minorities should be minimized. 
     Therefore, owner housing units represent a strong test for
     the uniform existence of a telephone gap.  
                   "In California counties, where data is available,
     the differences between African-Americans and whites vary in
     the extreme.  Yuba County has a gap of 37.24 percent, while
     nearby Sacramento County shows almost no difference. 
     Furthermore, five of the counties measured indicate higher
     telephone penetration rates amongst African-Americans than
     whites.
                   I think that kind of data indicates that the
     explanation as to why we have different penetration rates in
     different areas of society is not something that ia easily
     solved at a national level.
                   Again, to quote from this research paper, "If we
     wish to solve the mystery of the telephone service gaps, we
     will have to look beyond the data that has guided us in the
     past.  We must go beyond national data that will uncover a
     complex array of factors more particular to localities than
     to the country as a whole." 
                   I would state that this information indicates that
     the reasons that people do not have a telephone go far
     beyond price and affordability, and probably need to be
     addressed at a local level in terms of trying to design very
     specific programs if you're going to address those issues.
                   Another reason for reduced telephone penetration
     is that the cost of wiring sparsely populated areas can be
     very prohibitive.  We've been at this game, I might say, for
     a long time, this idea of trying to identify what the cost
     of Universal Service is in remote areas precedes the Telcom
     Act.  The models that we are looking at now, including the
     more recent version that the FCC has put out, started back
     several years ago, and there is no question that when you
     look at those models it indicates that there are areas of
     the country that it is extremely expensive to deploy wire
     line facilities.
                   I think what we've missed in the process, though,
     over these past few years is that wireless technology has
     probably become the more cost efficient way to serve the
     areas.  One example I would give you is a subsidiary of Bell
     Atlantic Mobile, Southwestco Wireless, basically operates in
     Arizona serving many remote areas, including the Tohotum
     Indian Reservation, an area where, quite frankly, it's
     probably cost prohibitive to deploy wire line facilities.  
                   Another example I quote was Western Wireless in
     Antelope Valley Nevada.  This is an area where basically
     they were able to provide service to 58 customers who lived
     there for a cost of $100,000 versus what would have been the
     wire line cost of $1.3 million.
                   I would maintain that it is probably not in the
     best public interest to, in effect, subsidize or grant
     support levels to wire line companies in numbers that can
     exceed $100 a month when in fact you can get wireless
     alternative that gives you almost nationwide coverage for
     that same price.
                   In closing, let me say that telephone service is a
     bargain and will remain affordable as local competition and
     technology develops.  However, states and the FCC must
     address the implicit support in their rates that will not be
     viable with increasing competition, and I would add that
     that doesn't necessarily have to be done immediately, but as
     competition develops.
                   Some states will not have the resources to solve
     their own high cost problems.  For those states, and only
     those states, a small targeted federal fund can provide
     assistance to ensure that their rates remain affordable. 
     The distribution of these funds within a state and the need
     for intrastate support program are more effectively
     addressed at the state and local levels.  However, the Joint
     Board must continue to monitor these issues as we move
     forward to detect if additional policy intervention is
     warranted.
                   Thank you for this opportunity, and will be glad
     to answer any questions.
                   CHAIRMAN KENNARD:  Thank you, Mr. Gumper.
                   Mr. Cooper?
                   MR. COOPER:  Thank you, Mr. Chairman.
                   My name is Mark Cooper.  I am Director of Research
     at the Consumer Federation of America.  I have also
     testified in about 40 states.  At least two dozen of those
     on Universal Service, including Texas and Florida, which are
     represented on the Board.  I have a project in New Mexico
     looking at low income people.
                   The Joint Board and the Federal Communications
     Commission face a difficult task in the months ahead of
     lowering access charges to cost, expanding participation in
     the Lifeline Program, funding the schools' libraries, and
     help grow Health Care Program, and providing high cost
     support to rural areas and insular areas, all this while
     keeping rates just reasonable and affordable.
                   However, the Joint Board and the FCC have already
     forced the conceptual framework to make this task manageable
     in the decisions that were laid down in 1996.  They have
     firmly and soundly refused to change the fundamental
     principle, a simple idea that shared services should share
     the cost for the facilities they use.  There is no legal,
     constitutional, economic or public policy reason to stop
     treating the loop as a shared cost between all the services
     that use it, the principle that was laid down 70 years ago
     by the Supreme Court.
                   The 1996 Act reaffirmed that fundamental
     commitment in Section 254(k) where not only was a subsidy
     for competitive services forbidden, but also basic service
     was required to bear no more than, and could bear less than,
     a reasonable share of joint and common costs.  
                   If you accept that principle, we will have no
     difficulty preserving the affordability of service, and we
     have said that, CFA and its member groups, at the federal
     level and the state level.  I recently testified to that, in
     fact, in Florida as well.
                   The FCC and the Joint Board have determined that
     forward-looking economic costs are the only basis on which
     we can build an effectively competitive industry,  efficient
     forward-looking economic costs, and I urge you to resist the
     tendencies to constantly build back in inefficiencies into
     your analysis under the threat or claim about stranded
     costs.
                   The FCC has already adopted the principle that the
     unit of analysis for unbundling the network elements should
     be the same as the unit of analysis for calculating
     Universal Service.  If we have a statewide average unbundled
     network element, we ought to have a statewide average
     estimate of Universal Service costs.
                   The FCC and the Joint Board have adopted the
     fundamental principle that affordability is not just a
     question of are people wiling to pay more, but what is the
     burden.  That is an absolutely crucial observation.  We know
     you could double the telephone rates and most people would
     keep their phones.  The market will bear a lot more.  The
     simple fact of the matter is we're not supposed to be
     pricing up to what the market will bear.  
              And there are some people who will not be able to bear
     that increase in costs.           
              The fact that the telephone costs have been declining
     in real terms does not justify rate increases.  Many
     consumer products, particularly those in the technology
     industries, have been declining in real terms.  That's not a
     justification to increase peoples' prices.
                   Now, we believe if you apply these principles you
     will have a manageable task, but there will still be a need
     for Universal Service Funds, and let me give you a few
     principles to apply, and specific principles we've advocated
     at the federal and state levels.
                   First, as you have already done, you must treat
     the telephone network as a multi-product integrated entity. 
     Include all the revenues from the services that use this
     network.  Don't try and get it all from basic service, which
     is what some companies would like you to do.
                   Second of all, all Universal Service programs
     should be funded from one source.  This effort to split low
     income and high cost in school and libraries misses the fact
     that these are all Universal Service programs, all embraced
     by Congress and they should be funded in the same way.
                   Third, I believe that all Universal Service
     programs should be funded from all telecommunications
     revenues, and, again, in your order you establish the fact
     that you had the authority to do that.  It's folly to burden
     one sector with all of the burden of Universal Service
     costs.  Universal Service benefits all classes of customers,
     all services and all geographic areas.
                   Finally, the FCC has articulated the correct
     principle in how to collect funds.  It has argued against
     line items, and we believe that this is required by the Act,
     it's practically necessary, and conceptually correct. 
     Legally, the Act required telecommunications service
     providers to make the contribution for Universal Service. 
     Line items on consumers' bills are not service provider's
     contribution.
                   As a practical matter, the FCC has had a certain
     amount of difficulty of finding ways to ensure that federal
     rate cuts get passed through to residential and small
     business customers.  If you impose a line item on peoples'
     bills, they will suffer a net increase because you've been
     unable to figure out how to make sure the little guy gets
     his share of the rate cuts.
                   Conceptually, I don't believe that line items are
     appropriate.  Now, let me make it clear.  We firmly believe
     that consumers should get useful and correct information in
     their bills so that they can make effective economic
     choices.  But a Universal Service line item is neither
     economically useful nor economically accurate.
                   When you put a line item on someone's bill, there
     is nothing the consumer can do with that information.  Every
     service provider charges them, so they can't avoid it.  It
     cannot inform their consumption decision, and that's what
     economic decision-making is about.
                   When you put a line item on their bill, the
     consumer has no way to accurately measure its value. 
     Universal Service is a public good.  The indirect value of
     ubiquity is an externality that consumers have difficulty
     evaluating.  
                   More importantly, those consumers who are the
     direct beneficiary of that Universal Service Fund would be
     completely uniformed if you tell them you're paying $2.00
     for Universal Service, but you don't also tell them you're
     receiving $10.00 of subsidy.  It is very difficult to
     portray that information.
                   Now, if the purpose of putting the information on
     a consumer's bill is a policy purpose -- excuse me -- a
     political purpose, to tell them that the program exists,
     then be my guest.  Once a year inform them that there is a
     Universal Service Fund.  Here is what it's for, here is how
     it's paid, and here is how much it costs in the aggregate. 
     That is useful political information.  I don't think it has
     any place on a consumer's bill, but fine, put it there if
     you think you want to inform them.
                   Thus, we believe that Universal Service can be
     achieved by a simple set of principles that the Joint Board
     and the FCC have already articulated.   There is one way I
     can suggest that you can guarantee the little guy, the
     residential rate paper will get a benefit, and that is to
     reduce the subscriber line charge.  I've said this a few
     times in the past.  I will say it again.  It's an idea whose
     time has come.  
                   Fifteen, approximately 15 years ago when we began
     to put this charge in place, we had an estimate of federal
     costs that were brought into the federal jurisdiction, and
     over those 15 years the cost of basic service has declined
     dramatically, but the subscriber line charge never has.  Now
     is the time to ensure that rate payers get some of the
     benefit that was promised by this Act by reducing the
     subscriber line charge.  
                   You can also reduce other charges and raise your
     Universal Service Fund.  We prefer that that fund be raised
     from service providers.  That's what Congress thought,
     that's what is economically rational, and that is what we
     think will support this program and continue to advance
     Universal Service.  
                   This is a complex task as the Commission and the
     Joint Board have learned in the last couple of years.  We
     look forward to working with you to build on the sound
     principles you've already laid down.
                   Thank you.  
                   CHAIRMAN KENNARD:  Thank you, Mr. Cooper.
                   Mr. Metts.
                   MR. METTS:  Good afternoon, Mr. Chairman,
     Commissioners, Members of the Joint Board.
                   I am John C. Metts, Chief Executive Officer and
     General Manger of Penasco Valley Telephone Cooperative, PVT,
     headquartered in Artesia, New Mexico.
                   I am appearing today on behalf of the National
     Telephone Cooperative Association, NTCA, of which I am a
     member of the board of directors, representing Arizona, New
     Mexico, Oklahoma and Texas.  NTCA represents approximately
     500 small and rural telephone companies operating throughout
     the United States and in nine foreign countries.
                   We appreciate the opportunity to appear before you
     to discuss the issue of affordability, which is among the
     most critical issues for rural telephone companies during
     the transition to the new competitive environment.
                   PVT is a subscriber-owned cooperative which serves
     just over 3,000 access lines in six exchanges scattered over
     4600 square miles in southeastern New Mexico.  The largest
     community in our telephone service area is Mayhill, New
     Mexico, with a population of 300 people.  Approximately 20
     percent of our access lines serve businesses, the rest are
     residential.
                   PVT services and technologies are state-of-the-
     art, with all digital switching, equal access, advanced
     calling features, and INSD capability.  Some of our most
     remote subscribers are served by BEDRS Radio.  Otherwise, we
     use a mixture of fiber and copper looped technology.
                   In addition to POTs and advanced services, PVT
     offers interactive educational television to the schools,
     internet access, cellular and paging.  PVT is beginning
     construction of PCS service and has obtained an LMDS
     license.  
                   Our basic service rate is $14.90 per month for
     residential, and $20.30 for business customers.  PVT is
     typical of small rural telephone companies in the NTCA
     membership, except like most western countries, its
     subscriber density is much lower.  
                   I believe there is general agreement that basic
     telephone service today is generally affordable for most of
     the population.  This agreement was reflected in the Joint
     Board's recommended decision and the Commission's report and
     order in the Universal Service proceeding.
                   The Joint Board and the Commission also concluded
     correctly that affordability has both an absolute component
     and a relative component.  I also are that subscribership is
     an important issue, but not the only measure of whether
     service is affordable.
                   PVT, like most NTCA member companies, has a high
     level of subscribership.  In addition to subscribership,
     regulators should consider affordability issues in the
     context of the other Universal Service principles in Section
     254 of the Act.  The first of which is that rate should be
     just, reasonable and affordable.
                   The Act also establishes that rates for urban and
     rural areas must be reasonably comparable for similar
     services.  Any comparison of rates must, as the report and
     order recognized, consider the vast differences in calling
     scope between urban and rural companies.  
                   PVT has an average of 500 access lines per
     exchange.  However, with EAS to US West areas from three of
     these exchanges, the average subscriber in those exchanges
     has a calling scope of approximately 5,055 lines.  For the
     other three exchanges, the local rate only provides access
     to 104, 458 and 1206 lines, respectively, and those
     exchanges calls, the school, doctors and county seats are
     toll calls.  
                   Even with EAS, rural subscribers necessarily use
     much more toll than urban subscribers to conduct their daily
     affairs.  That's a fair comparison to both local service
     rates and the average intra-LATA toll bill.
                   It's very important at this critical point in the
     implementation of the 1996 Act to pause for a moment to
     reflect on how it became to be that rural areas are so well
     served today, especially by rural telephone companies.
                   The good service and affordable rates we now enjoy
     have not always been available to rural areas of this
     country and generally are still not in major portions of the
     world. 
                   Before making extensive changes in this successful
     system, it's important that the Joint Board and the
     Commission have a very degree of confidence on the
     replacement methodology.  
                   As Chairman Kennard so aptly said earlier this
     year, "Most important, we must make sure that the new
     Universal Service mechanisms work."
                   To make a long story short, affordable quality
     service has been widely deployed since the Second World War
     in high cost, low density rural areas because of a
     combination of factors.  
                   First, in 1949, The Rural Electrification Act was
     amended to provide loans to telephone companies serving
     rural areas.  Congress took this action in response to find
     the telephone subscribership in rural areas was very low and
     had in fact declined substantially since 1920.  Around the
     same time, the FCC, working with the Joint Board, began to
     evolve the separation rules which in their present form
     allow for recovery of substantial portion of the cost of a
     rural company to be recovered through access charges and
     Universal Service support.
                   For 1996, rural utility service borrowers obtained
     64 percent of their revenues from these sources and only 27
     percent from local service charges.  
                   The result is that local rates are affordable
     despite the much higher per subscriber cost for providing
     service.  For those subscribers for whom the local rate is
     still too expensive, Lifeline and Link-Up Programs may make
     the difference.  PVT participates in both state and federal
     assistance programs.  
                   The exception to the general availability of
     affordable telephone service is in those remote areas where
     potential subscribes of non-RUS borrowers are required to
     contribute several thousands of dollars in aid to
     construction charges in order to obtain service.  For most
     families in remote areas, particularly on indian
     reservations, these charges effectively preclude
     subscription to service.
                   The Commission's decision to fund only 25 percent
     of the Universal Service support necessarily means that in
     many high cost rural states the support will not meet the
     statutory criteria of sufficient and predictable, and that
     local rates will not be just, reasonable and affordable, nor
     comparable to urban rates.  I understand that this decision
     is now being reconsidered, and I applaud the Chairman's
     statement last April that recognized that there are areas
     where it makes little sense to limit federal support to 25
     percent.  
                   States which have mostly high cost areas cannot
     raise the 75 percent of the support within their borders
     except by extracting contributions from subscribers at a
     level that defeats the purpose of Universal Service support. 
     The point has been well explained in the reconsider
     petitions of several states and the local exchange carrier
     associations.  I would add, however, that this question
     needs to be addressed sooner rather than later as many
     states are actively considering state Universal Service
     funds and the unresolved 75/25 issues makes it almost
     impossible to understand what will be needed in the
     individual states.  
                   Third, continued affordability of local service is
     depended on recognition of the impacts of various aspects of
     the Commission's access reform orders.  The two primary
     concerns are primary inter-exchange carrier charge, PICC,
     and the subscriber line charge.
                   When the Commission first adopted the subscriber
     line charge, it was recognized by all that from the
     subscriber's perspective the subscriber line charge was
     added to the local service charge to determine the bottom
     line amount required for each month to maintain dial tone. 
     However, at that time there was a more clearly identifiable
     pass-through of the reduced access charges by inter-exchange
     carriers in that there were corresponding toll rate
     reductions.  This process maintained the essential character
     of local service charges as mandatory and toll as a
     discretionary expenditure.
                   I thank you for the opportunity to be here today. 
     I'll be glad to answer questions.
                   CHAIRMAN KENNARD:  Thank you very much, Mr. Metts.
                   We'll now go to a question and answer period from
     the panel here.  I'll ask each of the commissioners who are
     inclined to ask questions to limit their questioning to no
     more than a four-minute question and answer period per
     commissioner, and we'll go in the order that we gave our
     opening statements.  
                   I'll begin by asking just a couple of brief
     questions of the panel.
                   Mr. Gumper, first of all, let me thank you and
     commend you for your service on the USAC board.  You've been
     a very dedicated participant in that organization, and I
     just wanted to publicly commend you and thank you.
                   And I was very interested to hear your report on
     the effectiveness of the Lifeline and Link-Up Programs as
     those programs have been expanded and made more effective. 
     But I was having difficulty reconciling that with your
     position in your testimony that you believe that meeting the
     challenge of underserved areas is principally a local issue
     because it seems to me -- first of all, I agree with you
     that these issues of serving underserved areas are very
     complicated and they are made more complicated by issues of
     poverty and race and class, and these are not easy issues
     for us as a country.  They never have been.  
                   But I part company with you when you say that
     these issues, as they pertain to affordable telephone
     service, should not be dealt with at the federal level, and
     I think Lifeline and Link-Up are good examples of how we've
     had a federal role and a matching state role that has been
     quite successful.  
                   And I'm just curious how you reconcile those two
     positions.
                   MR. GUMPER:  Let me be clear.  What I meant by
     that was that the -- I think the federal program of Lifeline
     and Link-Up is out there, and obviously it has been expanded
     and it will help resolve some of the penetration issues.  
                   I think the question is do you need to do more in
     terms of telephone penetration other than what the program
     that you have already put in place.  And the answer to that,
     I believe, would be no; that given the telephone penetration
     in terms of the socio-economic people we're talking about,
     what we're down to, and I think the study by Jorge really
     points that up, these variations go beyond the question of
     just affordability and price.
                   The Lifeline and Link-Up Programs are there for
     those people that lack a telephone is a question of
     telephone price, they can take advantage of that.  I would
     maintain, though, that there are still going to be people
     who for other reasons aren't going to want to have a
     telephone in their home.  And I know that comes as a shock
     to some of us. 
                   And I know when I was a -- years ago I had a -- I
     used to commute to Rockland County and there was a working
     couple, and one day I offered to give them a ride home
     because he didn't have a car, and they were both -- had nice
     jobs, and as we were approaching their apartment, they said
     could I stop at the pay phone so they could make a call and
     make arrangements for a taxi the next morning.
                   And when they got back in I said, "You don't have
     a phone at home."  And they looked at me and said, "No, we
     are pestered by phones all day long on our jobs, and the
     last thing in the world we want in our house is a phone."
                   Now, these were two well-to-do, you know, couples,
     could easily afford a phone.  They didn't want one.  
                   So I think the problem we have to deal with is
     that there are going to be -- we're never going to get to
     zero percent, and that's why I think if one wants to go
     beyond the Lifeline and Link-Up, it's going to take a
     different type of emphasis to understand what it is that's
     driving people who don't take advantage of these programs
     not to have telephones in their homes.  That's all. 
                   CHAIRMAN KENNARD:  It seems to me that the class
     of people who don't have a telephone just because they don't
     want one but can otherwise afford it is a very, very small
     percentage of American, and not, frankly, one that, I agree
     with you, we shouldn't be terribly concerned about, that's a
     matter of a personal choice.
                   But I don't think it's appropriate, though, for
     the class of people who don't have phone service for other
     reason, be it affordability or issues of poverty or
     education, that we should just abdicate the federal role
     altogether, because there are -- certainly most states will
     act responsibly in this matter.  But there may be those
     states that don't, may not have the resource, and it seems
     to me that there should be a federal safety net of sorts to
     make sure that we can advance universal service to the
     extent possible.
                   Mr. Cooper, you touched on an issue that we have
     been grappling with for quite some time at the Commission,
     and that is how we make sure that consumers get the benefits
     of savings in a declining cost industry.  And I'm curious as
     to whether you have some more specific proposals or guidance
     that you can give us on ways that we as regulators and
     policy makers can ensure that consumers get the benefits of
     access charge reductions, for example, all classes of
     consumer, not just the more attractive high-end business
     customers.
                   MR. COOPER:  Well, the first answer and one that
     CFA has always embraced is that the consumer's best friend
     is effective competition.  That is the best form of consumer
     protection.  The difficulty is that we do not have effective
     competition in many telephone markets, and we particularly
     don't have it in the residential and local exchange and
     exchange access markets.
                   So the first line of defense is something that
     this Commission, again, has been working on i terms of its
     local competition approach, and it's the 271 process, and
     that will take a long time.  It's become quite clear that a
     100-year-old monopoly may take 100 years to go away.  Who
     knows?  It's not going away so fast.  That's the first line
     of defense.
                   If that line of defense -- if that form of
     consumer protection is not going to work, then you have to
     look at the regulatory approaches.  Our experience has been,
     CFA has not itself looked at the numbers, but the way I like
     to put it is that there has been enough finger pointing back
     and forth so that neither side has any credibility to
     demonstrate to the average consumer that they've been
     getting the benefits of the cost reductions that this
     Commission has ordered.           
              My folks just don't believe it, and they want a better
     measure.
                   We relied upon the subscriber line charge as a way
     for you to at the end of the day say, look, that number is
     on the bottom of your bill and it got smaller.  That was the
     number put on in the 1980s.  It grew to its current level by
     the mid-'80s, and it stayed there.  And other numbers have
     been reduced by this Commission.  
                   Back in 1980, the split of the recovery of those
     costs in the federal jurisdiction was 50/50.  Because of the
     last 10 years of reducing other charges and leaving that one
     alone, I think it's something like 80/20 today.  That is, of
     those original costs, we're getting 80 percent of them from
     the end user and 20 in the usage charges.  
                   One way to go about this is get us back to the
     50/50.  Make that reduction.  I know I write that check
     every month.  And so if you lower that number, you can say
     we lowered that.  Will other numbers go up?  That's our
     fear, but at least you have this bottom line protection.
                   It's extremely important that if you do it, you
     tell people you've done it because the cost of providing the
     service has gone done, which it demonstrably has.  That
     means that people then can't run and say you've got to
     replace that money.  There is nothing to replace.  It's
     become less costly to provide service, and I think that's
     exactly what regulators should be doing.  We support that in
     the access area.  We support it in the subscriber line
     charge.  Move prices to costs, and that's the one place you
     really do control that number.  I understand you don't
     control a bunch of other numbers, although we wish you had
     retained control of some of them, but clearly that's one you
     have control over.  
                   CHAIRMAN KENNARD:  Thank you, Mr. Cooper.
                   Chairman Johnson.  
                   CHAIRMAN JOHNSON:  Yes, let me follow up on that
     with Mr. Cooper and Mr. Gregg also providing an answer.
                   So I guess it's your opinion then that if we were
     to look at access, if we assume that there is some Universal
     Service support in access, and I'm not certain if you agree
     with that or not, but let's just assume it for now, and you
     were to restructure that in some way.
                   If we could ensure that there was a flow-through
     and so that minute of use would go down, even though we've
     restructured and put some of it on the end user's bill, if
     we can show that the bill will go down, not necessarily the
     local rate but their overall bill would go down, would that
     be a concept you would be supportive of?  And maybe that's
     too hypothetical, but if you can answer that, that will be
     helpful.
                   Then I want you to tell me how we can get those
     dollars to be flow-through so that we can have some minute
     of use benefit.  
                   MR. COOPER:  Well, there is two difficulties. 
     One, when you say the bill goes down, the problem is that
     you will only be able to tell me the average bill goes down
     because if you lower the per minute of use charges, it's
     clear that the people who use the most minutes gets the
     biggest cut, and the people who use a small number of
     minutes get a little cut and -- I mean, the numbers are
     proprietary.  You ought to ask companies, but there is a
     substantial number of people who don't place a long distance
     call in a given month, so they get no reduction.  So you
     have always got this problem of flowing through your per
     minute reduction to people in an equitable fashion, which is
     why I prefer this.
                   I know my constituents pay that subscriber line
     charge every month.  And so if you put a Universal Service
     dollar on their bill and take a subscriber line dollar off
     their bill, well, you haven't done much, you've changed the
     name, but at least I know my bill didn't go up.
                   CHAIRMAN JOHNSON:  Well, if that end user
     surcharge, it was a surcharge based upon revenue, that would
     at least be a little more equitable because --
                   MR. COOPER:  Oh, absolutely.
                   CHAIRMAN JOHNSON:  -- the ones that use more
     minutes would pay more.  
                   MR. COOPER:  If you force me to accept a line item
     on the bill, and I've said that in my testimony, I think it
     ought to be as a percentage of all the services sold.  I
     think all the services benefit from ubiquity, and so if you
     make me accept the line item, then clearly I prefer a
     percentages of the total bill as opposed to identifying
     basic service.
                   And think about it.  The purpose of this program
     is to keep basic service affordable.  Why then do it on a
     per line/per month basis which is, of course, attacking the
     affordability.  Do it on a percentage of revenue basis.  I'd
     much prefer that.
                   If you give me a percentage of revenue basis, then
     the match between the high volume users who are getting the
     cuts in their per minute charges and paying the surcharge
     are clearly much better, and then you can say with much
     greater confidence that the two balance one another out.
                   One thing is very important is when we look a
     these per minute surcharges, a lot of the benefit flow out
     to business customers, and we're all for business, but
     remember it's the business customers that frequently,
     certainly large businesses, are heavy users.  They are the
     guys that have already been getting the cuts in the
     marketplace so far as we can tell.  Now you're going to cut
     costs again.  They capture it.  So if you do a percentage of
     total bill, at least you're charging the people who appear
     to be getting the benefits of what competition there is.
                   CHAIRMAN JOHNSON:  Can you -- you said one other
     thing as to the general proposition of perhaps local rates
     may go up but bills would go down you said for the average
     customer. 
                   Do you know, or maybe Mr. Gumper may know, whether
     or not we have any information in the record that could kind
     of give us a demonstration of the usage, how many people use
     long distance, $10.00 a month, $5.00 a month?  Is there a
     way to have that information to give me more information
     when I have to make these kind of hard decisions?  
                   MR. COOPER:  Well, in Florida, where we have this
     ongoing proceeding, depending on how you calculate what goes
     up and down, but if you -- if you lower the cost -- the
     price of all the vertical services, that is, everything but
     basic and try and make that up on basic, three out of four
     people end up with higher bills, particularly because so
     much goes off to the business customers.  
                   Now, if you just hold it back and say we're only
     going to do local and long distance for residential
     customers, well, then, it's easier.  But remember, in the
     State of Florida, and I just testified there, out of every
     dollar of rate rebalancing, 40 cents went out of the
     residential class and into the business class.  
                   It's very difficult to say the residential
     customer is going to be whole when that much goes between
     classes.  This is just the arithmetic of rebalancing rates.
                   Another 30 cents in Florida went to vertical
     services.  Well, if that much is going to those kind of
     services, it's very difficult to tell the average
     residential rate payer who consumers are on vertical
     service, a small number of long distance calls, that their
     bill is going to be equal.  
                   But, again, this is information you can get from
     the companies --
                   CHAIRMAN JOHNSON:  Okay.
                   MR. COOPER:  -- as you consider that decision.  It
     will vary from state to state, and depending on which
     scenario you use about which rates are going up and which
     rates are going down.
                   CHAIRMAN JOHNSON:  Okay. 
                   MR. COOPER:  But that's the question to ask.
                   CHAIRMAN JOHNSON:  Thank you.
                   CHAIRMAN KENNARD:  Thank you.
                   Commissioner Ness.  
                   COMMISSIONER NESS:  Thank you, and thank you,
     panel, for your interesting observations.
                   We, in implementing the '96 Act, took a number of
     steps to enhance Lifeline and Link-Up, and one of those
     steps was to extend the benefits of Lifeline to all states
     whether or not the state was having matching funding.  
                   Can any of you -- does any of you have data to
     comment as to whether or not states have continued to fund
     into Lifeline where we have increased the amount of funding?
                   In other words, are the states continuing to fund
     the program?  Has it been successful?  Or have some states
     seen the federal subsidy as a means to cut back on what they
     were providing in terms of service?
                   Mr. Cooper, you look like you would like to answer
     that question.
                   MR. COOPER:  I spend a lot of time on the road
     doing Universal Service.  I'll give you one example which
     was very distressing to me from the State of Oklahoma, which
     had previously -- had passed the statute which said there
     should be a -- the state should match 3.50 and get the 3.50,
     so we had a $7.00 discount.
                   When the federal discount went to $5.20, if the
     state had continued the 3.50 match, then we would have
     gotten to the new 10.50.  
                   Some people interpreted the statute to suggest
     that, no, what the legislature meant in Oklahoma was that we
     really want the discount of $7.00, and what the state did
     was back down from 3.50 to "1.62 and a half cents or
     whatever the number was, to hit the ceiling at $7.000.
                   That problem exists out there.
                   COMMISSIONER NESS:  May I assume its anomaly?
                   MR. COOPER:  I would not assume it's an anomaly. 
     The $5.25, it was very easy for people to say let's take
     that as a Lifeline program.  
                   I assume that you folks have the ability to
     monitor.  Very few states have finished the Universal
     Service, even the Lifeline part, because they have been
     become tied up in the cost issues.  
                   But there is a great deal of resistance to going
     to a 10.50 discount, which is obviously a very substantial
     discount.
                   COMMISSIONER NESS:  Mr. Gregg, you look like you
     wanted to comment.  
                   MR. GREGG:  I can speak for my state, and we were
     very appreciative of the Commission's action.  The most 
     beneficial thing you did was to require that eligibility be
     based on income.  Before a number of states had limited
     assistance for telephone rates to handicapped and aged
     individuals.  By basing it on income, it you really opened
     the door.
                   We have an overall state penetration rate in West
     Virginia of 94 percent, exactly the national average. 
     However, we have 11 counties with very high unemployment
     that have penetration levels of 85 percent or less, and this
     is totally income-based basis for not being on the system. 
     There is no geographical limitation whatsoever. 
                   The fact that you opened the door to eligibility
     based on income has allowed us to expand that program, and,
     in fact, we did expand it up to the maximum amount.  The
     final funding of that from the state level is still up in
     the air, but we are fully committed to getting the maximum
     benefit that you appropriated.  
                   MR. GUMPER:  May I just add something?
                   COMMISSIONER NESS:  Yes.  
                   MR. GUMPER:  I believe that, and I will check into
     it and try to get it to the members here the information.  I
     believe USAC, though, could provide you data as to what we
     are providing as support on an average line per state.  And
     obviously if there is increased matching, you know, we can
     see what the states are doing, but I will see what
     information USAC could provide along those lines.
                   COMMISSIONER NESS:  It's an extremely important
     program, and I'm very anxious to ensure that that which we
     do at the federal level works for the states, and works most
     importantly for the consumers.  
                   MR. COOPER:  Let me recommend one specific policy
     to you.
                   COMMISSIONER NESS:  Yes.  
                   MR. COOPER:  As Billy mentioned, you changed the
     criteria and many states did not have -- you know, had other
     criteria.  It's now time if a state doesn't change the
     criteria, to take the money back, cause we wrote a series of
     waivers to let the states avoid -- they said they needed
     time, and in a specific state we worked, we passed
     legislation to remove from the books the restrictive
     criteria, and then the governor vetoed, and said, "Don't
     worry, the FCC will keep giving us the money even though we
     still have the restriction."
                   We're going into another state legislative cycle. 
     This Commission, if you want people to take up this
     improvement in the program, you're going to have to make it
     clear that this is what you meant, and if you don't change
     your criteria, you're going to lose the federal support.  As
     I said, I wouldn't do it tomorrow, but let's make it clear
     by, you know, three years after the original concept was
     laid out there, if you don't really want let low income
     people in without being also disabled or elderly, we're not
     going to put the money up.  You have to back up that policy.
                   COMMISSIONER NESS:  Mr. Metts, you wanted to
     comment also.
                   MR. METTS:  Yes.  New Mexico has had a low income
     telephone assistance program for over 10 years.  We
     participate in that with our cooperative.  We have 56
     customers that avail themselves of that program alone with
     the federal.  That's less than two percent of your
     customers, yet we know there are several more qualifying
     people that could qualify on an income basis.  They don't
     take the service either because of pride or whatever.  It's
     advertised to them.  We notify them every year.  
                   So the fact of low income being at that big a
     consideration and people not taking telephone service, our
     statistics don't show that.  
                   COMMISSIONER NESS:  Okay, thank you.  My time is
     up.
                   CHAIRMAN KENNARD:  Thank you.
                   Commissioner Schoenfelder.  
                   COMMISSIONER SCHOENFELDER:  Mr. Gregg, I would
     like to have -- I think that you were answering Commissioner
     Johnson's question about this and I'm going to try -- I took
     notes, so I'm going to try to quote what you said.  If I'm
     wrong, will you correct me, and then expand on this a little
     bit?
                   I think you said if the Commission ties access
     reduction with Universal Service reform, then they should
     reduce or eliminate the SLIC.  And I think that's the same
     thing Commissioner Johnson was talking about, and you didn't
     get a chance to answer and I'd like to have you just expand
     on that a little, please.  
                   MR. GREGG:  I took her question to be more
     general, looking at the whole area of access charge
     reductions, for example.
                   COMMISSIONER SCHOENFELDER:  It could have been.
                   MR. GREGG:  And whether IXCs have actually flowed
     those through to end users.  And I'll vary a little bit from
     what Mr. Cooper said.
                   He said that we need competition in the local
     loop.  I think if you look at the toll area, which is what
     we're concerned about, the access charge reductions went to
     the IXCs which provide toll, which is competitive.  And this
     points out one of the failings of competitive market.  While
     it does much good, in a competitive market where you're
     allowed to do the economically rational thing, you're going
     to put the money where it does you as an economic unit the
     most good.  
                   You're going to do -- first, you're going to keep
     it if you can.  Secondly, you're going to pass it through to
     competitive computers, customers who will shop around and go
     elsewhere if you don't cut rates to them.  And lastly,
     you're going to soak customers who don't make a choice, who
     are non-shopping customers, who are default customers.
                   In fact, in West Virginia, in any one month half
     of the customers make no intra-LATA toll calls, and I'm sure
     this goes on to the interstate arena as well.  You have a
     disparity.  You have a number of customers -- a small number
     of customers that make a whole lot.  You have a very large
     portion that make none or very little.  They don't care,
     they don't know, they don't shop.  They are still paying the
     same default rates they paid 10 years ago.
                   We just put out a survey last month.  We do an
     annual survey on long distance rates in West Virginia.  In
     the last 10 years average toll rates have fallen 44 percent,
     and they've fallen 13 percent just in the last year after
     the advent of One Plus competition.  However, the default
     rate that is charged to customers that do not choose has
     varied virtually none in the past 10 years.  It is still
     exactly where it is, and you still have a large majority of
     customers that are still paying that rate.
                   So if you want to pass through, you can't rely
     upon the competitive market.  They're going to do the
     economically rational thing.  I would cite to Commissioner
     Baker's statement.  When they passed the Telecommunications
     Act of 1995, they mandated that certain companies reduce
     their intrastate access down to interstate levels.  They
     also required that those access reductions be passed through
     to all customers on a proportionate basis, and that has
     happened.  Access has gone down but customers have been
     guaranteed and, in fact, have received those access charge
     reductions on a proportionate basis, all customers.
                   COMMISSIONER SCHOENFELDER:  I have one quick
     question for Mr. Cooper, and it's a yes or no question. 
     Honest.
                   MR. COOPER:  It's tough to get a yes or no from
     me.
                   (Laughter.)
                   COMMISSIONER SCHOENFELDER:  
                   But I think you said that the funds should be
     raised from providers, and not from the end user is what I
     was taking it for you to mean.
                   Do you really believe that the provider will not
     pass that cost on to the consumer?
                   MR. COOPER:  Well, it gets --
                   COMMISSIONER SCHOENFELDER:  Yes or no.
                   (Laughter.)  
                   MR. COOPER:  To the extent they think they can,
     they will.  And if there are market forces that prevent them
     from doing so, they will not be able to, and that's a
     marketplace question just like any other cost of doing
     business.  
                   COMMISSIONER SCHOENFELDER:  That's pretty close to
     a yes or no.  Thank you.  
                   CHAIRMAN KENNARD:  Chairman Wood has just informed
     us that the shuttle launch was successful today.  We missed
     it.  Discovery 25.  So we will have, at least as we speak,
     we still have a full congressional delegation from the State
     of Ohio.
                   Commissioner Furchgott-Roth.  
                   COMMISSIONER FURCHGOTT-ROTH:  Thank you, Mr.
     Chairman.
                   Mr. Metts, I always like people who put the number
     of children they have on their bio, and I'm very pleased to
     see that you have five children.
                   (Laughter.)  
                   COMMISSIONER NESS:  Something magical about that
     number.  
                   MR. METTS:  We have close to the same.  
                   COMMISSIONER FURCHGOTT-ROTH:  Yes.  Mr. Metts, we
     on the Joint Board have before us some items that have been
     referred to us on high cost recovery for large telephone
     companies, and I know that you represent a small rural
     telephone company and I see some other folks from small
     rural community in the audience today.
                   One possible solution would be to raise the size
     of the Universal Service Fund for large companies, and I
     just want to get your reaction.
                   Do you think that's something that should be done
     before we look at small company issues or should be done in
     isolation from looking at the size of support for small
     companies?  
                   MR. METTS:  Well, I don't know that I understand
     exactly where you're coming from.  
                   COMMISSIONER FURCHGOTT-ROTH:  Well, let me try to
     rephrase it.  
                   MR. METTS:  Okay.  
                   COMMISSIONER FURCHGOTT-ROTH:  Could you explain,
     and I know cooperatives are sort of member-owned, could you
     explain to the members of your cooperative if you're told,
     well, this is the support we get from the federal government
     through Universal Service support, and it's going to stay
     that way for a little while.  There's another telephone
     company somewhere else in the country, it's a very big
     company, and they just got so many millions of dollars more,
     but don't worry, our turn is coming a few years down the
     road.  
                   How would the members of your cooperative feel
     about that?
                   MR. METTS:  That would be extremely difficult. 
     Every year at our annual meeting we explain the fact of what
     it costs us to provide service, and we also explain what
     kind of support we're getting from Universal Service Funds,
     high cost funds.  
                   Our local service revenue requirement is $66.00 a
     month.  Now, disregarding what I've heard about cost of
     service going down and getting cheaper, that is not the case
     in rural America.  It costs us $50,000 to put in a mile of
     fiber.  Our average net depreciated investment per look is
     $7400.  So we -- we have to have Universal Service Funds. 
     Our local service rates would go from $14.00 to $70.00
     without USF.  So it's extremely important to us.
                   And even though we continue to tell our members
     that some day this may change, and you will have to realize
     we provide you all these advance services, that you cannot
     continue with that rate.  It's hard enough for them to
     understand why it would go away.  it would be extremely hard
     to explain it went away to a bigger company.  
                   COMMISSIONER FURCHGOTT-ROTH:  Thank you, Mr.
     Metts.
                   Mr. Cooper, I appreciate your comments about why
     prices should in some sense reflect costs, and I appreciate
     your comments about if you reduce usage sensitive rates,
     that much of the benefit would go to consumers that use
     telephone services a lot, which may, in fact, be a lot of
     business customers. 
                   Is it not possible that one could get the benefits
     of reducing usage sensitive rates, which, of course, just
     penalize customers who want to use the phone and discourages
     them because they're having to pay something that's well
     above cost, is it possible to come up with a system of flat
     charges which, of course, can be paid both by long distance
     local companies in such a way that flat charges are higher
     for business customers and lower for residential customers?
                   MR. COOPER:  That sounds like the system we have
     today.  The question of whether charges should be flat or
     fixed is a separate question from whether or not costs are
     above or below or they are subsidies.  
                   We supported the concept of a PICC in the sense
     that it made sense to recover a fixed cost for a facility
     that's being used by the long distance provider in a fixed
     fashion, and we did support it.  It's become a bone of
     contention, but it makes economic sense to have those fixed
     charges to cover fixed costs.  And if you did cost cause of
     analysis, you might well find that there -- as I said, when
     we first supported that, sometimes costs are not so fixed;
     that is, people decide how many fibers to put in there, how
     much to light, and it starts to look variable as the revenue
     opportunity is a variable revenue opportunity.
                   But clearly, we supported the concept of
     recovering those fixed cost with fixed charges, and
     distinguishing between high and low volume users.  
                   COMMISSIONER FURCHGOTT-ROTH:  Thank you, Mr.
     Chairman.  
                   CHAIRMAN KENNARD:  Thank you.  
                   Chairman Wood?  
                   CHAIRMAN WOOD:  Mr. Gregg, in your testimony you
     mentioned, actually in your written testimony, you mentioned
     about the totality of the bill shouldn't go up.
                   in this age of, I think, migration back toward the
     one bill option, although hopefully from a number of
     different companies instead of just one or two, isn't the
     totality of the bill that we need to be thinking about, the
     whole telecommunications service bill?  
                   MR. GREGG:  I think you need to focus primarily on
     the basic rate, rates that people have to pay to get access
     to the network.  Every other type of usage that you make of
     that network tends to be discretionary to some extent,
     except for rural areas, as Mr. Metts stated, where toll
     calls are a necessity.  
                   CHAIRMAN WOOD:  Right.  
                   MR. GREGG:  But I believe that our charge is not
     to worry so much about vertical services, not to worry so
     much about advance service pricing.  It's to make sure that
     basic service, the price, the rate that everyone of us, no
     matter what our economic standing is, has to pay to get on
     that network and to keep that network at the high value it
     current has, because 94 percent of our citizens are
     connected.  So in that regard, I think the focus is on local
     rates.
                   I think there are ways to address the toll issue
     through EAS, for example.  There has been a movement
     throughout the nation to increase the value that a customer
     gets from his calling area, and, in fact, customers have
     shown that they are willing to pay more if they get more
     value.  In fact, starting in 1988 and concluding in 1994, we
     instituted statewide EAS in our state.  Every subscriber of
     every phone company has exactly the same calling area, and
     exactly the same calling options, and exactly the same
     rates.  
                   Obviously, some are supported more than others,
     but everybody is put on an equal footing and everybody has
     options to try to fit what they need with their income and
     their desires.  
                   CHAIRMAN WOOD:  What's your basic -- what would
     the basic local rate plus SLIC, plus mandatory taxes and
     local fees be?  
                   In other words, if all you wanted was dial tone an
     no caller ID.  
                   MR. GREGG:  9.50.
                   CHAIRMAN WOOD:  With the SLIC included?
                   MR. GREGG:  With the SLIC.  9.50.  
                   CHAIRMAN WOOD:  And what would be --
                   MR. GREGG:  That is all measured though.  Every
     call you make is measured.  
                   CHAIRMAN WOOD:  And what is a per minute or per
     call?
                   MR. GREGG:  It's per minute, distance, time of
     day.  It has all four dimensions.  
                   CHAIRMAN WOOD:  It's like Chicago.  Okay.  Just
     like Chicago has.
                   MR. GREGG:  Just like Chicago. 
                   Then we have basically four different levels.  You
     can buy a greater amount of prepaid flat service.
                   CHAIRMAN WOOD:  Right.  
                   MR. GREGG:  $15.00.  Your local change is all
     flat.  Everything else is measured.  
                   CHAIRMAN WOOD:  Fifteen plus nine?
                   MR. GREGG:  Fifteen plus the 3.50.  
                   CHAIRMAN WOOD:  Okay.  Okay.  
                   MR. GREGG:  $22.00 plus the 3.50 for your home
     exchange, surrounding exchanges.  
                   CHAIRMAN WOOD:  Okay. 
                   MR. GREGG:  And then the rest measured.  Twenty-
     nine bucks plus the 3.50, everything flat.
                   CHAIRMAN WOOD:  Let me ask the other three
     panelists.  Mr. Gumper, in your testimony you compared it to
     the cost of the pizzas you got.  I was comparing it to the
     cab ride I took from the Reagan Airport to here, and I don't
     know what affordability is.  
                   What is affordability since that's your panel?  I
     mean, in dollars, what affordability of basic local service? 
                   Mr. Gregg gave a good range of what West Virginia
     is talking about.
                   MR. GUMPER:  Well, I think --
                   CHAIRMAN WOOD:  You said 21 bucks for the pizzas?
                   MR. GUMPER:  The average -- okay, yeah, the
     average local service right now is $21.00, and that includes
     basically your surcharges and your taxes.  The average total
     bill is $54.00.  So you can see for the average customer
     their basic service represents about 40 percent of their
     total bill.  
                   You know, I think when you take a look at the
     penetration rates overall, it's obvious that telephone
     service is affordable.  The vast majority of people in this
     country have it, and when you compare the prices of other
     goods and what has happened to those goods and services over
     the last 10, 15, 20 years, telephone service, particularly
     basic service, becomes even more affordable.  
                   So I would say I think a lot of states have gotten
     rates into the neighborhood of 20 - 25 dollars for basic
     service, and they have not seen penetration rates suffer.
                   CHAIRMAN WOOD:  In the co-op, Mr. Metts, you're
     right next to a lot of the folks I regulate, and I know your
     rates are probably maybe even a little higher than what they
     are.  You said 14?
                   MR. METTS:  $14.90.
                   CHAIRMAN WOOD:  Four, and is that with the SLIC?
                   MR. METTS:  With the SLIC and 911 will be about
     $19.00.
                   CHAIRMAN WOOD:  Okay.  And calling scope of how
     big?
                   MR. METTS:  Well, some exchange is 500 customers. 
     Some exchange is 5,000, because we don't -- we don't provide
     service in the town where we're headquartered.  That U.S.
     West.  But we have one exchange has 104 customers and that's
     all they can call, and there is no doctors, there is no
     school, there is no medical facilities.  They can call the
     volunteer fire department, and everything else is a toll
     call.  
                   CHAIRMAN WOOD:  And your toll rate would be what
     per minute?
                   MR. METTS:  The toll rate?  
                   CHAIRMAN WOOD:  Is it distance sensitive or is
     there an average number?  
                   MR. METTS:  No, it's would be distance sensitive.
                   CHAIRMAN WOOD:  I'm just trying to get an idea of
     what the number --
                   MR. METTS:  Twenty-five cents probably.
                   CHAIRMAN WOOD:  Okay.  Mr. Cooper, what's
     affordable?
                   MR. COOPER:  In response to Julia Johnson's
     question, and it's something I did in Florida, this question
     of, well, compared to other things it's gotten real cheap,
     so therefore a big increase would be affordable.
                   It depends on what you look at.  Remember, this is
     an electronic-based, technology-based industry.  If you
     compare it to computers, it's not gotten real cheap. 
     Computers have gotten a lot cheaper.  It's -- ironically
     since the breakup so has gasoline, so has shoes, so has TV,
     so has audio, so there is a bunch of stuff there that has
     gotten a lot less expensive, and it's not clear that that is
     a standard that you ought to apply.
                   Now, if you put the -- cable rates have gone up
     more.  So if you put us back to 1984, you can actually say
     that telephone costs less than cable, but that's an
     unregulated monopoly.  That's exactly what we're trying to
     stay away from.  But I will tell you the companies in
     Florida said, "Hey, look what cable rates have done." 
     That's exactly the comparison we don't want.  
                   So the question is are rates affordable today? 
     Yes.  Could you double them without causing people to drop
     off the network?  You probably could.  Would some people
     drop off the network?  Yes, they would.  Would a lot of
     people end up with a higher bill, particularly my
     constituents?  Yes, they would.  
                   So that affordability is a complex concept, and we
     don't think you ought to increase basic rates today going
     forward.  The point was to start where we were and see if we
     could get a competitive market to lower those prices.  
                   CHAIRMAN WOOD:  Thank you.  
                   CHAIRMAN KENNARD:  Thank you.  
                   Commissioner Powell.  
                   COMMISSIONER POWELL:  Thank you, Mr. Chairman.  I
     have this set of concerns.  If we were to be concerned
     solely in the administration of our functions with consumers
     getting the best deal possible, you might have a certain
     kind of system.  But we have other obligations and events we
     are trying to help to foster the proper conditions for, not
     the least of which is a form of competition that will bring
     values, in the judgement of the Congress, to these consumers
     as well.  
                   And in light of that, I'm sort of struck by
     certain statements that I want to explore a little further,
     first with you, Mr. Cooper.  You said something which, to
     some degree, knocked me over in the sense that affordability
     shouldn't have anything to do with what the market would
     bear.  I'm not so sure I fully understand what you mean by
     that.  
                   It seems to me if it's unaffordable, I wouldn't be
     able to pay, but you seem to have a definition of
     affordability that would allow consumers to maintain
     subscribership but still as a matter of government policy
     should be kept below those levels.  That seems to be
     extraordinarily intention with any kind of competitive
     market, no matter how you created it.  If you had a notion
     that a market could produce rates that consumers or users
     would be willing to play but nonetheless the government
     would keep them below those rates as a matter of policy, and
     I would just like to hear you flush that statement out a
     little.
                   MR. COOPER:  Well, the answer, the simple answer
     is the following.  That the market that you've described to
     me only has a demand side.  That is, what you're saying is 
     that we're going to price by looking at what the demand side
     of the market says.  
                   In point of fact, the magic of our capitalist
     system is the supply side of the market.  So that a
     competitive marketplace, you're not only looking at what the
     consumer is willing to pay, you have to look at what your
     competitors are willing to charge. 
                   And so the real driving force in a competitive
     market, which we endorse, is on the supply side where people
     come in and say, "If he tries to put his price up," he looks
     at telephone service and he knows Cooper would pay twice as
     much for service, if he tries to double my rate, the supply
     side enters and said, "I don't have to let him do that.  I
     can steal Cooper as my customer without raising his price." 
     So that's the first part of the answer is that when we talk
     about a supply side, and we have commended the Commission
     for vigorously trying to get that supply side of the market.
                   The second answer is that even on the demand side,
     and we've said this in our testimony, and I go back to the
     original Michigan petition on the demand side, clearly
     affordability is not an absolute concept.  If you look in
     the dictionary today, the first definition you will get of
     affordability is a relative concept.  It doesn't say
     "ability to pay."  It says, "ability to pay without undue
     harm, burden," et cetera.  So that our concept of
     affordability is, in fact, a relative concept.  
                   We do ask how much does it hurt, and that, we 
     think, is the -- when Congress said affordable, they didn't
     point their finger to whether it was definition A or
     definition B.  So I believe that both on the demand side and
     the supply side.  
                   COMMISSIONER POWELL:  Well, that's a good point,
     but one of the things that concerns me is that in order to
     materialize or pump the supply side, to create those choices
     in the first place are going to require some level of price
     flexibility or some level of ability to respond to pricing
     in order to make it viable to enter and be that choice in
     the first place.
                   And so, I mean, I don't really dispute your --
     your focus is right to be concerned with both, but what I
     struggle with is the interaction of the two; that there are
     potentially subsidy distortions and distortions that could
     be justified if focused exclusively on, and Dave's point
     about quality and cost need to be considered, but if that's
     all you focused on, you could easily engineer a system in
     which those things were maximized, fearfully to the
     exclusion of potential for efficient entry, and that's just
     my caution. 
                   In the interest of time, let me move to another
     question, and I think maybe I'll direct to Mr. Gregg.  I
     kind of clicked in late to the point of your discussion but
     the focus on basic rates, I think, was your core points, but
     you were discussing the general issue of passing savings
     through only to competitive customers and not to those who
     don't seem to switch from basic rates from month to month,
     et cetera.  
                   It seems to me part of our -- and this may even
     play into the question of line items and what values they do
     or don't serve, but it seems to me that in the exercise of
     how consumers are going to interact one has to be concerned
     about conditioning them to change the paradigm as well. 
     That is, someone mentioned about consumers for the vast
     majority of the time that they have had an interaction with
     a phone see it as a guarantee level of affordability, a
     utility-like model.
                   But as we introduce a competitive model, there is
     a fear to me, it seems to me, that the logical thing, if you
     are a producer, is to pass it through to competitive -- to
     your competitive customers.
                   Now, I would be very concerned if there were true
     barriers to basic residential customers switching to more
     competitive alternatives, but I don't want to accept, I
     don't think, that if people won't choose options available
     to them, if there is information as to -- informed
     information available in the market for them to make those
     choices, just because they don't for whatever reasons, which
     would be difficult for us to determine, that we should
     nonetheless play to that lower common denominator.
                   I'm somewhat surprised by this assertion because
     if you take an AT&T, they don't hide the 10 one-rate plan. 
     My TV is bombarded with this.  I get called with it all the
     time because they have learned that the switch stimulates
     demand and they get a benefit from people switching to some
     of these more competitive plans.  Nonetheless, they still
     have a problem every month with people who will not switch
     from it. 
                   And at some point isn't it responsible to say that
     the policy shouldn't be geared to take care of a class of
     consumers that will not make those choices for whatever
     reason?  
                   MR. GREGG:  Well, you are correct, but in spite of
     being bombarded every conceivable way, through radio,
     television, newspapers and actual phone calls to their
     homes, there is a vast majority of customers who simply will
     not and do not switch, do not care to get in the game at
     all.  And this is probably true in terms of shopping for
     bread.  I go to the corner grocery even though I know I'm
     paying 50 percent more rather than drive a couple more
     blocks to go to the big supermarket, and that's going to be
     true in any competitive market.
                   I think my response was if the concern is we've
     reduced access $9 billion, we want to make sure the end
     users get $9 billion of savings.  The only way you're going
     to actually be able to verify that is by some sort of
     prescriptive requirement.  If you're not willing to do that,
     if you're willing to let the market work and let the players
     make economically rational decision, you're going to get
     what you've gotten, which is that the savings go to the
     competitive customers.  Why would you in your right mind
     pass it through to customers who are going to pay whatever.
                   COMMISSIONER POWELL:  Um-hmm.  Um-hmm.  
                   MR. GREGG:  And the distinction, though, to get
     back to Mr. Cooper's perspective, is that while we do have a
     competitive market in toll, we still do not have a
     competitive market by any stretch of the imagination for
     local service, and that is why it would be unconscionable to
     let local service rates rise now.
                   For example, one paradigm would be cap rates where
     they are.  Rates are affordable right now.  Cap them where
     they are.  Let competition seek out the areas where they can
     provide service below that price, where the cost is low.  If
     those internal subsidies that exist within states, those are
     not affected by the external subsidies that the federal
     government gives them.  if those have to be recompensed by
     some sort of Universal Service Fund, that's the state's
     responsibility first.  And if they need additional
     assistance, that is when I believe the federal government
     should kick in additional external subsidies.  
                   COMMISSIONER POWELL:  Thank you.  
                   CHAIRMAN KENNARD:  Ms. Hogerty.  
                   MS. HOGERTY:  Yes, Mr. Gregg, I was interested in
     your suggestion.  I believe that you suggested that perhaps
     the fund should be somewhere close to where it is today, and
     you have also suggested that implicit subsidies are
     something that you should let the competitive market deal
     with, and I think that's just what you were talking about
     with Commissioner Powell.
                   Could you expand on that some more?
                   MR. GREGG:  Well, basically you've got --
                   MS. HOGERTY:  And if you want to use competition
     as a standard, do you have some kind of criteria that could
     be used.  
                   MR. GREGG:  Once again, going back to where we are
     now.  Rates are affordable.  We've got a high cost fund of
     1.7 billion; Lifeline, a half a billion; schools and
     libraries, 1.3; and whatever the rural health care is going
     to end up being.  So you're looking at basically about a 3
     billion plus fund that's being recovered by approximately
     five percent surcharge by most long distance companies.
                   I believe that for the high cost issue, the $1.7
     billion, that fund right now is sufficient.  The funds that
     Mr. Metts' phone company gets, the funds that the small
     rural telcos in my state get that keeps their rates
     affordable are flowing now.  If you can guarantee that they
     will at least continue to flow at that level, I think that
     we in the states can deal with the internal subsidies that
     come about because of average rate, those flows of business
     to residential and urban to rural.
                   Right now those flows are happening through
     average rates.  We have an implicit Universal Service Fund. 
     Unless and until competition begins to erode those internal
     implicit flows there is no need for any additional Universal
     Service funding.  And if you look at the pace of local
     service competition developing, I believe it will be -- any
     losses, any revenue losses from beginning competition will
     be more than offset by access line growth and revenue growth
     of the incumbents.  That's what we have seen so far.  Even
     in areas where there has been the greatest competition
     growth, there still has been very healthy growth by the
     incumbent.  
                   MS. HOGERTY:  So would you see the way this
     playing out is that the incumbents would come to their state
     regulators and say we need to start de-averaging our rates?
                   MR. GREGG:  Right, the state regulators are the
     ones that have set up whatever system exists in their
     particular state.   And as I said in my statement, it varies
     wildly across the United States.  They are the ones that
     know where the high cost areas area.  They know them
     inherently.  They are from those states.  
                   I tend to agree with Commissioner Furchgott-Roth
     that I don't think it's possible for people sitting in
     Washington constructing a wonderful machine to somehow
     magically figure out the cost in every sub grid of every
     census block in the United States.  I just don't think it's
     possible.  It's like trying to reach the horizon.  You can
     never make an abstraction of reality reality.
                   So for those reasons I believe that dealing with
     those implicit subsidies, those internal subsidies, should
     be left in the first case to the states.  If and when we
     have real data that there is an additional need there to
     support affordability, then we can come to the federal
     government and see if we need any additional external
     subsidies.  
                   MS. HOGERTY:  Mr. Gumper, I wanted to ask you
     about Lifeline and Link-Up.
                   Do you know how many of those who are actually
     eligible for those services are taking them?
                   MR. GREGG:  No, I don't.
                   MS. HOGERTY:  Okay.
                   MR. GREGG:  I would estimate it's probably a
     fairly small percentage for a couple of reasons.  One,
     obviously as it's already been alluded to, there is no
     question that in many parts of this country, particularly
     the more rural areas, not only in program like Lifeline and
     Link-Up, but the school lunch program and things like that,
     we know that people who are eligible for it many times
     prefer not to participate.
                   The other thing I would point out is because the
     Joint Board expanded the Lifeline, Link-Up Program effective
     January 1st of this year, there were a lot of states that
     did not have a program prior to that, so they have
     implemented those programs, so there is obviously going to
     be some time required to ramp up those programs to a more
     appropriate participation rate since they are fairly new and
     there is going to be a need for consumer education in those
     states where they never had the program existing before.  
                   MS. HOGERTY:  Mr. Metts, what kind of an education
     program do you have for Lifeline and Link-Up?
                   MR. METTS:  Well, there is a state program by the
     State Corporation Commission mandates that you do certain
     things for that program every year, and we send out mailers
     to the customer base and that type of thing.  And they have
     to qualify, they have to go through State Human Services and
     be able to qualify for light, heat, Medicare, those types of
     things, but it's --
                   MS. HOGERTY:  So it's an annual mailing --
                   MR. METTS:  Yes.
                   MS. HOGERTY:  -- is the way you notify?
                   MR. METTS:  Yes.  
                   MS. HOGERTY:  Okay.  Don't you think that perhaps
     if the education effort were beefed up a little bit you
     might get a better subscription?
                   MR. METTS:  I do not know that.  It is possible
     that it could, but I don't know that that would do it.  
                   MR. GREGG:  In our state the Health and Human
     Services Department dispenses information about the
     telesystems program with every welfare recipient
     application.  
                   MS. HOGERTY:  I don't know if -- do I have some
     more time?  Mr. Cooper --
                   CHAIRMAN KENNARD:  No.  
                   MS. HOGERTY:   Am I out of time?  
                   CHAIRMAN KENNARD:  You're out of time.  
                   MS. HOGERTY:  Okay.  
                   CHAIRMAN KENNARD:  If you have one more question,
     go ahead, Martha.  
                   MS. HOGERTY:  That's okay.
                   COMMISSIONER TRISTANI:  Mr. Chairman, I have two
     questions and I'll try and be brief.
                   CHAIRMAN KENNARD:  Okay.  
                   COMMISSIONER TRISTANI:  One is a follow up on
     Lifeline, Link-Up, and I will say being from New Mexico I am
     proud that our state was a little bit ahead of the curve
     with this program, with the requirements, so I know that
     it's a good program.
                   Having said that, though, I'm troubled from some
     of the things I have heard today that there are some states
     that have not changed eligibility requirements, and so that
     alone tells me that there must be a lot of eligible people 
     that aren't linked up because they can't apply.
                   And may I ask, Mr. Cooper, what state that was
     where it was vetoed or --
                   MR. GUMPER:  I believe that was the State of
     Minnesota.
                   COMMISSIONER TRISTANI:  Okay.  
                   MR. COOPER:  And, again, it's a state I have been
     active in.  But there is another answer here, is that the
     FCC identified a sensible approach, which was automatic
     enrollment.  As you've just heard two people tell you that
     State Department of Health and Human Services gets a piece
     of paper back from a customer and then sends another piece
     of paper to the phone company.  Instead of simply saying all
     these people are receiving food stamps, light, heat, et
     cetera, put them in the Lifeline Program, which is what the
     board recommended.  Tremendous resistance.  These are people
     who have already declared themselves to be in need and found
     to be in need.  Why are we forcing them to fill out another
     piece of paper?
                   And that answer to that is there is a lot of folks
     who have said they've gotten food stamps or they have gotten
     those programs, and have not come in for Lifeline.  They
     don't know.  We don't need the mailing.  We just need an
     exchange of data tapes and all these folks will get that
     benefit.  
                   A perfectly good idea, applied in a couple of
     places.  But to my knowledge, no other state since the Board
     and the FCC recommended that we adopt automatic enrollment,
     no other state has done so.  
                   COMMISSIONER TRISTANI:  Okay.  I'm going to go
     back to, and it relates to Lifeline, Link-Up, the class of
     people who aren't connected, six percent.  
                   Mr. Gumper, first of all, I want to thank you for
     sharing the study which you talked about, and I haven't had
     time to read through all of it, but I will tell you that it
     doesn't say income doesn't matter.  It says there are a
     variety of issues, and I won't go into detail, but it keeps
     pointing back to income makes a difference.  Certain
     minority groups like African-Americans and Latinos are more
     disconnected.  
                   Not surprising, or actually this statistic
     surprised me, but I guess it shouldn't have, single civilian
     female with children has the second lowest telephone
     penetration rate, 82.6 percent, exceeded only by the
     homeless.  And I'm bringing up that statistic because you
     also said that you thought, and maybe I misunderstood you,
     you thought we'd reached this optimum, like 94 percent.  the
     Commission shouldn't be doing more, and let me -- let me
     just go a little further.
                   My question to you and the rest of the panel is
     have we reached an optimum?  Is this something the FCC
     should be looking at?  Should we be looking at in
     conjunction with the states?  Do we know enough about the
     reasons for non-subscribership?
                   MR. GUMPER:  I would say, first of all, I don't
     think we know enough, and I think that was what Jorge's
     study really points out; that this is a very complex issue. 
     Some of the variations, I would point out, and the reason
     why I quoted the statistics from California is because
     California happens to have a very aggressive low income
     program.
                   COMMISSIONER TRISTANI:  Um-hmm.
                   MR. GUMPER:  They have one of the highest
     penetration rates.  I think New York and California today
     represent a big chunk of the Lifeline and Link-Up
     participants.  And yet even in a state like California,
     which has a very aggressive program, and New York, as my
     testimony also quoted because he also has some statistics
     from New York, New York, Lifeline costs $1.00 a month.  It's
     hard to believe that when you can get telephone service for
     $1.00 a month that affordability is a primary issue if
     you're talking about the price of basic telephone service.
                   So the question then comes is why do you have such
     large variations in people who own their own homes, and
     those statistics are owned, so those people own their own
     homes, and yet we see variations where in some cases there
     is no variation in some counties.  In other cases, it's 35 -
     40 percent.  
                   I would say those kind of extreme variations in
     two states that have very aggressive Lifeline programs, and
     you can get telephone service at very, very cheap rates,
     then affordability is not the issue.  
                   Now, there may be places where it still is
     because, again, we have just started the Lifeline, Link-Up
     programs, and as Mark has indicated, obviously there has
     still been a lot of resistance in some areas to follow a
     norm.  So I don't think you can just say we can wash our
     hands.  
                   As I said to the Chairman before, I think the
     current Lifeline and Link-Up programs that exist should
     address the issue of affordability.
                   COMMISSIONER TRISTANI:  If properly implemented.
                   MR. GUMPER:  Yes.  
                   COMMISSIONER TRISTANI:  Now, let me just -- what
     do we do about Native American reservations, which as the
     Navajo, and the statistics are in here where I think it's 18
     percent penetration?  And, of course, I think distance has a
     lot to do with that.
                   MR. GUMPER:  I tried to allude, you know, in my
     remarks, because I think realistically in those areas where
     it is very, very expensive, there it's not so much a
     question of affordability, I don't believe.  I think it's a
     question that it is cost prohibitive.  
                   And then the question is do you as a Joint Board
     recommend and adopt a program which basically provides large
     amounts of funding to wire line companies to deploy
     facilities to those very remote areas, or, in fact, do you
     look to a wireless solution.  
                   And I would say that given what has happened in
     the wireless market and the price structures that have been
     occurring more recently there -- you know, when this debate
     started three - four years ago wireless was probably not a
     very viable alternative.  Today, the amount of minutes that
     people get in wireless packages and the price they can get
     it at, realizing that in some cases that package covers the
     entire United States, is it feasible or reasonable to
     subsidize wire line companies to the same level just to
     provide local usage where in fact someone can get five - six
     hundred minutes of nationwide use for the same amount of
     dollars?  
                   I would say it's not.  
                   MR. COOPER:  I think if you look at people who own
     their own homes, you've excluded people who don't.  And if
     you look at the median income of those two groups, you would
     find a dramatic difference.
                   The simple fact of the matter is that the single
     most important determinant of telephone subscribership is
     income.  If you look at six percent of people who don't have
     phones, you will discover that two-thirds of them, three-
     quarters of them have income below 200 percent of poverty. 
     Simple observation.
                   Now, that means that there are some people who
     have higher incomes who don't have telephones, and then
     you're going to ask yourself, but the big problem is income. 
     The second question you will discover if you run the
     econometric models, it will always enter the analysis,
     language spoken at home.  If you don't speak English at
     home, the phone is less valuable to you because everybody
     out there on the network speaks English primarily, so you've
     got less value to you.
                   And so the language and cultural stuff will help
     to answer that.  But all of those other factors get pretty
     small when it comes to -- you start from income.
                   Now,  Frank is right.  After you -- after you've
     controlled for income, you've got all these other things
     that affect telephone subscribership, but I think the thing
     you're reacting to we sort of gave, and it's an impression I
     don't think he intended to give, he says income doesn't
     matter.  He didn't say that.  
                   But there comes a point where if you look at the
     statistics, if you hit about $40,000 of household income, or
     50, from there on up 98 percent of the people have phone
     service in every income group.  Two percent of those folks
     don't, but there down you get down to, you know, 20 percent
     who don't have in the lowest income.  
                   So with respect to the question of affordability
     income definitely still matters, and the Lifeline Program is
     important, and it's targeted but it's not fully subscribed
     nor is the benefit 100 percent in most places as defined by
     the Joint Board and the FCC.
                   COMMISSIONER TRISTANI:  Is there anything else the
     FCC could be doing that it's not doing?
                   MR. COOPER:  Well, as I've said, we -- we thought
     the FCC did a terrific job in defining the program.  We just
     don't have people buying into it, and we don't have people
     doing automatic enrollment.  We are still fighting this
     business about how do we send paper around, educate and move
     it around.  So the answer is that, as I said, make it clear
     that if they don't expand the eligibility, they're not going
     to get the money.  
                   You may have to lean harder on the question of --
     five and a quarter is very attractive for states to take the
     money and run.  There is a lot of people looked down and
     said, "That's a big discount, why do we need a match?"   And
     you made it too easy to do that.  
                   So I think you've defined a great program.  It
     just hasn't been taken up in the rest of the country, and
     then now you ask yourself how do we put some muscle behind
     getting people to adopt the program.  
                   CHAIRMAN KENNARD:  Thank you.
                   Commissioner Baker?  
                   COMMISSIONER BAKER:  Thank you, Mr. Chairman.  
                   I'll base my questions on Mr. Cooper's testimony,
     but I will invite any of the panelists to respond.
                   First, regarding line items, Mr. Cooper, you 
     stated that in your opinion line items should not appear on
     consumer bills, correct?
                   MR. COOPER:  Yes.  
                   COMMISSIONER BAKER:  Okay.  But aren't line items
     consistent with the notion of making Universal Service
     support explicit?  That is, consumers realize what portion
     of their bill goes to support high cost funding?
                   MR. COOPER:  Well, the word "explicit" appears in
     the statute, and in that section of the statute it talks
     about service provider contribution.  It never says -- and
     so if a service provider is told here is how much your cost
     of Universal Service is, that is explicit to the service
     provider, and that's the way the provision was written.  
                   Could you have written a provision which said
     consumers should be told it cost them $2.00 a month?  
     Congress could have written that.  They said explicit, they
     said telecommunications service providers.  And, in fact, if
     you tell them you are paying $2 million or whatever the
     number is and there is no other subsidy any place in any HUR
     playing -- paying, it is explicit to the telecommunications
     service provider, which is what that section of the Act
     says.  
                   MR. GUMPER:  I'd like to respond to that for a
     second.  
                   COMMISSIONER BAKER:  Yes, and I guess, Mr. Gumper,
     if I can anticipate your response because my follow-up
     question would be, I mean, can't we all reasonably
     anticipate that providers charged with an obligation of
     contributing to a support fund would in fact pass this along
     to consumers?  
                   MR. COOPER:  We didn't say they couldn't pass it
     along, and they will try, and we'll see where they put it. 
     Some might say -- one company might put in the bottom of the
     bill, which is what we saw in long distance, and another
     company might say, "Hey, we don't put that on your bill." 
     And the consumer will start to figure out and they'll look
     at that.  So essentially this is just like any other cost of
     business.  Why don't they break out the CEO's salary on the
     bottom of the bill, or the unemployment insurance that they
     pay?  Every company pays unemployment insurance for those
     bills.  Do you see it on the bottom of the bill saying, "You
     see that, you're paying for unemployment insurance in the
     State of Georgia?"  
                   The answer is that each cost of business is
     recovered in the price sold to the customer and we don't
     separate out those things on the bottom of the bill.
                   MR. GUMPER:  Okay, let's though point out that in
     the telecommunications industry every telcom company, except
     for the local exchange carriers, has the flexibility to
     recover their contribution in any way, shape or form they
     desire.  And I agree with you, most of them will put it as a
     line item in one shape or another on a customer's bill, and
     we've seen that happen as this past year has rolled out.
                   The only exception are the local exchange
     carriers.  We do not have the flexibility to just simply say
     we will recover those costs any which way we can.  We have
     to be given permission of our regulators to recover those
     costs.  And right now today the local exchange carriers
     recover our contribution and for Bell Atlantic's case it's
     about 215 million a year we put into the fund through our
     access charges which, quite frankly, we don't think is a
     very viable way to do that.  And it's sort of a little bit
     of follow, you know, the nut under the cap because, you
     know, the long distance carriers in effect reimburse us
     through access charges for most of our contribution, and it
     probably would make a lot more sense for us not to put it in
     our access charges, but to put it on a line item on the
     bill.  But the only way we can do that is if we're given the
     permission from the regulators.  
                   MR. GREGG:  Mr. Baker, my preference would be to
     prohibit service charges altogether like Section 167(h) of
     the Georgia Telephone Competition Act.  However, if you are
     going to impose surcharges, I believe that the most
     important thing is that they not be made mandatory.  Right
     now we have virtually every company putting a surcharge of
     one type or the other.  AT&T is 93 cents per month.  Others
     are 4.9 percent, 5.2 percent.
                   However, I believe if you do not make them
     mandatory, that the market will ultimately drive them out. 
     If consumers do not like paying all these other extra
     charges that are on their bill, there is going to be
     somebody who is going to come up and fill a niche and says
     no hidden charges, 10 cents a minute, and when we say it you
     can believe it.  We're not going to be like MCI.  We're not
     going to be like AT&T and say 10 cents a minute, but what we
     really mean is 10 cents plus five percent.  
                   So I believe as long as you let -- if you're going
     to have surcharge -- I'd rather have it in the cost of
     overall rates, but if you're going to have surcharges or
     allow surcharges, allow them, don't mandate them, because if
     you mandate them it will be like the SLIC.  It will stay
     there forever.  
                   COMMISSIONER BAKER:  Okay, which leads into my
     next question.  And again starting with Mr. Cooper's
     comments, you would favor a reduction or elimination of the
     SLIC; is that correct?
                   MR. COOPER:  Yes.  
                   COMMISSIONER BAKER:  Okay.  Squeezing the balloon
     at one end, which makes it bigger at the other, where does
     the balloon get bigger?  Do the reductions in the SLIC
     translate into dollar increases in the high cost fund?
                   MR. COOPER:  We think the balloon ought to let
     some air out of it.  
                   (Laughter.)
                   MR. COOPER:  There is no doubt there is a lot of
     excess profits and other things that will make plenty of
     room for these funds without simply having to find them some
     place else.  So there is no doubt, and we've been consistent
     in that.  We think there is too much air in the balloon.  
                   MR. GREGG:  Remember the SLIC supports incumbent
     local carriers, and the question of whether reductions in
     the SLIC are going to be sufficient to trigger basic rate
     increases, as you say, squeeze the balloon and it comes out,
     is once again a state issue.  
                   This is a federally imposed end user surcharge
     that basically affects the state performance of companies. 
     Let the states judge it, and as Dr. Cooper said, there is
     probably a lot of air that can be let out without any
     adverse affect on anybody.
                   MR. GUMPER:  Just for the record, I will point out
     I don't think there is a lot of air.
                   (Laughter.)
                   MR. GUMPER:  And also I've agreed with almost
     everything you've said, Billy, up to this point.  
                   (Laughter.)
                   If you reduce the SLIC, the balloon is in the
     charges that the IXCs pay us because unless we were to
     change the separations rules, those are interstate revenues. 
     And if you reduced the collection of the subscriber line
     charge, presumably it would mean an offset in interstate
     access charges either through a PICC or through a per minute
     kind of charge, not a local rate increase.  
                   MR. COOPER:  I predicated on an efficiency finding
     and a cost finding that allows that air to get out, and in
     that I agree with Frank.  It will stay in this jurisdiction
     and you really do have to base it upon a finding that the
     dollar figure has declined so that it doesn't just pop up
     someplace else.  
                   COMMISSIONER BAKER:  Next question.  Heretofore we
     have addressed cost of service by looking at either flat,
     that is, per line charges or per minute charges.  That's
     been the traditional way.  That's been the way we've done it
     up till now and that's the way we're going to do it for
     purposes of the order that will issue regarding high cost
     fund.  
                   But it's entirely conceivable, and some would say
     likely, that in the not too distant future there will be a
     new means of measuring service and that is "bit metering,"
     to use an expression.  In which case, conceivably voice gets
     very, very cheap.  But laying that side, any thoughts as to
     how or whether we need to address that issue so that the
     current order that will issue will at least not be
     incompatible with a market that might exist in the very near
     future where bit metering at least supplements if not
     supplants the tradition division between flat line and
     permanent charges.  
                   MR. COOPER:  Well, I'd be a big fan of bit
     metering because voice is very skinny and it doesn't take up
     a lot of space and it's very simple.  But that is the
     fundamental premise of how I approach this.  That is, the
     loop that connects everyone's house to a central office is
     capable of providing a tremendous amount of service, and it
     is critical and we have said this for years and years that
     capturing all of that growth to contribute to share the cost
     of this network is exactly the way you accomplish
     affordability.  So that whether you want to measure bits,
     you will hear people argue that some bits are different, we
     suddenly learn if there are big streams and they behave
     differently, but the answer is absolutely, the amount of
     service provided over that loop should share all the costs
     of the loop, and that's a position that I've counted seven
     times since the Act was passed that this Commission has
     reaffirmed that fundamental concept.  It's extremely
     important at both the federal and state level.
                   CHAIRMAN KENNARD:  Okay, I'm afraid we're going to
     have to wrap up.  It's unfortunate because I think we were
     just getting warmed up there, but we are about 45 minutes
     behind schedule and we really need to get moving.  
                   We'll have a 15-minute break, reconvene at 3:30,
     and I did want to thank this great panel that we had to get
     us going.  Thank you very much.
                   (Applause.)
                   (Whereupon, a recess was taken.)
                   CHAIRMAN KENNARD:  I think we should get going
     since we already falling behind schedule.  
                   Our second panel today is on consumer and
     education issues, and we will proceed the way we did with
     the earlier panel.  I will ask each of the panelists to
     introduce themselves and give an eight-minute presentation. 
     We have our trusty timekeeper here who will keep us on
     track, and then afterwards we will have an open session of
     questioning and answers for the panel.
                   Our first panelist will be Michael Travieso.
                   MR. TRAVIESO:  Travieso.
                   CHAIRMAN KENNARD:  Travieso.  Thank you.  
                   MR. TRAVIESO:  Like the gas. 
                   CHAIRMAN KENNARD:  Okay, great.  Thank you.  
                   MR. TRAVIESO:  Thank you, Mr. Chairman and Member
     of the Commission and the Board.
                   My name is Mike Travieso.  I am the Maryland
     people's counsel.  My job is to represent the residential
     customers in the State of Maryland of all utility services,
     including telephone services.
                   I would prefer not to actually read my testimony
     today.  It's been submitted in written form and it's in the
     record. Instead, I'd like to pull the major points out of
     that testimony and perhaps make a few observations which are
     based somewhat on anecdotal information, but also I think
     are things that have been discussed in literature from the
     NNRI and the regulatory assistance project, and Barbara
     Alexander and others.  
                   First, I would say that many customers, telephone
     customers still do not understand the difference between
     long distance toll and local telephone service.  
                   Second, while most people probably know that they
     can switch long distance carrier, if they choose to.  Few,
     if any, know that at some point in time in the near future
     they will have a choice of local exchange carriers.  Most
     customers don't understand that the advertisements that you
     see for 1010 calling or for competitive long distance 10
     cents a minute calling, which guarantees a savings, are
     based on what Billy Jack referred to this morning as the
     default service, and not on calling plans which a large
     percentage of customers actually have.
                   Consumers of telephone service, in general, are
     not equipped to make intelligent choices.  Making an
     intelligent choice is obviously an important component of a
     properly functioning competitive market.  Customers do not
     understand their bills.  You have a NOPR that you've issued
     on this -- more or less on this subject matter, and
     customers do not know which services are regulated and which
     services are not regulated.  
                   Most customers do not understand that state
     utility commissions cannot help them with problems with
     their long distance companies.  They don't understand the
     jurisdictional split.  And despite the reference, I guess it
     was Commissioner Tristani made to the 100,000 calls received
     by the FCC complaining about slamming, most people don't
     know what the FTC is, they don't know what the FCC is, and
     they don't know what the state public utility commissions
     are, nor do they know what they do.  
                   Dissipation rates and Lifeline and Link-Up
     programs are low because consumers do not know that these
     programs exist generally.  The question is not how many
     participants are there in Lifeline or Link-Up programs.  The
     question is what percentage of the eligible population
     actually participate.  And it's clear to us that very many
     of these customers do not actually know that these programs
     exist.  There is insufficient notice to consumers about the
     existence of these programs.
                   I might add a footnote here that what I was going
     to say about that is that automatic enrollment is the
     obvious solution to that problem, but Mark Cooper has
     already said that, so I would only second that as a
     proposition that if you go to a social service agency and
     you are eligible for LIHEAP or whatever the state
     eligibility requirement is in the state law, that you be
     told that you can automatically enroll at that point in
     these kinds of programs and you would be enrolled unless you
     declined to enroll.
                   What are some reasonable solutions to these
     problems as we move into the all market-based
     telecommunications service industry?  
                   I believe that federal and state regulators must
     play a major role in educating consumers.  I believe
     unabashedly that government is good, for example, and that
     government can do good, so that we can use our agencies,
     state and federal agencies to provide information to
     consumers in ways that we probably haven't done in the past
     because we've had a regulated marketplace.  
                   There ought to be toll free hot lines to
     appropriate government agencies.  Government agencies should
     have web pages which provide information to consumers. 
     Government agencies can mandate that the bill be used as a
     way to inform consumers.
                   For example, I believe that a bill should
     separately identify different providers that are providing
     services to that customer by name and by telephone number. 
     This would be a very easy way to allow a customer to detect
     whether they've been slammed or not, and some states do not
     have those kind of requirements.  And I'm sure if you tried
     to figure out from reading your telephone bills what
     services you get and how much you're being charged for them,
     many of you have probably had difficulty doing that.
                   Those bills could tell consumers where to complain
     if they have particular problems with providers and which
     agencies have jurisdiction over which companies.  We could
     require periodic bill inserts to explain about
     telecommunications deregulation and about customer rights
     along the lines of what's now required in the Truth and
     Lending Act, and the Telecommunications Disclosure and
     Dispute Resolution Act.  
                   We could have public service announcements
     sponsored by the FCC and/or state commissions.  We could use
     the FCC and state commission staff to hold public forums. 
     We could set up clearinghouses of information that could be
     shared amongst state agencies and then be made available to
     consumers where appropriate. 
                   We could create and/or staff up consumer resource
     centers within agencies.  We must do more than just field
     telephone calls.  We actually have to help solve the
     problems.  I know in my state we have a consumer division of
     the Public Service Commission.  It is the stepchild of the
     Public Service Commission.  It is the second which gets the
     least attention, has the least amount of resources, has no
     access to staff counsel until very recently, is not seen as
     a good place to work, et cetera, et cetera.  That has to be
     changed if we're going to move into a situation in which, in
     my belief, agencies are going to turn into more like
     consumer protection agencies and less like rate-making
     agencies as we deregulate all of the, or virtually all of
     the utility services except perhaps network services and gas
     and electric.
                   We can provide consumer oriented information
     through brochures on things like how to evaluate a provider,
     how to compare prices, how to detect fraud and deceptive
     practices, what questions to ask a company soliciting your
     business, how and where to file a complaint, and things of
     this nature.
                   I might indicate that it's not only government
     agencies that can and should be doing these things, but I
     believe government agencies ought to be doing these things. 
     My own agency has hired a person, we are a little law firm,
     that's basically what we are.  We've taken away one lawyer
     position and we've hired one public information position so
     that we can have a person during this time period who can
     arrange for our staff to go out and talk to the public. 
     I've been on cable TV.  I've been on public radio.  I've
     been on public television, and I've gone around to the AARP. 
     I've been all over the place trying to explain these things
     to the public.  
                   So I think that's a key and I would urge
     commission, federal and state, to sort of reexamine their
     traditional roles and to come to the conclusion that
     consumer education and consumer protection is going to be an
     extremely important role in the future.
                   I appreciate the opportunity to be come and
     testify before you today.  
                   CHAIRMAN KENNARD:  Thank you very much.
                   We have a surprise guest today, Michele Farquhar
     on behalf of Western Wireless.  
                   MS. FARQUHAR:  First, I would like to thank the
     Universal Service Joint Board for reaching out to the
     wireless industry for their thoughts on critical Universal
     Service issues, such as consumer education and affordability
     of basic telecom service.  I also appreciate the opportunity
     to represent John Stanton, who is the chairman and CEO of
     Western Wireless, which offers cellular service in primarily
     rural areas.
                   Consumer education is clearly a critical issue
     that needs to be addressed as we move towards a more
     competitive Universal Service market.  Briefly, I'd like to
     highlight some of Western Wireless's Universal Service
     initiatives that are aimed at bringing the benefits of
     competition to consumers located in rural and high cost
     areas, and you can follow along with the handout that was
     passed around earlier.
                   Western Wireless is already demonstrating its
     unique capabilities of itself and other wireless carriers
     serving approximately 50 customers in a very remote region
     of Nevada, which is unserved by any other local exchange
     service carrier.  These customers are receiving local dial
     tone service through a new wireless local loop technology at
     a flat rate of $10.00 per month.  The difference between
     this rate and Western Wireless's costs are recovered through
     a state rural improvement fund.
                   To expand its own Universal Service offerings,
     Western Wireless recently filed petitions in 13 states,
     seeking designation as an eligible telecom carriers or ETC. 
     As an ETC, Western Wireless intends to provide competitive
     local telephony service to consumers in rural and high cost
     areas. 
                   Western Wireless is also sponsoring a wireless
     cost model and is working with federal and state regulators
     to establish an affordable Universal Service system that is
     both competitively and technologically neutral.  
                   We also want to express our appreciation to the
     Joint Board for appointing a representative of Western
     Wireless to the Rural Task Force.  
                   Turning to the issue of consumer education,
     Western Wireless strongly believes that three principles
     should guide the development of a consumer education
     program.
                   First, we should empower the consumer to decide
     which carrier best serves individual telecom needs and what
     services are included in the Universal Service offering 
     provided, of course, that that service meets the basic
     definition of Universal Service.  
                   Second, we should educate consumers on the
     benefits of competition. 
                   And, lastly, we should eliminate any barriers to a
     competitive Universal Service system that would harm the
     public.  
                   In adopting Universal Service policies, the Joint
     Board should first ask whether the policy is in the
     consumers' interest.  By focusing policy initiatives on the
     consumer, the public interest will thereby be served.
                   The first principle is empowering the consumer. 
     The consumer and not the regulators should be the decision-
     maker in the competitive environment.  The Joint Board
     recommended and the FCC adopted a list of services that must
     be provided by all ETCs.  
                   Beyond these mandated services, the consumer
     should be empowered to decide who provides the service, how
     the service is provided, and what additional services are
     offered.  The consumer should decide, for example, whether
     the service is mobile or fixed, whether unlimited local
     usage is included in the offering, whether the service
     should be for a large or a small local calling area, and
     whether other services and features are included in the
     offering.  
                   In other words, the Joint Board and the FCC need
     to work together to ensure that the Universal Service system
     is competitively and technologically neutral.
                   To make sure consumers get the full range of
     choices, regulators must take care to avoid inadvertently
     creating pitfalls for new entrants, particularly wireless
     carriers.  For example, the definitions of which services
     are supported should be broad enough in order to enable
     consumers to make their own choices about the type of
     Universal Service that they want and need.  As long as all
     carriers get the same amount of support per month, no
     carrier would have any unfair advantage over others and
     consumers' choices would not be distorted by skewed
     regulations.
                   The second principle is educating consumers on the
     benefits and pitfalls of competition.  For many consumers,
     the establishment of a competitive Universal Service system
     will be the very first time that they've had a choice of
     local service providers.  
                   As a starting point for educating consumers on
     Universal Service offerings, the Universal Service provider
     is required to advertise the availability and rates of the
     services offered as a condition of being designated as an
     ETC.  
                   In addition, the Joint Board may want to encourage
     all ETCs to further education consumers about the
     comparative benefits of different services or technologies. 
                   For example, on CTIA's web site, it includes
     information about how to choose a wireless service and how
     to choose and use a wireless phone, as well as information
     and tips on driving safety, wireless fraud and disabilities
     access.  
                   It will also be important for regulators to inform
     consumers that they will benefit from the increased
     competitive choices for local telecom service.  Indeed,
     regulators can cite to the positive experience of wireless
     subscribers with new competitive entry.  Many wireless
     consumers have already experienced benefits of lower calling
     rates, more minutes of use, and higher quality service.
                   The Joint Board and state commissions could
     sponsor public fora to educate consumers about the new
     competitive environment as well as new technology, such as
     wireless, and highlighting the benefits to consumers.  
                   Western Wireless recently testified at such a
     public hearing hosted by the State of Nebraska, which
     focused on consumer concerns about the size of local calling
     areas.  
                   The third principle is the elimination of barriers
     to a competitive Universal Service system.  The most
     significant barrier to entry is the differing amounts of
     support available to different classes of carriers.  How can
     a new entrant hope to compete if the incumbent -- against an
     incumbent if the incumbent is getting hundreds of dollars
     per line in subsidies while the new entrant can qualify only
     for a small fraction of that amount?
                   Regulators must ensure that Universal Service
     support is fully portable; that is, that competitive
     carriers receive the same dollar amount of support as
     incumbents for each line that they serve.  This basic
     principle should be applied for both implicit as well as
     explicit subsidies.
                   For example, the FCC has stated that rural
     telephone companies will continue to receive subsidies under
     the historic system until the year 2001.  Western would
     prefer to see that the new forward-looking Universal Service
     system implemented much sooner.   But if that is not
     possible, regulators could consider at least distributing
     Universal Service support to new competitive entrants based
     on a forward-looking cost model.  This support would roughly
     match the implicit subsidies that the rural telecos are now
     receiving, and this would ensure that all Americans,
     including consumers in rural areas, have access to the same
     array of competitive options as in urban areas.
                   More broadly, the FCC and the states must work
     hard to eliminate all implicit subsidies, such as inflated
     access charges and inequities in the phone companies' rate
     structure as rapidly as possible.  And in the meantime,
     regulators should try to level the playing field by giving
     new entrants access to some of the revenue flow and
     corresponding explicit subsidies that the incumbents are now
     receiving.
                   Even the explicit Universal Service support
     mechanism need to be revised to ensure full portability of
     subsidies.  Western Wireless filed a petition two weeks ago
     with the FCC expressing concerns about the FCC's current
     Universal Service distribution rules which impose a delay of
     as long as two years on a new entrant's ability to receive
     explicit report and distribute funding to new entrants based
     on data and line counts that may be as long as two years
     old.
                   Similarly, some state commissions are not
     providing the right among of explicit intrastate Universal
     Service Funds to incumbents and new entrants. 
     Unfortunately, the Kansas Commission did just that.  While
     we have asked the FCC to preempt this aspect of the Kansas
     Universal Service system and policy, we're also working
     directly with Kansas and other state commissions to remedy
     these problems.  
                   In closing, I'd like to quote from a recent speech
     by Chairman Kennard before an International Telecom
     Regulator Group at the ITU plenipot where he stated that,
     "Universal Service rules also should not unfairly advantage
     or disadvantage one technology over another.  Wired
     telecommunication services may make sense in some places,
     while wireless may make sense in others.  Our objective
     should be to create an environment where such distinctions
     are of no great consequence to the consumers."
                   Thank you very much.  
                   CHAIRMAN KENNARD:  Thank you very much, Michele.
                   Commissioner Gillis.  
                   COMMISSIONER. GILLIS:  Thank you, Mr. Chairman.
                   I am Bill Gillis, from -- commissioner from the
     State of Washington.  I am a member of the NARUC
     Communications Committee.  I am vice-chair of the NARUC Ad
     Hoc Consumer Affairs Committee and I chair the Rural Task
     Force.
                   In thinking about our working title for my
     remarks, I thought about a couple of things.  One of them I
     was thinking of a title of, gee, it's really lonely being a
     regulator, or why don't my friends call me anymore.
                   (Laughter.)
                   Back in the good-old days of competitive reforms,
     we could always count on consumers being in our hearing room
     and supporting us when we're working on competitive reforms,
     but that support has dwindled considerably in recent times.
                   In my own state, for example, we had a hearing on
     the final rule for our state access reform rule, and nobody,
     not one person stood up and said we were doing the right
     thing, and that's not too easy.  
                   Where have the consumers gone?  And it's something
     that we do, it's pro-competitive, it's something that we're
     doing for consumers. 
                   Well, what we hear in hearings and really talking
     to people one on one, what we're hearing is that the
     consumer is saying that we see the cost but we don't see the
     benefits.  Is competition ever going to come to the
     residential and small business customers?  We don't think
     so.
                   You know, where they are seeing competition,
     primarily in the long distance realm, they are saying it's a
     hassle, we don't like marketing phone calls in the evening,
     we're getting charged for services we didn't subscribe to,
     and so forth, and we're not so sure about this competition
     thing. 
                   And it's that backdrop that makes it hard to
     explain Universal Service to consumers, and we try to
     explain to them, well, we need to take these implicit
     subsidies and make them explicit, so we aren't forced to
     make a choice between competition and Universal Service.  We
     shouldn't be forced to make that choice.
                   But they say, well, we don't want this competition
     thing anyway.  We're not so sure about that, and besides
     isn't that a new tax of some sort people are talking about,
     and what's in it for me anyway?  
                   And the bottom line I get from that as a state
     regulator is we aren't doing a very good job of consumer
     education.  We need to make our competitive policy more
     consumer friendly.  We need to find out a way to explain it
     to people.  
                   Chairman Woods in his opening comment summarized
     in one sentence what I struggled to -- struggled around to
     say, is that we need to tell the consumers the truth.  It's
     our burden to explain to them what we're doing and why we're
     doing it, and we need to be accountable.
                   So where do we start?  Well, one area we start is
     recognizing consumer expectations.  From the standpoint of
     your work, the FCC and the Joint Board, I think the most
     important expectations I hear from my consumers is that they
     should not be made worse off as a result of competition. 
     That's the bottom line from their perspective.
                   And to me, that is the fundamental goal of
     Universal Service, is making sure that to the best of our
     possible ability to be able to look them in the eye and
     saying we are doing everything we can to make sure that no
     citizen, no business in this nation is going to be worse off
     as a result of competition.  Hopefully, a lot of people are
     going to be made better off.  
                   And, you know, we need to really resist people who
     characterize Universal Service as a new social program,
     social welfare program of some sort.  It's not.  The bottom
     line of Universal Service is it's our mechanism to make sure
     that the benefits of competition are distributed nationwide
     to everybody and not just to those that happened to be lucky
     enough early in the competitive reforms to be able to have a
     choice.  It distributes benefits evenly across the country
     and we owe that to the customers.
                   Preparing consumers for change, state utility
     commissioners and NARUC have been very active in recognizing
     that we need to -- we need to do better jobs at consumer
     outreach, education and protection.  I enclosed with my pre-
     filed remarks a copy of the White Paper that was drafted by
     the Ad Hoc Committee on Consumer Affairs and the
     Communications Committee jointly, and some various
     principals that were in that, and I'm not going to go into
     those now.  
                   The one principle that I did want to mention
     though comes from another NARUC resolution which did
     indicate that the content of bill should be accurate, if
     nothing else.  Chairman Woods commented about telling the
     truth.  And what we've done in our state goes beyond the
     NARUC resolution.  I don't mean this to be NARUC's position,
     but we've taken that a bit farther, and we decided that that
     mean in the context of Universal Service full disclosure.
                   In our draft Universal Service rule, what we've
     done is for companies that would receive Universal Service
     Funds they would have two choices.  One, no disclosure,
     including no disclosure of percent of customer payment
     contributed to it by the carrier, or full disclosure.  And
     full disclosure means the amount of monthly support the
     carrier receives from the fund, the amount of carrier
     contribution, the amount of support per line received by the
     carrier, and the customer's exchange, and a recurring
     statement of the carrier's toll and per line reduction
     ordered under a different section of our rule.  In other
     words, tell them everything.  Don't mess around with it. 
     And that's our suggestion, and I am speaking for myself, not
     NARUC in this regard, I would recommend that to you at the
     federal level is that that's something to think about, is
     just require full disclosure.
                   Final topic is I was asked to comment on the
     potential role of NARUC as a clearinghouse of information on
     consumer issues to help you at the FCC in getting a better
     understanding of consumer needs.  And I think that's a great
     idea.  It's very consistent with what we're trying to do
     anyway. 
                   The Ad Hoc Committee on Consumer Affairs, which I
     am vice-chair of, was established by NARUC for the purpose
     of helping us, the states, understand and share among
     ourselves what are the different options for reaching out to
     consumers for consumer protection, consumer education.  And
     we're developing a sharing arrangements to get a better
     understanding of what consumers want in individual states.
                   The ad hoc committee just completed its two years
     work plan, and one element of that plan is to do a better
     job of communicating between states and federal agencies on
     consumer issues, so that's just right on target.  
                   And so my recommendation is, and actually I'm
     looking at Commissioner Schoenfelder because she chairs the
     policy subgroup on consumer issues for the Communications
     Committee, but I think we ought to just do it.  We'll just
     figure out a way to make it work.  If our colleagues at the
     FCC want that relationship, it's something that I think we
     can easily accommodate.  
                   So to summarize, the bottom line for me is I'm a
     believer in the '96 Act.  I think that it's a well written
     document.  It's something that promises good things for
     America, and I want to see both competition and Universal
     Service.  I don't want to make a choice between Universal
     Service and competition.  I want them both.  I think we can
     do that, but we're not going to get there if we don't have
     the support of consumers.  At least in my state, we've lost
     it, and I think that's true nationally, is that consumers
     for a variety of reasons are doubting whether competitive
     forms make any sense for them, particularly residential and
     small business consumers.  We need to step back.  
                   We need to make sure that our competitive policies
     are consumer friendly.  We need to be able to explain them
     to consumers in a very truthful fashion, and I would also
     comment that we need to have a Universal Service Fund that
     is sufficient in size and administered in a way that we can
     truly look consumers in the eye and say that we haven't made
     you worse off.  At least we've done our best to make sure
     every citizen of business in this nation is at least as well
     off after these reforms than they were before they happened.
                   Thank yo for this opportunity to comment.  I look
     forward to answering questions later.  
                   CHAIRMAN KENNARD:  Thank you.
                   Mr. Lubin.
                   MR. LUBIN:  My name is Joel Lubin.  I work for
     AT&T.  I have the good fortune of working on these
     interesting and complex issues.
                   Thank you for giving me the opportunity to speak
     before you today regarding issues of educating the consumer
     in the telecommunications marketplace.  AT&T supports the
     Commission's objective of eliminating customer confusion and
     better educating consumers about telecommunications issues,
     in particular, Universal Service.
                   Let me also say that in a competitive long
     distance market, AT&T has every incentive to ensure that its
     customers fully understand its offers and charges associated
     with these offers.  If our customers are confused, they have
     choice.  We are in the business to win customers and keep
     them satisfied, not to have them leave because they are
     confused.
                   For this reason, we provide educational
     information when new charges are introduced or if charges
     change through bill messages or bill inserts.  
                   In the case of the charges that we have imposed to
     recover our Universal Service expenses, we work closely with
     regulators and other stakeholders to ensure that our
     messages to our customers were clear and complete.  Our
     bills include an 800 number for customers to call if they
     have questions about their bill.  
                   And here again, it's in our interest to ensure
     that our bills are clear and understandable, both because
     it's what our customers want and deserve, and because it
     minimizes our costs by reducing the number of calls to our
     customer care 800 number.  We believe that we have taken
     extraordinary steps to achieve this goal given the existing
     circumstances surrounding Universal Service.
                   However, some of the customer confusion over USF
     implementation is caused by carriers doing different things. 
     This can be significantly mitigated if all carriers assess
     end users for this expense in a similar manner.  And it is
     inevitable that all carriers in a competitive marketplace
     will recover this expense from their customers because it is
     an external cost that is beyond our control and cannot
     merely be competed away.  
                   Under the existing rule, carriers are assessed USF
     based on the previous year's revenues and have complete
     discretion over the manner in which they recover the
     assessment as part of their current year's cost.  
                   Unfortunately, this means that some carriers who
     have less revenue in '98 relative to '97 will have a
     collection rate that is literally higher than the assessment
     rate.  
                   Some seek to recover their assessments through
     fixed monthly charges while others recover it through a
     percentage assessment.  Some seek to recover their
     assessments from interstate services only, while others
     recover it from all services.  The FCC has allowed the ILECs
     to recover their obligation from the inter-exchange
     carrier's access charges, known as ILEC flow-back.  That's
     what you heard Frank Gumper talk about in the previous
     panel.  That's raising the cost of providing LD service. 
     Some IXCs recover their ILEC flow-back portion from their
     nationwide average toll rates, while others include it in
     their end user USF recovery charges, thus raising the USF
     line item on the bill.
                   AT&T has decided to charge 93 cents per month to
     each of its residential accounts and a 4.1 percent surcharge
     to its business customers, interstate revenues.  Given that
     each carrier has its own set of uncollectibles that it must
     account for, it is not surprising that each would charge
     their customer a different rate under the Universal Service
     banner.  This has resulted in needless customer confusion.
                   Competitive neutrality is enabled when all
     carriers are required to use the same assessment and
     collection rate applicable to all end user revenues.  With
     simultaneous assessment and recover of the carriers'
     Universal Service obligation and no discretion on the part
     of the carrier as to how the recovery will be made as
     between different classes of customers, the end user
     surcharge approach removes the potential kind of
     gamesmanship over USF recovery that inevitably fosters
     customer confusion, dissatisfaction with the entire system.
                   Such an approach applied fairly and uniformly to
     all customers will ultimately lead to customer acceptance,
     if not approval, and serve to strengthen our universal
     support mechanism.
                   An alternative revenue base surcharge, the
     Commission could require both assessment and recovery from
     an interstate service providers by an end user per line
     charge.  That is to say the carrier owes what it collects
     from the subscriber based on the new assessment rate that
     the carrier does not set but USF sets under the direction of
     the regulator.
                   Here in this example, the denominator of the
     factor would be calculated by the administrator based on
     total lines, including primary line, non-primary, wireless
     lines, business lines, paging lines.  A per line charge has
     the additional benefit of solving the internet assessment
     controversy with a per line charge to the customer line
     itself is assessed for the Universal Service, not the
     services provided over the line.  
                   The Commission can also decide to enforce public
     policy objectives by varying the per line factor by customer
     type.  For example, it could decide among a number of
     options to cap the customer per line assessment at a dollar,
     cap paging at a quarter, exempt Lifeline customers from any
     assessment at all, and have the business per line charge
     make up the difference.  
                   Through the common USF factor, all carriers would
     be charging the respective customers uniformly.  Thus, all
     customers within the same segment would be charged the same
     amount regardless of their service provider.  
                   Whether the Commission implements a revenue or a
     per line surcharge, the anti-competitive ILEC flow-back
     issue would be eliminated.  All carriers, including the
     ILECs, will be assessing and collecting their obligations
     simultaneously from their retail customers.  This also
     eliminates the possibility of carriers gaming the process. 
     From the customer's perspective, the USF charge would be
     clear, unambiguous and consistently labeled, eliminating
     significant amount of confusion on the topic.
                   Thank you for your time.  I look forward to
     answering your questions.  Thank you.
                   CHAIRMAN KENNARD:  Thank you.
                   Mr. Gilles.  
                   MR. GILLES:  My name is Dave Gilles.  I'm an
     assistant attorney general in the Wisconsin Department of
     Justice.  I have worked in the Office of Consumer Protection
     in Wisconsin, Department of Justice, for long enough to
     remember when consumer -- the very infrequent consumer
     complaints about telephone services were routinely and
     quickly resolved by an industry that was subject to very
     comprehensive regulation on the federal and state level.  
                   That is not the case today.  
              During the last four years, I've had the occasion to
     handle six cases against companies that were engaged in
     slamming or cramming practices, and the resources devoted by
     our office and my counterparts in other states have
     increased dramatically over time. 
                   Today, I would like to address two issues.  I
     would like to outline consumer education efforts that have
     been undertaken in Wisconsin to try and improve consumer
     understanding in this industry.  
                   And secondly, I would like to provide you with
     some observation that I have as a person involved in
     enforcement and enforcing deceptive practice issues about
     what it is about this industry that creates the climate for
     this fraud.
                   Turning to the first point, Wisconsin has
     undertaken two approaches to deal with consumer education
     concerning telecommunication services.  The Wisconsin
     attorney general, in 1996, petitioned the Wisconsin Public
     Service Commission to undertake steps to promote consumer
     education issues and other consumer safeguards.  And as a
     result of that, last March the Public Service Commission,
     which had worked closely with other state agencies,
     announced a four-part consumer education program that
     consisted of primarily the development of a buyer's guide to
     telecommunication services, as well as specific information
     pieces dealing with particular issues.  
                   Now, this printed materials -- the printed
     materials were coupled with television and radio public
     service announcements which announced their availability. 
     In addition, distribution was coordinated through libraries
     and community groups, and, finally, there was online access
     to it through the web site for the Public Service
     Commission.
                   As best we can determine, it's been successful,
     although the distribution has been limited.  The reports are
     being revised because at the time they were prepared
     "cramming" hadn't become a term of art in this business. 
                   The second aspect of consumer protection education
     that's been undertaken in Wisconsin, in contrast to this
     generic approach, has been a pilot program that the
     Commission approved for Ameritech to undertake with regard
     to consumers who were having difficulty in paying bills.  It
     was a program that's become known as "Telcap," and was
     focused on persons who appeared not to have the resources to
     pay for basic local phone service.
                   Specific Ameritech personnel were trained in
     providing information about Lifeline and other resources
     that would be available to people in the situation, and
     according to the reports, this has been effective in
     lowering the number of disconnections that are occurring in
     the pilot program.
                   I'd be happy to provide more information regarding
     either of those programs to you.
                   Turning to the second point, I would very much
     like say that as a result of the consumer education efforts,
     I don't have as much to do, but that's no the case.  We have
     begun three actions this year, and these are very time
     consuming and we continue to get lots of complaints.  
                   There are three things that, I think, give rise to
     this, at least, and the first is in the deregulated industry
     telecommunication services with lower barrier to entry, it
     provides a very attractive place for people who are not
     interested in delivering what consumers think they are
     buying.  The opportunity to use the telephone system to
     collect for fraudulent practices is one that has not missed
     people who used to have to go door to door to sell their
     subscriptions.
                   Let me tell you a couple situations that I have
     encountered.  In 1995, we brought an action against a
     company that was using a prize promotion to sell
     subscription service to calling card customers.  This is
     before the term "cramming" had been coined.  As a result of
     setting these boxes out at our state fairs, this company
     enrolled 4,000 people in Wisconsin that failed to check off
     after the fine print that by entering the contest they also
     agreed to a $5.00 monthly calling card subscription.  So
     this was in addition to their dial 1 plus.  
                   So a few people complained to us and after we
     filed an action against the company, and determined that
     after the promotion had run 4,000 people were signed up. 
     About 10 months later 2,000 people continued to pay $5.00 a
     month without ever making a long distance call with the
     calling card. 
                   Now, the company assured us that they had sent a
     welcome package that contained the plastic card with the
     number, but we all -- at least my belief is that most of
     those are regarded as solicitations and get accorded the
     same treatment that your invitations to subscribe for
     another credit card get.  
                   And so what we had was, after eight months you had
     2,000 people continuing to pay this $5.00 a month charge.
                   Now, in the settlement discussions with the
     company, I sat across the table from the president, and I
     said, "Well, your primary business is selling long distance
     service, right?"  He agreed.
                   I said, "That means that when someone isn't using
     your card to make calls, you aren't making money.  You
     aren't doing your business."  He said, "That's true."
                   I said, "What do you do to let people know about
     your service?"  
                   "Well, we contact them once a month.
                   "How do you do that?
                   "On the bill it says services $5.00." 
                   That was how he contacted their people.
                   Two other points in terms of the marketplace. 
     Information about what services are has to be clear,
     accurate and not misleading.  The notion of unbundling
     services and creating the impression that somehow these
     unbundled components are being used to pay a specific tax,
     are being used for some purpose that's not clear from the
     description of it, gives rise to concern from someone who
     has been involved in prosecuting deceptive advertising
     cases.  It creates -- it creates a concern if the money
     that's collected is not obligated to go to the source that's
     designated and referenced.
                   For example, in one case involving a cruise line
     that was unbundling service, all cruise lines had to pay
     some sort of tax based on usage.  What this cruise line did
     that we prosecuted it unbundled the tax that it had to pay
     and told people after they signed up for the cruise, besides
     that, you have to pay a $40.00 tax," and people paid it
     thinking this was part of the price of admission, like sales
     tax.  In fact, it wasn't.  
                   Now, in conclusion, I think that what has to be
     done is we have to continue with consumer education efforts. 
     Secondly, that the Commission, as well as other enforcement
     agencies, have to take action to apply established consumer
     protection principles to bring incentives in the marketplace
     that would discourage fraud, and to implement those
     principles in this new competitive market.  
                   Finally, I would like to acknowledge and
     appreciate your efforts in pursuing these matters, and thank
     you for the opportunity to share these views today.
                   CHAIRMAN KENNARD:  Thank you very much, Mr.
     Gilles.  
                   Dorothy Attwood.
                   MS. ATTWOOD:  Thank you.  I'm Dorothy Attwood. I
     am Chief of the Enforcement Division in the Common Carrier
     Bureau. I've seen half of you regularly, but I'm very
     pleased today to participate in this panel, and even more
     pleased that this focus on consumer education and protection
     by the Joint Board will help foster the key cooperative
     effort on this issue.
                   As the Commission and this Board has recognized,
     consumer protection, education and enforcement have played
     an increasingly important role as we move into a deregulated
     environment.  
                   Moreover, like other issues for which we may share
     different visions, on this issue of consumer protection and
     education and enforcements, the interests of the states and
     the FCC are aligned.  In fact, our interests are not just
     shared, but borrowing from the popular jargon of today, I
     think we could say that we're co-dependent on each other,
     because for every consumer call, letter, e-mail or complaint
     that the state receives, the odds are the Commission
     received them as well.  
                   Moreover, the odds are that you probably in the
     state hear about when the Commission treats consumers well
     or perhaps not so well, and we certain hear about your job
     performance as well.  This all means that our collective
     performance to consumers as government entities is
     intricately linked.
                   Now, the good side of our co-dependence is that
     for many issues, for every consumer whose concern, confusion
     or complaint we resolve, we both benefit, and importantly
     because we share the consumer, the consumer also benefits
     for each of our actions.
                   Similarly, when either state or the FCC brings
     successful enforcement action against a carrier that is
     shirking the law, we all benefit from the message that it
     sends to the industry generally.  And again, most
     importantly, our shared consumer benefits as we collectively
     ferret out those carriers that can play by the rules and
     those carriers that cannot.  
                   At its core, our co-dependence means that a
     victory for one is a victory for all.  It also means that
     through cultivating our shared goal of consumer protection,
     we can make even greater gains in ensuring that the
     marketplace is full of informed consumer choice and not
     confusing, misleading or fraudulent carrier conduct.  
                   Some of the specific ways we can build this
     cooperative effort, in our view, is through actively seeking
     to avoid jurisdictional divide.  We need to work together so
     carriers can't exploit the boundaries and work to create a
     seamless consumer protection network.
                   For example, the Common Carrier Bureau recently
     provided the State of Wisconsin, which -- Mr. Gilles, in
     fact, with an informal staff opinion regarding the
     preemptive effect of the federal anti-slamming provision in
     Section 258 of the Act in relation to certain state laws,
     Wisconsin state laws prohibiting unfair and deceptive
     practices.
                   Wisconsin had come to us for this letter in
     connection with a suit brought by a carrier under state law,
     and the carrier had claimed that the state had no authority
     to proceed against it because federal law preempted.  
                   In this letter, and it's in your materials, we
     concluded that the Wisconsin statutes at issue didn't
     obstruct the Commission's objective at all, but rather,
     although utilizing different means to do so, both the
     Commission and the state laws served to protect -- prevent
     slamming and were not incompatible.
                   We issued a similar letter to the State of
     California and also to Vermont earlier in years past, and
     have been told by both those states that they have been
     extremely effective in litigation, in working toward not
     creating a divide on jurisdictional grounds.
                   The bottom line here is that when it comes to
     consumer protection, the more cops on the beat the better. 
     Moreover, through utilizing all of the consistent state and
     federal laws and resources, we maximize our potential to
     shut down or at least rein in disreputable businesses.
                   As we all know, Al Capone ultimately went to
     prison for tax evasion.  So at least  in this one instance I
     think we all agreed that the Tax Code served the public's
     interest.
                   Another way we can work together is through
     improving our coordination of federal and state enforcement
     actions against common problem carriers.  Specifically,
     we're actively working here at the FCC to enhance our data
     collection and mining of information that we receive from
     consumers by way of written complaints, e-mails and calls. 
     The sooner we can understand and analyze what consumers are
     telling us, the sooner we can act on emerging problems.
                   While we improve this ability at the FCC, we need
     also to work on making sure this information is available as
     a shared resource for the states.  We each see a piece of
     the problem, but together the telescope range geometrically
     increases. 
                   Moreover, such coordination helps to leverage all
     of our limited resources, to get the most bank for the
     public's buck.
                   Indeed, Commission Johnson visited our shop
     yesterday with her consumer protection folks, and gave us
     some very useful information about what Florida is doing,
     and it was very gratifying to see a publication that Florida
     apparently issues, I guess on a monthly basis, called
     "Consumer Activity Report."  If you look on it, there is a
     listing of the apparent slamming infractions.  And we looked
     at that and we saw that of the top four who have --
     consumers have complained against these certain carriers, of
     those top four, three of them the Commission today at least
     has taken action against.
                   Several months ago we took action against Al
     American Telephone, which is on the top of your list. 
     Today, the Commission adopted two over a million dollar
     notice of apparent liability against two other carriers on
     your list.  
                   And so when we help enforcement actions against
     companies, it's gratifying to see that the Florida consumers
     are also clearly directly impacted.
                   Another way we can improve our coordination about
     emerging problems is to seek a coordinated -- is seek to
     coordinate joint consumer alerts about fraudulent schemes
     that help -- and therefore we can help each other spread the
     word, and help consumers that way.
                   Finally, we need to think proactively about not
     just how to manage the complaints that we all receive and
     pool our equally scarce resources, but how to ultimately
     reduce these complaints.  Swift and strong enforcement
     action are a part, but giving consumers appropriate tools to
     protect themselves is absolutely vital.  And on this basis
     the Commission recently adopted a truth in billing notice of
     proposed rule-making.  We sought comment on ways that
     information could be provided to consumers about the
     services being billed by carriers.
                   Last Friday, the Bureau held a forum where state
     representatives were participant, and to discuss some of the
     recommendations raised in that NPRM, and through this effort
     of working toward clarifying consumer information and
     understanding of their charges, we work to minimize consumer
     confusion and carrier fraud, and ultimately we arm consumers
     with the best weapons that they can have in the new
     marketplace and that is clear information.
                   We look forward to working with the states closely
     on this effort, and I just remind you that comments are due
     November 10th, and we look forward to getting them in.  
                   Other proactive measures should include web link-
     ups so that other relevant federal and state agencies and
     enforcement bodies can be reached by consumers in a single
     try. 
                   Finally, I look forward to learning from states
     about the techniques that have proved effective in providing
     consumers real measures of protection and education, and I
     welcome this dialogue today and in the future.  
                   CHAIRMAN KENNARD:  Thank you, Dorothy.  Good job.
                   We're now in the question and answer period of our
     panel, and rather than go seriatim, as I mentioned earlier,
     I'll first invite the commissioners here to explore with the
     panelists any particular issues that were raised or any
     other issues that might be on your mind.
                   I did want to echo one thing that Dorothy Attwood
     said about our truth in billing notice.  That notice was
     inspired, in part, by the very excellent paper that NARUC
     put out on consumer education, and I think that that effort
     itself is a good example of state governments and state
     commissioners working together with the federal government
     and federal commissioners to solve a very difficult problem
     for consumers.  
                   So I also would like to invite you all to focus on
     that proceeding and to file your comments or to give us your
     views in any way possible.
                   With that, do we have any questions from the
     bench?  
                   Chairman Johnson?
                   CHAIRMAN JOHNSON:  Yes, I have a question for Mr.
     Lubin.
                   Making sure that I understand your analysis
     because I got your pre-filed a little late, but you're
     suggesting that we as regulators would require or mandate
     that there be an end user line item charge on the bill; that
     that somehow would help with the flow-through issue?
                   I didn't follow your argument or your position, so
     could you please explain?  
                   MR. LUBIN:  Yes, Ms. Chairman.
                   What we are describing is that whatever the
     assessment mechanism is that is finally implemented from
     USAC and if it's a percentage of revenue, if it's a line,
     whatever it turns out to be, and let me for the moment,
     let's just pick a revenue assessment, and it turn out to be
     3.25 percent, then all carriers would put on their bill 3.25
     percent.  They wouldn't raise it.  They wouldn't lower it. 
     They would put 3.25 percent. 
                   And by virtue of all carriers who have an
     assessment paying in to the Fund, meaning collecting the
     money from the retail user, by doing that the local company,
     if they have an assessment and it turned out to be 3.1
     percent or whatever it turned out, they would collect it the
     same way, pay it to the administrator, and thus eliminate
     the problem that Frank Gumper talked about on the previous
     panel.
                   So when I said it would eliminate the flow-back,
     of which there is approximately $800 million today, that the
     LECs pay that's buried in access fees, by literally having
     an assessment and collection to be the same for all carriers
     who are being assessed the value, yes, it would eliminate
     the flow-back.
                   CHAIRMAN JOHNSON:  What if a company didn't want
     to assess --
                   MR. LUBIN:  Ah, excellent question.
                   CHAIRMAN JOHNSON:  -- or collect?  Or collect
     really.
                   MR. LUBIN:  Right.  
                   CHAIRMAN JOHNSON:  If they didn't want to collect
     it from their customers --
                   MR. LUBIN:  Right.
                   CHAIRMAN JOHNSON:  -- there would be a
     governmental mandate that they have to collect this money
     even though they don't want to?  
                   MR. LUBIN:  A couple of thoughts, and maybe there
     are other ways -- variations, but the thought that I would
     have is the obligation is still there on that carrier.  Now,
     maybe the carrier comes along and says, "You know what, I
     don't want to do it."  I would suggest that they still have
     that as a line item on the bill, and literally waive the
     charge.  And when I say "waive the charge," is if somebody
     says, "You know what, I don't want to do this, and for the
     next six months or the next two years or the next 10 years
     I'm going to waive it," they waive it. 
                   However, they still have the obligation, if it was
     3.1 percent, to collect the 3.1 percent and hand it to USAC. 
     They just elect to waive it.  
                   And the reason I highlight that is you eliminate
     the problem associated with each carrier having let's say a
     different collectable rate, or last year's revenues are
     different than this year's revenues.  
                   And, in fact, if this individual is a customer of
     mine and that individual left me and went to another
     carrier, I no longer would have the obligation to pay the
     3.1 percent.  The other carrier would have the obligation.
                   So, yes, from my point of view, if you had the
     assessment and the collection to be the same as defined by
     the USAC, and that if a carrier didn't want to do it, and
     wanted to use that as some vehicle to win a customer, they
     can effectively waive it, but they still have to pay
     theoretically that number to USAC.  
                   CHAIRMAN KENNARD:  Mr. Lubin, what would you do
     about carriers that don't send out a monthly bill, that
     don't have presubscribed customer or dial-around customers,
     phone cards?  
                   MR. LUBIN:  You'll get a couple answers.
                   I mean, first of all, if it's a percentage of
     revenue, my view is you do the same thing.
                   CHAIRMAN KENNARD:  Um-hmm.
                   MR. LUBIN:  Because if they don't send a bill,
     they don't get revenue.  So if it's a percent of revenue,
     it's not an issue.  
                   If it were a line charge, which is hypothetically
     another way, then you have to ask the question who is the
     assessor of the line charge.
                   CHAIRMAN KENNARD:  Um-hmm.
                   MR. LUBIN:  And we can have a discussion of that,
     and if you want, I'll give you my answer right now, but to
     me --
                   CHAIRMAN KENNARD:  Go ahead.
                   MR. LUBIN:  My answer of the line charge is the
     local company for residents would have the line charge.  And
     so the dial-around issue is not an issue.  
                   For 800 or whoever has the customer, if it's a
     private line business, whatever, let's say I have the
     relationship, then I put that per line charge on the bill,
     and I collect it and I had it off to USAC.  
                   I would also suggest to you that if it were this
     way, and again I'm not trying to be arguing that per line is
     the right approach, I'm just trying to lay out, hey, there
     is two different ways of going about it.  Each one has
     different attributes, and you've got to figure out which
     attributes you find most compelling in terms of public
     policy.  
                   But the other point I was going to make to you is
     if the LEC were the collector on the -- on the residential
     line or the local line, for that matter, you have the most
     efficient collection mechanism; the lowest of collectable
     rate, the least customer confusion because of all billing
     information that goes back and forth to various vendors.  
                   And by the way, I'm not saying this to try to put
     the burden on the LEC because I expect -- I hope to be a LEC
     as well, but I am looking for what is the most efficient
     from my point of view rational way if you went down the per
     line basis.  The alternative is you don't go down the per
     line basis.
                   CHAIRMAN KENNARD:  Thank you.
                   MR. LUBIN:  Yes.  
                   CHAIRMAN KENNARD:  Chairman Wood?
                   CHAIRMAN WOOD:  Commissioner Gillis, welcome. 
                   If you could do it over again, how would you do it
     so that your customers would be -- I mean, specifically,
     what would had not done that you all did do or what would
     you do that you all forgot to do?
                   COMMISSIONER GILLIS:  So I still have friends, you
     mean?  
                   CHAIRMAN WOOD:  So they call you back.  
                   COMMISSIONER GILLIS:  Well, it's hard to say what
     we would do over.  It's probably easier to talk about what
     we should be doing on a going forward basis.
                   But I think what we have not done well is make the
     case to customer of why these competitive reforms are in
     their interest as customers beyond just telling them, well,
     it's the law.  I mean, that's -- I've tried that.  That's a
     regulator's cop-out, and say -- hold up the Act and say,
     "Well, I know, but it's the law."
                   Actually, I agree with the law.  I think that the
     '96 Act is right on target and what we should be doing.  So
     that is just probably a cop-out.  
                   But I think the best we can do and what we need to
     do more of is to present the case to consumers of why these
     competitive reforms are needed.  We also need to, and what
     we could do better, I think, is be more sensitive in the way
     we design our competitive reform, to make sure they are
     consumer friendly; that we do -- just to pick on one -- do
     our best to make sure that we can prevent customers from
     being billed for services they didn't subscribe to, those
     kind of things; make it easy for customers to make choices
     as much as we can.
                   But there is always this tough balancing act. 
     That's my biggest problem in doing this as a regulator. 
     It's -- we can't always do everything that makes it easy for
     consumers or protecting consumers exactly to the extent that
     it provides a barrier to entry, and we always need to weigh
     those things.  
                   But it's a long waffley answer, Chairman Wood.  I
     don't really know, but I know that we aren't doing it well
     enough at the moment.  
                   COMMISSIONER SCHOENFELDER:  May I?
                   CHAIRMAN KENNARD:  Please.  
                   COMMISSIONER SCHOENFELDER:  I would like to follow
     up with Commissioner Gillis just a little bit.  He and I
     worked together on a few interesting consumer issues, and
     this is more of a comment, but I guess I would invite anyone
     on the panel to comment on what I have to say.
                   He said something about we need to tell our
     consumers the truth, and that is absolutely imperative that
     we do that.  I can't emphasize that enough.  We have to be
     believable.  And one of the things that's frustrating to me
     is I listen to Michael say that we need to do this, this and
     this, and everything he said we do at my commission.  I've
     done it.
                   In addition to that, I've written a weekly news
     column.  I've done all kinds of interesting things.  Now, we
     have a saying in my state that you can lead a horse to
     water, but you can't make him drink, and sometimes that's
     where I'm at.  Sometimes I think I become so frustrated in
     trying to educate the consumer about what's happening in
     this industry that I wonder want to do next.  And we've
     stolen things from Commissioner Johnson's commission.  We've
     stolen ideas of how to do things because she has a large
     consumer education group and we don't.  
                   CHAIRMAN JOHNSON:  Do you want to give them back?
                   COMMISSIONER SCHOENFELDER:  No.  
                   (Laughter.)
                   We just take her idea.  We have done all sorts of
     things to educate our consumers.  We have put on workshops. 
     We have done those things.
                   First of all, I have a couple observations that I
     think might be driving this, and one of them is that we need
     to -- government by its own nature, and we do great things
     as government, and by the way, I'm an elected commissioner,
     which means that my constituents call me up with slamming
     complaints, and we do solve those on the state level before
     anybody ever questions the jurisdiction.  We just take care
     of them.  
                   MR. TRAVIESO:  Good for you.
                   COMMISSIONER SCHOENFELDER:  We did that and many
     states do by the way.  We just don't refer them to the
     federal jurisdiction unless there is a major jurisdictional
     problem and someone raises that issue. 
                   But one of the things I think that is happening is
     that we need quicker responses to the developments in the
     marketplace.  The amount -- a number of people who are
     performing in the marketplace right now are more than what
     there are regulators.  So we need help from consumer groups. 
     We need help from anyone who will help us inform people. 
     But most of all, we need help from the citizens of this
     country to better inform themselves.
                   And is that handing it back and saying, well, I'm
     not accepting my responsibility?  I don't think so.  But I
     think that we have to do some of that.
                   And then my other observation is competition is
     just plain messy, and that's difficult, and this is an area
     where consumers have never had to deal with competition
     before, and so they are not used to it, so they take
     additional education and additional understanding on our
     part.
                   I think some companies can help.  Rather than just
     slam them, educate them a little bit if you'd like to keep
     them as consumers.  
                   But I'll shut up with that and ask someone to
     respond to those terrible outlandish observations.
                   MR. TRAVIESO:  Well, at the risk of responding in
     kind, I would actually agree with almost everything you've
     said.  I don't think anyone can advocate that we have to --
     once we've done everything we can to provide the information
     to the consumers, that we then have to sort of follow them a
     round somehow and make sure that they use that information,
     and I don't think anyone is advocating that.
                   But I think they are advocating, certainly I'm
     advocating that it's extremely important to use every
     resource available to provide the information to the
     consumer, and then it's up to the consumer, presumably
     reasonably well informed consumer, to make whatever choice
     that consumer wants.  And if the consumer chooses to remain
     with X company, their incumbent local carrier, and pay more
     than they might pay by switching to a competitor, that's
     their choice, and I don't have any problem with that.
                   But I'd like to respond to one other point, and
     that is that the concept that commissions should go tell
     consumers that competition -- that the reforms that are
     occurring are good and are going to save them money, or are
     going to benefit them while at the same time -- we've had
     some panelists say things like we're going to have to
     rebalance the rates, their are implicit subsidies in
     residential rates, we can't have average rates anymore, we
     have to send price signals, rates are going to go up.
                   How do you propose to go tell consumers in your
     areas that competition is good for them and they're going to
     benefit from it and at the same time allow the market, which
     is what, you know, the market will do, to charge more for
     services than are already charged in places where it costs
     more to provide those services, and where we haven't built
     in maybe a necessary Universal Service, portable Universal
     Service Fund that will make up the difference?
                   So I would have -- I would be reluctant to
     encourage commissioners to actually proslatize.  I think
     what commissioners ought to do is to explain that we're
     moving from a regulated system to a competitive system and
     there are risks and benefits, and here they are, and here is
     a way for you all to evaluate your choices. 
                   COMMISSIONER SCHOENFELDER:  Can you simplify that
     enough so that the average American who does not want to
     understand this network completely can understand it?
                   MR. TRAVIESO:  I think you can.  You can use an
     analogy to a gasoline station.  You know, we don't regulate
     what gasoline stations charge, and there is competition, and
     you can drive three block and pay $1.20 a gallon or you can
     go -- ride around for a long time and find a station that
     pays $1.09.  And customers would understand that if there
     was one gas station and one rate, that's what they would
     pay.  And if there wasn't, and there was competition, they
     might pay more or less, depending on where they go.
                   And you have a lot of -- I mean, there are many
     services, all services basically, except for what's left
     over now is the regulated service, are competitive service. 
     People just have to understand that they're not guaranteed
     any longer a rate.  They're going to pay a market rate and
     it may be more or less.  That's what I don't think customers
     are hearing.  They are hearing from all -- from both the
     incumbents and the competitors that competition is great and
     they are all going to save money, and I Just don't think
     that's the truth, to speak in Commissioner Wood's terms.  I
     don't think that is the truth.  
                   COMMISSIONER TRISTANI:  Can i interject to the
     last --
                   CHAIRMAN KENNARD:  Sure.  Sure.  
                   COMMISSIONER TRISTANI:  Can you hear me?  And I've
     got to make a statement because I think we're talking about
     two kinds of consumer education.  We're talking about
     consumer education about the changing landscape, but we're
     also talking about consumer education, about consumer
     protection.  And I think it's really important to
     distinguish that.
                   I also think it's important to distinguish that
     state commissions have varying resources, and we know that
     well, and that there may be some state commissions out there
     that do no consumer education whatsoever.  And I can tell
     you because I was on the New Mexico State Corporation
     Commission about a year ago, that we were one of those
     commissions.  We had no resources, so we were not doing
     that.  I hope that the commission can do that now, but we
     were not.  
                   So many states are much further along than others. 
     Many states have good consumer advocates, people's council. 
     Many states do not have those resources or they are very
     limited.  In our state, the attorney general handle those
     kind of issues, and at that time they chose to devote their
     resources to the electric utilities, hardly anything to do
     with telephones.  
                   Getting back to the two kinds of consumer
     education, I think it's extremely difficult, and you used
     the gasoline analogy, but I think it's very difficult to
     explain the changing landscape.  I have trouble
     understanding it, so it's hard to explain.
                   But I think it's easier to explain consumer
     protections and the things you can do and ought to be able
     to do when you're slammed, when you're crammed, when
     deceptive practices are used, and I think we need to
     distinguish between the both, and I know you can't make the
     horse drink the water, but I think it's the obligation to --
     almost if you have to give it to them with you hand, you
     have to do that. 
                   And there are also different kinds of consumers,
     and the elderly are more prone to be the prey of the
     deceptive practices, and, you know, it's hard, and so we
     can't just say it's all one group of consumers and one kind
     of problem.  
                   And what I do want to ask after all of that long
     introduction is several of you talked about how well or how
     good it is to work together, the state commissions or the
     state council with FCC and et cetera, et cetera, and I know
     we're doing a lot of good efforts there.  But I know there
     is not a formal process.
                   And my question would be to any of you, what would
     be the best way to get a formal process going where we make
     sure that we're telling each other about the particular bad
     players, we make sure we're giving the same information to
     consumers?  Could anyone address that question?  How should
     we start?  
                   COMMISSIONER GILLIS:  I can take a start at that. 
     Specifically, we're having a NARUC meeting in Orlando next
     week.  
                   COMMISSIONER TRISTANI:  Oh, okay.  
                   COMMISSIONER GILLIS:  And Commissioner
     Schoenfelder is organizing a panel with part of the
     Communications Committee just on this topic.  
                   I can speak personally that I would be -- I will
     bring that request back to the Ad Hoc Consumer Affairs
     Committee, which I think is the key entity that should be
     involved with that, and I think that from NARUC's
     perspective it's a reasonable request, and it's more a
     matter of having the right contact within the FCC that you
     can tell us who that is that we can work with, and we'll
     plug in, and use some processes that really are pretty far
     along within the work of the Consumer Affairs Committee at
     this point.  
                   So I think we just need to make it into a project
     is my opinion, and we need a person, we can identify some
     people with NARUC and just do it.  
                   MS. ATTWOOD:  Well, I guess I am that person.
                   I wanted to say that there also are actually --
     well, there are informal, they are more routinized mechanism
     that at least we've been talking to states.  There is the
     National Association of Attorney General, the NAAG group,
     and they have conference calls.  We're usually on them at
     least every month where we talk about these issues,
     potential problem areas, and we are making a concerted
     effort in our division through the FCC to actually have
     specific state contacts for each person that we have a
     routine that we can call and talk about what we're doing and
     what they're doing.
                   COMMISSIONER TRISTANI:  I guess I'm going further
     than that, thinking there ought to be a plan where let's say
     we're going to do so many forums across the country.  I"m
     thinking out loud here but together.  
                   MS. ATTWOOD:  Yes, I agree.  
                   MS. HOGERTY:  Can I make an observation?
                   With all due respects to everybody in this room,
     it seems that there for some time has been a lot of talk
     about this, and very little is being done.  I think the
     notion of the federal and the state regulator, or all
     entities cooperating in this effort makes sense.  But I
     think Michael made a very good point that in most
     commissions, and there may be some exceptions, they have
     maybe a consumer protection division who is treated as a
     stepchild, who simply does nothing but answer calls.  That
     isn't doing the job.  
                   Consumers need to be educated so they can make
     intelligent choices.  It has to be explained to them what
     the market is turning into, and the fact that, as Michael
     pointed out, the people still don't -- many don't know the
     difference between a toll call and a local call suggests a
     huge amount of confusion among consumers.  They have to know
     where to complain.  There has to be some kind of remedy for
     things like slamming.  I mean, they can complain.  The
     regulators can go and give penalties.  That does absolutely
     nothing for the consumer who has been put through this
     treatment, they've have been slammed.  They don't get their
     money back.  You can file all the penalty actions you want
     to.  It's a very small sanction as far as stopping these
     companies from taking advantage of consumers.  And as long
     as consumers know that this is going to happen, that may be
     one reason why they do not go out and use the competitive
     market, because they do not want to take a chance of dealing
     with some kind of a fly by night, or someone who is going to
     take advantage of them.
                   I see some very good discussion going.  I don't
     see anything happening.  That is just my observation.
                   CHAIRMAN KENNARD:  Mr. Lubin, I noted recently
     AT&T inaugurated a new rate plan for its basic schedule
     customers and it increased the monthly rate to $3.00 per
     month for some classes of consumers.
                   I'm curious about what your company did to educate
     consumers about why you were doing that, what they were
     being asked to pay for, what has been the reaction from
     these consumers, what has been the churn rate among these
     classes of consumers.  If you can just give us some sense of
     the reaction to that, I think it would be helpful to us.
                   MR. LUBIN:  First of all, as you're probably
     aware, the minimum monthly $3.00, as I understand it, was
     for new customers, not for let's say all of the existing
     customers.  
                   Unfortunately, I am not that knowledgeable in
     terms of answering all the questions you have tee'd up, and
     I'll be glad to seek answers to your questions.
                   But at least the feedback that I've been getting
     is not a lot of calls coming in, but I should probably stop
     because I'm just not that intimately familiar with the
     answers to the questions your posing.
                   CHAIRMAN KENNARD:  I would be interested in
     learning more about that.
                   MR. LUBIN:  Okay.  
                   COMMISSIONER NESS:  Mr. Lubin, your basic proposal
     about requiring mandating that there be charges on a bill at
     a specific percentage, the Communications Act requires that
     every telecommunications carrier that provides intrastate --
     telecommunications services, intrastate telecommunications
     services shall contribute on an equitable and
     nondiscriminatory basis. 
                   In your view, do the local exchange carriers
     provide intrastate services?
                   MR. LUBIN:  Yes. 
                   COMMISSIONER NESS:  How would they be addressing
     the requirement that they pay into the Universal Service
     Fund?
                   MR. LUBIN:  Assuming the assessment factor were
     percentage, whatever that percentage is --
                   COMMISSIONER NESS:  Their customer, as I recall,
     would be -- would be the interstate carrier, they're
     providing access to the intestate carrier.
                   MR. LUBIN:  Right, but they also provide an
     interstate SLIC to the end user.  So my understanding, if
     the assessment on interstate revenues, let's just say it was
     3.14 percent or something like that, their obligation is
     3.14 percent on interstate retail revenues, which would
     include the interstate subscriber line charge.  They also
     have private line or special access lines that are bought by
     the end user.  
                   And so they are assessed on the interstate retail
     revenue which, from my point of view, unfortunately, then
     comes back, roughly 93 percent of it, comes back in the form
     of access. plus the schools/libraries which is assessed on
     inter and intra, the same thing occurs there as well.
                   COMMISSIONER NESS:  So, again, again are they then
     taking those revenues and assessing an end user charge on a
     consumer or are they assessing a charge on the interstate
     carrier?
                   MR. LUBIN:  Under what I would --
                   COMMISSIONER NESS:  Under your plan.
                   MR. LUBIN:  What I was suggesting is whatever the
     assessment rate is, and the example if it was 3.1 or 3
     percent on interstate revenue, it would apply 3.1 percent on
     interstate retail revenues.  What is that?  That would be
     the intestate SLIC.  That would be all of the retail,
     private line or special access lines they sell directly to
     the end user.  It would exclude access as it currently does.
                   COMMISSIONER NESS:  Thank you.
                   MR. LUBIN:  You're welcome.
                   CHAIRMAN KENNARD:  Commissioner Baker.
                   COMMISSIONER BAKER:  Thank you. To the panel,
     would anyone care to address the notion of how would we, how
     will we optimize as opposed to merely maximize the level of
     information that consumers get?  
                   And what I'm getting at is you take a bottle of
     cold medicine say, and inside that packet there is a little
     leaflet printed on tissue paper in about two point type,
     with about 10 pages of medicalese, legalese.  There is a
     pretty good argument to be made that that is too much
     information to be useful to most consumers.
                   At the other extreme, getting back to telecom, a
     one-line bill with one charge for "phone service" would
     obviously be insufficient.  
                   How do we optimize the level of information? 
                   I heard some of the panelists mention plain
     English as being one means, but can we expound on that a
     little bit?  
                   MR. GILLES:  I would like to respond to your
     question because, you know, phone service and the rates that
     we pay are not that dissimilar to credit, are not that
     dissimilar to rates involved in leasing vehicles, or
     something like that.  So there are places in the other
     markets that can be looked at as to how regulatory agencies
     have approached problems, particularly if you look in the
     area of consumer credit with truth in lending coming out. 
                   Before truth in lending you had all sorts of terms
     out there for what you were going to pay on time for
     merchandise, $20.00 a week forever or something like that. 
     People didn't disclose back-end charges in transaction. 
     There were all sorts of extra things after you got the
     merchandise that you had to pay.  And what we had with truth
     in lending was by definition you identified what the selling
     price is going to be, what the finance charge was, how many
     payments and so forth.  
                   Now, if you study the history of truth in lending
     over time, it -- the amount of disclosures has changed
     because at first you had limited disclosure and people
     thought more was better.  Then we came to the point that it 
     was information overload, and we tapered back truth in
     lending, so there has been a process at work though in that
     area in terms of how do you define a rate so that people can
     compare what the price of the service, what the price of
     credit is; that it would be worthwhile for the Commission to
     investigate, particularly in terms of the truth in billing
     requirement.
                   So, now, the more practical aspect of your
     question relates to, well, how is this going to work.  I
     mean, we can each in the state's attorney general, we've
     discussed at length how can we -- how can we -- we think
     some of these ads about long distance rates are deceptive,
     how can we approach this problem, how can we make sure that
     people are able to take this information and compare it.
                   Recently, the Federal Reserve Board revised truth
     in leasing, and they went through a very long rule-making
     process.  The Federal Reserve Board relied on its own
     initiative, it wasn't structured by industry, but it had
     input of everyone involved in that process, relied on
     standard techniques in terms of focus groups, in terms of
     surveying people as to what their take-away was, if you
     will, from a particular disclosure and to see if it was
     useful information or not.  
                   So they brought the principles that are out there
     in industry and marketing, and how do you make information
     and how do you make certain that this information is going
     to be useful and helpful to bear on that process.
                   Now, those are two items, I think, that could be
     considered in trying to identify what has to be disclosed in
     terms of the rate.  
                   MR. TRAVIESO:  I have a quick response to that
     also, another source of information that can be helpful.
                   There are probably eight or nine states that have
     already gone through an education process, a consumer
     education process in the electric restructuring that is
     going on in a number of states.  And they have actually --
     all of those states have issued RFPs to hire consultants to
     help them figure out how to explain, you know, to Joe Six-
     Pack, how to pick an electric company.  And they have more
     or less success, but there is a body of information which
     exists already because of that process which resides,
     typically resides at a state commission or may reside with
     consultants who have written articles about it to assist
     other commissions like mine, which is in the round table
     process right now trying to figure out how to do this on the
     electric side, which is a whole another problem.
                   But there is a body of information and they
     actually have focus group information.  They have done some
     of the things that have been talked about, trying to
     evaluate the success or failure of particular kinds of
     approaches, and there are many different approaches that
     have been used, and many different kinds of ad that you see
     if you happen to be in one of those states.  
                   So that's another place to go and try to see if
     you can learn something from that process.  
                   MS. FARQUHAR:  I also have a comment from the new
     technology or wireless perspective, that they also have a
     huge consumer education hurtle to overcome, to convince
     consumers, once they get over the regulatory hurtle, to
     adopt a new technology.
                   In fact, some of you may have seen the Teligent
     truck that's driving in front of the FCC and downtown D.C.
     and around downtown today, trying to get people to switch to
     this new fixed, broad-band wireless service here in
     Washington, and os they are expecting to have to do a huge
     consumer education, and we'll actually need state regulatory
     help to highlight the benefits of some of these new
     technologies.
                   CHAIRMAN KENNARD:  Thank you.  I think we need to
     wrap up.  I'm going to at this time invite the commissioners
     to offer any closing comments if they have any statements?
                   Okay, hearing none, I will thank our panelists for
     a very enlightening afternoon, and also I'd like to thank
     some people who made this possible today, the organizers of
     this event:  Lori Wright, Matthew Vitalie, Sheryl Todd,
     Astrid Carlson and Tom Power.  
                   Thank you all very much for participating.
                   (Applause.)
                   (Whereupon, at 5:06 p.m., the meeting was
     concluded.)
     //
     //
     //
     //
     //
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     //                        REPORTER'S CERTIFICATE
     
     
     FCC DOCKET NO.:      N/A
     
     CASE TITLE:   CONSUMER ISSUES AND EDUCATION
     
     HEARING DATE: October 29, 1998
     
     LOCATION:            Washington, DC
     
         I hereby certify that the proceedings and evidence
     are contained fully and accurately on the tapes and notes
     reported by me at the hearing in the above case before the
     Federal Communications Commission.
     
     
     Date:   __________           _Joel Rosenthal______________
                                   Official Reporter
                                   Heritage Reporting Corporation
                                   1220 "L" Street, N.W.
                                   Washington, D.C. 20005
     
     
                       TRANSCRIBER'S CERTIFICATE
     
     
         I hereby certify that the proceedings and evidence
     were fully and accurately transcribed from the tapes and
     notes provided by the above named reporter in the above case
     before the Federal Communications Commission.
     
     
     Date:   __________            ______________________________
                                   Official Transcriber 
                                   Heritage Reporting Corporation
     
     
                       PROOFREADER'S CERTIFICATE
     
         I hereby certify that the transcript of the
     proceedings and evidence in the above referenced case that
     was held before the Federal Communications Commission was
     proofread on the date specified below.
     
     
     Date:   __________            ______________________________
                                   Official Proofreader
                                   Heritage Reporting Corporation