1. 1 Introduction to Telecommunications Policy October 10, 1999 Aspen, Colorado Glenn H. Brown gbrown@mcleanbrown.com

2. 2 Agenda 1.The Policy Makers 2.The Telecommunications Act of 1996 3.Regulatory Issues Facing Rural America 4.Keys to Effective Advocacy

3. 3 The Policy Makers In This Section We Will Examine: –The Major Telecom Regulatory Bodies Federal Communications Commission (FCC) State Regulatory Commissions Federal/State Joint Boards –The Role of Other Governmental Bodies United States Congress Local and Municipal Government The Courts –How/When to Get Involved

4. 4 Federal Communications Commission Established by the Communications Act of 1934 Five Commissioners –Appointed by the President and Confirmed by the Senate –No More Than 3 From The Same Political Party –Five Year Terms –President Designates Chairman Six Bureaus –Organized by Function –Handle Day-to-Day Responsibilities Total Staff of 1755 (Per 1997 Annual Report) –Highly Qualified –Generally Lawyers, Accounts & Economists

5. 5

6. 6 COMMON CARRIER BUREAU Accounting Policy Division –Oversees Universal Service Funding Accounting Safeguards Division –Oversees Audits and Cost Accounting Rules Network Services Division –Oversees Numbering, Network Reliability, TRS and Hearing Aid Compatibility Enforcement Division –Handles Consumer Protection, Complaints and Merger/Acquisition Industry Analysis Division –Collects and Distributes Data on the Telecom Industry Competitive Pricing Division –Develops Pricing Policies for Interstate Services and Interconnection Policy and Program Planning Division –Develops Rules and Regulatory Programs to Facilitate Competition

7. 7 Levels of Entry at FCC Commissioner Level –Commissioner –Legal Advisor Bureau Level –Bureau Chief –Bureau Deputy Chief Division –Division Chief/Deputy Chief –Working Staff

8. 8 How the FCC Works Telecom Rules in Code of Federal Regulations (CFR) Title 47 FCC Processes to Make and/or Modify Rules –Notice of Inquiry (NOI) FCC Considering Possible Action Requests Input From Interested Parties Written Comments, Reply Comments and Ex-Parte Presentations –Notice of Proposed Rulemaking (NPRM) FCC Proposing Additions or Changes to Rules Written Comments, Reply Comments and Ex-Parte Presentations –Requests for Public Comment Requests Comment on Proposals and/or Papers Presented to Commission FCC Processes to Enforce Rules

9. 9 When/How to Work With the FCC Before Visiting With Commissioners or Bureau Chief be Sure Issue is “On the Radar Screen” Work With the Lower Level Staff First Best Time to Present Views is Before Issue is Put Out For Comment –Opportunity to Shape the Notice –Ex-Parte Filings Not Required File Complete and Informative Comments and Replies –Use Facts and Data Make Ex-Parte Contacts to Reinforce Your Advocacy –Support Your Position –Address the Issues Presented by Other Parties –Form Coalitions When Possible Contacts Prohibited During “Sunshine” Period

10. 10 State Regulatory Commissions All 50 States and DC Have Commissions –From 3 to 7 Commissioners –Commissioner Selection 39 States Appointed 12 States Elected –Staff Size From 11 (RI) to 800 (CA) –Varied Responsibilities Including Telecom, Electricity, Gas, Water, Taxi Cabs, Insurance, etc. –Varied Rules and Procedures

11. 11 State Commissions

12. 12 Major Differences

13. 13 The Joint Board Process For Issues That Cross Jurisdictional Boundaries –Jurisdictional Separations –Universal Service Makeup of Joint Board –Three Federal Commissioners –Four State Regulators –(Universal Service Joint Board Includes a Public Advocate) Joint Board Recommends, FCC Decides Mixed History

14. 14 The Role of Congress Congress Oversees the FCC and Approves Its Budget Congress Passed The Telecommunications Act of 1996 –Directed the Introduction of Local Competition –Mandated Universal Service Protection –Called For Eventual Deregulation Senators and Representatives are not Shy! –In 1998 Chairman Kennard Received Over 1800 Letters From Congress Politics Often Gets Involved

15. 15 Congressional Committees United States Senate –Commerce, Science & Transportation Committee John McCain (R - AZ), Chairman Ernest F. Hollings (D - SC), Ranking Member –Communications Subcommittee Conrad Burns (R - MT), Chairman Ernest F. Hollings (D -SC), Ranking Member –The “Farm Team” House of Representatives –Committee on Commerce Tom Bliley (R - VA), Chairman John D. Dingell (D - MI), Ranking Member –Subcommittee on Telecommunications W. J. “Billy” Tauzin (R - LA), Chairman) Edward J. Markey (D - MA), Ranking Member

16. 16 The Role of Local Government Traditionally Telecom Regulated at State and Federal Level Industry is Changing and Converging –Digital revolution blurs boundaries between telecom, cable and Internet –Wireless services growing geometrically Local Governments Becoming More Involved –Cable regulation has traditionally been local –Local zoning issues with tower siting –Sales tax issues with e-commerce Will Federal Government Preempt?

17. 17 The Role of the Courts Fish ‘Gotta Swim, Birds ‘Gotta Fly and Lawyers ‘Gotta Sue On Major Telecom Issues the Stakes are so High Than no Matter Who Wins - The Other Guy Takes it to Court If a Court Overturns the FCC on an Issue, it is Remanded Back to the FCC for Reconsideration

18. 18 1996 Telecom Act Major Objectives Open Local Telephone Markets To Competition Incumbent Local Exchange Carriers (LECs) Must Open Their Networks To Competitors: –Interconnection –Wholesale Provisioning Of Services –Unbundled Network Elements RBOCs May Enter Long Distance Markets Upon Meeting A 14-point “Checklist” FCC Must Provide For The Provision Of Universal Service –Rural, Insular & High Cost Areas –Schools And Libraries –Rural Health Care

19. 19 1996 Telecom Act Section 254(b) - Universal Service (1)Quality and Rates Quality services should be available at just, reasonable and affordable prices (2)Access to Advanced Services Access to advanced telecommunications and information services should be provided in all regions of the Nation (3)Access in Rural and High Cost Areas Consumers in all regions of the Nation should have access to services (including advanced services) at rates that are reasonably comparable to those in urban areas

20. 20 1996 Telecom Act Section 254(b) - Universal Service (4)Equitable and Non-Discriminatory Contributions All telecommunications providers should contribute to the preservation and advancement of universal service (5)Specific and Predictable Support Mechanisms There should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service (6)Access to Advanced Services for Schools, Health Care and Libraries Elementary and secondary schools and classrooms, health care providers, and libraries should have access to advanced services.

21. 21 1996 Telecom Act Other Major Provisions –Creates a Federal/State Joint Board to recommend universal service solutions to the FCC (254(a)) Recommendation due November 8, 1996 FCC to act on recommendations by May 8, 1997 –Defines “Eligible Telecommunications Carriers” (ETC) for receipt of universal service funds (214(e)) –Differentiates between “Rural” LECs and “Non-Rural” LECs Based on size (I.e. < 100,000 lines) and area served (3(37)) Different market opening requirements (251(f)) NRLECS shall have multiple ETCs (214(e)(2)) –States that any Federal universal service support “should be explicit” (254(e))

22. 22 Major Regulatory Issues For Rural America Universal Service Access Reform/Rate Rebalancing Local Competition Broadband Development

23. 23 UNIVERSAL SERVICE PROBLEM Goal of Low Basic Service Prices High Degree of Rate Averaging Two Sources of Historical Universal Service Subsidy 1. ExplicitAbout $1B 2. Implicit$5B - $19B Toll/AccesstoLocal BusinesstoResidence UrbantoRural Telecom Act of 1996 Changed Everything

24. 24 THE 1st FCC’s DECISION Issued May 8, 1997 Schools and Libraries –$2.25B Fund –Funding Based on State and Interstate Revenues –Sliding Scale of Discounts Rural, Insular and High Cost Areas –Funding 75% States / 25% Federal –“Non-Rural” Telephone Companies Support = Forward-Looking Cost - Benchmark 14 Month Process to Select Proxy Cost Model –“Rural” Telephone Companies Continue Present Mechanisms Transition to Forward-Looking Mechanism Beginning in 2001

25. 25 Major Problems Many Rural States Can’t Afford to Pay 75% of High- Cost Need –Key variable is the ratio of low-cost to high-cost customers Proxy Models –Widely divergent positions –Accuracy of Model for small areas Inherent Tensions Between the Players –High-cost states vs. low cost states –Local service providers vs. other telecom providers Who Will Pay For Universal Service? How?

26. 26 Note: This chart assumes a fund size of $4.5B derived from using FCC “common inputs” in the BCPM3 model. The actual fund size will be determined after completion of further proceedings to finalize model inputs.

27. 27 Note: This chart assumes a fund size of $4.5B derived from using FCC “common inputs” in the BCPM3 model. The actual fund size will be determined after completion of further proceedings to finalize model inputs.

28. 28 Ratio of $100/mo+ Customers to Total

29. 29 Proxy Cost Models The Original Contenders –BCPMBellSouth, Sprint, U S WEST($4.5B - $9B NRLEC) –HAIAT&T, MCI ($3B - $4.5B NRLEC) –HCPMFCC Staff Major Model Issues –Network Design - “Engineer-in-a-Box” –Customer Location –Input Values –Accuracy for Small Geographic Areas –Who Needs Reality? Current Status –FCC finalizing “synthesis model” and inputs for non-rural LECs –Rural Task Force to address model issues for rural LECs

30. 30 Reconsideration of 1st Decision April, 1998 - FCC Reports to Congress –Will reconsider 75/25 funding July, 1998 - FCC Refers Issues to Joint Board –Alternatives to 75/25 funding –Report due 11/23/98 –Delays “non-rural” LEC funding to 7/1/99 October 30, 1998 - Joint Board 2nd Recommendation –Some states will require additional federal support –Two-pronged test for support 1.Forward-looking costs >> national average 2.Inability to cover high-cost problem internally –Fund not “significantly larger” than present (ie. $125M for NRLECs) –Uses statewide averages of cost Continues urban-to-rural implicit subsidies Joint board may revisit if “competition threatens affordability ”

31. 31 The 2nd FCC Decision Issued May 28, 1999 Delays “Non-Rural” Explicit Fund Until 1/1/00 75/25 Funding Plan is Rejected Fund Covers State-Wide Average Costs over “Benchmark” –Uses “Synthesis Model” –Asks for input on what the benchmark should be State Must Provide $X/Line of the Support –Provides more funding to needy states –Asks for input on what the per-line amount should be Fund “Not Significantly Larger” Than Present ($125M) Recipients “Held Harmless” for Current Level of Support

32. 32 Problems With 2nd FCC Decision Political Tensions Within the System –Low-cost states vs. high-cost states –Local service providers vs. other telecom providers Averaging Perpetuates Implicit Support –High margin urban customers vulnerable to competition –System will be slow to react in crisis Creates “Two-Tier” System for Rural Consumers –“Rural” Companies Support at 115% of embedded cost –“Non-Rural” Companies Support no larger than present Must rely on implicit subsidies Perpetuates the Status Quo –No more support than present ($125M) –No one gets less than present

33. 33 Additional Problems Funding and the Models –$125M falls far short of requirements HAI w/Defaults$3 Billion BCPM w/Defaults$9 Billion Either w/FCC “Common”$4.5 Billion –Output very sensitive to inputs and platform (see above) –FCC’s “Synthesis” model still not finalized –If model is delayed, so is funding “Non-Rural” vs. “Rural” Issues –“Non-rural” must be funded at least 115% –Forward-looking vs. Embedded Averaging is Fundamentally Incompatible With Competition –False entry signals in over-priced areas –False protection for high-cost rural customers

34. 34 Additional Problems (Continued) A Fund That is Too Small Will Harm Rural America –Increased reliance on vulnerable access charges –Investment and advanced services drawn to urban areas –Rural consumers become “have-nots” Advanced Services Will Come Fastest by Letting Markets Work –Provide sufficient funding to rural areas –Relax rules that prevent incumbents from delivering services Inter-LATA restrictions Unnecessary unbundling and separate subsidiary rules Universal Service Fills the Gaps –Fully competitive market delivers advanced services to most –Universal service fund fills the gaps –The greater the role of markets, the smaller the fund

35. 35 Schools, Libraries & Rural Health Care Initial FCC Decision Set Funding Targets –Schools & Libraries$2.25B –Rural Health Care$0.40B Sliding Scale For S&L Discounts –Rural vs. Non-Rural –Relative Poverty Levels Funding Phased In Over Time

36. 36 Access Reform/Rate Rebalancing The “Flip-Side” of Universal Service As Explicit Support is Increased Rates are Reduced to Remove Implicit Support If Sufficient Explicit Support is not Provided: –Implicit support remains in rates –Competition erodes implicit support –Pressure for rural rate increases Implicit Support Distorts Competitive Markets –False entry signals in low-cost markets –No incentives for competition in rural markets

37. 37 Broadband Development Exciting Technology Developments for Delivery –DSL –Cable Modems –Wireless? –Other? What Role Should Universal Service Funding Play? Should Narrowband Regulatory Model be Applied? Should Competitive Markets be Allowed to Work?

38. 38 What Can Concerned Citizens Do? Get Informed and Get Involved Contact The Following: –Your State Public Service Commission –The Federal Communications Commission (FCC) –The Federal/State Joint Board –Your Congressional Delegation Major Message Points: –Universal service is a national priority –A sufficient federal fund must be established for high-cost areas –Advanced services will come to rural America through a combination of targeted supports and free market incentives –Markets must be allowed to function!

39. 39 Keys to Effective Advocacy 1. Regulators Are People Too 2. Work The Staff First 3. Use Your Time Wisely 4. Listen As Much As You Talk

40. 40 Keys to Effective Advocacy 5. It’s The Public Interest, Stupid 6. Know Who Supports You – Who Opposes You 7. Acknowledge Other Points Of View 8. Address Holes In Your Argument

41. 41 Keys to Effective Advocacy 9. No Surprises – No Threats 10. Use Facts and Data 11. Keep Your Commitments 12. It Ain’t Over ‘Til Its Over