Testimony before the Pennsylvania Senate

Consumer Protection and Professional Licensure Committee

Regarding Universal Telephone Service

September 8, 1997

SENATOR BELL AND MEMBERS OF THE SENATE COMMITTEE ON CONSUMER PROTECTION AND PROFESSIONAL LICENSURE

My name is Irwin A. Popowsky. I am the Consumer Advocate of Pennsylvania. I want to thank you for inviting me to testify before this Committee on the issue of universal telephone service for all Pennsylvanians.

First, let me state that the subject of this hearing is not only an important issue for the future of telephone service in Pennsylvania. In my mind, it is the most important issue that policymakers need to address if the current restructuring of the telecommunications industry in Pennsylvania and indeed the Nation as a whole is to be carried out in a manner that is consistent with the public interest.

In my view, we will have accomplished little as a society if we move forward with a highly competitive information superhighway that provides more and more services to fewer and fewer segments of our population. The measure of our success in the information future should not be how many video channels we can simultaneously squeeze through the telephone lines of a few individuals. Rather, it should be the quality and universality of the service we provide to our most remote and least wealthy consumers.

Universal service has been the bedrock principle of federal telecommunications policy since the enactment of the Federal Communications Act of 1934. It has also been a fundamental goal of Pennsylvania policy, and I believe it remains so today. Thus, while most people say the purpose of the federal Telecommunications Act of 1996 was to bring about greater competition in the telecommunications industry, I would argue that an equal, if not more important goal of that Act was the expansion of universal service throughout the Nation. Also, while most people remember the debate over the 1993 telecommunications legislation in Pennsylvania to be about reducing rate regulation and encouraging broadband network deployment, the very first principle espoused in the first sentence of that legislation was to "maintain universal telecommunications service at affordable rates."

If anything, the need for a strong universal service policy has increased as the importance of telecommunications has grown in every aspect of our lives. The General Assembly has recognized this fact, for example, through the establishment of its statewide 911 policies. We all recognize the difficulty that persons have if they lack telephone service in today's society, whether it means they have a harder time finding employment, need to search for a pay phone in case of an emergency, or simply are shut off from the ability to talk to family and friends that most of us take for granted. It is not without reason that the special discount service for low-income telephone customers is called "lifeline" service. The telephone is indeed a lifeline for many individuals and the loss of basic telephone service is not merely an inconvenience, but can lead to tragic consequences for persons who lose their contact with vital life-giving services.

But even if we were a society that was totally lacking in compassion and had no concern about some individuals' ability to contact others, the fact is that universal service increases the value of the telephone network to everyone. If only the King had a telephone, and couldn't call any of his subjects, then that telephone would be worthless. Similarly, if only a minority of consumers had telephone service, then the network would be much less valuable for social and commercial purposes than a network on which nearly everyone is linked. The more people with phone service, the more valuable phone service becomes. Leaving aside all the commercial value of being able to contact consumers, think of the school nurse who must try to reach the parent of a child in case of a medical emergency. Isn't it beneficial to society if that parent can be reached by telephone?

Once we recognize the paramount importance of universal telephone service, I think it is necessary to recognize that Pennsylvania's local exchange companies have a record that they can be proud of in bringing about a high level of such service in our Commonwealth. Pennsylvania has long had one of the highest penetration rates for telephone service in the Nation. I think that is because our telephone companies have been able to maintain relatively low rates and our Public Utility Commission has recognized the special importance of keeping the rates for basic residential service at a reasonable and affordable level.

That is not to say that universal service has been achieved in Pennsylvania. While the overall penetration rate for telephone consumers in Pennsylvania was nearly 97% in 1996, the rate for low-income consumers was 92.4%. For very low-income consumers who do not own their own homes, we know that as many as 15 to 20 percent of low-income renters in Philadelphia and in some of our poorest rural counties in Pennsylvania do not have telephone service.
The critical question we face today though is how to preserve and expand universal service in the face of greater competition in at least some portions of the telephone industry. You might wonder why that is a problem since, after all, competition is supposed to drive down the price of telephone service, and that ought to enhance rather than threaten universal service. The difficulty lies in the method by which the price of basic residential telephone service has been set in the past and whether or not that pricing method can survive in a more competitive future.

Most telephone industry representatives will tell you that residential local telephone service is subsidized by other services-such as business, toll, and access. I don't subscribe to that theory, since I believe that the rates of residential customers as a whole in Pennsylvania more than cover the costs of providing those customers with local service. Even I would concede, however, that there are some areas in Pennsylvania, particularly in more rural areas, where the cost of providing telephone service to residential consumers is higher than the revenues that are being received for the services that the telephone company is providing.

The fact that some customers are paying less than the cost required to serve them was not a problem as long as the telephone company operated as a monopoly and could effectively average the costs of all services to all customers in a way that provided an overall level of recovery that was sufficient to cover the company's costs. That ability may be lost if competitors enter the market and seek to serve only those customers (or provide only those services) whose rates exceed their costs, while ignoring those customers who are costlier to serve but whose current rates are set at the same level as the low-cost customers.

One solution to this problem-which the PUC has recommended and which I support-is the creation of a competitively neutral universal service fund. This fund would be available to any telecommunications provider who serves customers in a high cost area and would make up the difference between the cost of providing that service and the (presumably) lower rates that the customer would be charged for universal service. The benefit of this method is that if a new competitor is able to provide service at a lower cost, it could pass on those savings to the consumers while still receiving the same universal service support funding that is provided to the incumbent local provider.

While this solution sounds simple, it raises at least two very difficult issues. First, what rates for a basic universal service package should be charged to the customer in the high cost area? Second, who pays for the universal service fund and how should that money be collected?
In an Order entered January 28, 1997, which I suspect gave rise to many of the concerns of Senator Bell and others that resulted in this hearing, the Commission suggested that an affordable rate that should be used for the purpose of calculating the universal service support was $20 per month. My Office and others strongly opposed setting a universal service rate at such a high level. Our fear was that this $20 rate-though not designated as such by the Commission-would become a target rate that would lead to substantial increases in basic service rates across the Commonwealth. Indeed, a $20 rate for basic residential serivce would be 75% to 100% higher than the current rates being paid by the great majority of residential consumers in Pennsylvania. Our Office argued that the current level of rates should be used as the base from which universal service support would be calculated. Commissioners Hanger and Rolka suggested in their dissents to the Commission's January 28, 1997 Order that the rate should be no more than $15 per month.

Significantly, in an Order on Reconsideration dated July 31, 1997, the Commission clarified that its $20 per month benchmark was not intended to serve as either a floor or ceiling on basic service rates. The Commission suggested a revision to its universal service rate methodology that would look at the revenues provided by residential customers from a wider array of services and that might avoid some of the difficulties created by its prior ruling.
The other issue that needs to be resolved is how universal service support for high cost customers will be funded. Many segments of the telephone industry are advocating rate increases or surcharges on the bills of all customers. The Commission thus far has resisted suggestions to impose a specific surcharge on customers' bills to cover these costs. Our Office has taken the position that it would be counter to the whole purpose of universal service if these funds are collected through increases in the very basic residential services that we are trying to protect. Thus, we have opposed any efforts to increase basic service rates as the means of funding universal service support at this time.

While I think our Commission is doing a commendable job in trying to maintain and enhance universal service in a rapidly changing regulatory environment, we need to make sure that the cure that we are developing is not worse than the disease. Quite simply, the means to achieve greater universal service protection in a more competitive environment cannot possibly be to raise rates for the very services that we are trying to protect. This Committee is absolutely right to raise concerns about even the suggestion that basic rates should be permitted to increase to $20 per month in order to ensure universal service. Rate increases of the magnitude suggested by such a target level could cause thousands of Pennsylvanians to fall off of the telephone network. As I noted above, I believe it is not the intent of the PUC to authorize or encourage such rate increases at this time, but I certainly think it is important for the General Assembly to express its concern over such possibilities through hearings such as this one.

In sum, I think our Commission has gone a long way toward developing a universal service mechanism in which all segments of the telecommunications industry can participate in a competitively neutral manner. I would only urge the Commission and the industry to continue to recognize that the path to greater universal service is not through increasing basic residential rates. Rather, we should try to build on the admirable record achieved by our Pennsylvania telephone companies to date and develop means to support universal service in a way that increases the availability and affordability of service to all Pennsylvania consumers.