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States Steal a March on Federal Telecom Reform

State governments are moving ahead of Congress in telecom reform, and are coming up with a variety of approaches

Sept 95 Jurisdictions: Congress, Hawaii, Georgia, Florida, Virginia Problem: Federal telecom reform could radically reduce state and local government regulatory authority

Solution: States are passing their own telecom reforms in hopes of maintaining some control

Contact: Laurie Itkin, NCSL, 202/624-5400 One size won't fit all? By Brian Miller Features Editor While Congress fiddles, state governments are moving to prevent fires in their own backyards. Just this year, more than a dozen states have passed legislation to both govern emerging telecommunications markets and prevent federal preemption of what the states consider to be their territory

The coming convergence of cable, long-distance and local telephone carriers in the same markets - and new broadcast and communication technologies as well as potential profits from interest groups - is driving statute and regulatory reform. Congress has already been working for well over a year to revamp telecommunications laws governing when and how competition can take place, but has yet to send a bill for the president's signature

States, meanwhile, have been moving forward with their own versions of intrastate telecommunications reform legislation to govern emerging competition. Thirteen states have passed legislation this year related to local competition, new pricing schemes and universal service frameworks, among other matters, while public utilities commissions (PUCs) in other states are changing telecommunications regulations to meet the present and future of telecommunications

Congress may end up passing laws preempting some state telecommunications changes. States cannot contradict federal law, which acts as sort of a minimum set of rules for the whole country. But states can elaborate on federal laws or fill in explicit or implicit gaps left by Congress

But some of the language in the two congressional bills being worked on in Washington could preempt states if signed into law, including rights-of-way and tax collection. For example, in July, the House bill called for the FCC to decide on the siting of cellular telephone towers, a situation local governments decry as an infringement on their planning powers

Part of the states' strategy in passing legislation before Congress is that it will be more difficult politically for the federal government to preempt the states. If there are state laws already on the books, the states will add strength to their preemption arguments. "States realize that we have to move quickly to keep the federal government from preempting us," said Hawaii Sen. Carol Fukunaga, who was instrumental in getting telecommunications legislation through the Legislature and signed into law this spring. "States are taking action so that we are not told that one size fits all." Telecommunications legislation passed by states in the past year have significant differences, yet there are a few common denominators: universal service, terms and conditions for competition in local markets, and price reregulation. The bills passed vary in both breadth and specificity, with Virginia passing a bill with only a few pages and Florida enacting a 100-plus page version

THE PUC ROLE Many of the new laws direct PUCs to determine issues based on guidelines created by statutes. Utility commissions' role in telecommunications reform is to implement laws through regulations, similar to executive branch agencies implementing legislation. The purpose of the recent Hawaiian legislation, for example, was to "facilitate the PUC process," said Pearl Imada Iboshi, the state's chief economist. "The PUC has decision-making power to open competition on its own, and the legislation frees them to decide issues. The hope is that [the legislation] would show the Legislature's and governor's commitment to speed the PUC process." PUCs across the country have increasingly begun looking at local competition, reregulating rates and creating new universal service mechanisms, both with and without legislative guidance, said Michelle Harris, an advocate and spokeswoman for the National Association of Regulatory Utility Commissioners. "Technology is pushing the issue," she said

UNIVERSAL SERVICE Most states are passing vague language directing PUCs to determine the definition of universal service, but some use relatively specific language

Hawaii's law, for example, states that "It is in the public interest to preserve and promote affordable, universal, and high-quality basic telecommunications services as those services are determined by the public utilities commission." Universal service historically has been funded mainly through what is called cross-subsidies. To keep residential telephone rates low enough to ensure that the poor can afford service, large customers such as businesses pay more than residential customers. Universal service cross-subsidies also help pay for hooking up rural customers, which is more expensive than urban connections

Some states are creating mechanisms to preserve universal service and ensure that all competitors are contributing their fair share. In Wisconsin, all telecommunications providers are required to contribute to a fund which will be used to help subsidize poor and rural customers, and help institutions such as schools and hospitals to afford telecommunications programs

Other legislatures are directing their PUCs to come up with universal service mechanisms which would meet certain goals, rather than prescribe how it should be done. The Florida PUC, for example, must make recommendations to the Legislature by January 1997 on a permanent universal service regime. Goals such as providing an evolving level of access to telecom services act to guide the commission as it searches for mechanisms

LOCAL COMPETITION One of the three issues being grappled with in most of the states includes allowing competition for local telephone service. States are directing utility commissions to set the conditions for competitors to enter local telephone service areas, and a variety of approaches are being taken. "When allowing open competition, they have to think about deregulating rates and revamping universal service so that all [carriers] contribute," said Laurie Itkin, a policy analyst with the National Conference of State Legislatures

Among the requirements states are passing is called "unbundling" services

This means that the steps it takes to get a dial tone to the home, including switches and relays, must be separated and billed so that competition can occur at each step of the way. This is considered a prerequisite to allowing local competition because local carriers today have an advantage by already packaging dial tone delivery. By unbundling or separating the steps it takes to get the dial tone to the home and pricing each of these segments, competitors are on more equal footing

As states begin to allow competition for local telephone service, certain terms and conditions are being created by the utility commissions. Local calling areas with smaller numbers of access points, or connections, are generally able to delay or avoid direct competition until market conditions enable a fair playing field for all competitors, including long-distance companies, cable and local carriers

PRICE REREGULATION As local telephone service is opened for competition, there are some changes in the way local carrier prices are regulated by state utility commissions. The idea is to govern the competition until it has been transformed from a regulated monopoly to a free market. In Florida, for example, recently passed legislation allows an incumbent local exchange company with more than 100,000 access lines to elect price regulation

Traditionally, local telephone company prices have been regulated based on a request by the company that takes into account operating costs and other expenses. The company applies to keep a percentage of the revenue as profit, and some states give a company credit for capital investment

Price caps, meanwhile, are set by a utilities commission using various formulae to limit what customers can be charged for certain services. The rates can be increased on appeal by telcos for inflation and other factors, and there are incentives built in for companies to keep their rates below the ceiling

There are other approaches being taken by states to move from rate-of-return pricing. As a condition for alternative regulation, large telcos in Georgia must pledge to invest $500 million per year over five years in infrastructure upgrades. The investment may include contributions to telemedicine or distance learning infrastructure

Other states are creating formulae for contributions to universal service accounts which would be used to help subsidize those who would otherwise be unable to afford the service

The reasoning behind universal service funds is sort of a quid pro quo, with the state easing up on regulations to allow companies to go into new markets in exchange for contributing to community good

But federal legislation being debated could preempt state rate regulation, and have the FCC determine telephone service pricing. This is an issue state and local governments are concerned with, and Congress is being lobbied to allow local areas to determine the pricing. "It would be easier for states to do because they know the markets," said NCSL's Itkin

Which brings us back to the federal preemption that state and local governments hope to minimize or prevent. States are working out their own mechanisms for local telephone competition and other matters, and there is the danger that the federal legislation being considered by Congress could be detrimental to state interests, which vary from place to place. "A one-size fits all approach will not work," said Harris