I. INTRODUCTION

The Alliance for Public Technology ("APT"), the Communications Workers of America ("CWA") and the National Association of Development Organizations ("NADO") submit these joint comments in response to the Commission's Notice of Proposed Rulemaking ("NPRM") in the above referenced dockets. The NPRM seeks comments on a proposal submitted by the Coalition for Affordable Local and Long Distance Service ("CALLS") on July 29, 1999 to reform interstate access charges and universal service. The five-year plan would cover those price cap incumbent local exchange carriers ("ILECs") that elect to participate in the negotiated compromise developed by Coalition members AT&T, Bell Atlantic, BellSouth, GTE, SBC and Sprint. CALLS urges the Commission to adopt the plan in its entirety and to implement it by January, 2000. The Commission now asks whether it should grant CALLS' request. As explained below, joint commenters support the proposal and recommend that the Commission adopt it, but only after ensuring that all consumers, regardless of their long distance calling volumes or patterns, will receive lower long distance toll rates from interexchange carriers' non-discriminatory pass-through of access charge reductions. While the instant NPRM may elicit different approaches or improvements to the CALLS plan, at present, joint commenters believe the proposed plan offers a viable means of stabilizing universal service during the transition to competitively neutral, explicit universal service support mechanisms. Admittedly, the CALLS plan is not a perfect solution, but its creation through arms' length negotiation between long distance carriers and incumbent local phone companies that are more often opponents than proponents in any given matter, is an encouraging development in a rapidly changing telecommunications marketplace.

As new packet switched networks emerge to enable users to avoid long distance charges containing the subsidies now implicit in per minute access charges, the urgent need for reform becomes clearer. Without prompt action, the inevitable collapse of the current access charge regime will undermine universal service funding and threaten the nation's commitment to affordable quality telephone service for everyone. And, unless sustainable universal service support exists for basic telephone service, joint commenters fear that mechanisms cannot develop to ensure that low-income, working, elderly, disabled, and rural residents gain access to advanced telecommunications networks that can improve their education, health care, economic development, and other important aspects of their lives.

II. THE CALLS PROPOSAL COULD BENEFIT ALL CONSUMERS

CALLS has offered a plan consisting of three interdependent elements:

1. A portable $650 million explicit universal service fund to replace a comparable amount of implicit subsidy now collected by ILECs through interstate access charges from long distance companies;
2. A single flat rated subscriber line charge ("SLC") created by consolidating the existing SLC with current charges related to the presubscribed interexchange carrier charge ("PICC"); and
3. A "social compact" providing for a 50 percent reduction over five years in per minute interstate access charges and generally holding them at those lower levels.

Concerned about the CALLS proposal's suggested SLC increase and other ways the plan could affect consumers, APT asked Joel Popkin and Company to evaluate the plan, and to study specifically its consequences for rural residents and for low and moderate income customers. Chief economist Steve Posiask conducted the study titled " An Assessment of Consumer Welfare Effects of the CALLS Plan," ("Consumer Welfare Study," attached hereto as Appendix A), which APT and CWA released together on October 25, 1999).

The Consumer Welfare Study concludes that:

The CALLS plan will enhance overall consumer welfare mainly because it leads to more rational pricing for telecommunications services. Per minute interstate access charges, the usage charge by local telephone companies to long distance companies for originating and terminating a long distance call and a key input for long distance pricing, will be cut in half. As the price that long distance customers pay falls, consumers can both pay less for the calls they are already making and can increase the amount of long distance calls they make. Economists often measure consumer benefits by adding the gains from lower prices for existing usage and expanded usage - a measure of economic well being called consumer welfare. The drop in interstate access charges, when reflected in long distance bills, significantly increases welfare for consumers. (Emphasis added).

Although the CALLS plan provides the greatest benefits for business customers, the Consumer Welfare Study also demonstrates that residential customers at all income levels could gain annual benefits of $1.2 billion . They could also save at least 2% annually on their phone bills, which is the amount of savings working families with incomes of $30,000 to $50,000 per year could expect to receive if the Commission adopts the CALLS plan. Beyond the aggregate benefits, the Consumer Welfare Study further identifies the plan's potential advantages for joint commenters' constituents, many of whom can ill afford higher prices for the basic necessity of quality telephone service.

A. Universal Service

Joint commenters find most appealing the CALLS plan's universal service protections for rural and low-income customers. By specifying means to ensure that these customers' telephone service remains affordable, CALLS members attempt to address the mandate of Section 254(b)(3) of the Telecommunications Act of 1996. The provision establishes the universal service principle that "[c]onsumers in all regions of the Nation including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services including interexchange services and advanced telecommunications services" that are reasonably comparable to those in urban areas at reasonably comparable rates.

1. Rural Customers - The demographics of the country's rural population emphasize the importance of affordable telephone service in nonmetropolitan areas. "According to the Earth Island Journal, rural America contains 43 percent of the disabled, 32 percent of the unemployed and 39 percent of people below the poverty line." The CALLS plan provides a "universal service 'safety net' [a]s a necessary counterpart to the common line restructuring" it proposes. Specifically, CALLS recommends an additional $650 million per year in explicit universal service support to mitigate the effect of geographic deaveraging of SLCs and unbundled loops that would end rural rate subsidies from urban customers. This additional universal service funding supports primary residential and single line business SLCs, which the plan caps at $7.00 per month.

The Consumer Welfare Study quantifies the average savings for rural customers at about 3 cents per month, compared to monthly gains of $2.10 for urban and $1.06 for suburban households, but points out that other intangible benefits, such as increased competition from more rational pricing, could accrue to rural consumers. The study also does not attempt to calculate the important benefit of less expensive Internet access from lower toll rates for rural customers without local dial-up access.

2. Low-Income Customers - The CALLS plan recommends unifying SLCs and PICC-related charges into a simplified SLC and extending Lifeline subsidies to reimburse ILECs for the higher combined SLC. At present, Lifeline universal service payments support only SLCs and exclude PICCs. By eliminating the PICC, the CALLS plan removes a charge that some Lifeline customers now pay and guarantees that low-income Lifeline subscribers incur no increased line charges. The Consumer Welfare Study estimates that Lifeline customers with annual incomes below $10,000 could receive almost 3 percent in annual welfare gains under the proposal, while those with incomes between $10,000 and $20,000 could obtain added benefits worth about 2.6 percent per year. Significantly, the study warns that "maintaining the status quo and leaving the implicit usage-based subsidies in place and failing to provide targeted low-income line charge assistance produces sizeable harm to many consumers for the modest benefit of a few."

Joint commenters applaud the CALLS plan's suggestion to enhance Lifeline coverage. In view of the importance of the Lifeline extension to maximize the plan's benefits for people who can least afford telephone rate increases, joint commenters strongly recommend that the Commission work with states to maximize enrollment in the Lifeline program.

B. Potential Consumer Benefits From Lower Switched Access Fees

By halving per minute access charges over five years, the CALLS plan could result in long distance rate reductions for consumers, but only if interexchange carriers pass on their reduced costs through lower long distance toll charges. Joint commenters recognize the potential advantages for consumers not only from more affordable long distance service, but also from the diminished tension under the current rate structure that requires access charge payments of long distance companies yet exempts Internet Service Providers ("ISPs") from such payments. The plan's more favorable pricing could promote bundled service offerings of local calling, long distance, wireless and Internet services in a flat rated package that consumers might find attractive.

Moreover, the CALLS proposal also provides a mechanism to reduce per minute switched access charges in a manner that preserves incentives for quality improvements and investments in the local network. CWA previously provided to the Commission evidence that the Commission's 6.5 percent annual productivity adjustment as set forth in the May 1997 Access Reform Order is too high as measured by expected productivity growth in the industry. Setting the wrong productivity factor will cause price cap LECs to reduce network investment and operating expenses, which will result in lowered service quality on today's network and delayed deployment of advanced services.

The CALLS proposal addresses this problem by setting a floor below which traffic-sensitive switched access charges will not drop. Negotiations resulted in CALLS members proposing a 50 percent reduction in switched access charges from today's average of 1.1 cents per access minute to a target of just over 0.55 cents per access minute for Bell Companies and GTE and 0.65 cents per access minute for other price cap LECS. Joint commenters believe that this mechanism for lowering switched access charges will have the added benefit of reducing the opportunity for arbitrage and uneconomic bypass that currently threatens universal service, while preserving incentives for continuous investment in the local network by price cap LECs.

III. THE COMMISSION MUST ENSURE THAT INTEREXCHANGE CARRIERS EQUITABLY PASS ON ACCESS CHARGE REDUCTIONS TO ALL CONSUMERS THROUGH LOWER LONG DISTANCE RATES

The Consumer Welfare Study predicts perceptible benefits for a wide range of consumers if the Commission adopts and implements the CALLS proposal. Joint commenters are keenly aware, however, that the "study assumes that long distance price reductions are commensurate with changes in per minute switched access charges." Consequently, the plan's potential to make telephone service affordable for everyone may never materialize if long distance carriers fail to cut long distance rates equitably for all consumers. The CALLS plan makes no promises on that score, although its members emphasize that

overall toll charges have a more substantial impact on whether telephone service is affordable than do fixed monthly charges. By dramatically reducing switched access charges, which can thus lower long distance bills, it is likely that the plan would, in fact, make telephone service more affordable." (emphasis added.)

Therefore, joint commenters strongly urge the Commission to ensure that interexchange carriers cut long distance rates in a manner that maximizes the consumer welfare benefits. In this way, the Commission will protect low volume phone users and other consumers from bearing a disproportionate share of the proposed line charge increases.

IV. CONCLUSION

As the Commission evaluates the merits of the CALLS plan, joint commenters ask that it look to the future of the Information Age and remember its obligation to preserve universal service in an era of emerging competition for new and innovative telecommunications services. Basic telephone service is a necessity in today's world, and therefore, it must be affordable and available for everyone. Joint commenters contend that on balance, the CALLS plan would shield rural and low-income consumers from unreasonable rate increases, provides measurable benefits to households of all income levels, and could facilitate long distance rate drops for all residential customers. Accordingly, joint comementers recommend that the Commission adopt the CALLS proposal as an effective plan for achieving universal telephone service, the precursor to the advanced telecommunications service that will be indispensable in the Information Age .

Respectfully submitted,

Maureen A. Lewis
General Counsel
Alliance for Public Technology
919 18th Street, N.W., Tenth Floor
Washington, DC 20006
(202)263-2972

Debbie Goldman
Research Economist Communications Workers of America
501 Third Street, N.W.. Suite 1100
Washington, DC 20001
(202)434-1194

Aliceann Wohlbruck
Executive Director
National Association of Development Organizations
444 North Capitol Street, N.W.
Suite 630
Washington, DC 20001
(202)624-7806

November 16, 1999