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To: Anthony Wong who wrote (3494)	11/22/1998 12:33:00 PM
From: Anthony Wong	Read Replies (2) \| Respond to of 11568

U.S. Regulators Wrestle With Plan to Keep Phone Rates in Check Bloomberg News November 22, 1998, 11:49 a.m. ET U.S. Regulators Wrestle With Plan to Keep Phone Rates in Check Washington, Nov. 22 (Bloomberg) -- Providing local phone service to the tiny, isolated West Texas town of Westbrook isn't cheap. It costs SBC Communications Inc. about $200 a month per phone line, though its residential customers pay less than $20 a month. San Antonio-based SBC can keep the phone service affordable because of a system known as universal service. The 64-year-old system -- which distributes as much as $300 million a year to the large phone companies -- is designed to ensure that all Americans can afford local phone service, even in remote mountainous regions, rural villages and other hard-to-reach spots. Now, federal and state regulators are working to revamp the system. They want to keep local phone rates low across the U.S., while encouraging competition. The problem is no company wants to lose money serving towns like Westbrook when it could be winning lucrative business customers in places like Dallas. ''In the past, universal service was somewhat less challenging because we usually had one monopoly provider in every community,'' said Federal Communications Commission Chairman William Kennard. At that time, a ''social compact'' existed between government and industry in which the government guaranteed companies a certain rate of return in exchange for their serving the entire community. Now, multiple local phone companies mean ''you have to revamp the universal service system to make sure it works for a more competitive environment,'' said Kennard. Prices May Rise If the FCC gets it wrong, consumer groups and others warn that phone service prices may rise. ''Entire regions face a threat of rate increases,'' said Gene Kimmelman, co-director of Consumers Union's Washington Office. ''There's pressure both at the state and federal level to increase the monthly fees for telecommunications services.'' In addition, critics say that under the current system, a poor resident of an inner city neighborhood -- inexpensive to serve because there are lots of people and the infrastructure is already there -- subsidizes phone service for a vacation home- owner in Aspen, Colorado, a mountainous resort area that's costly to serve. Tomorrow, a joint board of state and federal regulators will recommend ways to overhaul universal service. For now, they're only dealing with the subsidies that go to the Baby Bells and other large local phone companies. The FCC plans to review the recommendations, issue its own proposal and implement new rules by July. It's unclear how specific the joint board will be in its recommendations. The FCC expects to get some consensus, and the board is trying ''to come up with something that works for the states as a whole, while recognizing the need to have a national framework,'' said Julia Johnson, chairman of the Florida Public Service Commission and state chairman of the joint board. 'Cream Skimming' Unless the FCC can design a fund that will make areas like Westbrook attractive for competition, other companies are only going to focus on business customers in cities -- ''cream skimming'' as it's known -- and competition will never progress to the rural areas of the U.S. ''The FCC faces a political balancing act,'' said Jay Bennett, SBC's federal regulatory director. The agency must weigh the needs of urban and rural customers, local and long-distance phone companies, and so-called high-cost and low-cost states. For example, it must consider the needs of companies serving rural areas, such as SBC and Denver- based US West Inc., and companies serving more urban areas, such as New York-based Bell Atlantic Corp. and Chicago-based Ameritech Corp. Until now, local phone companies have kept residential rates low through a series of cross subsidies. Rates for business and new services such as call-waiting and voice mail are inflated to offset below-cost residential rates. Also, local phone companies charge long-distance companies inflated access fees to connect calls. Subsidies Phone companies serving rural and other high-cost areas also keep residential rates low through subsidies from a federal universal service fund. All telephone companies are required to pay in to the fund, and the money is distributed to companies serving the high-cost areas. The 1996 U.S. Telecommunications Act says the subsidies flowing between services and companies can no longer be hidden from consumers. The FCC is charged with finding a way to take the hidden subsidies out of the rates and replace them with direct subsidies from federal and state funds. Currently, the federal government provides about 25 percent of universal service support and states contribute the rest. That's likely to change, with more burden going to the federal government. The size of the fund may also shift. The U.S. Telephone Association, which represents most big phone companies, is recommending to the FCC that the amount of subsidies rise to $3.5 billion a year. Long-distance companies are pushing to keep subsidies at the current $300 million. Congress will be watching the process carefully. Legislators representing rural areas are concerned that if the overhaul isn't done properly and rates go up, voters may blame Congress. ''I think Congress and federal policy-makers had a belief that the '96 act was going to produce widespread competition that would lead to lower rates for consumers overall,'' said Greg Voigt, a telecommunications attorney with the Washington law firm of Wiley, Rein & Fielding. ''The difficulty is recognizing that some rates are too low to begin with.'' --Heather Fleming and Alan M. Wolf in Washington (202) 624-1835