J. Kerrey

Mr. KERREY

Mr. KERREY. That is correct.

Mr. KERREY. Mr. President, this is a very simple amendment. Once again, it references title III. Title III is a section where we describe how we are going to end regulation. It is a section where we come in very directly, and make the transition to a competitive pricing situation. For citizens, consumers, taxpayers, voters and everyone else trying to figure out what this bill is all about, we currently allow local telephone companies to set prices based upon a rate-of- return methodology. Most of the States are set up that way. We are moving to price caps. States are beginning to experiment with price caps, even with restrictions on them. We are going to make a transition to a different method of pricing, eventually allowing the price to be set upon the cost of the service that is being provided. The language of title III lays out a framework for transition from a rate-based-rate-of-return system to a price cap system. This amendment simply adds to the description under ``in general''--a paragraph that makes certain that: Pricing flexibility implemented pursuant to this section shall be for the purpose of allowing a regulated telecommunications provider to respond fairly to competition by repricing services subject to competition but shall not have the effect of shifting revenues from competitive services to non-competitive services. Mr. President, this is merely language under the general section of section 301, that attempts to say let us make certain that we do not have any language in this bill that permits the pricing and the shifting of revenues from a competitive situation to a noncompetitive situation. I yield the floor.

Mr. KERREY. Mr. President, I ask unanimous consent that reading of the amendment be dispensed with.

Mr. KERREY. Mr. President, I send an amendment to the desk and ask for its immediate consideration.

Mr. KERREY. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. KERREY. That is an unusual request. I will take a different course. I will take the road less traveled. Mr. President, I yield the floor.

Mr. KERREY. Mr. President, I say to the chairman and ranking member of the committee, I have some amendments filed. I am not sure I am going to bring them all up. I filed them under the cloture rules. Some I am not quite sure I want to bring up. My understanding is under the cloture rules, each Member has an hour to talk. At some point, I am going to want to make a closing statement. I know I control some time. I just want to make sure I reserve about 30 minutes so I can make a final statement.

Mr. KERREY. Mr. President, this amendment would go into the bill, for colleagues who are checking the language out, on page 116. And it refers to the duty to subscriber. Well, it would add to the rate-of- return regulation elimination. In the third title of this bill, we are at the end of the transition. I do not know when that is going to be-- 3, 4 years, it could be sooner, depending upon the local area. This amendment goes after those areas where you may still have some monopoly constraint. We are going to move, again, for emphasis, so that Senators understand what this bill does. This bill preempts State legislatures, State Governors, regulatory commissions that say you can no longer have rate-based return regulation. We are going to move to a price cap system of regulation. I happen to think price cap in almost all situations can be better than rate-based. But there are some, Mr. President, where we could have trouble. This amendment tries to address those situations by saying that ``Nothing in this section shall prohibit the commission for interstate services and States for interstate services from considering the profitability or earnings of telecommunications carriers when using alternative forms of regulation other than the rate of return regulation.'' It does not say they have to. It says nothing in this law shall prohibit them from considering the profitability of the companies. Mr. President, residential and business consumer representatives and telecommunications competitors alike support this legislation's goal of encouraging effective competition in the local telephone service market. However, what I am calling the monopoly telephone rate amendment is necessary to protect ratepayers of noncompetitive telecommunications services from experiencing multibillion dollar rate increases for these services during the transition to effective local competition. State regulators--that is to say, the National Association of Regulatory Commissioners; consumer representatives, the American Association of Retired Persons, the Consumer Federation of America, Consumers Union, the National Association of State Utility Consumer Advocates, as well as business telephone users--that is to say, the customers of telephone companies, business users, the International Telecommunications Association--all are concerned about section 301 of this bill. In mandating price flexibility and prohibiting rate of return regulation, section 301 also prohibits State and Federal regulators from considering earnings when determining whether prices for noncompetitive services are just reasonable and affordable, while the FCC and many State commissions have instituted various price flexibility plans, typically based upon the principles of price cap regulation. Almost all of those plans involve some consideration of earnings. If regulators are prohibited from considering the earnings factor when determining the appropriateness of prices for noncompetitive services, then the captive ratepayers of these services will be subject to billions of dollars in rate increases that regulators could otherwise prevent. The monopoly telephone rates amendment does not change the bill's prohibition on rate-of-return regulation, but would merely allow State and [[Page S8316]] Federal commissions to consider earnings when authorizing the prices of those noncompetitive services. The ratepayer stake in the monopoly telephone rates amendment is dramatically demonstrated by reviewing the role of earnings within the regulatory structure for the 4-year period from 1991 to 1994. During that period, if the regulators of both interstate and intrastate operations of the local telephone companies had been prohibited from considering earnings when approving rates under their price cap plans, the excess revenue over existing authorized rate levels could have easily exceeded $18 billion. In other words, if S. 652 had become law in 1991, telephone ratepayers of noncompetitive services--and I keep emphasizing that where you have competition, there is no problem--but ratepayers in noncompetitive areas and services would have had to pay $18 billion more in telephone rates than they did between 1991 and 1994. Future pocketbook hits will be even higher unless this legislation is amended. The monopoly telephone rates amendment provides a safeguard against a rate impact for the future. A recent study by Montgomery Associates, located in Massachusetts, estimated the rate impact over the next 4 years of S. 652, if its current form were enacted. Based upon an examination of regulatory and industry data, the study conservatively estimates that local rates would increase by $6 per month over the next 4 years. The monopoly telephone rates amendment recognizes it is highly appropriate that State regulators continue to have a role in determining the appropriate price of noncompetitive services in their States, and in so doing, have the discretion to consider the earnings of the local telephone company. Approximately 75 cents of every dollar consumers spend on their overall telephone bills is for calls made within their State. As we learned when deregulating other industries, the legislative goal of local telephone competition advanced in this legislation will not be achieved overnight. In the interim, State regulators and legislatures will continue to be responsible for ensuring quality service and fair rates for noncompetitive telephone services. Their hands will be tied if Congress strips them of the authority to even look at the company's earnings before considering the price level of noncompetitive services. At a time when the Federal Government is committed to better recognize the appropriate role of local government in assessing and protecting the citizens of its State, it makes no sense to handicap the States as they promote the emergence of competition in local telephone markets. As the chairman of the Vermont Public Service Board recently described in testimony before the Judiciary Committee on antitrust business rights and property rights: In truly competitive markets, prices are the result of the forces of supply and demand and don't need to be regulated at all. However, because local exchange, ancillary services, and interLATA toll markets are at best partially competitive, regulatory oversight is still needed and--no one expects this situation to be remedied within the next 12 months. How are prices in these markets to be set? They necessarily involve the careful consideration of each provider's rate of return on noncompetitive services. A judgment about that rate of return must underlie the initial determination of the starting prices allowed. How else can regulators determine whether the prices charged for their noncompetitive services are ``just and reasonable,'' or whether excessive revenues from such services will be available to subsidize competitive service and keep out potential competitors? The monopoly telephone rates amendment, Mr. President, recognizes that the earnings of local telephone companies are formidable. Each of the 7 Baby Bells is among the Fortune Top 50, with most in or approaching to the Fortune Top 20 list. According to the most recently available statistics from the FCC, Statistics of Common Carriers, 1993-94 edition, those local telephone companies required to report their earnings to the FCC billed $90 billion in rates for 1993 and had net earnings of more than $5 billion. Since the competition we strive for in this legislation will not become an instant reality, the monopoly telephone rates amendment recognizes the need to provide State and Federal officials with the tools necessary to ensure that the noncompetitive service of the local telephone companies are not priced at excessive levels. Accordingly, I urge my colleagues to support the monopoly telephone rates amendment.

Mr. KERREY. Mr. President, we are about to vote on a motion by the Senator from South Dakota to table an amendment that provides for a single consumer on the joint Federal-State board. This provision is in the House bill. I call to my colleagues' attention, who are trying to figure out exactly whether or not to support an amendment that will provide one consumer representative on this board, that it references the universal services section. As we move from this monopoly that has been established to provide universal service--understand, that is the purpose of the monopoly. The monopoly is put together to provide universal telephone service. It has gotten the job done. Now we are going to move from a monopoly situation to a competitive situation. I support changing the law to get that done. But as we make the transition, Members should understand that we are putting universal service at risk because we are basically moving over time so that these companies--currently monopolies, currently pricing in the vast majority based upon a system of rate-based rate of return--are going to move to a system of price caps, and eventually they are going to price based on cost. Currently, you will have situations in a metropolitan area, say Omaha, [[Page S8315]] NE, where residential rates are about $14 a month, and business rates are $30 a month. It does not cost the company any difference. There is no difference in running a line to a business and running a line to a resident. The law as set up gives the monopoly the authority to earn a rate of return. But it is also given the ability to subsidize the residential rates, to shift costs; in other words, so we can keep the residential rates lower than they otherwise might be. I do not know whether the rates are going to go from $14 to $18, or whether in a competitive environment they are going to go down. I do not know. We are going to allow them to price differently. In transition, one of the biggest questions is, How do we continue to provide universal service to these residential consumers? These are the consumers. There is already in place a Federal-State joint board. It is going to be entitled for 1 year at least ``Federal-State Joint Board on Universal Service.'' The statute says that: Within one month after the date of enactment of this Act, the Commission shall institute and refer to a Federal-State Joint Board under section 410(c) of the Communications Act of 1934 a proceeding to recommend rules regarding the implementation of section 253 of that Act---- Which is the Universal Provisions Act. including the definition of universal service. The Joint Board shall, after notice and public comment, make its recommendations to the Commission no later than 9 months after the date of enactment of this Act. In other words, this joint board is going to make the recommendations about universal service to the FCC. The FCC then: . . . may periodically, but no less than once every 4 years, institute and refer to the Joint Board a proceeding to review the implementation of section 253 of that act and to make new recommendations, as necessary, with respect to any modifications or additions that may be needed. As part of any such proceeding, the Joint Board shall review the definition of, and adequacy of support for, universal service and shall evaluate the extent to which universal service has been protected and advanced. In paragraph (b), the Commission then is told to act. The Commission shall initiate a single proceeding to implement recommendations from the initial Joint Board required by subsection (a) . . . And then it is supposed to complete this proceeding within a year after the date of enactment of this act. So this joint board is going to be making a very important recommendation about how we maintain this universal service that our consumers, our taxpayers, ratepayers, voters out there have grown accustomed to. All this amendment does is say that the joint board should have on it a single consumer representative. It is something that I understand is a philosophical problem of specifying what each one of these members are going to look like and which political parties and how many corporations. This merely says one individual. It is the same language that is in 1555, the House bill. If there is going to be a tabling motion, I urge my colleagues to vote against tabling. This is a proconsumer vote.

Mr. KERREY. I ask unanimous consent that the amendment I just sent to the desk be laid aside and that the previous amendment be the order of business. And I will speak a little bit further on that before a tabling motion is made.

Mr. KERREY. Mr. President, I send an amendment to the desk and ask for its immediate consideration.

Mr. KERREY. Mr. President, I have an amendment numbered 1313. Amendment No. 1313 (Purpose: Clarifies state rate-making authority)

Mr. KERREY. Mr. President, I ask unanimous consent that the amendment be laid aside temporarily.

Mr. KERREY. Mr. President, is the current business my previous amendment?

Mr. KERREY. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. KERREY. Mr. President, let me read the language. Certainly I believe the language is clear on that point. I am not trying to preclude at all. You can still have a small carrier, a very small company come in and be given the interconnection requirement at the local level. It would be less likely to happen. This amendment does not say that that company is precluded. It does not use the language ``preclude'' at all. It says interconnection for the purpose of providing--only if that company reaches ``interconnection agreements under section 251 with telecommunications carriers that have requested interconnection for the purpose of providing telephone exchange service or exchange access service, including telecommunications carriers capable of providing a substantial number of business and residential customers.'' What it is attempting to do--and I left the language relatively general, in fact, because what I am trying to do, I say to the Senator from Alaska, what I am trying to do is to make sure--we tried earlier unsuccessfully. In fact, I have a couple other amendments that I do not believe I am going to send to the desk refighting the battle over whether or not the Justice Department should be the arbiter of whether or not there is competition. In S. 1822, last year's bill, what we said was that once the Department of Justice has determined there is local competition, the local company then can do long distance. That was the method by which we made certain that there was local competition prior to the company getting into long distance. That was the idea. Well, now what we have done is replaced the Department of Justice determination with a checklist so that we have this checklist and we have language in 251 that allows for these interconnections. Well, what this simply does is it tries to make sure we get a little more certainty of competition because the FCC does not make any judgment about competition other than the connection. The FCC takes the 14-point checklist. The FCC has to certify that the checklist has been satisfied and that the company has reached an interconnection agreement under section 251 that provides at a minimum for interconnection that meets the competitive checklist requirements. I understand that it says at a minimum, and there needs to be more. What this attempts to do is bulk that up and describe something a bit more than what is required currently under 251.

Mr. KERREY. Mr. President, the amendment is very straightforward. It merely asks for a consumer advocate to be appointed to be a member of this joint Federal-State board.

Mr. KERREY. Mr. President, I have an amendment at the desk. I ask for its immediate consideration. It is amendment No. 1344. Mr. President, there is under provision of this amendment creation of a new Federal-State joint board.

Mr. KERREY. While I understand the Senator has some additional amendments--I have some other ones I would send down--let me describe a little bit what was in this amendment so colleagues understand how this bill has been modified. I think it is an important amendment because we are moving from a system of assessing rates for your local telephone service, based upon a rate base. That typically is calculated, presented to the public service commission or the public utility commission of the State, and the public service commission or public utility commission makes a determination about local telephone charges based upon that rate. There are a number of States that have moved to a more competitive type of situation. I think there are seven, eight, or nine States that have done so--I believe Colorado just recently passed legislation. This legislation, S. 652 preempts the States and says we are going to go to a price cap system of regulation as opposed to rate base. So, all 50 State public utility commissions or public service commissions would be required to use a price cap system under this legislation. I think it is going to be important, as you move to this widespread use of price cap regulation, to say very clearly, given the rather substantial penalties for failure to provide interconnection--and they are rather substantial; as I said, I believe it is $1 million a day and up to $5 million a day-- that you will not tap the ratepayer. I believe it is important, if penalties or damages get assessed, it does not get passed on to that individual ratepayer. Regulators are inevitably going to be asked by local telephone companies or local providers of service, as new competitors come on line, to adjust these caps. When they do, it is going to be very difficult if not impossible to exclude consideration of costs in making that adjustment. In making that adjustment they may not be able to identify and exclude penalties effectively. [[Page S8313]] This amendment will, as a consequence, protect ratepayers. Mr. President, I am proposing an amendment designed to protect ratepayers from having to shoulder the burden of any civil penalties, damages or interest assessed against local exchange carriers for violating the interconnection and other duties imposed on them by this legislation. Section 224 of the bill contains enforcement provisions. Under these provisions, a telecommunications carrier that fails to implement the requirements of sections 251 and 255 can be punished by a civil penalty of up to $1 million for each offense. A Bell company that repeatedly, knowingly, and without reasonable cause fails to implement an interconnection agreement, to live up to the agreement after implementing it, or to comply with the bill's separate subsidiary requirements can be fined up to $500 million. These penalties are intended to deter companies from evading their responsibilities to provide effective interconnection. The section also provides that private parties injured by such conduct can recover damages and interest. I have very serious doubts, Mr. President, about the efficacy of the civil penalties and the prospect of damages. I think there will be a lot of uncertainty as to whether sanctions will be imposed. This uncertainty is inherent in the nature of the interconnection requirements in the bill. For example, the very first duty under section 251 is the duty to enter into good faith negotiations with any telecommunications carrier requesting interconnection. The lawyers could litigate until kingdom come about whether a company has failed to negotiate in good faith. A similar example is found under the minimum standards of interconnection. The local exchange carrier must take whatever action under its control is necessary, as soon as it is technically feasible, to provide telecommunications number portability and local dialing parity. Now these two things--number portability and local dialing parity--sound a little arcane, but they are both essential to having any kind of meaningful local competition. Number portability means that customers can keep their telephone numbers when they switch phone companies. Quite simply, telephone customers--both business and residential--are not as willing to switch phone companies if they also have to switch phone numbers. If I'm a small company in Omaha, NE, I can't afford to change telephone companies if it means that I have to change phone numbers, even if the competitor offers an otherwise better deal. My customers wouldn't know how to get a hold of me. All my listings, stationery, and business cards would have to be redone. So new phone companies who want to compete with the established carrier will be at a tremendous competitive disadvantage if there is not number portability. But the local exchange carrier doesn't have to take any action until number portability is technically feasible. Who is going to decide that issue? You can bet the lawyers will have something to say about it, as well as platoons of experts. Same situation with local dialing parity. Local dialing parity means that a customer who subscribes to a competitor can make calls by dialing the same number of digits as they would if they were customers of the established phone company. That's a big deal. People don't like to dial any more numbers than they have to. Back in the days of the old Bell system, that was one of the ways the monopoly disadvantaged MCI and other long distance competitors. You had to dial access codes if you wanted to use MCI. That discouraged people from switching. So the bill says that a local exchange carrier has to provide number portability and local dialing parity as soon as it is technically feasible, or there will be penalties. Well, it could be years before the lawyers and the experts and the FCC and the courts figure out what is technically feasible. By that time, the penalties or a private action to recover damages may not mean too much. Which brings me to my next point, Mr. President. Even if penalties eventually are imposed, we don't know how significant the penalties actually would be. The bill sets upper limits on the amount of penalties. But it doesn't offer any assurance that a penalty would ever approach those figures. Actual penalties, if they are imposed at all, could be a fraction of the possible amount. A private party seeking damages would also face daunting prospects in proving the level of those damages, since in many cases the injured party might never have gotten its business going because of the very violation complained of. The speculative nature of damages might be a serious barrier to recovery for the injured party. This balance of uncertain high penalties or damages against the certain and enormous financial benefit to local exchange carriers-- especially the Bell companies--of not providing effective interconnection to would-be competitors suggests that the deterrence effect of this penalty scheme will be minimal. So I have my doubts, Mr. President, that this enforcement approach is going to provide much encouragement to local telephone monopolies to cooperate in opening up the local market to competition. But if civil penalties are imposed or damages assessed, one thing we need to make sure of is that they are not passed on to local ratepayers. That is what my amendment does, Mr. President. It states that-- . . . [n]o civil penalties, damages, or interest assessed against any local exchange carrier as a result of a violation referred to in this section will be charged directly or indirectly to that company's ratepayers. This amendment is necessary, because the ratepayers are captive to the local exchange carriers. They don't have any choice. Without this amendment, the carrier could just pass the penalty or damages along to ratepayers--who would have to pay, because of that lack of choice. And, in that case, the carrier would have succeeded in evading the requirements of the bill twice--first by not meeting its interconnection obligations and second by making captive ratepayers foot the bill for the penalty or damages. Moving to a price cap form of regulation will not solve this problem. In fact, a price cap system may increase the chances that ratepayers will end up paying the local exchange carrier's civil penalties and damage judgments if this amendment is not adopted. Under traditional rate of return regulation, at least, the State regulators can conduct a rate case and scrutinize the claim and tell the carrier, No, that's a penalty, you can't pass that along. Under price cap regulation, regulators will inevitably be asked to adjust the caps. And when they do adjust them, it will be impossible for them to exclude consideration of costs in making that adjustment. But in making that adjustment, they may not be able effectively to exclude penalties and damages from the adjustment. This amendment will put the burden on the local exchange carrier to make sure that penalties, damages and interest don't end up burdening ratepayers. It makes sure that the penalties penalize the local exchange carrier, not the captive ratepayers. Amendment No. 1344 (Purpose: To provide for the representation of consumers on the Federal-State Joint Board on universal service)

Mr. KERREY. Mr. President, I ask the modification that I have now reviewed with the distinguished manager of the bill be included as part of this amendment.

Mr. KERREY. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. KERREY. I am withdrawing the modification so I can get the language clear enough so that the Senator from South Dakota can evaluate the modification itself. Then I can proceed and discuss the amendment while the modification is being sent to the Senator. I can redo it here so it is a cleaner copy.

Mr. KERREY. You are saying you object to modifications?

Mr. KERREY. Without modification?

Mr. KERREY. Let me withdraw the modification, and I would like to have the modification sent to the Senator from South Dakota. I, personally, would prefer not to have the amendment without this clarification. I would like to have the manager of the bill look at the modification before it is accepted, and I would like to talk about the bill or the amendment for a little while, so we can look at a clean copy.