[Congressional Record Volume 140, Number 146 (Saturday, October 8, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: October 8, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                        REMARKS OF A.C. PARTOLL

                                 ______


                         HON. EARL F. HILLIARD

                               of alabama

                    in the house of representatives

                        Friday, October 7, 1994

  Mr. HILLIARD. Mr. Speaker, I would like to submit for the Record the 
following speech by Mr. A.C. Partoll, addressing the Organization for 
the Protection and Advancement of Small Telephone Companies, on June 
26, 1994.

       Good morning, everyone. I'm very pleased and honored that 
     you invited me here today to discuss the changes and 
     challenges we face in this wonderful industry of which we are 
     both a part.
       In what may rank as the understatement of the week, we are 
     at a very interesting--one might even say critically 
     important--time for the telecommunications industry. 
     Consider, if you will, that:
       The technology that drives our industry is advancing more 
     rapidly than ever before.
       Even as we meet, the rules for governing it are being 
     written and rewritten in Washington and the state capitals to 
     encourage more competition, less regulation, and greater 
     customer choice; and
       The very shape of our industry is changing through mergers, 
     alliances, and a coming together of our industry with other 
     industries, like computing and entertainment.
       I'd like to look at all of this with you this morning--and, 
     in particular, to offer my thoughts as to what it may mean 
     for small telephone companies and what small companies should 
     be doing to prepare for this very different future.
       I want, especially, to spend some time this morning 
     discussing the issue of universal service. It is, as you well 
     know, one of the cornerstones of public policy related to 
     telecommunications. Yet, technology, competition and 
     convergence are changing many of the underlying assumptions 
     on which universal service policy has been based. I have some 
     ideas--which I'll be getting to shortly--on how that policy 
     needs to evolve so that it can continue to serve the needs of 
     our customers and our society.
       But, first, let's turn to technology. I knew 30-plus years 
     ago I joined a great company and a great industry, when I 
     learned that more than 100 years ago, on a hot, humid August 
     afternoon, a tall, angular man, dressed in a woolen, vested 
     business suit and wearing a white starched collar, poured 
     acid on a plate, which spilled on his jacket and pants, and 
     all he said was, ``Mr. Watson, come here, I want you!''
       Since that day, ours has been a technology-driven business. 
     New technologies ever since have made it possible for us to 
     deliver our
       But the most recent wave of technology has taken us a step 
     further. These developments--and I'm speaking about things 
     like digital, fiber-optics; large network databases and high-
     speed signaling; voice recognition and video compression; 
     cellular and PCS technology, and multimedia--have literally 
     changed the face of our industry.
       They have made possible new applications that profoundly 
     affect the way our customers live and work. These 
     applications have also spurred competition and have begun to 
     bring players in our industry into natural partnerships with 
     those in others.
       As we at AT&T see the industry developing, those 
     applications can be grouped into five segments:
       Networked computing, which is the integration of multiple 
     machines, data bases and networks. This networking enables 
     people to have immediate access to a wide variety of 
     geographically dispersed information, making new services 
     possible.
       Multimedia messaging, which comprises products and services 
     that store, convert and relay information. This also 
     integrates voice messaging applications with data and image * 
     * * for example, e-mail, PC and fax systems.
       Visual communications, which add the dimension of human 
     expression to applications for business, education, 
     entertainment and shopping. These will soon be economically 
     attractive to customers.
       Voice and audio processing, which will make possible 
     continuous speech recognition and language translation. This 
     will give people another easy, economical way to access 
     people and information, as well as the crossing of cultural, 
     geographic and language barriers.
       Finally, personal communications services and wireless 
     products and services are already allowing person-to-person 
     communications--employing voice, data and image calls and 
     messages--anywhere, anytime. With these applications. In 
     fact, if I had to describe in one word the way our 
     industry will be governed, that word would be 
     ``competition.'' The success of competition in benefiting 
     customers for long distance services and customer premises 
     equipment businesses has encouraged policy-makers to begin 
     testing it in traditional local exchange markets.
       Most recently, toll calling within LATAs has been opened to 
     competition. We're seeing interLATA carriers begin to focus 
     on this new market as a way of meeting more of the needs of 
     their customers.
       We will soon, I believe, begin to see the start of tests to 
     determine if competition is viable in local exchange 
     services. A test fundamentally, of the proposition which all 
     of us have assumed for so long ... that is, that the local 
     exchange is a natural monopoly.
       For such tests to take place, however, the states must 
     remove current barriers to entry and create appropriate 
     conditions in these traditional monopoly markets. My guess is 
     we'll probably see these tests first in high-density areas.
       As I said, the success of competition in other parts of the 
     industry has encouraged--really, made inevitable--the coming 
     of competition elsewhere in the industry. The day is rapidly 
     approaching when every rate in the industry will be under 
     competitive pressure to reflect the cost of service, for the 
     first time, every source of cost in the industry will be 
     under pressure.
       What will be the impact? No one knows. But there are a few 
     things that we can say with relative certainty:
       Consumers will benefit from the increased innovation, wider 
     choice and downward pressure on prices that come with 
     competition.
       New players will arrive on the scene.
       Existing players will have to devise new business 
     strategies to attract and retain customers and cut costs.
       The pace of technological innovation in the local exchange 
     will, if anything, accelerate.
       With the growth of competition, the traditional role of the 
     regulatory will change. Regulators will face new, and 
     arguably more challenging questions than they confronted in 
     the past. For example, are all local exchanges alike? If not, 
     how do the differences affect their ability to support 
     competition? To what extent is local exchange competition 
     viable in rural areas? Will there be a carrier of last 
     resort, and, if so, who will bear the cost of infrastructure 
     development in rural areas?
       Finally, we will need to find a way to ensure that the 
     crown jewel of United States telecommunications, universal 
     service, not only survives, but flourishes.
       I'd like, if I may, to offer my observations on some of 
     these issues, with particular attention, as I said earlier, 
     to universal service.
       If competition in the local exchange is to take hold, a 
     number of conditions must be in put place. Among these is the 
     need for cost-based and non-discriminatory prices for local 
     exchange components and services.
       But cost-based pricing of local exchange services, 
     including access charges, would be a threat to the manner in 
     which universal service is assured today. For those local 
     exchange carriers charging less for local service than their 
     costs, cost-based pricing could mean increasing prices for 
     service beyond what some customers could afford.
       So, we have what seems to be a dilemma. Local competition 
     is desirable, but we won't have it unless we can remove 
     subsidies and allow prices to seek levels that should prevail 
     in competitive markets. If we do that, we place at risk the 
     way we fund universal service.
       This is demonstrated most poignantly when we look at the 
     special problems of high-cost rural areas and the small 
     telephone companies that serve those areas. AT&T has gone on 
     record, in Congressional testimony, with the view that rural 
     areas do have unique problems, and that such problems might 
     best respond to approaches different from those applied in 
     more densely populated areas.
       I'm surely not here to today to announce AT&T's plan to 
     solve these rural problems. However, as some of you know, we 
     have been working with leaders of the Rural Coalition to 
     better understand those problems and determine how the 
     industry can best care for them in today's changing 
     environment.
       Our discussions have helped us to identify a number of 
     issues that must be addressed:
       Carrier of last resort in rural areas. As you know, 
     subsidies help cover the cost of building infrastructure to 
     serve high-cost areas. In addition, revenue from a few large 
     customers often makes the difference in serving high-cost 
     areas. If either of these is threatened, rural local exchange 
     carriers see threats to their ability to meet their service 
     obligations while remaining profitable.
       High access charges in rural areas. As the interexchange 
     carrier of last resort in many rural areas--serving a 
     significantly higher proportion of high-cost customers than 
     our competitors--AT&T is under tremendous pressure from the 
     gap between access charge levels in rural and urban areas. We 
     can't continue indefinitely to average high rural access 
     charges into our nationwide costs and be competitive with 
     carriers who don't have that burden or serve as great a 
     proportion of high-cost customers. In addition to creating 
     pressure on AT&T to deaverage toll rates, the disparity 
     between rural and urban access costs keeps other long 
     distance carriers away from rural customers and/or encourages 
     cream-skimming of the few large customers in some rural 
     areas. High rural access charges, combined with high 
     billing and collection costs, give many of AT&T's optional 
     calling plans little or no margin in rural areas. In sum, 
     this disparity puts pressure on AT&T to deaverage 
     nationwide toll rates, keeps many rural customers from 
     having a choice among long distance carriers or having 
     access to all of AT&T's optional calling plans, and puts 
     small telephone companies in peril of cream-skimming by 
     competitors.
       Infrastructure sharing. AT&T supports enabling small 
     companies serving rural areas to have access to technologies 
     requiring economies of scale to be cost-effective. We oppose, 
     however, using this access as a vehicle for one group of 
     companies to control another; or to inhibit technological 
     innovation by dictating switch design or architecture to 
     manufacturers. Those who manufacture network 
     telecommunications equipment should have to design to the 
     needs of a marketplace made up of companies using 
     infrastructure sharing.
       Finally, there is the problem that I spoke about earlier. 
     Today's subsidy mechanisms to support universal service are 
     incompatible with competition in the local exchange.
       I don't claim to have definitive public-policy solutions to 
     resolve these issues. I do know that while AT&T supports 
     full, open competition in our industry--including local 
     exchange competition--it also supports--without reservation--
     the maintenance of universal service.
       Let me share with you some of AT&T's current thinking on 
     ways to meet these seemingly conflicting objectives so that 
     you can react.
       First, if customers are to realize the benefits of 
     competition in the local exchange, we must reform and reduce 
     access prices by assigning and recovering costs properly. 
     Non-traffic-sensitive costs should be recovered on a per-line 
     basis in charges to customers, or from a new Universal 
     Service Fund, or from both, and not on a minutes-of-use 
     basis. Traffic-sensitive costs should be recovered on a usage 
     basis, either by trunk or by minute of use. Depending upon 
     how this is implemented, it could mean increases in local 
     rates.
       This brings me to my second point. To preserve universal 
     service, we should explore the creation of a new USF to which 
     I just referred. This fund would subsidize subscribers who 
     require income assistance. State and local authorities would 
     determine who would qualify, based on a means test.
       Third, to fund the new USF, we could implement a surcharge 
     on all retail revenues of all carriers providing two-way 
     telecommunications services.
       Fourth, we should ask a neutral, third-party organization 
     to administer the USF. This organization would match the 
     subsidy to the subscriber, collect the funds from all 
     participating carriers, and distribute the funds back to the 
     carriers serving the eligible subscribers.
       Now, none of what I just said is news to many of you. It's 
     what AT&T has been exploring for some time now. Nonetheless, 
     our discussions with representatives of small telephone 
     companies through OPASTCO and others has persuaded me that 
     more may be required if we are to preserve universal service 
     in rural America.
       What more?
       For starters, I believe we should consider the possibility 
     that it may not be appropriate to allow rates for local 
     service to rise to their natural, cost-based level for all 
     telephone companies. We suggested to Congress, as I mentioned 
     earlier, that rural companies might require different 
     treatment to address their unique problems. This might well 
     be an area where different treatment is called for.
       If this is so, we should also consider the possibility that 
     the new USF should have two objectives rather than one. The 
     first I have already mentioned--the subsidizing of needy 
     subscribers in a competitively neutral way. A second 
     objective might be to find a way to subsidize the 
     establishment of local exchange and access rates in rural 
     areas that are comparable to those in areas served by the 
     RHCs and GTE--again, in a competitively neutral way.
       The devil is, obviously, in the details, and no doubt 
     addressing the details will surface difficulties and 
     differences to be worked out. But let me tell you what I 
     think the end result could be. I think it is possible to 
     develop a plan that accomplishes the following things, which 
     I would hope virtually every telecommunications company in 
     the land could eventually support:
       True, open competition would exist in those exchanges 
     capable of supporting it.
       Rural subscribers would pay exchange service rates 
     comparable to those charged to urban subscribers.
       Access and long distance rates could both be reduced, 
     thereby stimulating traffic for local and interexchange 
     carriers alike.
       Access and long distance rates in rural areas could be 
     comparable with those in urban areas.
       Customers of low-cost companies could continue to subsidize 
     customers of high-cost companies for infrastructure 
     development in a way that would not distort competitive 
     markets.
       Truly needy subscribers could be subsidized in both rural 
     and urban areas, also in a way that would not distort the 
     competitive market.
       With the exception of the new USF, Life-Line, Link-Up and 
     Telephone Relay Service, all subsidies, both implicit and 
     explicit, could be eliminated.
       It might even be possible that through gains in efficiency, 
     total subsidy levels could be reduced.
       Does that describe a world in which your company could 
     continue to meet its obligations to rural America--and 
     flourish in the process? I think it does. But what you think 
     is what matters.
       As I said earlier, we want to work with you to find 
     solutions we can all support.
       I promised you that I would also offer some suggestions for 
     small telephone companies on getting prepared for the future. 
     I do this with great reluctance, but with the best of 
     intentions. I don't wish to make it seem that I know better 
     than you how to run your business. But there are similarities 
     between the road that my company has been on for the last ten 
     years and the challenges that I see ahead for you--and the 
     experience I've gained over that decade gives me some 
     confidence that what I have to say might be of some value to 
     you.
       First, I think you might begin by accepting the reality, if 
     you haven't done so already, that competition is coming to 
     traditional local exchange markets. Trying to put the brakes 
     on that train is not a practical strategy. ``How can we make 
     it work?''--not ``How can we prevent it?''--should be the 
     question with which you are concerned. I say that from the 
     perspective of one who spent more than ten years, in the late 
     70s and early 80s, unsuccessfully trying to stave off 
     competition in the interstate long distance market.
       Second, you can support the work your leaders are doing 
     with legislators, regulators and other parts of the industry 
     to implement competition in a way that protects your 
     interests and the interests of your customers.
       Third, you can prepare your businesses for the new world by 
     developing a game plan for operating in a fully competitive 
     local exchange and long distance environment. Among the 
     issues you should consider in this context are:
       What advantages do I have over potential competitors?
       How can I capitalize on those advantages?
       How can I get my local exchange and access rates to a level 
     where I will be less vulnerable to competition? What can I do 
     on my own? What regulatory changes do I need?
       How can I partner with other carriers to increase 
     profitability by stimulating traffic?
       Indeed, it occurs to me you should be asking yourselves 
     these questions even if local exchange competition were not 
     on the horizon.
       In closing, let me say that I know it is inevitable that 
     AT&T's actions will have an impact on you. I want to assure 
     you, however, that despite our commitment to competition and 
     customer choice, we support universal service, and we support 
     small companies bringing Information Age technology and 
     services to rural areas.
       And we want to work with you to ensure that outcome.
       Thank you.

                          ____________________