NEWS October 11, 1996 COMMISSIONER RACHELLE CHONG CALLS COMPETITION THE NEW COIN OF THE REALM FOR PAYPHONE INDUSTRY Speaking to the American Public Communications Council's 1996 Eastern Conference in Nashville, FCC Commissioner Rachelle B. Chong said that competition had become "the new coin of the realm for the payphone industry" in light of the FCC's September decision which she called a "Magna Carta" that has restructured the payphone industry. She said that the twin stars guiding the FCC's decision were promoting fair competition among payphone providers and the widespread deployment of payphone services to the American public. Commissioner Chong noted that the past regulatory system had resulted in disparate treatment of key payphone players, which in turn, had resulted in distortions in the marketplace and customer confusion. The FCC's new payphone provisions dismantle the existing regulatory system and level the playing field for fair competition to flourish. She emphasized that the new rules strip out all existing subsidies, provide for nondiscriminatory access to local telephone company bottlenecks, ensure fair compensation for calls originated on payphones, and provide an equal opportunity to compete in the payphone business. She outlined the FCC's two-stage transition plan towards a competitive marketplace. During the next year, the new rules require local telephone companies to end all subsidies from their payphones and compensate independent payphone providers for access code calls and subscriber 800 calls on a flat-rate basis. During the second stage (beginning in November 1997), carriers will have a per-call tracking capability in place and will compensate payphone providers on a per-call basis. Commissioner Chong also noted the many consumer benefits associated with the Commission's new payphone rules. "Payphone consumers are guaranteed free access to dialtone, emergency services, and for the hearing disabled, telecommunications relay service calls," she said. She said that the new rules require payphone providers to prominently display the local coin rate at each payphone. She pointed out that the FCC took steps to protect consumers by reserving the right to review deregulation in the industry, and by establishing guidelines for the states to maintain and fund public interest payphones. She concluded her speech by noting the similarity between the payphone proceeding and other areas where the Commission is currently implementing the requirements of the Telecommunications Act of 1996. "Our goals are really the same," she said. "Eliminate subsidies, provide nondiscriminatory access and, implement rules that allow competitors to enter the market on an equal footing -- all while preserving the availability of telecommunications service to all Americans." - FCC - Remarks of FCC Commissioner Rachelle Chong American Public Communications Council's 1996 Eastern Conference & Expo October 11, 1996 Nashville Voyaging to Competition: The New Coin of the Realm Good morning! It is a great honor to be here today in Opryland speaking to members of the payphone industry. Actually, I thought it was more of an honor until I opened up the conference brochure to see that I was headlining opposite -- Don Rickles. Now, my staff was quick to point out that in the conference brochure photos, Mr. Rickles and I appear to have the exact same smiles. If you study the photos, it appears to be true. This led me to wonder if maybe Mr. Rickles and I are twins, separated at birth?! Obviously, I went on to lead a dull life as a Washington bureaucrat, while my twin has gone on to fame and fortune -- by insulting people. Well, as today's less famous headliner, I am very pleased to be here. I don't mind the trip at all, because I've had an interest in the payphone industry for some time now. You see, from work at my old law firm, I learned a little payphone lingo -- you know, COCOT, sent-paid calls, and OSPs. . . When I became a Commissioner a few years ago, I made it my business to find out what your issues are. Why, I've even traveled the world -- performing personal research on payphones!! Okay, I can hear you skeptics muttering, "Yeah, right." To prove that it's not a bunch of baloney, I have brought along photographic evidence of my long running interest in the world of payphones. These photos are all the real thing; I kid you not. Dan, slide one, please. Here I am in a payphone booth in Sydney, Australia in 1994. I am saying, "G'day mate. Could you put some shrimp on the barby?!" Slide two please. Here I am in Tokyo in 1995 trying out a Japanese payphone. Gee, those Japanese payphones must make you green with envy! Here, I am thanking the operator, "Domo arigato gozaimasu! Sayonara!" Slide three please. This is me at the FCC's payphone. You might be wondering why I am at a payphone, when my office is just down the hall. Well, during the long government furlough last January, the FCC commissioners were still on duty. Picture us sitting alone in our big offices -- no staffers, and no visitors allowed. To make matters worse, we commissioners were told not to make any toll calls, since the agency had no money to pay for them! This is why I had to resort to this payphone. All this goes to prove that I have cared about your industry for a long time. My office has always worked very hard on payphone issues for two reasons. First, I thought the prior industry structure did not promote fair competition and a level playing field. Second, there are many consumer issues related to payphones, and I did not feel that consumer interests were being adequately protected. I wanted to take this opportunity to thank both my common carrier advisors to date, Richard Welch (now Chief of the Common Carrier Policy division) and my current advisor, Dan Gonzalez, for doing some excellent work on payphone issues for me. It goes without saying that the unsung heroes of our Order are the FCC staffers. Under the leadership of Mary Beth Richards, their hard work helped up produce the Magna Carta of the payphone industry. Right after my speech, Dan will be available to answer your questions about our order, along with Mary Beth Richards and Michael Carowitz of our Common Carrier staff. I urge you to talk with them, and ask any questions you have. They are our experts, and I know their goal is to help you understand the nuances of our order. Voyage to Competition Moving right along -- did you know that tomorrow is the anniversary of Columbus' landing in America? Yes, tomorrow is Columbus Day. I want to point out that Columbus was definitely a man who was not afraid to do what I call "thinking outside of the box." He had all the great scientists of his time insisting that the earth was flat, while he entertained this radical idea that the earth was round! With sheer persistence, courage, and a bit of good fortune, Columbus disproved the conventional wisdom of his day. To prove that the world was round, he boldly set sail for the horizon, relying on a few guiding stars. While he was at it, he had the good fortune to stumble on America in the process. Now that sure turned out to be a real career enhancing move! Looking back, we marvel at Columbus' voyage which ushered in a new age -- an age where discovery and enlightenment became the new coin of the realm for western civilization. Five centuries later, the telecommunications industry is also on the verge of a new age -- a new age where we leave behind the "old-world" monopoly style regulation and instead, focus our sights on finding a "new world" of competition, including for the payphone industry. Our voyage to this new world is guided by twin stars given to us by Congress. One star points towards promoting competition among payphone service providers. The other star directs us to promote the widespread deployment of payphone services to the American public. Guided by these twin stars, the Commission has charted a course to reach a new pro-competitive, de-regulatory world. This will be a world where payphones are governed by a new market-oriented framework -- instead of government regulation. So, congratulations. Competition has become the new coin of the realm for the payphone industry. Your ship has finally come home. FCC Rulemaking Proceedings I would now like to talk about the two FCC proceedings that have created the new world of payphone competition: first, the Commission's September order that implements the Section 276 payphone provisions of the 1996 Telecom Act; and second, the recent Notice of Proposed Rulemaking that relates to the provision of operator services from payphones. A. Section 276 Payphone Order Let's start with last month's payphone decision. I was really pleased to see the Chairman of the APCC describe the reaction to our order and the compensation provisions as "extremely positive." He said that most of you have gone through stages of "disbelief, shock, and euphoria." That sounds a lot like what the FCC experienced on February 8th when the Telecom Act passed. In making the payphone decision, I was guided by three keystones of my regulatory philosophy: First, I have been boldly going where no one has gone before, seeking out new forms of telecom competition, and firing phasers at outmoded regulations. (Have I mentioned yet that I am a Trekkie?!) Second, my crew and I have been promoting regulatory parity between service providers -- regardless of the technology used to offer the services. Finally, our prime directive has been to promote simple pragmatic regulation. Under the prior legal and regulatory framework, how you were regulated depended on whether you were a local exchange company or an independent payphone provider. Now, Spock the Vulcan might note that this system was "highly illogical." Bell Operating Companies could subsidize their payphone operations, but could not select a long distance carrier on their payphones. Unlike the incumbent LECs, however, independent payphone operators had to be more self reliant, by supporting their businesses on the revenues received at payphone stations and through commission arrangements with OSPs. Since the early 1980's, these rather disjointed regulations -- resulting in disparate treatment of the key players -- created incentives and distortions in the market that led to great consumer confusion. But the good news is that the Telecom Act of 1996 was passed, containing in it the engine of reform for your industry. The FCC got directions from Congress to create a new competitive payphone industry, while ensuring that public interest payphones remain available. You don't have to be a rocket scientist to figure out that in order to carry out Congress' mandate, we had to dismantle the existing regulatory system. In restructuring the payphone industry, our new rules set out to do the following:  First, we wanted to strip out all existing subsidies.  Second, we wanted to provide for nondiscriminatory access to local telephone company bottleneck facilities.  Third, we wanted to ensure fair compensation for all calls originated on payphones.  Finally, we wanted to allow all competitors an equal opportunity to compete in the payphone business. Fair Compensation Our decision tried to cover the entire landscape of the payphone industry. While I haven't time to discuss the entire decision, I do want to mention what I consider to be the hit parade of major points: One of the boldest things we did was to ensure fair compensation for payphone service by letting the market set the price for individual payphone calls. I think market forces generally work just fine, and so I'm confident that competition and consumer choices will ensure that a fair price be set. I've let experience be my guide here. I understand that in a handful of states that have let the market set the price for individual payphone calls, the prices have generally settled out to .35 cents, which strikes me as a fair price. The Commission envisioned a two-stage process as a transition to market-based rates. Stage one will roughly occur within the next year. During this first stage, local telephone companies will have to end all subsidies for their payphones by April 15th. They will not be permitted to receive compensation for non-coin calls made on their payphones until they get rid of those subsidies. Also during this stage, independent payphone providers will be compensated for access code calls and subscriber 800 calls on a flat-rate basis. During stage one, the Commission has entrusted our state colleagues with the job of continuing to set the local coin rate, but we strongly encouraged the states to deregulate local coin rates during this first year. We also require the states to examine their payphone rules to review and remove those regulations that may impede competition. In stage two, which starts around November of next year, carriers must have a per- call tracking capability in place and are required to compensate payphone providers on a per-call basis. During the second year, local coin rates will be set by the market and a thirty-five cent default compensation rate will kick in. At the end of stage two around November of 1998, the market-based local coin rate at a payphone will become the default compensation rate for all compensable calls made at that payphone. Under our decision, however, the default rate is not set in stone, because payphone providers and carrier-payors can mutually agree to set a different compensation rate. So, as I see it, at the end of all of this, competition -- and not government regulation -- will be the driving force in determining calling and compensation rates in the payphone industry. Nonstructural Safeguards for BOC Provision of Payphone Service Market forces alone, however, are not the only tool that will bring competition to the payphone market. Congress also sought to enhance competition by requiring us to implement nonstructural safeguards. These nonstructural safeguards prevent a BOC from subsidizing its payphone service directly or indirectly with regulated telephone company revenues, and prevent a BOC from discriminating in favor of its own payphone service. After careful consideration, we decided to implement our existing Computer III and ONA (that's Open Network Architecture) nonstructural safeguards to the provision of payphone service by BOCs. I know that many of you here today would have preferred that the FCC adopt stricter requirements. But we decided not to adopt any additional safeguards because we feel confident that our existing nonstructural safeguards will prevent BOCs from discriminating or cross-subsidizing their payphone operations, while allowing them to compete in the market place. These safeguards will become effective soon. In less than 90 days from now, BOCs must file "CEI" plans. For those of you who haven't had your language lobe supplanted by a common carrier acronym chip, "CEI" stands for "Comparably Efficient Interconnection" plans. In plain English, that means the BOCs must tell us how they plan to comply with our safeguards. Monopoly Locations and Public Interest Payphones Another reason for my strong support of the new payphone order is that, even while deciding to rely on market forces, we have still made sure to protect consumers. Under our order, payphone consumers are guaranteed free access to dialtone, emergency services, and, for the hearing disabled, telecommunications relay service calls. Our rules also require that payphone providers prominently display the local coin rate at each payphone. Our rule gives consumers the price information needed to let them make an informed decision about whether to use a particular payphone. Plain and simple, a consumer ought to know how much he or she is being charged for any service prior to using the service. In addition, the FCC has retained the right to review the deregulation of local coin rates nationwide and determine whether there are some locations where market forces are not effective. The concern is that there are some locations -- like airports and train stations -- where payphone providers have monopoly contracts that may prohibit consumers from receiving the benefits of market forces. Although we took no direct action in the September order with respect to monopoly locations, we did make it clear that we stand ready to address any problems that might arise. I will not hesitate to recommend swift action if I see that consumers are being taken advantage of at these types of locations. Finally, the Commission established guidelines by which the states may maintain and fund public interest payphones. It goes without saying that payphones located in isolated or remote areas serve as critical links to our telephone network for all Americans. Stranded motorists and beachgoers facing an emergency situation rely on payphones located on rural roads or public beaches. Payphones can save lives. The Commission has recognized that, in these special locations, there may be circumstances where the free market may not adequately encourage the deployment of payphones that would serve important public health, safety, and welfare needs. Therefore, we have entrusted the states with the important task of using their expertise and knowledge of local conditions to ensure that payphones are still maintained at these types of locations. As a result, Americans should have as easy access to payphones in the 21st century as they had in this century. While this regulatory program is designed to promote public interest payphones, the ultimate success of that effort will rest on your shoulders. I encourage you to explore new technologies, such as wireless payphones or other cutting edge ideas, to upgrade your system, expand the reach of payphone service, and better serve your customers. B. OSP Reform I would now like to turn to the OSP Reform Notice of Proposed Rulemaking we released in June -- also known as the rate benchmark item. Under current law, an OSP must identify itself to a payphone customer at the start of each phone call -- before the caller incurs any charges. This branding requirement lets payphone consumers know that they may be buying service from a carrier that may not be their primary long distance company. While this branding requirement has had some success, the number of complaints on OSP rates filed at the FCC and with the states has continued to increase. This trend is of great concern. It suggested that our current rules may not be providing adequate notice to consumers who wish to avoid paying high rates charged by some OSPs. The Notice sets forth a proposal that would require OSPs to disclose their rates before connecting a call, if that rate is above a certain percentage above a set benchmark rate. This benchmark would basically be an average of the "0+" rates charged by the three largest interexchange carriers. The pleading cycle closed in August. With the benefit of hindsight, I would like to make two points regarding the notice. First, I would like to highlight the fact that the Notice reaffirms the FCC's belief that BPP -- that's "Billed Party Preference" -- would generate significant benefits for consumers. I personally believe that billed party preference is the best long term solution to the high OSP rate problem. It would ensure that operator assisted long-distance traffic would automatically be carried by the OSP preselected by the caller. Although our Notice did not propose to adopt a BPP system in the immediate future because of the costs associated with such a proposal - - it still left the door open on this issue by saying that we intend to revisit BPP as local number portability develops. And in case you haven't noticed, local number portability technology ought to be developing quickly, especially under the new Telecom Act which recognizes how critical number portability is to true competition. I believe that the Commission should not hesitate to revisit the BPP cost and feasibility issues once local number portability is firmly in place, and carriers install facilities that would allow them to perform database dips for each call. Second, it struck us that the record in the OSP Reform proceeding is no longer up to date. We have just released a public notice that would give you an opportunity to supplement the OSP reform proceeding record in light of our new September payphone order. If you file a pleading, and I hope you do, I would like you to share your thoughts with the Commission on what impact, if any, the new payphone market structure we have just created will have on the proposals made in the OSP Reform item. At a minimum, our September payphone order raises new questions that will directly impact our actions in any future OSP Order. For example, some of these questions might be what effect will the new compensation structure in the payphone industry have on the business relationships between payphone providers and OSPs? Will the fact that independent payphone operators are now entitled to compensation at market-based rates for calls made at their payphones reduce their reliance on revenues from OSP commission payments? If the answer to that question is yes, then do you think that would have any effect on the rates that OSPs will charge payphone consumers? As you can see, our restructuring of the payphone industry has raised some new issues and questions that naturally were not anticipated when the FCC made its OSP Reform proposal. I would like to have a better understanding of the new competitive payphone market and its effect on OSP rates, before adopting a proposal that was made under very different market and regulatory conditions. While I don't wish to prejudge this issue, I do know that history has proven to us that head-to-head competition may best take care of the high rate problem. Conclusion In closing, I wanted to step back and take a moment to give you a big picture view. The 1996 Act is catapulting us into the Information Age at record speed. Due to the tight statutory deadlines contained in the Act, the telecommunications industry is undergoing some momentous changes in a compressed period of time. In August, we put in place new interconnection rules to swiftly bring competition to the local exchange telephone market. And right now, the FCC and the states are hard at work at revising our universal service system for a competitive world. And of course, access charge reform is on our radar screen for year's end. When you think about it, our intent in restructuring the payphone industry is similar to our recent efforts on interconnection and universal service. Our goals are really the same: eliminate subsidies, provide nondiscriminatory access, and implement rules that allow competitors to enter the market on an equal footing -- all while preserving the availability of telecommunications service to all Americans. What does this all mean for the payphone industry? Well, maybe you feel a little like Columbus must have felt as he gazed for the first time on the uncharted shores of America. He may have felt a little anxious about the new adventures and perhaps some unknown dangers that he knew lay ahead, yet he must also have felt great excitement about the new opportunities presented to him. But as we know, Columbus' voyage not only proved he was right, but he made the history books along the way. Like Columbus, we should not look back at the way we have always done things, but as regulation fades from view, you must now look ahead as market forces take over. So go out there and roll up your sleeves and go make some history! Thanks for letting me put my two cents in on your issues! Good luck out there and may you live long and prosper.