Price Cap Performance Review for
Local Exchange Carriers
CC Docket No. 94-1

Consumer Federation of America et al.,
Petition for Rulemaking
RM-9210

MCI Telecommunications Corp., Emergency
Petition for Prescription
CC Docket No. 97-250

COMMENTS

S. Jenell Trigg,
Assistant Chief Counsel for Telecommunications

Eric E. Menge,
Assistant Chief Counsel for Telecommunications

Office of Advocacy
U. S. Small Business Administration
409 Third Street, S.W. Suite 7800
Washington, D.C. 20416

October 26, 1998

The Office of Advocacy of the United States Small Business Administration ("Advocacy") submits these Comments in response to the Federal Communications Commission’s ("FCC" or "Commission") Public Notice to solicit comments to refresh the record in the Access Charge Reform and related proceedings.(1) Congress established the Office of Advocacy in 1976 by Pub. L. No. 94-305 (codified as amended at 15 U.S.C. §§ 634 a-g, 637) to represent the views and interests of small business within the Federal government. Its statutory duties include serving as a focal point for concerns regarding the government’s policies as they affect small business, developing proposals for changes in Federal agencies’ policies, and communicating these proposals to the agencies. 15 U.S.C. § 634c(1)-(4). Advocacy also has a statutory duty to monitor and report on the FCC’s compliance with the Regulatory Flexibility Act of 1980 ("RFA"), Pub. L. No. 96-354, 94 Stat. 1164 (1980) (codified at 5 U.S.C. § 601 et seq.), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 ("SBREFA"), Subtitle II of the Contract with America Advancement Act, Pub. L. No. 104-121, 110 Stat. 857 (1996). 5 U.S.C. § 612(a).

Advocacy has commented previously in the above-captioned proceedings.(2) Advocacy applauds the Commission’s reconsideration of its Access Charge Reform proceeding. We also remind the Commission of its statutory duty, pursuant to the RFA, to ascertain the practical impact on all classes of small entities(3)as part of its consideration of Bell Atlantic’s and Ameritech’s pricing flexibility proposals, in addition to MCI’s Emergency Petition for Prescription (CC Dkt. No. 97-250, CCB/CPD No. 98-112 (Feb. 24, 1998)), with particular attention to mitigating economic harm to small business consumers. Advocacy believes that the information submitted in this Comment will assist the Commission in these efforts.

Advocacy has observed changes in the level of competition of the marketplace and remains unconvinced given available evidence that there is widespread competition and realistic-choice of local service providers for small business end-users, particularly in rural areas. The lack of competition for local service and thus, lower rates, is of great concern to Advocacy, especially given the cumulative impact of small business’ increase in telephone bills for long distance service and toll free service.(4) Furthermore, Advocacy is concerned that the FCC will continue to rely on the pass-through of access charge savings by IXCs to end users in the form of lower rates as the lynch pin of its access charge reform policies. The FCC’s presumption that these rate savings would, and in the future, offset increases in flat rate fees for end-users, whether such fees are directly or indirectly imposed by the FCC, was flawed for the following reasons:

Advocacy has also argued previously that the FCC did not analyze properly the impact of its current access charge reform decision on all classes of small businesses, as mandated by the RFA.(5) In fact, the FCC’s failure to undertake a sufficient analysis on the impact of small business end-users has been a major catalyst for consumer, industry, and congressional criticism of its policies. It is important to analyze the economic impact on all classes of small entities, during the review of these new proposals– and not a post hoc analysis only after such policy deliberations are over.

Although Advocacy requested in March 1998, that the Commission include a breakdown of rate savings and surcharges by consumer class (i.e. residential, small business, and large business consumers) in its investigation of MCI’s, Sprint’s, and AT&T’s alleged pass-through of access charge savings via lower rates,(6) it is our understanding that the FCC has not received sufficient information on this subject. The major IXCs’ reliance on programs such as MCI’s "Five Cent Sundays" and Sprint’s "Friday’s Free" as rate savings is misplaced when applied to the needs of small business consumers. For example, "Five Cent Sundays" may be great for Grandma and the kids, but it does nothing for a small business that needs to do business during traditional business days, which is Monday through Friday. Moreover, Advocacy believes that there have been adjustments in the parameters of peak and non-peak hours, or minimum billing amounts necessary to receive promotional benefits that serve to undermine purported benefits of lower rates to small business customers.(7)

Notwithstanding the numerous complaints to the FCC and many State Public Utilities/Service Commissions from small businesses triggered by the January 1998 effective date of the PICC and additional Universal Service Fund ("USF") surcharges imposed by many IXCs, this anecdotal evidence has been the only proof of the detrimental impact of the FCC’s access charge reform rules on small businesses -- until now.

To supplement the record in this proceeding and to substantiate and complement the anecdotal evidence noted above, Advocacy submits, "Flowthrough of January 1, 1998 Access Charge Changes to Small Business Customers," a study by the National Economic Research Associates ("NERA"), a renowned international economic consulting firm founded in 1961(8)The NERA Study not only documents statistically that small business consumers in the northeastern states(9)have not been the beneficiaries of the FCC’s access charge reform policies given net increases in telephone bills driven by a 26 percent increase in IXC’s profit margins, but also concludes that there is "no evidence that the long distance carriers would pass on any future decreases in access charges to small business customers." Id. at 6. Advocacy believes that this scenario is replicated throughout the country, particularly since the sampled states represent a comparable cross-section of urban and rural areas.

The following are highlights of the NERA Study:

The NERA Study substantiates Advocacy’s concern that small businesses have disproportionately and unfairly shouldered the burden of access charge reform. While it was designed by the Commission that businesses with multiple lines would implicitly subsidize primary residential lines on an interim basis during the Commission’s transition period to explicit subsidies,(10) it was not anticipated by the Commission (although raised by Advocacy) that IXCs would fail to pass-through access charge savings to its small business customers in the same proportions that the IXCs received in lower per minute access charges.(11) Furthermore, the FCC did not foresee additional USF surcharges and higher per minute rates imposed by the IXCs on small business customers. This result does not make good public policy nor economic sense given that small businesses operate at the margins. Increases in fixed costs, with no increase in value or service, simply undermines the ability of small businesses to sustain business operations and to compete on a more level playing field.

For the record, Advocacy does not comment at this time whether or not there should be further reductions in access charges. However, Advocacy recommends that if further access charge reductions are to be made by the Commission, given the inadequacies of the current scheme, that the Commission mandate that IXCs reduce rates for all end users proportionately to the access charge savings the IXC receives. Every measure must be taken to ensure that small business consumers are not handicapped further.

Advocacy acknowledges that the U.S. Court of Appeals for the Eighth Circuit upheld the Commission’s Access Charge Reform’s First Report and Order, including the imposition of increased SLCs and the new PICC on multiple line businesses and non-primary residential lines.(12) The court found that the Commission’s access charge reform scheme had balanced appropriately its concern that universal service would be threatened if the Commission raised the SLCs on primary residential lines.(13) However, whether this scheme imposes a significant economic impact on small business consumers is separate and distinct from the Commission’s authority to devise a scheme as a means to protect universal service. Moreover, the two issues originate from two separate statutes; small business impact is under the RFA and the Commission’s discretion to promulgate rules is under the Communications Act of 1934, as amended by the 1996 Act. Additionally, two separate classes of entities are involved, small business consumers and small ILECs. We note that the issue of whether the FCC properly addressed the significant economic impact on small businesses pursuant to the RFA, on any of the issues raised on appeal, was not before the court. Therefore, the Eighth Circuit decision cannot be interpreted broadly to infer that the significant economic impact on small business end-users due to higher SLCs and new PICCs was also acceptable as a matter of law. The FCC still has the duty to address the problem of significant economic impact caused by increased telephone bills of small businesses across the country, notwithstanding the affirmation of its First Report and Order.

In summary, the Office of Advocacy respectfully requests that the Commission condition any further reductions of access charges on the pass-through of such savings by IXCs proportionately to each class of customer, including small business consumers. We also strongly encourage the Commission to undertake a complete regulatory flexibility analysis, during its deliberations, on all small entities impacted in this proceeding – especially small business consumers. The supplemental evidence submitted in this Comment documents that small businesses have been disproportionately harmed and have unfairly carried the burden of access charge reform by the Commission’s previous decisions.

S. Jenell Trigg,
Assistant Chief Counsel
Telecommunications

Eric E. Menge,
Assistant Chief Counsel for
Telecommunications

ENDNOTES

1. Commission Asks Parties to Update and Refresh Record for Access Charge Reform and Seeks Comment on Proposals for Access Charge Reform Pricing Flexibility, Public Notice, FCC 98-256 (Oct. 5, 1998).

2. Ex parte Comments of the Office of Advocacy, U.S. Small Business Administration to the Notice of Proposed Rulemaking in CC Dkt. No. 96-45, 96-262, 94-1, 91-213, 96-262 (April 29, 1997); Ex parte Comments of the Office of Advocacy, U.S. Small Business Administration to the First Report and Order, Order on Reconsideration, and Second Order and Memorandum Opinion and Order in CC Dkt. No. 96-262, 94-1, 91-213, 96-262 (Nov. 21, 1997) ("Advocacy RFA Comments"); Reply Comments of the Office of Advocacy, U.S. Small Business Administration to the Consumer Federation of America, et al., Petition for Rulemaking in CC Dkt. No. 96-262, 94-1, 91-213, 96-262 (Feb. 17, 1998).

3. Small entities impacted in these proceedings may include incumbent local exchange carriers ("ILEC"), competitive local exchange carriers ("CLEC"), Internet service providers ("ISP"), enhanced service providers ("ESP"), interexchange carriers ("IXC"), and consumers (or end-users).

4. Such increases for toll free service are due to the FCC’s implementation of Section 276 of the Telecommunications Act of 1996, which mandates that payphone service providers be fairly compensated for all telephone calls made from a payphone. The FCC imposed a per call fee to be paid by toll free carriers to payphone service providers and allowed such fees to be passed on to the toll free subscriber. See, e.g., In re Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996, CC Dkt. No. 96-128, Report and Order, 11 FCC Rcd 20,541 (1996); see also Letter from S. Jenell Trigg, Assistant Chief Counsel for Telecommunications, Office of Advocacy, U.S. Small Business Administration, to Magalie Roman Salas, Secretary, Federal Communications Commission (Jan. 12, 1998) ("While it was expected that such charges could be passed on by the carrier, it appears that it was not expected that small businesses would incur cost increases in the tens of thousands of dollars per year.") (citation omitted).

5. Advocacy RFA Comments, at 2.

6. Letter from Jere W. Glover, Chief Counsel for Advocacy, and S. Jenell Trigg, Assistant Chief Counsel for Telecommunications, Office of Advocacy, U.S. Small Business Administration to William E. Kennard, Chairman, Federal Communications Commission (Mar. 3, 1998).

7. Id. at 2.

8. Paul S. Brandon, Flowthrough of January 1, 1998 Access Charge Changes To Small Business Customers, National Economic Research Associates, Sept, 17, 1998 (Appendix A) ("NERA Study"). This study was commissioned by Bell Atlantic and has been used by the Office of Advocacy with permission.

9. Six states were sampled in this study, Maine, Massachusetts, New York, New Hampshire, Rhode Island, and Vermont. We encourage other economic analyses of the flowthroughs of access charges for small business on a regional and national basis.

10. In re Access Charge Reform, et al. (CC Dkt. 96-262), First Report and Order, 12 FCC Rcd 15,982, paras. 72-74 (1997).

11. See "The Average Small Business is a Winner" Chart presented by FCC Chief Economist at May 7, 1997, Public Meeting (estimating a per minute savings of $31 for an average small business with four lines and a total long distance bill of $375). Advocacy notes that the NERA Study sample criteria was a small business with less than $1000 a month – a higher amount than the FCC study based its projected savings.

12. Southwestern Bell Telephone Co. v. Federal Communications Commission, No. 97-2618, LEXIS 20479, to be reported at153 F.3d 523 (8^th Cir. 1998).

13. Id. at *12.

* Last Modified: 6/14/01