TESTIMONY OF ROBERT B. NELSON OF THE

MICHIGAN PUBLIC SERVICE COMMISSION

BEFORE THE HOUSE ENERGY

AND TECHNOLOGY COMMITTEE

SEPTEMBER 29, 1999

Good morning, Madame Chair, Vice-Chairman Bradstreet and members of the Committee. I am Robert Nelson, Commissioner with the Michigan Public Service Commission. In February of this year, I attended a meeting of this Committee during which Commissioner David Svanda addressed the issue of competition in the Michigan telecommunications industry. I was an observer at that time and had no idea that, some seven months later, I would be addressing you on the very same issue. Today I intend to briefly review Commissioner Svanda's testimony, give you an update of progress in the industry since that time, and provide some thoughts on what lies ahead for the industry. In so doing, I will attempt to relate my comments to issues that you will be confronting in the next year as you make a decision regarding the sunset of the Michigan Telecommunications Act on January 1, 2001.

I. Review of Commissioner Svanda's February 10, 1999 testimony

A. Svanda noted that intraLATA interexchange service in Michigan was slightly competitive and local exchange competition was even more anemic. In rural areas there was virtually no competition.

B. He cited two sections of the MTA that needed attention prior to January1, 2001- the lifeline section (316) and the requirement that all local exchange carriers restructure their rates to ensure that they fully recover their TSLRIC or "forward looking" costs.

C. He noted the trends toward convergence of various telecom industries through technology and mergers and acquisitions.

D. Svanda called for "flexibility" in the rewrite of the MTA, in order to recognize technological changes and the constant changes in federal law and regulations.

II Update

A. IntraLATA interexchange service is slightly more competitive than in February because all local carriers are now providing dial one parity, pursuant to federal mandate and MPSC's previous decisions which implemented MTA and were upheld by the Michigan Supreme Court on July 8, 1999. This should result in greater toll rate competition; local rate competition still "anemic", even though there are now 79 licensed competitive local exchange carriers.

B. Legislature has extended sunset on lifeline (PA 31).

C. PSC issued USF order on Tuesday. We held that we do not have statutory authority to establish a state USF and even if we did, proponents did not make their case. However, there may be a need for such a fund since many local exchange carriers would be caught in a bind between the need to fully recover their TSLRIC costs under Section 316 of the MTA and the need to have services and rates that are "reasonably comparable" to those in urban areas of the country under Section 254(b)(3) of the FTA. PSC believes that "reasonably comparable" should include access to new technologies.

TSLRIC may be higher than embedded costs, thus forcing the rates, in some cases, dramatically upward, by the end of this year. The possibility of $40 local rates for some independent companies exists.

D. Trend toward convergence continues with proposed merger of MCI World Com and Sprint, and the proposed merger of GTE/Bell Atlantic and Vodafone Airtouch. MPSC filed comments with FCC on Ameritech-SBC merger -- arguing that Michigan should not be disadvantaged vis-a-vis other Ameritech states that had approved merger.

E. PSC issued fine on Tuesday for slamming against CEO Telecommunications, dba LD Services. This was the third fine issued against a telecommunications carrier for slamming (Brittan Communications and ACI Communications, no longer doing business, were fined on April 30, 1999.) Companies are agreeing to settle slamming complaints to avoid being fined. Cramming complaints are on the increase (no specific statutory authority to deal with these).

II What's ahead

A. FCC has commenced a new rulemaking proceeding that, if adopted, would require local exchange carriers to bill their customers up to $7/month by 2003 ($14 if carriers mirror for intrastate access) in return for access to the long distance network. The FCC will also address universal service for urban areas by the end of the year and for rural areas by 2001.

B. PSC will be reviewing TSLRIC filings of smaller local exchange companies. As Commissioner Svanda noted in February, this area may need legislative attention, especially in view of our USF order, before the end of the year.

C. FCC may act on Ameritech-SBC merger very soon. We believe that whatever state legislation is enacted, it should allow PSC to implement provisions of federal law and regulations. The FCC may want States to implement conditions imposed on the new company and state law should allow us to do so.

D. MTA rewrite. Ameritech argued in a case decided yesterday that the Commission lacked authority to impose penalties for violations of rules promulgated pursuant to MTA. The Commission should at least be allowed to enforce the rules the Legislature required us to promulgate.