Date: March 1, 2001

Presenter: Gene Hand

Affiliation: Telecommunications Director, Nebraska Public Service Commission (PSC)

Mr. Hand has been with the PSC for 25 years at the time of this presentation. The Commission is a constitutional agency that is not under the control of the Governor. The main focus of the Commission is to be an advocate for the public good. There are five representatives to the Commission elected by geographic area. In addition to telecommunications, the Commission also oversees grain elevator operations, inspection and plan review of modular homes, taxies and limos, household movers, private water companies in subdivisions, power line construction issues, gas line authority, and cable. Mr. Hand outlined numerous topics that are representative of issues evaluated by the PSC.

Each year the PSC is involved in legislative issues. In past years, telecommunications has dominated their attention. Current issues in the Nebraska Unicameral of interest include LB806 and LB807. These Bills are structured to deal with gas regulation and jurisdiction areas.

The majority of the time for the Commission's work is the telecommunications dealing with; LECs (Local Exchange Carriers like QWEST and Alltel), CLECs (Competitive Local Exchange Carriers such as AT&T Local Service and COX), ISPs (Internet Service Providers such as Radix and Novia), and IXCs (Interstate Exchange Carriers like AT&T and MCIWorldCom). Nearly five years ago the Telcom Act was passed which was designed to open up the market for competition. The track record on introducing new competition has been mixed. The market is currently undergoing a retraction due to market conditions. Several new markets in Nebraska have experienced companies taking Chapter 11 in the last 6 months.

The end of last year (2000) there were 67 CLECs with authority to operate in Nebraska (that number is expected to decline in 2001). Nebraska is reflective of the mixed results of competition in telecommunications. One newer telcom carrier (CLEC) that is stable and has made sizable investments in local infrastructure is COX, now the fourth largest telcom company in Nebraska. On the other end of the spectrum is Jato Communications, which unfortunately pulled the plug for the majority of its national DSL operations without customer notice.

Generally the Commission will grant the Certificate for telcom companies to operate in Nebraska with minimal review of the company's application. The general rise in the markets fueled capital for investment by telcom companies. The Commission will look favorably upon capital investment because such “private investment” is generally contributing to the “public good.” The purpose of the Commission is to look out for the interests of the “public good.” The Commission did have concerns about granting one “closed system” the authority to operate by using public easements. The use of a public easement for the construction of a private network was not seen to be consistent with investment in the “public good.” The proposal by CityNet was restructured so their business plan would provide an open system and the Commission was able to approve their operation.

One ongoing concern by the Commission is the level of public complaints about telcom companies. The level of complaints since the Telcom Act has risen threefold.

One example is the rise in wireless activity. In the January 1995 there were over 160,000 wireless access lines. In January 2001 there are over 600,000. Wireless growth is exceeding wireline (traditional wired phone services) growth. The PSC is concerned about regulating behavior so that the differences in technology will result in the same level of service availability, appropriate cost and service allocations. For example, getting the 911 service surcharge on the wireless phone to be allocated proportionally to 911 centers throughout the state. The use of the mobile line may be in other areas than where the call was billed. The state agency collects the funds and redistributes to improve the accessibility of emergency services.

Private communications and the public utilities are the two main lobbyists in the state. The two have opposing competitive interests when considering “dark fiber” deployment. The dark fiber issue goes back to the NPPD installation with the Community College in Norfolk, NE in 1998. The use of public monies to develop a backbone of a telecommunications company was challenged. The application by NPPD for a Certificate to operate was denied. However, the partnership with OPPD and Alltel has been generally well received because the division of investment keeps separate the public and private initiatives. Recently, the PSC was instructed to allow political subdivisions to utilize or resale dark fiber. The price to the consumer was determined to be a cost based structure that allows for profit from the use to be placed in a fund for scholarships and research.

The area code issue was reexamined when determined that the existing numbers were underutilized and a new area code was imminent. The problem in Nebraska was the way numbers were distributed, not that there was a shortage. The “prefix” to the number is a three-digit sequence that allows for up to 10,000 combinations of the last four-numbered sequence (NXX-XXXX). Not every small town will need 10,000 numbers so Nebraska asked for FCC authority to appropriate the phone numbers in 1000 lot segments instead of the existing 10,000 lots. This allows for improved distribution and delays the new area code implementation.

The Telcom Act was approved five years ago this month. In many cases, the costs have gone up (particularly residential) and quality of services appear to have gone down. The regulated environment of the old system had subsidized rates systems. The subsidized rates offset the residential services with business services. These subsidies are being changed to reflect actual costs, hence the price of local access for residential services is going up. The cost of interstate calls had gone down over the past decade, however, the in state calls have just recently dropped significantly.

There will be some averaging costs in the cost of the loop from the incumbent (LEC) to the customer. The cost averaging for loops in the urban area will be lower than the rural areas due to population density. The rural carriers will still receive some form of subsidy to offset their higher loop costs.

The 14 Point Checklist for the Telcom Act is the focal point of the judging of whether incumbents will be allowed to provide long distance service. The LATA will not need to exist in Nebraska if/when QWEST gets approval. (LATAs were an artificial construct as a result of divestiture). The testing of the criteria has to do with the Central Office support systems and is central to the operation of the LEC. There will be extensive testing to validate the competitive nature of the industry (mostly on the national level).

This new environment with multiple providers will invoke a whole new set of standards for services. The new complexity is due to the existence of service issues between phone companies, not just between the customer and their phone company. The customer may contract with a phone company that leases its lines from another phone company. When there is a problem, the repair systems have to sort out where the problem is and who owns the problem. The service providers will be given the opportunity to work through these issues first and then they will have to work with the PSC.

The Nebraska PSC is unique in its “deregulated” processes. Rate changes in Nebraska are very flexible. The majority of rate changes just require a public filing notice. There are some issues in this area where companies are using new technologies, which have not been reviewed for their regulatory impact. For example, the voice over IP (VoIP) will be a challenging area for considering reevaluating the subsidy issues. The wireless fixed location (wireless to the apartment) also has the benefits of the telcom infrastructure, but is currently not required to pay the subsidies.

There are competitive elements in the rural area that do not make sense. Bringing fiber to a small town of 500 people does not mean there will magically be high tech jobs. The fiber capacity availability of NPPD is very appealing, but may not be as useful when a route to a substation is not to a town. There needs to be a rationale for the investment, which coincides with appropriate uses.

QWEST and Alltel reinvestment in Nebraska has not been a strong record in the past and is questioned with all the consolidation of services and personnel in the major cities. The challenge for corporations is where to put their investment for the greatest return. The challenge to the Commission is to ensure services are available for economic development and improving the public good. The recent downturn in the capital markets has literally killed some promising businesses that were highly leveraged. One result is that there are some tremendous values in used equipment right now due to the collapse of certain companies that are trying to salvage their assets. This can be a great opportunity for start ups trying to enter a new market.