1. Listed are states that have any rate plan that involves charging for local calls by the minute or by distance. Some states listed have LMS only in certain counties or in areas served by electronic switching equipment. Others have LMS only on an experimental basis. States that have an experiment noted.

are

Mr. WYDEN. Well, thank you.

This panel has been interesting. So often on Capitol Hill, I think my colleague would agree, we get these murky, namby-pamby kinds of statements. That certainly has not been the case with respect to this panel, and I thank you all for coming.

My very distinguished and able colleague, Mr. Skelton, from Missouri, is here as well, and, without objection you may proceed.

OPENING STATEMENT OF HON. IKE SKELTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSOURI Mr. SKELTON. First, I would like to thank my colleague, Mr. Wyden, for his continued leadership of this task force and his continued efforts on behalf of small businessmen and the preservation of a universal telephone system.

Each day I receive letters from small business owners, senior citizens, and other individuals expressing concern about the increase in their local telephone bill. They express concern because the phone is vital to their business, or it is their means of communicating with the world outside their home, and they do not know if they will be able to absorb the rate increases. These letters bring home the reality of the impact rising local rates are having on the system's smaller users. Either they pay the increases or they drop off the system, they cannot shop around for local service.

I am concerned that long-distance access charges coupled with other local rate increases may price that plain old telephone service that we have taken for granted so long right out of the reach of small businesses and their customers. This is especially true in rural, high cost areas.

How do we maintain the affordable, dependable, and efficient telephone system we have enjoyed for so many years? What is a fair rate? Who gets cut out if prices are unfair? Are certain parts of America going to be isolated because telephone rates are too high? How severe is the threat of bypass?

Our goal is to maintain an affordable and fair telephone system, one from which we can all benefit, because small business owners cannot go anywhere else to get local telephone service.

Mr. WYDEN. You are very gracious, and it was very, very good to be in your home State recently, where we got some careful, good input from the small businesses in the Midwest. I am very thankful for all your leadership and interest in the issue.

Let me start with a couple of questions for this panel. Mr. Lilly, I want to start with the point you made about the vacant building of Southwestern Bell. To make sure I understand your argument, your argument is that this vacant building isn't going to be used, yet it went into the rate base. Your theory is that if you cut out some of those kinds of things, a phone company could lower some of its costs and then eliminate some of the threat of bypass. Is that essentially the argument that you are making?

Mr. LILLY. That is right. Also, it was alluded to earlier by one of the other witneses here, there are all kinds of bookkeeping trickery that goes on.

For example, it came out in the rate, in the final order on this rate case, Il.ad better not quote that, I don't have my notes. This

matter of shifting stuff into the rate base and shifting profits out of the rate revenue into other divisions of the company. I cannot document this, but there is no doubt in my mind that it is taking place because every time you turn up another rock, there is a big worm under it.

Mr. WYDEN. I was trying to assess your general view, we are not making any accusations. I am sure if the good people from Southwestern Bell were here, they would have an explanation.

Mr. LILLY. I am sure they do, but on this particular one on the building, this came right in testimony by the vice president for revenues at that time, yes, it was there, their thinking was that it would be used for an additional directory assistance building; then the economy changed, so they didn't need it. But the fact remains the rate payers are paying for it.

Mr. WYDEN. I bring it up only because I think this is one area that everybody in this complicated technologically frustrating area can agree on. If we can be more efficient, that is going to lower our telephone companies' costs, reduce some of the threat of bypass.

Now, Mr. Kimmelman, a question for you. I was fascinated with this point that you made with respect to the bypass issue that you thought that first, we couldn't ban bypass, I agree very strongly that you don't put a hold on technology, we don't want to do that in this country, and, second, your thesis that somehow what we are doing on the bypass issue is using a blunt instrument when we ought to be trying, in your words, to do something that resembled brain surgery, very careful, very precise kind of steps.

What exactly would the brain surgery consist of, because there are a lot of us that agree that it is a blunt instrument, and I would like you to elaborate on that.

Mr. KIMMELMAN. I will give you some ideas. I don't think anyone knows for sure. I think the key element is flexibility. You don't put a flat charge on everyone across the board and say "This is going to solve a problem" when the problem is many different problems and may not exist someplace else.

So I think one thing you can do is you can look toward some flexible pricing approaches, starting with the FCC and giving direction to the State commissions, looking at every particular problem, possibly bulk rate discounts for large users-if that is what is needed to keep them on the network, possibly some greater tapering of rates in some instances, basically special package pricing for particular kinds of problems.

That would not mean all of a sudden shifting costs on residential customers, it wouldn't necessarily mean shifting cost from long distance to local; it would be pinpointed and targeted.

The example of bypass is a good one because look at the opposite side of bypass. Low-income people dropping off the network if phone costs rise too much. Now, telephone companies have come in with their solution to bypass. The equivalence solution for bypass in the low-income example would be me coming in to you and saying, because a number of people are going to leave the network, we need to keep basic service prices at a subsidized level, $5 a month for everybody in the country just to keep those people on the network.

Now, obviously that is not a targeted solution. Obviously, that is not a responsible approach to the problem, I don't believe their shifting $6 a month onto every rate payer to deal with what they think is a problem is any more responsible than that.

Mr. WYDEN. It is interesting, this idea of bulk pricing discounts. So what you are saying is if we looked at various kinds of pricing schemes for different groups, we could deal with the bypass issue without perhaps having to have access charges or something like that?

Mr. KIMMELMAN. That is one way.

For example, the commission in Missouri may look at a small town that is a one-industry town and see that even though it may be a very rural area, and you wouldn't think there was bypass, there is a problem. The company that has threatened to leave the network could drive up the rates dramatically for the small number of residential ratepayers left on the network. This problem could be addressed by a targeted discount.

Other rural areas may not have that problem. Another small town may be almost purely residential and small business, have no big business that does a lot of long-distance calling. My approach would be to put the tools in the hands of the State commissions with some direction and some flexibility so that they could spread the costs in a responsible, equitable fashion that wouldn't just be an across-the-board shift.

Mr. WYDEN. You make some fascinating general suggestions. Your argument is basically saying "Don't throw out the baby because the bath water is a little dirty," and there is the bypass issue, it is out there. I happen to think that a lot of the bypass in the years ahead is not going to take business from A's business and take it to B but somebody is going to come along with some technological innovation, neither A nor B have, and are going to bypass the system.

So we really are just hungry for some precise instruments to deal with this issue, and we are interested in any suggestions you have in the days ahead.

Mr. KIMMELMAN. One final note on this point. The worst thing, I believe, that can happen in the future of telephone pricing is to move immediately to a radical new system like access charges which could raise rates $5 to $10 for everybody in the country and then find that we still have a lot of big businesses going to private systems, dumping more costs on everyone who is left with only one alternative, the public telephone company driving their rates go up even higher. That is the worst situation, and I think before we lock ourselves into a price structure that could lead in that direction, we ought to look for alternatives.

Mr. WYDEN. Ms. Claybrook, a question for you about the CUB's, something we talked quite a bit about over at the Commerce Committee. I was on the plane coming back yesterday from Oregon and was reading an Oregon magazine that the Oregon Chapter of the National Federation of Independent Business had come out against the CUB's or was now going to announce their position, or something like that. Have you all, in looking at the CUB's, seen that the small business groups are opposed to them?