COM/SK1/MP1/bb1 ALTERNATE DRAFT Agenda ID #2366

Alternate to Agenda #1866

09/18/03 Item 37a

Ratesetting

Decision ALTERNATE PROPOSED DECISION OF COMMISSIONERS KENNEDY AND PEEVEY

(Mailed 6/11/03)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Commission's Own Motion to Assess and Revise the New Regulatory Framework for Pacific Bell and Verizon California Incorporated.

Rulemaking 01-09-001

(Filed September 6, 2001)

Order Instituting Investigation on the Commission's Own Motion to Assess and Revise the New Regulatory Framework for Pacific Bell and Verizon California Incorporated

Investigation 01-09-002

(Filed September 6, 2001)

(See Appendix A For List of Appearances)

INTERIM OPINION REGARDING PHASE 2B ISSUES

SERVICE QUALITY OF PACIFIC BELL AND

VERIZON CALIFORNIA, INC.

Table of Contents

Title Page

INTERIM OPINION REGARDING PHASE 2B ISSUES 1 1

SERVICE QUALITY OF PACIFIC BELL AND 1 1

VERIZON CALIFORNIA, INC. 1 1

I. Summary 2 2

A. Introduction: Major Finding and Scope of Study 2 2

B. Verizon Provides Very Good Service Quality 3 3

C. Pacific: Good Service Quality with Residential Service Weaknesses 4 4

D. Under NRF, Pacific's Service Quality Has Improved Only for Business Customers, while Residential Service Quality Shows No Major Trend; Verizon's Business and Residential Service Quality Have Improved 5 5

E. Other Information Consistent with Quantifiable Data 7 7

F. Areas for Improvement 8 8

II. Scope of This Phase and Methodology 8 8

III. California Measures of Service Quality and Standards 13 13

A. GO 133-B Measures, Standards, and Caveats 13 13

1. Definition of "Primary Line" is Unclear 16 16

2. Automated Response Units (ARU) 16 16

3. Busy or Abandoned Calls Not Counted Under GO 133-B 18 18

4. Commission Recognizes Need to Revise GO 133-B 18 18

B. Performance of Pacific and Verizon Against GO 133-B Measures 19 19

1. Held Primary Service Orders 19 19

a) Position of the Parties 19 19

b) Discussion: Measurement Problems, but Pacific and Verizon Exhibit Show Improvements 22 22

2. Installation-Line Energizing Commitments 25 25

a) Position of the Parties 25 25

b) Discussion: Pacific and Verizon Meet GO 133-B Standard for Honoring Installation Commitments 27 27

c) Monthly Data: Pacific and Verizon Meet GO 133-B Standard for Honoring Installation Commitments for ALL 144 Months Under NRF 28 28

3. Customer Trouble Reports 29 29

a) Position of the Parties 29 29

b) Discussion: Pacific and Verizon Met GO 133-B Standard for Incidence of Trouble Reports 31 31

c) Monthly Data: Pacific and Verizon Met GO 133-B Standard for Incidence of Trouble Reports for ALL 144 Months Under NRF 32 32

4. Toll Operator Answering Time 33 33

a) Position of the Parties 33 33

b) Discussion: Pacific and Verizon Met GO 133-B Standard for Operation Assistance Answer Time 34 34

c) Monthly Data: Pacific and Verizon Operation Assistance Answer Time 36 36

5. Directory Assistance Operator Answering Time 37 37

a) Position of the Parties 37 37

b) Discussion: Pacific and Verizon Met GO 133-B Standards for Directory Assistance Answer Time 38 38

c) Monthly Data: Pacific and Verizon Met GO 133-B Standards for Directory Assistance Answer Time 39 39

6. Trouble Service Answering Time 41 41

a) Position of the Parties 41 41

b) Discussion: Pacific Has Met GO 133-B Standard for TRSAT Since 1999; Verizon Since 1996 42 42

c) Monthly Data: Pacific Has Met GO 133-B Standard for TRSAT Since 1999; Verizon Since 1996 45 45

7. Business Office Answering Time (BOAT) 46 46

a) Position of the Parties 46 46

b) Discussion: Pacific Has Met BOAT Standard Since 1997; Verizon Since 1998 48 48

c) Monthly Data: Pacific Has Met BOAT Standard for 67of 109 months; Verizon 80 of 109 52 52

C. Summary of Empirical Assessment of Pacific's and Verizon's Performance on GO 133-B Measures 52 52

IV. Federal Measures of Service Quality - ARMIS and MCOT Data 55 55

A. ARMIS Measures 55 55

B. Accuracy of Data 56 56

1. General Issues with Pacific's Data 56 56

2. Pacific's Data Concerning Installation Orders Require Clarification 59 59

3. Allegation that Pacific's Reports Contain Erroneous DuplicateRecords Has No Factual Basis 60 60

4. Allegation that Pacific's Reports Contain Erroneous "Anomalous Records" Has No Factual Basis 61 61

5. Verizon's Data Are Accurate 61 61

C. Summary Table of ARMIS 43-05 Measures 63 63

1. The Number of Initial Trouble Reports per 100 Lines: Pacific Residential Significantly Better than Reference Group and Business Comparable to Reference Group and Significant Improving Trends; Verizon Business and Residential Significantly Better than Reference Group and Trend Improving Significantly 70 70

2. The Number of Repeat Trouble Reports per 100 Lines : Pacific Residential and Business Significantly Better Than Reference Group, Business Also Improving Significantly; Verizon Residential and Business Significantly Better Than Reference Group, Trends for Both Improving Significantly 73 73

3. The Number of Initial Out-of-Service Trouble Reports per 100 Lines: Pacific Residential and Business Significantly Better Than Reference Group; Verizon Residential and Business Significantly Better Than Reference Group, Business Trend Improving Significantly 76 76

4. The Number of Repeat Out-of-Service Trouble Reports per 100 Lines: Pacific Residential and Business Significantly Better Than Reference Group, Business Trend Improving Significantly; Verizon Residential and Business Significantly Better Than Reference Group 79 79

5. The Number of Subsequent Initial Trouble Reports and Subsequent Repeat Trouble Reports: Insufficient Observations 82 82

6. The Number of Initial All Other Trouble Reports per 100 Lines: Pacific Residential and Business Significantly Better Than Reference Group, Business Trend Improving Significantly, but Residential Trend Worsening Verizon Residential Significantly Better Than Reference Group, Business Indistinguishable From Reference Group, Business Trend Improving Significantly 83 83

7. The Number of Repeat All Other Trouble Reports per 100 Lines: Pacific Residential and Business Significantly Better Than Reference Group, Business Trend Improving Significantly, but Residential Worsening; Verizon Residential Significantly Better Than Reference Group but Business Indistinguishable From Reference Group, Business Trend Improving Significantly 86 86

8. Initial Out of Service Repair Interval (in hours): Pacific Residential Significantly Below Reference Group and Business Indistinguishable, No Significant Trends; Verizon Residential and Business Signficantly Better Than Reference Group 88 88

9. Repeat out-of-service repair interval (in hours): Pacific Residential Significantly Worse Than Reference Group, Business Indistinguishable; Verizon Residential and Business Significantly Better Than Reference Group 93 93

10. Initial all other repair interval (in hours): Pacific Residential Significantly Worse Than Reference Group, Business Indistinguishable but Significant Improving Trend; Verizon Residential and Business Better Than Reference Group, but Significant Worsening Trend for Residential 96 96

11. Repeat All Other Repair Interval (in hours): Pacific Residential Significantly Worse Than Reference Group, Business Indistinguishable; Poor for Residential, Average for Business; Verizon Good 99 99

12. Average Installation Interval: Pacific Indistinguishable From Reference Group; Verizon Inconclusive 102 102

13. Switch Downtime: Pacific Significantly Better Than Reference Group; Verizon Statistically Indistinguishable From Reference Group with Significant Worsening Trend 107 107

14. Switches Down per Switch 108 108

15. Number of Switch "Occurrences": Pacific "Under Two Minutes" Trend Improving; Verizon "Under Two Minutes" Trend Improving, But "Percent Unscheduled" Trend Worsening 109 109

16. Installation Commitments Met: Pacific Residential Performance Indistinguishable From Reference Group Business Significantly Better But Trend Worsening; Verizon Residential and Business Performance Indistinguishable From Reference Group with No Significant Trends 110 110

D. Summary of Empirical Assessment of Pacific's and Verizon's Performance on ARMIS 43-05 Measures 112 112

E. MCOT Data 117 117

1. MCOT Data - Pacific Shows No Service Diminishment Following Amertech Merger 118 118

2. MCOT Data - Verizon California (GTE) Shows No Diminishment of Service Quality Following Merger 121 121

V. Survey Data and Customer Satisfaction 125 125

A. Customer Satisfaction and Service Quality Surveys - Pacific 125 125

1. ORA Survey 125 125

2. Pacific's Surveys 130 130

a) J.D. Power Survey - Pacific 130 130

b) IDC Survey - Pacific 131 131

c) Other Customer Surveys - Pacific 133 133

B. Customer Satisfaction and Service Quality Surveys - Verizon 141 141

1. ORA Survey 141 141

2. Verizon's Surveys 141 141

VI. Other Direct Measures of Service Quality 142 142

A. Informal Complaints: Pacific Low Incidence 143 143

B. Informal Complaints: Verizon Very Low Incidence 148 148

C. Formal Complaints - Pacific 152 152

D. Formal Complaints - Verizon 158 158

VII. Other Issues In This Proceeding 159 159

A. Allegation by TURN that Pacific Inappropriately Aggregated Data Lacks Merit 160 160

B. Technological Change and Affects on Pacific's Service Quality - None Documented 160 160

C. Growth - Pacific 163 163

D. Staffing - Pacific 163 163

E. Weather - Pacific 165 165

F. Marketing - Pacific 168 168

G. Still Other Issues - Pacific 168 168

H. Movement of Functions to Unregulated Affiliates - Verizon 169 169

I. Service Performance Guarantee - Verizon 171 171

J. Technological Change - Verizon 172 172

K. Growth - Verizon 172 172

L. Staffing - Verizon 172 172

M. Weather - Verizon 173 173

N. Marketing - Verizon 173 173

O. Mergers and Structural Changes - Verizon 174 174

VIII. NRF Incentives, Service Quality, and Competition 174 174

A. NRF Incentives and Service Quality, Positions of Parties 174 174

B. Discussion: Incentives to Improve Service Quality Under NRF are Similar or Better than those Under Cost-of Service Regulation 177 177

C. Effect of Competition on Service Quality - Positions of Parties 180 180

D. Competition and Service Quality - Discussion 181 181

IX. Comments on Proposed Decision 183 183

X. Setting Aside Submission for Acceptance of New Information into Record of Proceeding 192 192

XI. Assignment of Proceeding 197 197

Findings of Fact 197 197

CONCLUSION OF LAW 237 237

ORDER 241 241

I. Summary

A. Introduction: Major Finding and Scope of Study

This proceeding has conducted a comprehensive investigation into the quality of telecommunications service offered to Californians by Verizon and Pacific under the New Regulatory Framework (NRF) mode of incentive regulation. We found that Verizon offers very good service quality, that Pacific offers generally good service quality in most areas, however, there are several important areas of weakness for residential customers in particular.

This investigation assessed the performance of Verizon and Pacific in meeting the six California-adopted performance standards contained in General Order (GO) 133-B. In addition, we used standard statistical methods to analyze the trends in service quality for Verizon and Pacific under NRF regulation. The investigation also examines Federal service quality data. Since there are no standards adopted by the Federal Communications Commission (FCC) for these service quality measures, we compare the performance of each company against reference group of the ten largest national utilities (excluding Pacific but including Verizon-California). As with the California data, we also use statistical methods to determine the trends in service quality over the NRF period. In addition, the investigation reviewed survey data, regulatory proceedings, and informal complaint data to supplement the picture developed through our data analysis.

We note that there are limitations with each of the various measures of service quality that we examine in this decision. We therefore base the conclusions that we reach regarding service quality on the totality of information provided in the record.

B. Verizon Provides Very Good Service Quality

The investigation found that Verizon offers very good service quality. On the GO 133-B service quality measures, Verizon complied with four of the six service quality standards adopted by this Commission for all years covered in our study.¹ On the remaining two measures, Verizon complies with the standard for most years. It has complies with all six GO 133-B standards since 1998. In addition, when evaluated on the Federal Communications Commission's (FCC) Automated Reporting Management Information System (ARMIS) service quality measures, we find that Verizon exceeds the performance of a reference group on eight measures for both residential and business lines, and on two measures for residential lines only. Verizon has statistically indistinguishable performance on two measures for both residential and business lines and on two measures for business lines, and one measure for the residential/business lines, only. Based on our statistical analysis, Verizon does not fail to meet the performance of the reference group on any measure - this in itself is exception.² Thus, on all significant Federal measures of service quality, Verizon meets or exceeds the performance of the reference group of large utilities.

C. Pacific: Good Service Quality with Residential Service Weaknesses

For Pacific, we find a general picture of good service quality with a few areas of weak service regarding residential services. On the GO 133-B service quality measures, Pacific complied with four of the six service quality standards adopted by this Commission for all years covered in our study.³ For the remaining two measures, Pacific complies with one standard for most of the years and shows improvement in recent years for the sixth measure. Pacific has complied with all six standards since 1999. In addition, when evaluated on the FCC's ARMIS service quality measures, we find that Pacific exceeds the performance of a reference group on six measures for both residential and business lines, and on one measure for business lines, one measure for the residential/business lines, only. Pacific has statistically indistinguishable performance on two measures for residential lines, and on five measures for business lines only. Pacific fails to meet the performance of the reference group on four measures for residential lines.

As these data suggest, Pacific has several areas of service weakness specific to residential services. Compared to the national reference group, Pacific has far fewer incidences of service trouble or outages, but once this occurs, Pacific's is slower to resolve the trouble. Pacific is also slow to answer customer-billing queries, a service quality indicator not systematically measured and for which there is no current standard.

D. Under NRF, Pacific's Service Quality Has Improved Only for Business Customers, while Residential Service Quality Shows No Major Trend; Verizon's Business and Residential Service Quality Have Improved

As noted above, both our utilities have performed well in meeting California-adopted service standards and have generally met or exceeded the performance of a reference group of large utilities. In addition to measuring the level of service for each company as noted above, we statistically examined how service changed during the years for which data is available during the period of NRF regulation. In particular, we sought to determine where service quality had improved and/or declined during NRF, and to determine whether NRF regulation was correlated with declines in service quality.

Concerning the effect of NRF regulation on service quality, we find that in general, service has improved during the NRF years. To reach this conclusion, we reviewed 7 GO 133-B measures and 16 ARMIS measures in this study to determine whether they showed a statistically significant increase or decline in service quality. Twelve of the ARMIS measures were examined separately for residential and business lines. This yields a total of 35 variables that we examined to determine if there were statistically significant trends in service quality over the NRF years. We examined these variables for each company.

Of the 35 variables for service quality reviewed in this study, Pacific showed statistically significant improvement on 7 of these business variables and one combined business/residential measure during the NRF period; it showed no statistically significant change on 23 of them; it showed statistically significant declines on 2 of the residential measures and one business measure; and on one measure we could not make a finding. Thus, for Pacific, more variables show improvement than show decline during the NRF period, while most show no significant change. Moreover, although 23 of the measures showed no statistically significant change, each of the four "residential repair interval" measures exhibited a curvilinear trend.⁴ Pacific exceeded the performance of the Federal reference group on 14 measures, had statistically indistinguishable performance on 7 measures, and failed to meet the reference group standard on 4 (residential) measures.

Verizon showed statistically significant improvement on 12 measures during the NRF period; it showed no statistically significant change on 19, and it showed statistically significant declines on 4 of the measures. Once again, despite performance that was either statistically indistinguishable or better than that of the Federal reference group on all measures and meeting the GO 133-B standards since 1998, more variables showed improvement than showed decline. Switch downtime, however, skyrockets, and is not explained. Finally, we note that Verizon's business and residential installation intervals show a pattern of curvilinear data.

Our examination of specific measures showed that sometimes one company showed a pattern of improvement, while the other company showed a pattern of decline.

Verizon's measures in total outperformed Pacific. When statistical significance is assessed, Verizon outperformed Pacific in 13 of 25 ARMIS measures, while Pacific outperformed Verizon in 3. Verizon performed better on ORA's customer service survey than Pacific. Similarly, regarding complaint data filed with the Commission, Verizon's numbers are proportionately lower than Pacific's.

Moreover, we find that under NRF, financial incentives concerning service quality are a little different than those in place under cost-of-service regulation. In either case, the regulated utility is encouraged to reduce costs to become more efficient, albeit under rate case regulation, cost savings are realized only between rate case periods. In addition, NRF regulation, in combination with advances in the availability of data and statistical software, has led to more systematic investigations of service quality by this Commission and the FCC.

These outcomes - overall high service quality, more improvements than declines in service quality, greater improvement in business service quality than residential for Pacific, and disparate patterns of performance across companies - are not possible to reconcile with the proposition that NRF caused a systematic decline in service. Indeed, they demonstrate the opposite: under NRF, service quality was good and improving. We expect the parties to present recommendations in Phase 3B of this proceeding concerning how to build on the record of good service quality produced under NRF and to improve on those areas of weakness in service quality identified.

E. Other Information Consistent with Quantifiable Data

As part of our investigation, we also reviewed survey data, informal complaint data, and formal Commission investigations of Pacific and Verizon. This information, which is more difficult to interpret quantitatively, presents a qualitative picture that supplements our statistical assessment. Customers are generally pleased with service quality, and the Commission has aggressively pursued lapses in service quality or marketing standards. Though such formal enforcement proceedings have been necessary to correct problems, such
proceedings have not been resolved in a timely manner, usually several years after the time of the offense. We will pursue in Phase 3B whether specific changes to NRF's incentive mechanism and monitoring program are necessary to promote service quality.

F. Areas for Improvement

As with any investigation, we find areas for improvement. In particular, we have identified areas of service where utilities can and should improve both their performance and their measurements of performance. In addition, we have identified several areas where regulation requires clarification and better measures of service quality. We note that Rulemaking (R.) 02-12-004 was opened to adopt revisions in GO 133-B and that is the appropriate forum for modifying these standards. Nevertheless, we are confident that the findings of our current investigation show where variables need clarification, where measurement is lacking, where standards may be necessary, and where no change is warranted. These findings should prove helpful to R.02-12-004.

¹ We examine the years 1993 through 2001 for all GO 133-B measures. Where data exists, we examine 1990-2001 ² We note, however, that for Verizon's performance on "business initial all other trouble reports" measure, Verizon's raw numbers exceed those of the reference group, although they are statistically indistinguishable, as discussed below. ³ We examine the years 1993 through 2001 for all GO 133-B measures. Where data exists, we examine 1990-2001. ⁴ Data worsened by a factor of nearly 2, followed by a nearly equivalent improvement.