VIII. NRF Incentives, Service Quality, and Competition
A. NRF Incentives and Service Quality, Positions of Parties
The parties dispute the impact of NRF incentives on service quality. TURN claims that NRF creates incentives to save money at the expense of service quality. It contends that NRF's emphasis on cost cutting and revenue enhancement has led to deterioration of service quality. It also believes the introduction of new technology affects service quality and may result in discrimination among technology "haves" and "have nots." It alleges that NRF creates incentives for the regulated utility to move functions outside the utility to an unregulated environment, which can leave regulated customers without adequate service. It disputes Pacific's claim that its other rates subsidize basic service, which Pacific claims minimizes its ability to cut costs for - and therefore undermine the quality of - basic telephone service. It does not believe that competition provides an incentive for good service quality. Finally, it believes that positive change will only result from active regulation in connection with NRF.
TURN points to evidence demonstrating that NRF incentives to cut costs and increase revenues have lowered service quality. TURN bases its allegations about repairs, installation and answer times on the reporting we discuss elsewhere in this decision. Concerning Pacific, TURN claims that the data show adverse impacts causing slow repairs, slow installation, slow telephone answer times, erroneous late payment charges, errors resulting from outsourcing company functions, charging for services that were formally free, and marketing abuses.
TURN relies on other formal Commission proceedings for its claims about late payment charges, outsourcing, service-charges, marketing abuses, and deteriorating service quality.
Similarly, ORA alleges that under NRF Pacific has "reduced [its] quality of service, grossly inflated staffing claims, . . . moved portions of the labor force out of California . . . , and had sustained facilities shortages. . . ."277
Pacific responds that these claims indicate fundamental disagreement with incentive-based regulation and that the criticisms do not belong here. Pacific states that in fact NRF gives it "strong incentives to provide high-quality service, to retain as many customers as possible, and thereby reduce the opportunity for competitors to `cream-skim' the most profitable, lower cost, and high-usage customers."278 It claims that the Commission adequately regulates service quality under NRF through its GO 133-B requirements and other monitoring reports, and that "[t]he Commission has not taken any steps to rescind NRF because . . . Pacific has consistently met or exceeded the Commission's benchmarks under GO 133-B."279
As it does for Pacific, ORA alleges that under NRF Verizon - albeit to a lesser extent than Pacific - has "reduced [its] quality of service, grossly inflated staffing claims, . . . moved portions of the labor force out of California . . . , and had sustained facilities shortages. . . ."280
TURN cites several specific problems with Verizon that allegedly support its claims about NRF. It states that "like its TRSAT, Verizon's BOAT was often below the GO 133-B standard, until shortly after the SBC/Pacific Bell merger decision, wherein the Commission stated that it would enforce the standards."281
Verizon responds that "Verizon's service quality results are compelling evidence that NRF gives strong incentives to provide high quality service." Thus, it agrees that we must examine its specific service quality results in order to determine the veracity of TURN's claims. However, Verizon also claims that NRF "encourages carriers to focus on service quality," citing several measures that Verizon has employed that go beyond the bare bones reporting that this Commission and the FCC require.282
B. Discussion
One possible way to address the parties' contentions about the incentives or disincentives created by NRF regulation is to compare the NRF incentives to those that existed under rate of return regulation. However, we view such a comparison as largely an academic exercise that would not advance our central goal in this proceeding of determining whether we should make any changes to NRF regulation as currently constituted.
Whether or not such incentives existed under rate of return regulation, it is clear that the design of NRF was and is to offer incentives to control costs and operate as efficiently as possible. As in deregulated markets, NRF companies make investment and expenditure decisions that affect the quality of service they provide to their customers. The experience of Verizon for most of the NRF period shows that NRF regulation and good service quality are entirely compatible. However, as the experience of Pacific shows, NRF as currently constituted did not prevent some significant service quality problems in some key areas.
As previously noted, one of the legislative goals for telecommunications is the provision of high quality telecommunications service to all Californians.283 The Commission wishes to consider any reasonable proposal that will further this goal. Accordingly, in the next phase of this proceeding, we will invite parties to propose any changes to NRF that they believe are necessary to promote high quality telecommunications service and help to prevent service quality problems for customers of Pacific and Verizon. In addition, as previously noted, our rulemaking to modify GO 133-B is another appropriate forum for considering changes to our existing regulations that would promote high quality service for customers of Pacific and Verizon, as well as all other carriers.
C. Effect of Competition on Service Quality - Positions of Parties
The parties express only nuanced disagreement about the effects of competition on service quality.
TURN notes that even assuming, arguendo, that competition is present in some of Pacific's markets - for example, in the California DSL market - there is no guarantee that service quality will be good. "The extant competitive pressures were not sufficient to force Pacific and its affiliate Advanced Services, Inc. (`ASI') to provide high quality Digital Subscriber Line (`DSL') service to the thousands of Californians who experienced the billing problems that led to the settlement agreement in C.02-01-007."284
For Verizon, TURN disputes any notion that competition necessarily improves service quality: "Their [Pacific and Verizon's] theoretical argument, such as it is, rests on the thin air of hypothetical `competition.'"285
Pacific's witness Hauser notes that "customers care about both service and price."286 He then proceeds to point out that Southwest Airlines has successfully competed in the air transport market with a low-quality, low-frill, but low-priced marketing strategy. Pacific claims that, "as competition increases, this incentive [to maintain service quality which does not adversely affect the demand for Pacific's competitive products] becomes `even more important.'"287 Thus, we note that Pacific's position is not a blanket argument that competition supports service quality.
D. Competition and Service Quality - Discussion
The positions of TURN and Pacific are consistent with our own Commission decision. As we observed in our recent Service Quality OIR:
It has now been over four years since we issued R.98-06-029 and nearly seven years since local exchange competition was authorized. We have concerns that our policies in pursuit of increased competition are insufficient to ensure high quality telephone service for all telephone subscribers, and especially for residential and small business customers.288
Even if parties believed that competition requires high quality service (which they do not), there remains a factual question over whether there is adequate competition in the local service market to create incentives to improve service quality. In our recent decision allowing Pacific into the long distance market, we found that competition in this market is less than robust: "Local telephone competition in California exists in the technical and quantitative data; but it has yet to find its way into the residences of the majority of California's ratepayers."289
The NRF framework was specifically designed to address a growing, more dynamic telecommunications marketplace. Such dynamics are rooted in technological change that has expanded service availability, options and technical quality, from wireline, wireless and broadband providers. Generally, such market dynamics place increased pressures on companies to maximize revenues and minimize costs. While this is a positive attribute of the competitive marketplace, it can also have negative consequences. Our interest is not in eliminating the NRF framework in order to stave off market uncertainties. Rather, our motivation is to promote the beneficial aspects of the NRF framework while discouraging marketplace behaviors that could jeopardize service quality, or cause anti-competitive behaviors.
We note, that it is entirely consistent with NRF to measure and review periodically the quality of service provided by Pacific and Verizon. Thus, NRF does not rely on the false assumption that competitive markets always produce high service quality, or the equally false assumption that local telecommunications markets are fully competitive. Instead, we intend for NRF regulation to create a series of regulatory and organizational incentives by increasing the attention given to measuring and reviewing the service quality records produced by Pacific and Verizon. We expect the parties to present recommendations in Phase 3B of this proceeding concerning how to build on the record of generally stable or improving service quality produced under NRF and to improve on those identified areas of weakness in service quality.
