Galvin Agenda Dec recategorize insider wire repairs and billable repairs in Category III

X. Ceiling Rates

Verizon's tariff rates for its IWMPs have not been changed since 1989, twelve years ago. Its currently effective tariff rates for its BRS and IWMPs were first capped as price ceilings in 1998.

A. BRS

Verizon's current and proposed ceiling rates for the individual rate elements of its business and residential customer BRS are set forth in Appendix-A. Of these rate elements, Verizon seeks to increase the first billable Weekday hour ceiling rate applicable to its business customers from $85 to $100. No other BRS ceiling rate changes are being proposed.

Verizon's business survey demonstrates that approximately 75% of the alternative business suppliers responding to the survey charge their BRS customers by either an hourly labor rate or by time and materials. While these hourly rates range from $18 to over $100, Pacific has been charging a $103 hourly rate since 1993.

We find Verizon's requested ceiling rates in the upper range of competitors. However, in our experience, self-reports of charges by competitive business suppliers deserve a measure of skepticism. This is partially because competitors tend to underreport. Verizon's requested $100 ceiling rate for the first billable Weekday hour of its Business BRS is within the range of rates being charged by alternative business suppliers within California and should therefore be approved.

B. IWMPs

Verizon seeks authority to increase the monthly ceiling rates for its IWMPs as shown in the following tabulation:

_____Ceiling Rates____

Service Current Proposed

Residence Service (Each Line) $ .95 $ 1.75 Business Service (Each Line) 1.95 2.50

CentraNet Service (Each Line) 1.95 2.50

Landlord (Each Residential Rental Unit) .95 1.75

Verizon supports its request to increase these ceiling rates, in effect since 1989, with a detailed cost study submitted under seal. The cost study utilizes the Total Service Long Run Incremental Cost (TSLRIC) principle to demonstrate that its floor rates cover directly attributable costs and provide some contribution toward covering shared and common costs.²⁶

Verizon seeks increases in these ceiling rates to bring them up to national competitive averages. Verizon explains that its requested ceiling rates are still below those currently accorded to Pacific in its adjacent territory and are also below the prices charged by other LECs offering the same services in 47 other states, states that have detariffed or deregulated inside wire maintenance and repair services.

TURN opposes any ceiling rate increases to the IWMPs on the basis that they already serve to fully recover costs and contribute to common costs. TURN concludes that any increase in these ceiling rates would amount to price gouging because Verizon's business and residential customers cannot obtain inside wire maintenance from any source other than Verizon.

ORA also opposes any ceiling rate increases to the IWMPs on the basis that Verizon's cost study demonstrates that its current ceiling rates significantly exceed the costs to provide the services and provide contribution margins in excess of 22% above the services' TSLRIC for a tariff pricing level.²⁷

TSLIRC studies are not used to establish ceiling rates. They are, however, used to establish price floor rates to ensure that a service is not priced below cost. Our analysis of Verizon's current IWMPs' rates (which are also its ceiling rates) confirm that, although Verizon's prices have remained constant for the past 12 years, current prices enable it to recover cost plus a reasonable markup for profit. We are cognizant that other LECs may be offering the same service at substantially higher rates in 47 other states, which have detariffed or deregulated IWMP services. However, there is no evidence to demonstrate that these LECs compete in the California market or that their markets are comparable to the California market. We also find Verizon's proposal for establishing the ceiling rates of its IWMPs on national averages to be inconsistent with not seeking a similar ceiling rate structure for its alternative BRS payment option. Ceiling rates should not be raised merely to approach or equal a national average.

Verizon does compare its requested ceiling rates to Pacific's ceiling rates for comparable service. However, it neither compares nor knows the rates of other California LECs or other businesses offering a similar service in California.

Verizon has not established that its California ceiling rates should be based on a "National Average." We deny Verizon's request to increase the ceiling rates of its IWMPs. However, this denial does not preclude Verizon from seeking future IWMP ceiling rate changes by application for Category II services and as currently authorized through the advice letter procedure for Category III services or as may be modified by any subsequent Commission action or other procedures that the Commission may establish.

²⁶ A volume sensitive TSLRIC is used to set price floors at or above costs to prevent a utility from pricing below cost and engaging in price squeezes against their competitors.

²⁷ A markup for Pacific's Open Access and Network Architecture Development pricing conventions was established in D.96-08-068.