XVIII. Comments on Draft Decision
The draft decision of the Administrative Law Judge (ALJ) in this matter was mailed to the parties in accordance with Pub. Util. Code § 311(g)(1) and Rule 77.7 of the Commission's Rules of Practice and Procedure. Comments were filed on ________________ and reply comments were filed on _______________.
1. The New Regulatory Framework, "NRF," is eighteen years old and now outdated given market advances and statutory changes.
2. NRF predates the Telecommunications Act of 1996, which opened local telecommunications markets throughout the country to competition.
3. NRF predates the dramatic growth in the Internet, in wireless technology, cable modems, DSL, and the development of VoIP communications.
4. NRF has its roots in monopoly cost-of-service regulation, including price controls, earnings regulation, controls on the introduction of new services, price floors and extensive audit requirements.
5. This proceeding has included an En Banc hearing with presentations by expert analysts and academics of telecommunications markets and regulation.
6. This proceeding has included two workshops. One workshop addressed issues concerning the schedule and scope of the investigation. The second workshop explored the policy proposals of active parties for three days.
7. This proceeding has included four days of evidentiary hearings, including oral arguments to the Assigned Commission.
8. California statutes concerning telecommunications regulation express a clear desire to support open and competitive markets.
9. In the same Public Utilities Code section that states goals for telecommunications, the California Legislature also provides direct guidance on the means regulators should employ to achieve these goals.
10. California statutes also call for regulators to adopt technologically and competitively neutral policies that encourage increased access to and usage of advanced telecommunication services.
11. Current telecommunications regulations also support major social policies including the provision of telecommunications services to low-income Californians and the provision of affordable telecommunications services in high cost areas of the state.
12. It would not be possible at this time for the Commission to adopt a completely uniform regulatory framework that applied to all communications carriers because the Commission does not have jurisdiction over all communications service providers, such as rate setting authority over wireless carriers or Voice over Internet Protocol providers.
13. Parties developed a record that fleshed out two general policy alternatives: one that would afford greater pricing flexibility to the ILECs, and another that would maintain the status quo.
14. Economic theory indicates that a reasonably competitive market will, over the long term, yield a system of rates that approximate the costs of providing those goods or services.
15. Economic theory shows that the rates and range of services that result from a competitive market will likely be better than those that would arrive from a regulated market.
16. The survey data provided by Verizon, of customers who have "cut the cord," indicate that many customers do see mobile and landline telephony as close substitutes in the market.
17. VoIP services provide another close substitute to circuit switched communications services. VoIP frequently offers a better service with more features and functionalities at any given price point - for traditional circuit switched voice communications services.
18. VoIP provided by cable telephone companies is a direct substitute for circuit-switched wireline service.
19. The historic practice of defining each telecommunications service as constituting a separate "market" is no longer relevant in today's technologically diverse telecommunications environment.
20. The market analysis presented by at&t witnesses Harris and Taylor indicating the obsolescence of historic market distinctions was compelling. The market analysis presents a better explanation of the rise of competing technological platforms for providing telecommunications services.
21. A service need not be identical to provide a competitive substitute.
22. Telecommunications technology and products are constantly changing.
23. As competition expands consumer choice, all consumers, including the disabled benefit as long as the needs of this community are examined directly and protected from withdrawal of services.
24. A substitute provides competitive discipline in a market segment when it is available.
25. Market power is the ability of a company to sustain prices at levels above those a market would produce by restraining the supply of telecommunications services to the market.
26. Review of the extensive record in this proceeding shows that Verizon, at&t, SureWest and Frontier lack the ability to limit the supply of telecommunications services in telecommunications markets, and therefore lack the market power needed to sustain prices above the levels that a competitive market would produce.
27. This result holds throughout the service territories of Verizon, at&t, SureWest and Frontier, and holds for both business and residential services.
28. The FCC has found that competition in local communications markets is not impaired when UNE-L is available, even if UNE-P is not available.
29. Verizon, at&t, SureWest and Frontier are subject to the unbundling requirements of the Telecommunications Act of 1996.
30. Verizon demonstrated the federal program to open local markets to competition has resulted in the presence of competing carriers throughout its service territory.
31. Verizon and at&t documented that alternative technologies have provided realistic alternatives to wireline telecommunications service.
32. Verizon demonstrated that wireless technology is the "key killer" of primary consumer lines.
33. Verizon demonstrated that wireless substitution accounts for approximately half of ILEC primary residential wireline losses.
34. at&t has demonstrated that wireless, even when purchased in addition to a wireline connection, provides competitive pressure on landline services.
35. at&t demonstrated that wireless technology already exercises a competitive check on its provision of telecommunications services.
36. SureWest's market power is limited by the presence of six wireless carriers in its service territory, as well as by the unbundling scheme adopted by the FCC and by developments in VoIP technology.
37. Frontier shows that it faces competition from wireless and VoIP technologies and that it is also subject to unbundling requirements.
38. Wireless service is a substitute for wireline service.
39. The evidence available does not support the conclusion that wireless service is a complement to wireline service.
40. Wireless services are increasing their portion of total communications minutes and accounted for 23% of all minutes in 2003.
41. The growth in wireless minutes and its increasing share of total communications minutes indicates that the relevant market is voice communications services, not wireline communications services.
42. In California, broadband is ubiquitously available.
43. VoIP provides a competitive alternative to circuit switched telecommunications services wherever a broadband connection is available.
44. Verizon has shown that providers of VoIP communications services have used numbers associated with every Verizon wire center except one.
45. Experts forecast that by the end of 2006, 64% of U.S. household will have the option of purchasing VoIP telephony service from their cable companies.
46. Cox has achieved a 40% penetration of the telecommunications market in Orange County, California.
47. The provision of VoIP telephony service by a cable company requires minimal incremental investment with expert estimates in the $300 dollar range. Thus, entry into telecommunications markets by cable providers requires minimal capital investments.
48. Verizon has demonstrated the presence of CLECs, wireless carriers and cable providers of telephony service throughout its entire California service territory.
49. The calculation of HHI values provides no information relevant to our assessment of ILEC market power because rapidly changing technological and market conditions undercut the HHI as a measure of market power.
50. Recent investigations of California telecommunications markets by the U.S. Department of Justice, the California Attorney General, the FCC and this Commission found the use of HHI to be of little value in assessing the market power arising from the mergers of AT&T with SBC and MCI with Verizon.
51. Market share tests are inherently backward looking and not a good predictor of future developments, particularly in a rapidly changing industry like telecommunications.
52. No market is perfectly competitive, but many markets are disciplined by threats of entry and the availability of close substitutes which check the pricing power of market participants.
53. In all markets, competition takes place "at the margins" and competition results from the ability of firms at the margins to increase their production to take advantage of market opportunities.
54. Although a loss of market share demonstrates low market power, market share loss is not necessary to demonstrate a loss of market power.
55. The unbundling requirements developed by the FCC and this Commission check the market power of incumbent carriers in local markets. Verizon has providing data that support this conclusion.
56. Wireless services are a competitive threat to wireline services
57. VoIP technologies compete with historic wireline telecommunications services.
58. Major competitors to ILECs now provide telecommunications services using VoIP technology in California.
59. The abandonment of the UNE-P regulatory strategy does not indicate the failure of the FCC program to open local telecommunications markets.
60. A set residential basic rate is needed to ensure that CHCF-B subsidies enable that social program to meet its policy goals .
61. Neither CHCF-B nor any other social policy program is directly affected by unsubsidized services.
62. Allowing geographically unfettered pricing for telecommunications services not supported by CHCF-B may improve market conditions.
63. Price controls are incompatible with the emergence of competition in the voice telecommunications market.
64. Market conditions support pricing freedoms for basic residential rates that are not subsidized by CHCF-B.
65. The removal of price caps on basic telecommunications services is a policy that many forward-looking states are adopting either immediately or with dates certain as they seek to revise telecommunications policies.
66. Continued pricing regulation of LifeLine residential rates will ensure that the Commission is able to adequately support ULTS in accordance with statutory objectives.
67. The Commission shall remain vigilant in monitoring the telecommunications marketplace.
68. There is ample evidence that for the small business segment of the telecommunications market, cross platform-competition is already here.
69. Neither policy nor market conditions support regulations to set the price of new telecommunications services.
70. The realistic threat of entry carriers in any market using UNE-L and the widespread competition offered by wireless, cable and VoIP providers permits prudent policy to rely on market forces rather than regulatory proceedings concerning tariffing and contracting.
71. Establishing a price floor supported by cost data for new telecommunications offerings is a procedure that is no longer needed.
72. The existence of UNE-L prices should, for any ILEC service using a loop, simplify the identification and determination of a "price squeeze."
73. In particular, those services provided on one loop should have a price above UNE-L for that loop.
74. Tariffing and pricing reforms adopted in this decision provide substantial pricing freedoms applicable to all services except those services receiving subsidies.
75. The competitiveness of the telecommunications markets enables us to rely on the market to assure the reasonable pricing of any bundle of services that does not include a service receiving a subsidy.
76. The considerations that led to our restrictions on the general pricing of LifeLine residential service and basic residential services in areas receiving CHCF-B subsidies also require us to limit the inclusion of these services in bundles.
77. Bundles may include any telecommunications service not receiving a subsidy.
78. Since we can rely on the market to assure the reasonable pricing of individual telecommunications services, we can also rely on the market to assure the reasonable pricing of promotions.
79. The federal regulatory policy of requiring that carriers' promotions lasting longer than 90 days be subject to resale requirements provide an appropriate limit on the market use of promotions.
80. Consistent with the Commission's policy that permits different prices for non-subsidized services in different areas of a carrier's service territory, carriers may limit the offering of bundles to particular geographic areas.
81. The inclusion of LifeLine services in promotions makes little market sense.
82. The inclusion of basic residential services in promotions offered in areas receiving a CHCF-B subsidy makes little market sense.
83. Telecommunications markets are ready to adopt the practices commonly used in competitive markets concerning contracting.
84. Current regulatory reviews of contracts no longer serve the public interest.
85. Competitive contracting practices will better serve customer needs that regulated contracting practices that impose reviews that delay the effectiveness of executed contracts..
86. Public policy and the level of market competition advise against the continuation of monopoly era regulations that limit the ability of carriers to withdraw or to grandfather services that are no longer attractive to customers.
87. Regulatory policies continuing such requirements on NRF carriers are incompatible with the statutory goals of technological and competitive neutrality.
88. The parties in this proceeding did not present anything in detail regarding service quality issues, but service quality reports are a large set of the overall monitoring reports.
89. Overall, the parties are in general agreement that California should streamline its monitoring and auditing requirements.
90. Concerning the issue of accounting standards, there is no reason to continue to require a set of regulatory accounts with California jurisdictional adjustments.
91. Experience over the last several years indicates that the NRF-specific monitoring reports were little used.
92. The link between costs and rates was broken nearly twenty years ago with the adoption of NRF.
93. Adopting a policy that allocates all gains or losses to shareholders will simplify the regulatory program and have minimal impacts on ratepayers and is consistent with the economic principle that those who bear the risk should reap the rewards.
94. The companies with which the ILECs compete retain all gains or losses from the sale of their utility property.
95. All parties agree to the elimination of most PUC earnings regulation.
96. There is no longer a need for the NRF regulatory apparatus of price caps, annual price cap filings, "productivity factors," and "sharing of revenues" that are included in the price cap calculations.
97. Firms factor in the risk of future regulation and its potential appropriation of gains in their investment decisions.
98. When there is no justifiable need for monitoring, such as in the competitive environment that exists today in telecommunications, regulatory reports of "regulated" earnings can only distort firms' decisions and conflict with the reports required by financial markets.
1. In addition to striving to meet the goals adopted in the OIR, a new regulatory framework must comply with state and federal statutes and should endeavor to meet the policy goals and conform to the policy preferences incorporated into statutes.
2. State policies for telecommunications, in particular, are set forth in Public Utilities Code § 709.
3. Specifically, Public Utilities Code § 709.5 endorses a reliance on competitive markets to achieve California's goals for telecommunications policy..
4. Public Utilities Code § 882 establishes that regulatory policies should encourage access to a wide choice of advanced telecommunication services.
5. In Public Utilities Code § 871, the Legislature reiterates its intent that our policies encourage development of a wide variety of advanced telecommunication facilities and services.
6. As to universal service programs which promote connectivity of all Californians to the landline telephone system, Section 709 of the PU Code requires affordable and widespread availability of high quality telecommunications services to all Californians.
7. In Public Utilities Code Section 739.3 to ensure the affordability of telecommunications services in high cost areas of California.
8. It is reasonable to consider the impact of any regulatory reform on our state's ability to (i) rely upon competition in the telecommunications marketplace; (ii) encourage development of a wide variety of new technologies and services; and (iii) support our state's public policy programs.
9. The Commission does not have equal authority over all communication service providers.
10. The Commission has different levels of jurisdiction over different providers.
11. Often the Commission's jurisdiction overlaps with that of other regulatory authorities, such as the Federal Communications Commission.
12. The evidence provided by Verizon on the changing pattern of telecommunications use - such as the decrease in access lines coupled with the increase in mobile lines - makes it unreasonable to accept the position of TURN and others that hold that landline and mobile services are complements, not substitutes.
13. There is no compelling reason to segment the market by user characteristics, such as income or use characteristics (such as business or residential use, level of use, or use by disabled customers) or to include that these groups of customers create a separate market.
14. There is no evidence that the patterns of use by poor customers differ from other customers, or that competition in telecommunications markets will not benefit these customers.
15. Verizon has developed a record in this proceeding that demonstrates that policy, technology, and market developments prevent it from exercising market power in its California service territories.
16. SBC's showing demonstrates that policy and technology also limit its market power.
17. Verizon and SBC have convincingly demonstrated that competitive forces limit market power by maintaining that the unbundling scheme implemented pursuant to the Telecommunications Act of 1996 by the FCC and this Commission makes the provision of telecommunications services by competitors possible in every wire center throughout its service territory.
18. Verizon's demonstration of the presence of competitors throughout its entire service territory makes it reasonable to conclude that Verizon lacks market power.
19. The testimony showing the limited market power of SureWest and Frontier was persuasive.
20. The reliance on HHI calculations is neither legally nor economically justified.
21. Substantial legal precedent addresses the dangers of relying on market share as a measure of competition in regulated markets.
22. Since Verizon, at&t, SureWest and Frontier lack market power in their service territories, price regulation is no longer needed to ensure that prices are just and reasonable.
23. There is no need to find that a telecommunications market is "perfectly competitive" to permit an increase in pricing flexibility and to modify monitoring and report regulations as we have done here.
24. There is no need to demonstrate the loss of significant market share to competitors by the incumbent carriers to justify the modifications to the regulatory program adopted herein.
25. The policy of geographically averaged rates, in conjunction with the CHCF-B program, supports the continued affordability of telecommunications services in areas where the costs of providing services exceed the prices charged.
26. It would be contrary to the Legislature's intent if the Commission no longer required CHCF-B subsidized services to be offered at geographically averaged prices.
27. Neither statutory directives nor market conditions warrant continuation of our geographically averaged pricing policy for services that are not subsidized by CHCF-B.
28. The combination of FCC-mandated unbundling policies, the required provision of stand-alone DSL service by Verizon and AT&T, and substantial cross-platform competition obviate the need for continuing price controls on services not subsidized by CHCF-B.
29. It is reasonable that the Commission eliminate price caps for unsubsidized basic residential rates on a date certain.
30. The Commission shall ensure that basic residential service remains affordable and does not trend above the current highest basic residential rate in the state, no matter the technology employed to offer such service.
31. The Commission retains the authority and firm resolve, should it see evidence of market power abuses, to reopen this proceeding to investigate such developments promptly.
32. It is reasonable to eliminate all price regulations of basic business service.
33. The proposal to permit the provision of new services with full pricing flexibility on a 1-day advice letter filing is most consistent with the statutory framework and current market conditions, because it creates no regulatory obstacles or regulatory uncertainties that would delay the introduction of new services.
34. There is no public interest in maintaining an outmoded tariffing procedure that requires the review of cost data and delays the provision of services to customers.
35. It is reasonable that all tariffs should go into effect on a one-day filing, but any tariffs that impose price increases or service changes require a 25-day advance notice to all affected customers.
36. Contracts should be effective upon execution.
37. Contracts should be filed with the Commission within 15 days after execution in order to enable it and interested parties to ensure that telecommunications carriers do not violate the anti-discrimination requirements embedded in state statute.
38. With the exception of basic residential (1MR and 1FR) and basic business (1MB) services, where the withdrawal of service would raise public safety issues, it is reasonable to require a 1-day filing period before the advice letter becomes effective and 25-day advance notice in advance of the withdrawal or grandfathering of any service.
39. Bundles can be tariffed under the same rules that apply to the tariffing of any telecommunications services and may be geographically targeted.
40. It is reasonable for California to rely on the federal regulatory policy on promotions, and not otherwise impose restrictions on the duration of promotions.
41. Consistent with the Commission's flexible tariffing of all non-subsidized services, permitting the flexible pricing of all bundles that exclude basic service is reasonable on a one-day tariff filing.
42. Since there is no longer a need to rely on the imputation of costs to ensure that the prices of any tariffed service are reasonable, there is no reason to retain such a requirement for bundled services.
43. It is unnecessary to adopt regulations requiring special disclosures associated with a bundle of services.
44. Because rates are subsidized in both LifeLine service and in certain high-cost wire centers, it is reasonable to prohibit the offering of bundles that include LifeLine services in any area of California, and it is also reasonable to prohibit the offering of bundles that include basic residential service in those wire centers where services receive a CHCF-B subsidy.
45. It is reasonable to permit a promotion to include any service not receiving a subsidy.
46. A promotion should be tariffed under the same one-day rules that apply to the tariffing of any telecommunications service and may be geographically targeted.
47. All carriers should face similar rules concerning the initiation and withdrawal of promotions.
48. Service quality issues should be reviewed.
49. The Service Quality OIR offers the appropriate venue for determining how the Commission should act to promote service quality in this new competitive telecommunications setting.
50. The Commission should defer all service quality issues to the Service Quality OIR.
51. To comply with the statutes encouraging uniform treatment of carriers and efficient regulation, it is reasonable that we adopt the policy that we instituted for AT&T in D.93-02-010, where periodic staff review of the accuracy of monitoring reports was found to satisfy any auditing requirements under the Public Utilities Code.
52. The Commission should adopt the FCC standard accounting practices for California carriers because the current requirement creates a confusing proliferation of regulatory accounts that make utility operations less transparent and accountable, and the regulatory adjustments no longer serve a ratemaking purpose.
53. The Commission should eliminate all NRF-specific monitoring reports rely on the FCC ARMIS data because our experience over the last several years indicates that these detailed reports were little used.
54. The Commission should determine in Phase 2 of this proceeding what information and what reports can best meet the needs in this new environment.
55. Allocating 100% of all gains and losses from the sale of land by ILECs is a modest revision of current rules, which already adopt this policy for property acquired in the last twenty years.
56. Allocating 100% of all gains and losses from the sale of land by ILECs will have minimal impact on rates and is consistent with the principle that those who bear the risk should reap the reward.
57. Allocating 100% of all gains and losses from the sale of land by ILECs is consistent with the rules under which carriers competing with ILECs now operate, and each of these reasons provides a rational basis for the Commission to revise its rules.
58. The Commission should end all the vestiges of the outdated NRF framework and rate of return regulation.
59. The Commission should end price caps, the annual price cap filing, the productivity factor and all residual elements of rate of return regulation, including the calculation of "shareable" earnings.
60. The Commission should also end the reporting of Yellow Page revenues, because the reporting is not required by statute, would cause California accounts to depart from standard accounting practices and thereby make the accounts of ILECs opaque and less subject to oversight.
61. In order to remove the vestiges of NRF and rate of return regulation as set forth in this decision, this order should be effective today.
IT IS ORDERED that:
1. For Pacific Bell Telephone Company, doing business as AT&T California, Verizon California, Inc. (Verizon), SureWest, and Frontier, the four largest incumbent local exchange carriers (ILECs) regulated under the new regulatory framework (NRF), the geographic averaging requirement shall be lifted for all services other than the California High Cost Fund B (CHCF-B) subsidized basic residential services.
2. Basic residential services receiving a CHCF-B subsidy shall be frozen at a level equal to the current rate, which shall be reevaluated in the upcoming CHCF-B review in Rulemaking (R.) 06-05-028.
3. Price caps on basic residential services that are not subsidized by CHCF-B shall be automatically lifted two years from the effective date of this decision.
4. Basic residential rates shall not fall below at&t's current 1 Measured Rate (1MR) and 1 Flat Rate (1FR) rates, unless R.06-05-028 adopts some other policy consistent with the statutory scheme.
5. All price regulations of basic business service shall be eliminated for at&t, Verizon, SureWest, and Frontier.
6. at&t, Verizon, SureWest, and Frontier shall be authorized to provide new services with full pricing flexibility on a 1-day advice letter filing.
7. at&t , Verizon, SureWest, and Frontier shall be authorized to allow all tariffs to go into effect on a one-day filing, but any tariffs that impose price increases or service restrictions shall require a 25-day advance notice to all affected customers.
8. For AT&T, Verizon, SureWest, and Frontier, contracts shall be effective upon execution; however, they must be filed with the Commission within 15 days after execution.
9. With the exception of basic residential (1MR and 1FR) and basic business (1MB) services, at&t, Verizon, SureWest, and Frontier shall be authorized to withdraw and/or grandfather services effective on a 1-day filing, but the carrier must provide a 25-day or more advance notice to the customer before withdrawing or grandfathering the service.
10. at&t, Verizon, SureWest, and Frontier may freely offer bundles of telecommunications services, but they shall not offer bundles or promotions that include LifeLine services, nor shall they offer bundles that include basic residential service in those wire centers where services receive a CHCF-B subsidy.
11. Pursuant to FCC regulations, at&t, Verizon, SureWest, and Frontier shall offer for resale the services in all promotions that last over 90 days.
12. All service quality issues shall be deferred to Service Quality Order Instituting Rulemaking 02-12-004.
13. We shall adopt the Federal Communications Commission's standard accounting practices for California carriers, and no longer require a set of regulatory accounts with California jurisdictional adjustments. at&t, Verizon, SureWest and Frontier should follow the FCC's standard accounting practices in all filings and reports made to this Commission unless subsequently ordered otherwise.
14. 100% of all gains and losses from the sale of land by at&t, Verizon, SureWest, and Frontier shall be allocated to their shareholders.
15. Price caps, the annual price cap filing, the productivity factor and all residual elements of rate of return regulation, including the calculation of "shareable" earnings are eliminated.
16. The reporting of Yellow Page revenues is eliminated.
This order is effective today.
Dated , at San Francisco, California.
INFORMATION REGARDING SERVICE
I have provided notification of filing to the electronic mail addresses on the attached service list.
Upon confirmation of this document's acceptance for filing, I will cause a copy of the Notice of Availability to be served upon the service list to this proceeding by U.S. mail. The service list I will use to serve the copy of the Notice of Availability is current as of today's date.
Dated July 25, 2006, at San Francisco, California.
/s/ VANA WHITE |
Vana White |
************ APPEARANCES ************ |
Glenn Semow |
Gregory J. Kopta |
Michael B. Day |
Thomas J. Long |
Greg R. Gierczak |
William Nusbaum |
Gina Gomez |
Helen M. Mickiewicz |
Lee-Whei Tan |
Judy Pau |
Mary E. Wand |
Leon M. Bloomfield |
Chong Comment Decision Attachments Comparison of URF Proposals
