C. Economic Considerations in the Proceeding
The deficiencies in the economic analysis in this record are plain to see. The limited rules adopted in this decision result from a balancing of the need to empower consumers in telecommunications markets and to prevent fraud, on the one hand, with the costs and economic effects that these rules would impose on consumers, telecommunications utilities, and the California economy. The rules adopted herein are necessarily limited because there has been no systematic effort to develop a record that shows that any other rule would produce benefits that exceed its costs.
As a consequence of this deficient record, the rules adopted here rely heavily on a bringing together in one place rules mandated by law or by prior Commission action, the adoption of industry "good practices," and a conscious effort to prevent fraudulent actions that both harm consumers and undermine competitive markets. In particular, consolidation into a single new general order existing rules and common industry practices will generate economic benefits through reduced complexity and regulatory uncertainty while imposing no new costs. Second, by relying on good practices to support new standards, we are confident that the costs imposed by new standards would pass a market test (because the industry would not move to such a standard unless it provided consumer value that exceeded costs). Third, since markets cannot function well in the face of fraud, we adopt rules that deter fraudulent practices, such as slamming. Thus, we believe our effort to bring together existing rules, to adopt industry "good practices" and to deter fraud in this General Order would meet a cost-benefit test had the record in this proceeding developed information that would make such an analysis possible.
As discussed below, the wireless representatives' main claim in their September 2003 motion-that the Commission ignored economic issues and ignored relevant law-is lamentably true, and we find it necessary to strictly control the scope and sweep of the rules embodied in our General Order. This decision now contains a discussion of economic issues to the best of our ability given the failure to develop an adequate record on this issue in this proceeding.
The Wireless Studies
Several flaws in the record of this proceeding significantly reduce our ability to use the LECG studies to refine or adopt new rules. First, despite the request of LECG and the wireless industry, the Commission failed to hold evidentiary hearings exploring the implementation cost estimates developed by Palmer. This is lamentable, because Palmer engaged in calculations that produce a plausible estimate that the implementation costs of the proposed rules is approximately $5.74-5.76 per subscriber line per month. This estimate is in fact produced by aggregating cost estimates provided by the five largest wireless representatives in California. The carriers' estimates were in no way analyzed or cross-examined in this record. Moreover, their very plausible estimate of costs adds up to a colossal impact on the California economy. The added costs would drive out investment in the cellular infrastructure in California. In addition, spill-over effects on those who use or supply the wireless industry would lead to total economic costs of $2.3 billion and 12,300 jobs. These costs would ripple throughout the entire California economy, not just in the wireless industry
Second, in Exhibit C to the Wireless Economic Comments, Palmer notes that updating the costs to reflect revised rules "is not a simple matter." (p. 9) He notes that the length of time to prepare the report was inadequate to create a detailed estimate. He concludes, however "if the 120-day implementation period is considered in conjunction with the new requirements of the revised draft rules, it would not be surprising to find . . . that the financial impact of the entirety of the rules [included in the draft decision of Commissioner Wood] would still be very substantial and possibly well within the range of the order of magnitude estimated in the September 2003 report." (p.12) Clearly, this makes it difficult to use these costs to adopt a particular new rule. On the other hand, it is clear that this study justifies great caution in adopting new rules. Moreover, since the Palmer study stands unrebutted and develops the most serious economic estimates of the costs of the March 3, 2004 rules, its makes wholesale adoption of that set of rules unreasonable.
Third, as economic studies frequently do, the LECG studies rely on a large number of assumptions. The record in this proceeding, however, failed to test the plausibility of these assumptions or subject them to cross-examination. For example, Aron estimates that an average customer's bill will increase by a specific percentage assumes that the wireless market is sufficiently competitive with a flat supply curve so that 100% of those cost increases will be passed on to the consumer.37 Aron also argues that the rules may not be necessary because carriers have a profit motive to initiate consumer protections on their own. Although these assumptions are common in economic analysis, the record of this proceeding fails to test whether these assumptions reasonable apply to the situation at hand.
Aron also opines that the proposed rules "may induce significant nuisance litigation costs."38 Although the AG and ORA argue that there is no reason to believe that Aron is qualified to offer a legal opinion, they fail to recognize that this is an economic opinion, and the high costs of litigation and regulatory uncertainty are well known and documented throughout the economic profession. Moreover, they fail to counter this opinion with any qualified information indicating that these costs would be low.
In summary, the professional nature of the LECG studies and the fact that they stand unrebutted in the record makes it unreasonable to adopt the aggressive regulatory changes proposed by many in this proceeding. Particularly deficient is the failure of rule proponents to offer any quantifiable justification for the rules that they propose other than vague assertions that the rules will be good for consumers. As a result, the conclusion that the aggressive consumer protection rules proposed by many will be harmful, particularly given the absence of documentation of genuine potential benefits, stands unrebutted. As mentioned previously, we have instead brought existing rules together and have adopted rules that serve to empower consumers in telecommunications markets and protect against fraud.
The Need to Analyze the Economic Effects of Proposed Rules
The wireless representatives further argue that the Commission has not met legal requirements to "assess the potential adverse economic impact on California business enterprises of proposed rules and regulations." This argument is unfortunately true.
Although the Wireless Industry relies upon Government Code § 11346.3 to support its claims, we find that it is Public Utilities Code
§ 321.1 that is most relevant to our analysis. Section 321.1, as mentioned above, signals that it is the "intent of the Legislature that the commission assess the economic effects or consequences of its decisions." The failure of the participants in this proceeding to analyze the economic consequences of their proposed rules produces a record that fails to justify sweeping changes in rules. However, we believe that the approach taken herein - grouping existing rules, sharply limiting new rules, and adopting only those rules where the market has itself attested to their value or where the rules prevent fraud that undermines the market - ensures that the benefits of the rules we adopt outweigh the costs.
The Record's Inadequacy for Adopting Major New Rules
The National Consumer Law Center, UCAN, The Utility Reform Network, and Consumers Union state in their reply to the wireless representatives' September 2003 motion:
It is often the case that regulations that protect the public health, safety and welfare impose significant costs on the regulated industry that can be estimated, even if imprecisely, while providing benefits that cannot easily be reduced to dollar terms. Examples include . . . and the Federal Communications Commission's ("FCC") number portability rules, where the industry must invest millions of dollars in the technology that allows for number portability while consumers gain the hard-to-quantify benefit of being able to switch carriers more easily.39
Although these comments are true, the example used to oppose conducting a cost-benefit analysis demonstrates exactly the opposite. Empowering customers to exercise choice is identified in virtually every aspect of federal law and FCC regulations as one of the highest priorities in telecommunications regulations and a most cost-effective means of consumer protection. There is arguably no more important tool to facilitate consumer choice in telecommunication today than Local Number Portability (LNP). While it may be difficult to put a financial estimate on the value of LNP to customers, a reasonable regulator could be assured that a weighing of the cost and benefits of this important provision would have justified the net benefits of increasing consumer choice.
In conclusion, most of the rules that we have included in the General Order are not new policy decisions, but instead were previously adopted to fulfill statutory requirements binding on both the carriers and the Commission. We have taken care to cite those statutes in the sections on rules above. Those few new rules that we adopt - such as the grace period for returning mobile phones or the anti-slamming provisions - reflect situations where the market indicates that benefits to consumers exceed the costs that they would pay or the preservation of consumer power requires the policing of fraud. We therefore believe that the rules we adopt today are either required by statute or would pass a systematic cost benefit test.
