STATE OF CALIFORNIA GRAY DAVIS, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

November 7, 2003

TO: ALL PARTIES OF RECORD IN ORDER INSTITUTING RULEMAKING 01-09-001, AND INVESTIGATION 01-09-002

Decision 03-10-088 is being mailed without the written Concurrence of Commissioner Brown, and Commissioner Kennedy; written Dissent of Commissioner Lynch and Commissioner Wood. The Concurrence and Dissent letters will be mailed separately.

Very truly yours,

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief

Administrative Law Judge

ANG:bb1

Attachment

COM/SK1/MP1/bb1 MAILED 11/07/03

Decision 03-10-088 October 30, 2003

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 8 8

F. Areas for Improvement 8 8

II. Scope of This Phase and Methodology 9 9

III. California Measures of Service Quality and Standards 14 14

A. GO 133-B Measures, Standards, and Caveats 14 14

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 20 20

a) Position of the Parties 20 20

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

2. Installation-Line Energizing Commitments 26 26

a) Position of the Parties 26 26

Annual Data: Pacific and Verizon Met GO 133-B Standard for Honoring Installation Commitments 27 27

c) Monthly Data: Pacific and Verizon Met 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) Annual Data: 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) Annual Data: Pacific and Verizon Met GO 133-B Standard for Operator Assistance Answer Time 34 34

c) Monthly Data: Pacific Met Operator Assistance Answer Time Standard 107 of 108 Months; Verizon 140 of 144 Months 36 36

5. Directory Assistance Operator Answering Time 37 37

a) Position of the Parties 37 37

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

c) Monthly Data: Pacific Met GO 133-B Standards for Directory Assistance Answer Time Every Month; Verizon in 106 of 108 Months 39 39

6. Trouble Service Answering Time 41 41

a) Position of the Parties 41 41

b) Annual Data: 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 in 92 of 132 Months; Verizon in 104 of 132 Months 45 45

7. Business Office Answering Time (BOAT) 46 46

a) Position of the Parties 46 46

b) Annual Data: 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 Duplicate Records 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 62 62

1. The Number of Initial Trouble Reports per 100 Lines: Pacific - Residential and Business Significantly Better than Reference Group, Business Significantly Improving Trend but No Trend for Residential; Verizon - Business and Residential Significantly Better than Reference Group and Trends Improving Significantly 69 69

2. The Number of Repeat Trouble Reports per 100 Lines : Pacific - Residential and Business Significantly Better Than Reference Group, Business Significantly Improving Trend but No Significant Trend for Residential; Verizon - Residential and Business Significantly Better Than Reference Group, Trends for Both Improving Significantly 72 72

3. The Number of Initial Out-of-Service Trouble Reports per 100 Lines: Pacific - Residential and Business Significantly Better Than Reference Group and No Significant Trend for Either; Verizon - Residential and Business Significantly Better Than Reference Group, Business Trend Improving Significantly, No Significant Trend for Residential 75 75

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 and No Significant Trend for Residential; Verizon - Residential and Business Significantly Better Than Reference Group and No Significant Trend for Either 79 79

5. The Number of Subsequent Initial Trouble Reports and Subsequent Repeat Trouble Reports: Insufficient Observations 81 81

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 but No Significant Trend for Residential 82 82

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 but No Significant Trend for Residential 85 85

8. Initial Out of Service Repair Interval (in hours): Pacific - Residential Significantly Below Reference Group and Business Indistinguishable From Reference Group, No Significant Trends for Either; Verizon - Residential and Business Significantly Better Than Reference Group, No Significant Trends for Either 87 87

9. Repeat out-of-service repair interval (in hours): Pacific - Residential Significantly Worse Than Reference Group, Business Indistinguishable From Reference Group, No Significant Trend for Either; Verizon Residential and Business Significantly Better Than Reference Group, No Significant Trend for Either 92 92

10. Initial all other repair interval (in hours): Pacific - Residential Significantly Worse Than Reference Group but No Significant Trend, Business Indistinguishable From Reference Group but Significant Improving Trend; Verizon Residential and Business Better Than Reference Group, but Significant Worsening Trend for Residential and No Significant Trend for Business 95 95

11. Repeat All Other Repair Interval (in hours): Pacific - Residential Significantly Worse Than Reference Group, Business Indistinguishable From Reference Group, No Significant Trend for Either; Verizon - Residential and Business Better Than Reference Group, Significant Worsening Trend for Residential but No Significant Trend for Business 98 98

12. Average Installation Interval: Pacific and Verizon Indistinguishable From Reference Group and No Significant Trends 101 101

13. Switch Downtime: Pacific - Significantly Better Than Reference Group with No Significant Trend; Verizon - Statistically Indistinguishable From Reference Group with Significant Worsening Trend 106 106

14. Switches Down per Switch 107 107

15. Number of Switch "Occurrences": Pacific - "Under Two Minutes" Trend Improving, No Significant Trend for "Over Two Minutes" or "Percent Unscheduled"; Verizon - "Under Two Minutes" Trend Improving, But "Percent Unscheduled" Trend Worsening 108 108

16. Installation Commitments Met: Pacific - Residential Performance Indistinguishable From Reference Group and No Distinguishable Trend, Business Significantly Better Than Reference Group But Trend Worsening; Verizon - Residential and Business Performance Indistinguishable From Reference Group with No Significant Trends 109 109

D. Summary of Empirical Assessment of Pacific's and Verizon's Performance on ARMIS 43-05 Measures 111 111

E. MCOT Data 117 117

1. MCOT Data - Pacific Shows No Service Diminishment Following the Ameritech Merger 117 117

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 and 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 193 193

XI. Assignment of Proceeding 197 197

Findings of Fact 197 197

CONCLUSION OF LAW 238 238

ORDER 240 240

APPENDIX A

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. We found that Pacific offers generally good service quality in most areas, but there are several important areas of weakness in the quality of specific residential services.

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 examined Federal service quality data. Since there are no standards adopted by the Federal Communications Commission (FCC) for these service quality measures, we compared 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 used 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 substantially complied with four of the six service quality standards adopted by this Commission for all years covered in our study.¹ For the 576 monthly instances for which we have data on these four standards, Verizon met the standard 570 times. On the remaining two measures, Verizon compiled a record of substantial compliance. For the 241 monthly instances for which we have data on these measures, Verizon met the standard in 184 months, or 76% of the time. In addition, when evaluated on the Federal Communications Commission's (FCC) Automated Reporting Management Information System (ARMIS) service quality measures, we find that Verizon exceeded 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. Based on our statistical analysis, Verizon does not fail to meet the performance of the reference group on any measure - this in itself is exceptional.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 substantially complied with four of the six service quality standards adopted by this Commission for all years covered in our study.³ When we examine monthly measures, we find that in 504 monthly instances for which we have measures, Pacific met the standard 503 times. For the remaining two measures, we find that in the 241 monthly instances for which we have measures, Pacific met the standard 159 times (66%). 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. 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 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 GO 133-B 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 California 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 quality has improved during the NRF years. To reach this conclusion, we reviewed 7 GO 133-B measures and 17 ARMIS measures for Pacific and 16 for Verizon 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 36 variables that we examined for Pacific and 35 for Verizon to determine if there were statistically significant trends in service quality over the NRF years. We examined these variables for each company.

Of the 36 variables for service quality reviewed in this study, Pacific showed statistically significant improvement on 6 of these business variables and one combined business/residential measure during the NRF period; it showed no statistically significant change on 24 of them (including 5 of the 7 GO 133-B measures); it showed statistically significant declines on 2 of the residential measures and one business measure; and on two measures we could not make a finding. Thus, for Pacific, more variables showed improvement than showed decline during the NRF period, while most showed no significant change. Moreover, although 24 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 , more variables showed improvement than showed decline. Switch downtime, however, skyrocketed, and is not explained. Finally, we note that Verizon's business and residential installation intervals showed 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 somewhat 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 while under NRF they continue. On the other hand, 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. The pattern of facts that we have established leads us to conclude that NRF did not cause a diminishment of service quality.

Although the facts demonstrate that under NRF, service quality was good and improving, we cannot include that NRF caused an improvement of service quality. In particular, the statistical methods and the available data do not permit us to determine if NRF caused an improvement in service quality.

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.