IV. Two Major Policy Alternatives Developed in the Record
Although the OIR aspired to create a "uniform" regulatory framework, parties agreed that it would not be possible at this time for the Commission to adopt a completely uniform framework that applied to all communications carriers. The Commission does not have equal authority over all communication service providers.139 It has different levels of jurisdiction over different providers. For example, the Commission has been preempted from regulation of wireless rates for wireless carriers by Congress,140 and it lacks jurisdiction over communications services provided to Internet users via VoIP. Our jurisdiction also often overlaps with that of other regulatory authorities, such as the FCC.141
Recognizing that we cannot adopt a fully uniform regulatory framework, parties instead 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. We describe specific parties' regulatory framework recommendations in greater detail below.
A. Increase Price Flexibility
Most parties suggest that the Commission adopt a revised framework that gives ILECs increased pricing flexibility. Parties recommending enhanced pricing flexibility include the following: AT&T, Verizon, DRA, Cox, Frontier, and SureWest. This section summarizes these various parties' proposals.
AT&T supports the greatest degree of pricing flexibility. It asserts that existing price regulation distorts operating and investment decisions, because it is applied asymmetrically.142 AT&T adds that technological innovation and competition across voice platforms have eliminated any ability to meaningfully evaluate competitiveness on a service-by-service basis.143 Thus the company calls upon the Commission to abandon the NRF framework adopted in 1989, and adopt a new framework that permits a significant amount of pricing freedoms.144
AT&T's proposed regulatory framework would eliminate a variety of existing price regulations. Imposing the company's proposed framework would eliminate earnings regulation (i.e., price index, earnings sharing mechanism, and imputation of Yellow Pages directory earnings).145 AT&T also would permit full pricing flexibility for all residential and business services.146 Specifically, the company's proposed framework would eliminate all pricing restrictions and limitations, including service categories, price floors (including imputation rules), price ceilings, the requirement to provide cost data, and any other limitations on pricing.147 AT&T further submits that carriers should be free to offer geographically deaveraged prices.148 The company, however, would support placing a price cap on current basic residential rates until June 1, 2007.149
With respect to Commission review of its operations, AT&T recommends that the Commission adopt a one-day advice letter process for revising prices, terms, and conditions (without cost support) for all residential and business services.150 AT&T further requests streamlined contract filing procedures (effective within 15 days) and recommends full pricing flexibility for contracts, by eliminating pricing restrictions and associated cost data requirements.151
Verizon supports a significant amount of ILEC pricing freedoms too. It contends that our complex economic regulations, designed over a decade and a half ago for a wireline-only world, inhibit the efficient operation of the modern voice communications market.152 According to Verizon, imposing rules only on ILECs depresses the full potential of the voice market and harms consumers.153 Verizon maintains that competition as a whole suffers as long as any single competitor is constrained in its ability to respond quickly to consumer demand; offer new services and new bundles; provide leading-edge technologies; respond to other competitors' moves; and realize the full risks and rewards of its actions.154 A lack of competition, in turn, causes consumers to suffer.155
Verizon's proposed regulatory framework urges full pricing flexibility for all "non-basic" retail services.156 It recommends that a price increase be allowed to go into effect twenty-five days after a company notifies its customer of the price increase and one day after filing an advice letter; it suggests that a price decrease be allowed to go into effect the day after an advice letter filing.157
Verizon also supports capping basic business and residential services for a three-year transitional period.158 This proposed cap would ensure revenue neutrality across "basic services."159 That is, price increases to "basic" services above the three-year cap would require Commission approval, but would be permitted in response to Commission-mandated price decreases to any other price-regulated service, e.g., switched access service.160
Full downward pricing flexibility and downward geographic deaveraging would be permitted during the proposed three-year transitional period.161 Price floors would be eliminated. 162 Price regulated (basic services) and non-price-regulated services, including affiliate services, could be offered on a bundled or promotional basis without restriction (e.g., time or geographic limitations) and would be accorded full pricing flexibility.163
Under Verizon's proposed framework, Individual Case Basis (ICB) contracts would be effective on their own terms and would be filed with the Commission within thirty days of execution.164 No cost support would be required.165 Any advice letter filings could be protested only for improper noticing or filing procedures.166 Tariffs would continue to be filed.167
DRA submits a two-part proposal for a new regulatory framework. In the first part, DRA recommends the elimination of virtually all price regulation for packaged service offerings.168 DRA also proposes the elimination of downward pricing restrictions for all services,169 and the elimination of upward price limits for most stand-alone services.170 Thus, if carriers want to adjust prices up or down for most stand-alone services, they would be free to do so.
The second part of DRA's proposal would impose a price cap on primary residential lines, single-line business access service, Private Branch Exchange (PBX) trunks,171 and associated services for recurring and non-recurring charges.172 DRA urges the Commission to retain the capped prices for a minimum of three years, at the end of which the Commission would review the status of the relevant market(s) in California to determine if competition is sufficient to constrain prices for residential and small business basic service.173 If the Commission determines that competition in the relevant market(s) has developed to the point that it poses sufficient price constraints, DRA recommends that the Commission then should eliminate the price cap.174
DRA maintains that basic rate increases, at least during the next three years, may have a number of adverse consequences. First, it states that these increases may encourage residential customers to forgo their primary wireline connection entirely, or to subscribe to less reliable services.175 Second, DRA contends that basic rate increases may harm small businesses that depend on analog lines for their operations (e.g., to verify credit card transactions).176 Third, it asserts that the increases could decrease coin-operated pay telephone (COPT) availability and public payphone services, which are important to people too poor to subscribe to their own telephone service.177
Cox makes three primary recommendations in this phase of the URF proceeding. First, Cox states that the Commission should eliminate the high-cost fund subsidies the ILECs receive before allowing ILECs to have downward pricing flexibility for basic services.178 Cox adds that these restrictions against downward pricing flexibility should apply equally to bundled services that contain the subsidized service.179 Second, Cox asserts that the Commission should not permit geographic deaveraging of basic services 180 Finally, Cox contends that the Commission should continue to impose some reasonable regulation on promotions, in terms of both duration and repetition.181
Cox contends that if its recommendations are not adopted, the ILECs will be able to abuse their market power.182 According to Cox, ILECs might lower prices in target areas where they face the most competition, and thereby discourage new entrants and drive out their competitors in those markets.183
Frontier and SureWest argue that the hallmark of a new regulatory framework should be full upward and downward pricing flexibility for all non-basic ILEC services.184 They also agree that the process for modifying the prices and terms of ILECs' service offerings should be streamlined.185 The two mid-sized ILECs reason that they should be given pricing flexibility like other competitors in the voice communications marketplace.186
Frontier and SureWest, however, support a two-year cap on "primary line residential services."187 To the extent that price caps remain on the primary line residential services, the two companies urge that an opportunity be provided for revenue-neutral rate rebalancing on these services.188
B. Maintain the Status Quo for Most Local Exchange Services
Only TURN argues that the Commission should largely maintain pricing regulation in its current form. This section reviews the basis for TURN's position and describes details of its recommendation.
TURN bases its recommendations upon its assessment of ILECs' market power. TURN states that its analyses demonstrate a high degree of market concentration in the four ILECs' service territories, with market conditions varying greatly within the large ILECs' territories.189 TURN adds that intermodal alternatives currently are not substitutes for ILEC local exchange service.190
Given its assessment, TURN argues that prices for most ILEC services should be frozen for three years and then reviewed by the Commission at the end of that time.191 Specifically, it states that prices should remain frozen for residential and business primary lines; local usage; Zone Use Measurement (ZUM); Extended Area Service (EAS); recurring and non-recurring charges (NRCs); and additional lines for business and PBX trunks.192 TURN would not afford ILECs pricing flexibility based on revenue neutrality grounds.193 After three years have passed, TURN states that the Commission should allow pricing flexibility only if subsequent Commission monitoring and review show this change is warranted.194 TURN adds that all ILEC services should be required to be priced higher than the lesser of long-run incremental costs or the tariffed price on the date an ILEC market is deregulated.195
Regarding Commission review of ILEC operations, TURN declares that while there is no need to have cost support for advice letters/contracts, the Commission staff should nevertheless retain authority to ask for necessary information.196 TURN urges the Commission to apply the following uniform advice letter process to all competitors: one day for price decreases; thirty days for price increases, with twenty-five days for customer notice.197 TURN adds that the same advice letter process for price increases should be applied to grandfathering and/or withdrawing of services.198 While it supports eliminating earning regulation, TURN states that ILECs should continue to report intrastate earnings too.199 TURN contends Yellow Page revenue should be included in these reports.200 Finally, TURN recommends the following uniform rule for all competitors' contracts: Contracts should become effective on their own terms, with fifteen-day filing requirements.201
In conclusion, parties to this proceeding recommended a variety of pricing frameworks, ranging from AT&T's proposal to TURN's proposal. We evaluate these proposals, and the evidence for them, in the sections following below.
139 Opening Comments of Pacific Bell Telephone Company at 11 (May 31, 2005) (hereinafter "Pacific Bell Opening Comments"); Comments of the Office of Ratepayer Advocates at 3-14 (May 31, 2005) (hereinafter "ORA Opening Comments"); Comments of the United States Department of Defense and All Other Federal Executive Agencies at 5 (May 31, 2005) (hereinafter "DOD/FEA Opening Comments").
140 See Section 332(c)(3) of the Telecommunications Act of 1996, which prohibits states from regulating wireless rates and entry, but reserves to the states authority over the terms and conditions of wireless service; ORA Opening Comments at 4-6.
141 ORA Opening Comments at 6-9.
142 Opening Brief of Pacific Bell Telephone Company at 54 (Mar. 6, 2006) (hereinafter "Pacific Bell Opening Brief"); Pacific Bell Opening Comments at 15-16; Opening Comments of Robert Harris at 50 (May 31, 2005) (testifying on behalf of AT&T) (hereinafter "Harris Opening Comments").
143 Pacific Bell Opening Brief at 55.
144 Id. at 58.
145 Id. at 75.
146 Id.
147 Id.
148 Id. at 58.
149 Id. at 75, n.305.
150 Id. at 75.
151 Id.; Comments of Emery Borsodi at 25-26 (May 31, 2005) (testifying on behalf of AT&T) (hereinafter "Borsodi Opening Comments").
152 Opening Brief of Verizon California at 1 (March 6, 2006) (hereinafter "Verizon Opening Brief").
153 Id.
154 Id.
155 Id.
156 Id. at 3.
157 Id. at 3; Comparison of URF Proposals Matrix (October 13, 2005) (hereinafter "Comparison of URF Proposals").
158 Verizon Opening Brief at 3.
159 Id.
160 Id.
161 Id.
162 Id.
163 Id.
164 Id.
165 Id.
166 Cost support would not be required.
167 Verizon Opening Brief at 4.
168 Only a one-day filing for price changes and a protest period, as currently exists, would remain. Brief of the Division of Ratepayer Advocates at 5 (Mar 6, 2006) (hereinafter "DRA Opening Brief").
169 Id.
170 Stand-alone services that would not be affected by this proposal are primary residential and single-line business access lines; PBX trunks; and associated services for both recurring and non-recurring charges (NRCs).
171 PBX trunks connect a customer's private switch to a telephone company's central office.
172 DRA Opening Brief at 5.
173 Id.
174 Id.
175 Id. at 17-18.
176 Id.
177 Id.
178 Opening Brief of Cox California Telecom at 17 (Mar 6, 2006) (hereinafter "Cox Opening Brief").
179 Id. at 16-17.
180 Id. at 16.
181 Id.
182 Id.
183 Reply Brief of Cox California Telecom at 10 (Mar 24, 2006) (hereinafter "Cox Reply Brief").
184 Opening Brief of Citizens Telecommunications Company of California at 19 (March 6, 2006) (hereinafter "Citizens Opening Brief"); Opening Brief of SureWest Telephone at 22 (March 6, 2006) (hereinafter "SureWest Opening Brief").
185 Citizens Opening Brief at 25-26; SureWest Opening Brief at 29-30.
186 Citizens Opening Brief at 19-20; SureWest Opening Brief at 23.
187 Citizens Opening Brief at 22; SureWest Opening Brief at 25.
188 Citizens Opening Brief at 23; SureWest Opening Brief at 26.
189 Opening Brief of The Utility Reform Network at 7-10 (March 6, 2006) (hereinafter "TURN Opening Brief").
190 Id. at 7-20.
191 Id. at 34.
192 Id. at 34-35.
193 Id. at 36.
194 Id.
195 Id. at 36-37.
196 Id. at 38.
197 Id.
198 Id. at 39.
199 Id. at 40.
200 Id. at 41.
201 Id. at 38.
