X. Tariffing of Services and Contracts; Price Floors; and Price Ceilings

To ensure that telecommunications prices are "just and reasonable,"⁶⁵² the Commission has developed a large body of rules for tariffing of services and contracts and establishing price floors and ceilings. These rules can require review of contracts and publication of contract terms.

We now turn to regulatory policies that apply to changes in the pricing of residential and business retail telecommunication services. These services generally are available through tariffs or contracts, which are also known as individual case basis tariffs.

A. Positions of Parties

AT&T proposes "full pricing flexibility for all residential and business services."⁶⁵³ AT&T states that this proposal "means eliminating all pricing restrictions and limitations, including service categories, price floors (including imputation rules), price ceilings, requirements to provide cost data, and any other limitations on pricing."⁶⁵⁴ For all services excluding basic residential services, "[a]dvice letter filings for tariff changes [w]ould be effective one day after the filing."⁶⁵⁵

AT&T's justification for this pricing policy reform flows from its market analysis. AT&T argues that "[e]liminating burdensome filing and cost requirements is not only consistent with a market-oriented approach to regulation, it will further regulatory symmetry among telecommunications market competitors."⁶⁵⁶ In particular, for price floors, AT&T asserts that "explicit price floors may have made sense in an environment where competition was limited and service components provided by ILECs were actually required for competitors to enter the market. That environment, however, does not exist today."⁶⁵⁷

Likewise, AT&T maintains its proposal for contracts would "further the Commission's goal of treating all telecommunications competitors in a neutral manner and accelerate the delivery of contract benefits to customers."⁶⁵⁸ Specific reforms proposed are as follows:

[T]he Commission should eliminate pricing restrictions for contracts and associated cost data requirements. The Commission should also streamline the filing process for contracts by allowing them to become effective upon execution by the parties, with the contract to be filed at the Commission within 15 days.⁶⁵⁹

AT&T argues that without these reforms the Commission will continue to restrict its ability to "meet[] the needs of customers through contracts."⁶⁶⁰ AT&T explains that it "is required to prepare and file supporting cost data with its contracts, and customers must wait as long as 40 days (assuming no protests are filed) for the contract to take effect."⁶⁶¹

Verizon similarly supports pricing reforms. Concerning tariffing, Verizon makes the following proposal:

Full pricing flexibility would be immediately accorded for all non-"basic" intrastate retail services, including usage; Key, PBX, multi-line, and additional residential lines; ZUM; and inside wire maintenance. Price increases would be effective on 25-day prior customer notice and Advice Letter ("AL") filing. Price decreases would be effective on 1-day AL filing.⁶⁶²

In addition, Verizon urges elimination of price floors for all intrastate, retail services.⁶⁶³ The ILEC argues that this elimination of price floors would not only promote "the OIR's goal of affordability of service," but it also would advance "a fundamental objective of competition itself, i.e., that firms not be discouraged from offering price decreases."⁶⁶⁴

Furthermore, given the level of intermodal competition, Verizon argues that "even if price floors were necessary . . . it would not be practical for the Commission to determine what an appropriate price floor would be."⁶⁶⁵ It explains that there is no consistent cost basis among intermodal carriers to determine an appropriate floor, since intermodal competitors do not use incumbent wireline networks to provide service.⁶⁶⁶ Finally, regarding contracts, Verizon proposes that Individual Case Basis (ICB) contracts be made effective on their own terms and be filed with the Commission within thirty days of execution.⁶⁶⁷ No cost support would be required.⁶⁶⁸

SureWest and Frontier support a streamlined advice letter process in which tariffs would go into effect in one day, but any tariff that increases prices would require a twenty-five-day notice to customers.⁶⁶⁹ The mid-sized ILECs also recommend the elimination of all price floors.⁶⁷⁰ SureWest argues that price floors prevent customers "from receiving the full benefits that downward pricing flexibility might provide."⁶⁷¹

Concerning contracts, SureWest and Frontier see no merit to requiring the filing of contracts with the Commission.⁶⁷² SureWest argues that their "contracts should be treated like other commercial contracts in any market. They are legally binding and enforceable in the courts, but of no regulatory importance unless they violate other laws."⁶⁷³ SureWest reasons that if "ILECS are not required to submit cost support for contracts . . . the requirement to file contracts will lose much significance."⁶⁷⁴ Continued imposition of this requirement, according to SureWest, "wastes carrier and Commission resources with little . . . countervailing benefit."⁶⁷⁵

DRA submits a more complex proposal. It suggests reforming regulation of tariffed services in the following manner:

[P]rice increases (where permitted) would be effective on 30-day advice letter filing and 25-day prior customer notice. Price decreases would be effective on 1-day advice letter filing. Contracts would become effective based on their own terms and conditions; the incumbents would be required to file contracts with the Commission within 15 days of their execution. Any required advice letter filings could be protested only for improper noticing or filing procedures, and no cost support would be required.⁶⁷⁶

DRA further urges elimination of Commission-established price floors for telecommunications services, a measure that would enable unlimited downward flexibility for all services.⁶⁷⁷ If competitors in the future have a complaint about ILECs' retail pricing, DRA states that they would go "directly to the courts and be allowed to make their case free from any pretense that the Commission has pre-determined economically meaningful price floors."⁶⁷⁸

DRA nevertheless states that some price regulation should continue to apply to certain services:

[P]rice caps should apply to both recurring and non-recurring charges. Price caps also would apply to measured local usage, ZUM, and EAS whenever those services are used in conjunction with a primary line service, but not otherwise. Finally, to avoid de facto price increases for residential primary line services, DRA proposes to retain the current price caps for residential inside wire maintenance plans.

The record concerning competition for business services supports retention of price caps for basic single-line business services and the usage associated with those services. Regulating the price of access lines without regulating the price of associated usage would enable the incumbents to avoid any meaningful price constraints on basic exchange services. DRA also recommends retaining price caps for PBX trunks, an essential input for the use of PBX systems as an alternative to the incumbents' Centrex/CentraNet offerings.

Finally, given the ILECs' dominance over basic access lines, DRA also recommends retaining price caps for special access (which the OIR indicated would be addressed in Phase 2 of this proceeding) and for E911 services.⁶⁷⁹

DRA explains that price caps will ensure services will remain affordable.⁶⁸⁰

TURN proposes that the Commission adopt a price cap that would apply to "residential and business primary lines, local usage, ZUM, EAS, recurring and non recurring charges, and additional lines for business and PBX trunks"⁶⁸¹ as well as "Caller ID, call trace, 976 service, 900/976 call blocking, non-published and unlisted telephone numbers, white pages listings and busy line verification and interrupt services."⁶⁸² This recommendation is consistent with its analysis that ILECs retain substantial market power.

TURN also supports a number of other price controls. It would impose controls on "services which are essential for persons with disabilities"⁶⁸³ and "inside wire maintenance."⁶⁸⁴ TURN adds that we should continue price floors. Under TURN's proposal, the Commission should require "all carriers to price services higher than the lesser of long run incremental costs or the tariffed price on the date that the market is deregulated,"⁶⁸⁵ but only as long as these rules are "combined with a monitoring program and the three year review."⁶⁸⁶

TURN recommends establishing uniform rules for tariffing and contracting by extending regulation to all competitors. With respect to tariffing specifically, TURN would establish uniform rules by extending regulation to all competitors. TURN supports "an advice letter process with a 1-day filing requirement for a price decrease, a 30-day filing requirement for a price increase, and a 25-day customer notice for a price increase."⁶⁸⁷ For contracting, TURN states that "contracts should become effective on their own terms, with a 15 day filing requirement. Given the concerns expressed above with respect to price floors and bundles/packages, on a transitional basis (until sufficient competition develops) tariffed service rates should be imputed in contracts."⁶⁸⁸

Similarly, DisabRA would continue price controls on a wide group of essential services.⁶⁸⁹ It too contends that there is little competition in the telecommunications marketplace.⁶⁹⁰

DOD/FEA provides broad support for flexible tariffing and simple contracting procedures. It states that "[p]rice decreases should be implemented on 1-day notice and price increases on 30-day notice without burdensome and unnecessary cost support."⁶⁹¹ With respect to contracts, DOD/FEA contends that ICB "contracts should be effective upon execution by the parties. Cost support should not be required, but the contracts should be filed with the Commission within 15 days of execution."⁶⁹²

Cox argues that non-basic services should have no price regulation and that tariffing and customer procedures should be "standardized at the current requirements of competitors."⁶⁹³ Regarding contracts, Cox states that "contracts should be effective on execution and that the Commission should not require that they be filed."⁶⁹⁴

Time Warner focuses on price floor issues. It asks that the Commission establish a price floor using "either the prices already adopted for wholesale inputs or UNEs or the current tariffed prices and then simply use the latest `Total of the Floors' imputation approach adopted in D.04-11-022."⁶⁹⁵ Time Warner argues that "[u]nder this approach, any regulated offering of telephone service must be sold above its long run incremental cost . . . and requires that the ILECs' prices be equal to or greater than the wholesale prices charged competitors."⁶⁹⁶ Time Warner asserts that this approach is needed to protect against potential anticompetitive actions by ILECs.

MCI urges the Commission to detariff telecommunications services. It contends that "provider-customer relationships should be governed by contracts as they are in all other areas of commerce":

Where the marketplace and consumer choice have been functioning more freely, tariffing is not practiced. Rather, wireless telecommunications, cable and internet access service providers enter into contracts with their customers. . . . In addition, to the extent tariff notice requirements have been criticized on competitive grounds, since they signal to competitors one firm's marketing and pricing plans, removal of this legacy requirement will overcome that objection.⁶⁹⁷

MCI adds that the FCC has detariffed competitive telecommunications services,⁶⁹⁸ and Public Utilities Code § 495.7 provides for detariffing.⁶⁹⁹

AT&T and CSBRT/CSBA provide further support for detariffing in their opening comments. AT&T explains that the "Proposed Decision's findings on competition and the lack of market power" warrant the Commission's consideration of "exempting the ILECs in this proceeding from tariffing requirements."⁷⁰⁰ CSBRT/CSBA asks us to "consider whether these requirements are necessary and/or desirable from a policy perspective" at a future date.⁷⁰¹

B. Discussion: Statutes and Market Conditions Support Streamlined Tariffing and Contracting Procedures

We find two of the statutory policies we reviewed in Section III to be particularly relevant to this section. First, California statutes direct us to use technologically and competitively neutral policies to encourage wide choice in telecommunications services. Second, statutes instruct us to support competition in the voice communications marketplace whenever possible. Both of these statutory policies conflict with our current tariffing and contracting regime.

Furthermore, our previous discussion of the state of the voice communications market in California established that the pricing power of ILECs is sufficiently checked by a number of competitive forces. These forces include the realistic threat of entry by carriers in any market using UNE-L and the widespread competition offered by wireless, cable, and VoIP providers. These market conditions lead us to conclude that we should rely on market forces - rather than time consuming and burdensome regulatory proceedings concerning tariffing and contracting - to promote the public interest. Continued tariffing and contracting procedures may even disadvantage consumers by unnecessarily driving up costs and delaying price decreases.

In a fast-moving technology space like telecommunications, there is no public interest in maintaining an outmoded tariffing procedure that requires the burdensome regulatory review of cost data and delays the provision of services (particularly new or less expensive ones) to customers. This system only made sense in a world where there was a single dominant ILEC, and active regulatory intervention was required to protect consumers. Thus, it is reasonable that all advice letters for tariffed services should go into effect on a one-day filing.

Any ILEC tariffs that impose price increases or service changes, however, require a thirty-day advance notice to all affected customers. In order to maintain a level playing field, we further order that CLECs, like ILECs, now must provide thirty-day advance notice for any tariffs that impose price increase or service changes. Customers should have some notice of price increases in order to decide whether to keep the service or switch to a competitor.

Furthermore, we do not find that we need to maintain general price floors and the submission of cost data. Time Warner, a carrier that obtains critical wholesale services from ILECs, argues that price floors will protect against anticompetitive actions in which an ILEC charges itself less for a wholesale input that it charges a competitor. Yet such a pricing policy is already illegal. Moreover, the price floor proposal recommended by Time Warner is cumbersome and more difficult to implement than it acknowledges. Establishing a price floor at the "total of the floors" is no simple matter, particularly since there are services for which no Long-Run Incremental Cost will be available.

If an ILEC engages in illegal pricing behavior, the existence of UNE-L prices should, for any ILEC service using a loop, simplify the identification and determination of any illegal practice. Any company harmed by illegal pricing can bring an antitrust action in a court of competent jurisdiction or pursue a specific complaint with us. Thus, we do not see any merit in TURN's related proposal to regulate and monitor carriers' service prices. We find this proposal burdensome and unnecessary in light of the affected ILEC's lack of market power.

As we further review the record in this proceeding, we find that MCI's proposal to detariff telecommunications service deserves serious consideration.⁷⁰² We agree that carrier-customer relationships in a competitive marketplace should be governed by contracts in which all rates, terms, and conditions are contained.⁷⁰³ We also concur that tariff notice requirements have the disadvantage of signaling a company's marketing and pricing plans to its competitors. In a competitive market, innovation should be rewarded and not inhibited by unnecessary rules. Moreover, detariffing of services would require ILECs to inform customers of the complete terms and conditions of service, as wireless carriers do today. Requiring this practice would limit ILECs' ability to change customer service and contracts through tariff modifications.

Public Utilities Code § 495.7 indicates that the Commission has the ability to order detarriffing of all services other than basic exchange service.⁷⁰⁴ We find that the record in this proceeding permits us to make the requisite findings for Public Utilities Code § 495.7(d). Additionally, on first impression, it appears that §§ 495.7(e)-(h) do not impose any implementation requirements that prevent us from ordering detariffing.

Since parties did not address the detariffing issue in their briefs, we will permit parties, in a separate briefing cycle, to address legal and implementation issues that the Commission should consider before ordering detariffing of telecommunications services. Opening briefs are due thirty days from the effective date of this decision, with reply briefs to follow in fourteen days. It is our intention to decide whether to order detariffing before the end of the year. We note that should we order detariffing, all the tariffing filing requirements, including the one-day filing provisions adopted herein, would end. Detariffing would affect all services other than basic residential service.

We tentatively envision following the same approach used by the FCC in 1996. The FCC decided to order, rather than permit, the detariffing of telecommunications services.⁷⁰⁵ Likewise, we preliminarily propose ordering carriers to cancel tariffs during a certain time period, either by replacement, supplement or expiration. We expect that we would give carriers broad freedoms to use various methods to establish legal relationships with customers in the absence of tariffs, including the use of short standard agreements.

To replace tariffs, we predict that we would issue requirements for the public disclosure of rates and terms. These new public disclosure rules would require that a carrier make available, to any member of the public in at least one location in California during regular business hours, timely and easily accessible information concerning its current rates, terms, and conditions. This information also would need to be posted on the carrier's public website. We also envision requiring an annual compliance filing with the Commission where the carrier files a complete schedule of all its rates, terms, and conditions. In detariffing services at the federal level, we note the FCC permitted an eight-month transition period, and we specifically invite comments concerning the time carriers will need.

Concerning contracting, carriers are ready to adopt the practices commonly used in competitive markets. Contracts will be effective upon execution. We, however, will require that contracts be filed with the Commission within fifteen days after execution. The filing requirement will enable the Commission and interested parties to ensure that carriers do not violate the antidiscrimination requirements embedded in state law.⁷⁰⁶

⁶⁵² Cal. Pub. Util. Code § 451.

⁶⁵³ Pacific Bell Opening Brief at 58.

⁶⁵⁴ Id. (footnotes omitted).

⁶⁵⁵ Id. at 59.

⁶⁵⁶ Id. at 58.

⁶⁵⁷ Id. at 82.

⁶⁵⁸ Id. at 59-60 (citations omitted).

⁶⁵⁹ Id. (citations omitted).

⁶⁶⁰ Id. at 56.

⁶⁶¹ Id. at 56-57 (citation omitted).

⁶⁶² Verizon Opening Brief at 3.

⁶⁶³ Id.

⁶⁶⁴ Id. at 26.

⁶⁶⁵ Id. at 28 (citation omitted).

⁶⁶⁶ Id. at 28 (citation omitted).

⁶⁶⁷ Id. at 3.

⁶⁶⁸ Id.

⁶⁶⁹ SureWest Opening Brief at 30; Citizens Opening Brief at 26.

⁶⁷⁰ SureWest Opening Brief at 20; Citizens Opening Brief at 17.

⁶⁷¹ SureWest Opening Brief at 20.

⁶⁷² SureWest Opening Brief at 30; Citizens Opening Brief at 26.

⁶⁷³ SureWest Opening Brief at 30.

⁶⁷⁴ Id.

⁶⁷⁵ Id.

⁶⁷⁶ DRA Opening Brief at 7.

⁶⁷⁷ Id.

⁶⁷⁸ Id.

⁶⁷⁹ Id. at 6.

⁶⁸⁰ Id.

⁶⁸¹ TURN Opening Brief at 34.

⁶⁸² Id. at 34-35.

⁶⁸³ Id. at 35.

⁶⁸⁴ Id.

⁶⁸⁵ Id.

⁶⁸⁶ Id.

⁶⁸⁷ Id. at 38.

⁶⁸⁸ Id. at 39.

⁶⁸⁹ DisabRA Opening Brief at 22-23.

⁶⁹⁰ Id. at 11-12.

⁶⁹¹ DOD/FEA Opening Brief at 8.

⁶⁹² Id. at 9.

⁶⁹³ Cox Opening Brief at 24.

⁶⁹⁴ Id.

⁶⁹⁵ Time Warner Open ing Brief at 7.

⁶⁹⁶ Id.

⁶⁹⁷ MCI Opening Comments at 15-16 (May 31, 2006) .

⁶⁹⁸ Id. at 16.

⁶⁹⁹ Id. at 15, n.10. Public Utilities Code § 495.7 states that the "commission may, by rule or order, partially or completely exempt certain telecommunications services, except basic exchange service offered by telephone or telegraph corporations, from the tariffing requirements of Sections 454, 489, 491, and 495" if the following conditions are met:

(2) The Commission finds that a telephone corporation is offering a service in a given market for which competitive alternatives are available to most consumers, and the commission has determined that sufficient consumer protections exist in the form of rules and enforcement mechanisms to minimize the risk to consumers and competition from unfair competition or anticompetitive behavior in the market for the competitive telecommunications service for which a provider is requesting an exemption from Sections 454, 489, 491, and 495. This paragraph does not apply to monopoly services for which the commission retains exclusive authority to set or change rates.

(c) Before implementing procedures to allow telephone corporations to apply for the exemption of certain telecommunications services from the tariffing requirements of Sections 454, 489, 491, and 495, and no later than September 30, 1996, the commission shall establish consumer protection rules for those exempted services that include, but are not limited to: (1) Rules regarding the availability of rates, terms, and conditions of service to consumers. (2) Rules regarding notices to consumers of rate increases and decreases, changes in terms and conditions of service, and change of ownership. (3) Rules to identify and eliminate unacceptable marketing practices including, but not limited to, fraudulent marketing practices. (4) Rules to assure that aggrieved consumers have speedy, low-cost, and effective avenues available to seek relief in a reasonable time. (5) Rules to assure consumers that their right to informational privacy for services over which the commission has oversight. (6) Rules to assure a telephone corporation's cooperation with the commission investigations of customer complaints.

(d) Prior to granting every exemption from the tariffing requirements of Sections 454, 489, 491, and 495, the commission shall find that there is no improper cross-subsidization or anticompetitive behavior in connection with the service for which an exemption is requested.

(e) Nothing in this section shall require that the commission exempt any telecommunications service or telecommunications service provider from the requirements of Sections 454, 489, 491, and 495, nor shall this section limit the authority of the commission to require telephone corporations to provide it with contemporaneous information about the current terms, conditions, and prices under which telecommunications services that are exempted, in whole or in part, from Sections 454, 489, 491, and 495 are being offered to subscribers.

(f) The commission, after notice and hearing if requested, may cancel, revoke, or suspend any exemption granted under subdivision (b) to any telephone corporation that fails to comply with any of the rules established by the commission pursuant to subdivision (c).

(g) Any telecommunications service exempted from the tariffing requirements of Sections 454, 489, 491, and 495 shall not be subject to the limitation on damages that applies to tariffed telecommunications services.

(h) The provisions of this section do not apply to commercial mobile services as defined by the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66).

⁷⁰⁰ Opening Comments of Pacific Bell on Proposed Decision, at 2 (Aug. 15, 2006).

⁷⁰¹ Opening Comments of CSBRT/CSBA on Proposed Decision, at 4 (Aug. 15, 2006).

⁷⁰² Unfortunately, following MCI's acquisition by Verizon, MCI did not participate in this proceeding, and the record concerning the detariffing proposal is limited. AT&T and CSBRT/CSBA, however, raise this matter in their Opening Comments on the Proposed Decision.

⁷⁰³ In the past, some utilities, including ILECs, have hidden behind the filed rate doctrine to trump a customer's contract with a later filed tariff. This practice supports our conclusion that a detariffed environment is fairer to customers, who will have all rates, terms, and conditions in a contract.

⁷⁰⁴ We observe that our recent Telecommunications Consumer Bill of Rights decision, D.06-03-013, and this decision itself have adopted the kinds of rules required by 495.7(c), and we intend to adopt explicit rules regarding the availability of rates, terms and conditions of service to consumers.

⁷⁰⁵ 11 FCC Rcd 20730, 20768 (1996) ("[W]e find that complete detariffing of interstate, domestic, interexchange services offered by nondominant interexchange carriers is in the public interest, and that permissive detariffing of such services is not in the public interest.").

⁷⁰⁶ See Cal. Pub. Util. Code § 558.