XVIII. Comments on Proposed Decision
The proposed decision of Commissioner Rachelle Chong in this proceeding was mailed to the parties in accordance with Public Utilities Code § 311(g)(1) and Rule 77.7 of the Commission's Rules of Practice and Procedure. Comments were filed on August 15, 2006 by AT&T, Verizon, SureWest, Frontier, CPA, CCTA, Cox, CSBRT/CSBA, DisabRA, DOD/FEA, Greenlining, DRA. TURN, Sprint Nextel, and TWTC. Reply comments were filed on August 22, 2006 by AT&T, CCTA, Cox, DOD/FEA, DRA, DisabRA, Frontier, TURN, TWTC, Sprint Nextel, SureWest, Verizon, and XO.
We organize our review of the comments and replies into two parts. The first part addresses parties' comments concerning the issues that were the focus of the evidentiary record in this proceeding - i.e., the definition of the market; assessment of the market power of AT&T, Verizon, SureWest, and Frontier; and adequacy of the evidentiary record. The second part addresses parties' comments concerning specific policies adopted in this decision.881
A. Comments and Replies Addressing the Definition of the Market, Market Power, and the Evidentiary Record
Parties' comments on the proposed decision divide between those that find the record adequate, the findings reasonable, and the conclusions justified, and those that dispute the adequacy of the record, the reasonableness of the findings, and the lawfulness of the conclusions. This section reviews both types of comments.
AT&T, Verizon, SureWest, and Frontier largely find the record adequate, the findings reasonable, and the conclusions justified. Typical of these comments is the following statement made by AT&T:
The Proposed Decision recognizes how changes in technology over the past decade, along with the provisions of the Telecommunications Act of 1996, have irreversibly unleashed competitive forces in California's telecommunications marketplace. In response to this reality, the Proposed Decision creates a regulatory framework that will benefit customers by giving communications services providers incentives and opportunities to offer products and services that customers desire, at the price and quality they demand.882
Verizon adds that the "PD's competitive analysis is particularly apt."883 It notes that we "[s]ystematically examin[ed] the extensive data provided by the parties," and based our market power conclusions "on several key facts supported by substantial record evidence."884 Verizon comments then proceed to cite the major factual findings reached by this decision. Similarly, Frontier and SureWest praise the analysis and findings of the proposed decision.885 CSBRT/CSBA also expresses support for reforming the regulatory framework.886
DRA raises the most objections to our analysis. Specifically, DRA argues that "the PD errs in defining the product market to include all voice services in a single market."887 DRA claims that we erred "by failing to specify a geographic market definition," and "[t]he PD completely overlooks the evidence of meaningful distinctions between services offered to large and small businesses, and between primary residential access lines and all other residential services."888 DRA further argues that failing "to distinguish between customers who subscribe to expensive service bundles and those who only buy (and perhaps can afford only) basic access line service with few or no additional frills also distorts its competition analysis."889 DRA asks us to notice Public Utilities Commission of Oregon, Order No. 06-399, In the Matter of Qwest Corporation Petition to Exempt from Regulation Qwest's Switched Business Services, entered July 12, 2006, mimeo, p. 2. DRA asserts that "the Oregon Commission declined to find that there was a single statewide market for all services."890
DRA's arguments still do not persuade us. DRA is incorrect to argue that we should have specified a geographic market analysis. While we recognized that our market analysis should address individual geographic regions, we found that the FCC unbundling requirement is ubiquitous throughout service territories of the ILECs. Thus, the need for any specific territory-by-territory delineation and analysis is obviated.
Ample record evidence, such as the testimony of Harris, supports our finding that there is a single voice communications market.891 Furthermore, DRA errs when it asserts that we fail to distinguish between primary residential lines and other lines. While we permitted pricing freedoms for secondary lines, linkages to social policy programs led us to institute price freezes for basic residential service on primary lines.
DRA's request that we subdivide the market according to customer demographics is contrary to voice communications' providers operations. Wireless carriers and VoIP providers typically provide service to all comers, and do not specialize in a single business or non-business market, or customer demographic.
DRA's citation to the Oregon Commission decision fails to note the Oregon Commission's holding in that decision. In fact, the Oregon Commission relaxed the regulation of business line pricing in metropolitan areas - a step more consistent with the policy steps taken in this decision than with DRA's recommendation for continuation of price controls for basic business service everywhere in California.892
We further find that since the New York telecommunications markets shares much of the size and dynamism of California's market the analysis and actions of the New York Public Service Commission are more applicable to the California market than the Oregon decision cited by DRA.893
The New York Commission's findings and analysis notably parallel our findings and analysis in this decision. The New York Commission recognized that its state "wireline business is under substantial competitive financial pressure":
It . . . seems clear that the arrival of intermodal competition has affected the customer/investor balance to the detriment of the legacy carriers. The wireline losses cannot long continue before serious problems will arise in the maintenance and operation of the legacy infrastructure.894
Although it continued a uniform pricing requirement for non-basic service, the New York Commission further observed that it has "long allowed Verizon's business exchange access service prices to vary between wire centers on a geographic basis," and more recently, it "permitted Verizon to charge different prices for the same service in different areas when justified by cost differences."895 Overall the New York Commission's policy changes go in the same direction as ours.
Any distinctions between policies adopted in this decision and those adopted in other states may be attributed to differences in state records. We adopt policies that are reasonable in light of the specific record before us, not the record before Oregon or New York. The voluminous record developed in California demonstrates that our policies are reasonable.
We now turn to the extensive comments of TURN.896 Like DRA, TURN objects to both our market analysis and the conclusions we drew in this decision. TURN disputes our characterization of its proposal as the status quo, and it itemizes a number of areas where it recommends changes.897 TURN contests much of our analysis concerning the market activity of selling telecommunications services in bundles. TURN argues that "the record evidence does not . . . identify any parties other than ILECs and cable companies as even being capable of providing a triple play of services."898 TURN also restates its argument that wireless and wireline service are not substitutes.899 TURN contends that the proposed decision "ignores the record evidence."900
TURN's major argument is that we were wrong to conclude that ILECs lack market power. TURN asserts that this conclusion was derived from ignoring and misinterpreting the record on line-loss,901 and it states that "competition at the margins" provides a false guide to market power analysis and is "not supported by the record."902
Concerning TURN's objection to our characterization of its proposal as the status quo, we maintain that this conceptual shorthand offers both a reasonable reading of TURN's proposals and fairly distinguishes its proposals from the proposals of other parties. We add that this characterization in no way affects our consideration of TURN's specific regulatory recommendations.
TURN's arguments concerning bundling are misplaced. The proposed decision does not define bundles as a group of services "capable of providing the triple play."903 Instead, our references to bundles apply to any collection of services packaged together. These bundles may include caller id, call waiting, and three-way calling - there is no need to include video to create a bundle. Thus, TURN's objection that few companies offer a triple play is immaterial to our conclusion that voice communications companies compete by offering bundles of telecommunications services.
TURN's other comments largely restate its prior arguments and misunderstand our analysis. While we decline to restate most of our arguments from the text above, we note that we discuss and reject TURN's argument that substitutes must be identical in Section V.A.2.
Similarly, we do not ignore TURN's and DRA's evidence on line loss.904 Just the opposite: We squarely address and rebut their arguments on line loss. Section V.B.5 points out that TURN can only find observable decreases in the purchase of wireline access lines by double counting - i.e., by counting a line providing both voice and data as two lines. DRA's line counts are similarly distorted. DRA adds 2 million "landline connections" for Verizon by adding in "special access equivalents" and excluding UNE-P losses. This count is particularly misleading. Special access lines are commonly used by wireless and VoIP competitors in their networks, so special access counts can indicate wireline line loss.905 In contrast, we base our market power finding on persuasive facts found and discussed at length in the record, such as Verizon's demonstration that it has lost hundreds of thousands of lines across its service territory for all land types, both residential and business.906
TURN errs in stating that we lack record support for our use of the competition at the margins concept. Harris explained that competition for small groups of customers can discipline prices all competitors charge, thereby providing widespread benefits to consumers, even to those who do not have options.907 Taylor also testified that "competition in markets takes place at the margin, not the average."908 We, therefore, reject TURN's allegation that there was no record basis for considering competition at the margins.
Like TURN, Cox argues that ILECs continue to have market power and allowing pricing flexibility is unwarranted. Cox asserts that the proposed decision errs by not considering market share to be the critical determinant of market power.909 Specifically, Cox argues that "there simply is no way that the Commission can find that the ILECs do not have market power if there has been no significant decline in market share."910 In addition, Cox argues that our analysis of cross-modal competition is flawed. Cox contends that we "cannot possibly find that wireless service is a substitute for AT&T's wireline service when a major element of that `substitution' is a shifting of customers from AT&T's wireline subsidiary, AT&T California, to AT&T's wireless subsidiary, Cingular."911 It adds that the "exact same error" applies to treatment of Verizon and its wireless subsidiary Verizon Wireless.912 Finally, Cox argues that the we failed to consider record evidence and the specific contributions of Cox:
There are two fundamental errors with this approach taken by the PD:
1. In almost every case, the PD, without explanation, fails to discuss the evidence that was presented at the evidentiary hearings conducted by the assigned ALJ; and
2. The PD, for some unexplained reason, explicitly ignores comments filed by Cox on major issues.
On the second point, Cox claims that we failed to consider adequately its Opening Comments, 5/31/05, pp. 5-10; Reply Comments, 9/2/05, pp. 7-9; Opening Brief, 3/6/06, pp. 5-15; and Reply Brief, 3/24/06, pp. 2, 4, 15.
Concerning Cox's argument that a demonstration of market share loss is essential to a market power finding, we note that this decision has addressed this issue at great length when assessing TURN's and DRA's arguments concerning use of HHI analysis for assessing market power.913 Our discussion of the applicability of an HHI analysis constitutes a detailed discussion of market share, because HHI is commonly used to convert market share into an analysis of market power. References to HHI, a technical term, may be interchanged with market share.
Our discussion in Section V.B.5 establishes that it is an accepted legal and economic conclusion that HHI (and market share) analysis is not an appropriate measure of market power in the factual setting we face, i.e., a formerly regulated market undergoing rapid technological and regulatory changes. In Reply Comments on the Proposed Decision, Verizon notes that "the PD devotes the bulk of its market power discussion to this very issue, carefully demonstrating with 25 separate footnoted citations to the record how `market shares are inherently backward looking and not good predictors of future developments, particularly in a rapidly changing industry like telecommunications.'"914
Cox's errs when stating that we failed to consider the fact that AT&T and Verizon have large ownership stakes in their respective wireless affiliates. Cox's analysis concludes that the cross-ownership by these companies undercuts competitive forces. For anyone familiar with the voice communications market, however, this conclusion does not follow. The market share of Verizon Wireless and Cingular each individually accounts for approximately twenty percent of the wireless market in California. Competitors with which each ILEC has no ownership interest over constitute approximately eighty percent of the wireless market. Thus, the cross-ownership of one wireless carrier by the ILEC has little effect on overall market dynamics.
Likewise, Cox's allegation that we failed to consider the evidence provided at the hearings carries no weight. First, both the ALJ and the Assigned Commissioner were present for the evidentiary hearings. Second, Cox confuses the purpose of evidentiary hearings. In a proceeding with pre-filed testimony, such as this one, the major purpose of the evidentiary hearings is to assist the Commission in evaluating and weighing this pre-filed testimony. The weight that we assigned to the testimony in our discussion is based both on the logic of the written argument and the impressions of witness credibility derived from the hearing room. Third, cross-examination of witnesses did not permit an overall presentation of the testimony of a particular witness. Instead, it focused on weaknesses or ambiguities in the testimony. Thus, it is extremely difficult if not impossible to present a cogent analysis based on the transcript of the hearings. Finally, Cox fails to recognize that the structure and outline of this decision is directly related to oral summaries parties provided at the last day of evidentiary hearings, TR 806-842.
Cox further errs in stating that we did not properly cite or consider specific arguments that it raised. We observe that Cox made substantial contributions to the development of the record in this proceeding and has caused us to consider carefully each step that we are taking. While Cox did not prevail on issues, our discussion in text above and in this section makes it clear that we seriously considered its arguments and analysis.
In drafting this decision, we sought to address the best formulation of a particular argument. Other parties also presented many of the arguments provided by Cox, and frequently we effectively address Cox's argument in discussion of another party. For example, Cox later stated that line losses were losses to broadband and, therefore, immaterial. These arguments closely track DRA's and TURN's arguments.915 Cox also argues that evidence it provided regarding the level of competition was "not challenged."916 This assertion suggests that Cox itself failed to comprehend the extent of the regulatory record in this matter. We note that there are over 900 footnotes in this decision that link parties' argument and analysis to the extensive record in this proceeding.
We add that determining a reasonable policy does not necessitate a discussion of every argument. Take, for example, Cox's argument that we failed to consider the arguments presented on pp. 5-15 of its Opening Brief. An examination of this section of its Opening Brief shows that pp. 6-7 constitute an elaborate discussion of milk regulation. Milk regulation, however, is not germane to either this proceeding or to the competence of the expert concerning the voice communications market. Moreover, we find that Cox's analysis presented on milk regulation is far from the accepted views of many economic experts and certainly untested. Although Cox's brief views milk regulation as a program to "limit price manipulation by a limited number of providers,"917 a cursory review of the U.S. Department of Agriculture indicates that this is a program of "price supports" with a goal of keeping the price of milk up. We continue to believe that we need not consider the off-the-topic milk regulation when deciding telecommunications issues, but we discuss it now to allay Cox's concerns that we have not adequately addressed its arguments.
In summary, we assure all parties that we have very carefully reviewed the comments and replies concerning the critical issue of market definition and market power. In response to these comments and replies, we have amended and changed the decision as we deemed appropriate.
B. Comments and Replies Concerning Specific Regulatory Policies
We turn now to a discussion of the comments and replies concerning specific regulatory policies. In addition to addressing the major findings of the proposed decision, the comments and replies on the proposed decision also requested changes in particular policies.
Although the ILECs supported our major findings, they request changes to specific proposals and explicit clarifications of the scope of the changes adopted. Most notably, AT&T, Verizon, SureWest, Frontier, and Greenlining argue that prohibiting the inclusion of subsidized basic residential services in bundles or promotions is not needed. They contend that the subsidy is unrelated to the price and that this prohibition has the potential to harm rural and low-income customers.918 Several note that this prohibition would be more restrictive than current practices.919
The ILECs also make a number of miscellaneous requests. Many of these suggestions call for clarification. AT&T urges us to clarify that the adoption of pricing freedoms and the principle of competitive neutrality extends to marketing rules and marketing scripts.920 AT&T and Verizon request clarification that our basing standards on FCC accounting rules would replace the company-specific California affiliate relations regulations with FCC's affiliate relations rules.921 Additionally, Frontier and SureWest ask that we state that our gain-on-sale rules are not limited to the sale of land.922
Other ILEC recommendations focus on price caps. AT&T and Verizon request that we state the price cap on residential rates would end prior to January 1, 2009 if the CHCF-B proceeding, R.06-06-028, adopts an earlier discontinuation date.923 Verizon, Frontier, and SureWest ask that we set a date certain for ending the price cap on lines subsidized by the CHCF-B, even if R.06-06-028 is not concluded.924
AT&T and Verizon also address future issues that may require a fact-specific determination of whether a price squeeze occurred. They maintain that courts are competent to make such a determination.925
We make multiple revisions in response to the ILEC comments. We clarify that pricing freedoms that we grant today extend to marketing rules and scripts, disclosure requirements, and administrative practices. We will ensure that all telecommunications rules, policies, and directives are implemented by the carriers and Commission Staff consistent with principles articulated in this decision. To the extent permitted by this decision, we will seek to ensure that we act in a competitively and technologically neutral manner. In a similar vein, we deem the FCC's affiliate-relations rules adequate for our current purposes. Should the Legislature pass video-franchising rules this year, however, we will determine whether additional affiliate rules beyond the FCC's are needed in Phase II. We add that our gain-on-sale policy applies to all utility assets, not just land. Regarding our discussion of a "price squeeze," we are convinced that such a determination requires an investigation of the facts of a specific circumstance, and we deleted language in the proposed decision that is inconsistent with this approach.
Concerning the cap on basic residential service rates, we deny the ILECs' request a termination date before January 1, 2009. We find that this date effectively allows the Commission to carefully consider very important public policy program issues relating to the basic rate in our Universal Service docket, R.06-06-028. Moreover, rates that receive CHCF-B subsidies can change only pursuant to rules that will be adopted in R.06-06-028. We decline at this time to grant freedom to increase the price of services that receive subsidies, particularly since the size of the subsidy is a function of the price that a participant in the CHCF-B charges.
We next turn to specific policy proposals of other parties. Unlike the ILECs, DRA opposes most of the major policy reforms adopted in this order. DRA contends that the elimination of reporting and auditing requirements go "beyond what the record evidence and applicable law permit."926 DRA also argues that the decision to permit geographic deaveraged pricing goes beyond the record in this proceeding.
The PD goes well beyond what the evidentiary record supports by giving the ILECs freedom to raise prices without the constraint of requiring that the new prices be applied throughout their California service territories. AT&T and Verizon first made this recommendation in their opening briefs. Thus, all of the evidence tested during the competition hearings was presented in the context of the proposals on the table at that time - none of which offered the ILECs free rein to raise prices only in specific geographic areas.927
DRA is joined by Cox,928 TURN,929 and TWTC930 in its argument regarding geographically deaveraged pricing. DRA further alleges that our decision to modify the audit process to eliminate detailed audits is erroneously based on a single audit experience.931
DRA also asks that we clarify some of our findings. According to DRA, "the PD does not clearly define what rate elements are frozen and apparently refuses to freeze the prices for services `associated' with basic service such as residential measured usage, Extended Area Service (EAS) and non-recurring charges for residential lines, even though these rate elements are also supported by [LifeLine] subsidies."932 DRA adds that the scope of the cap on basic residential services in areas receiving CHCF-B subsidies and the marketing restrictions on bundles are unclear.933
In response to DRA's challenges to the legality of our actions and the adequacy of the record, we note that the evidentiary record in this proceeding is extensive. Furthermore, all parties were notified of the scope of issues that we would address in this proceeding. The drafting of this decision demonstrates close linkages to the OIR initiating this proceeding; to the Public Utilities Code and federal statutes; and to the evidentiary hearings. In particular, the specific reforms that we adopt concerning pricing, monitoring, accounting, and geographic deaveraging have always been the focus of this proceeding.
DRA's specific allegation that there was insufficient notice concerning the issue of geographic deaveraging is at best misleading and more likely a falsehood. Specifically, DRA's allegation that the issue did not arise until the briefs were submitted is simply false. DRA itself proposed downward geographic deaveraging in its Reply Comments on the OIR of September 2, 2005, a full six months before the briefs were submitted.934 Cox asked for the retention of geographic deaveraging in its Opening Comments on the OIR of May 31, 2005.935 AT&T argued against this position in its Reply Comments on the OIR of September 2, 2005.936 Thus, it is clear that the policy of geographic deaveraging was an issue from the very start of this proceeding, and even recognized as such by some of the parties protesting most bitterly now that the issue has been decided in a manner contrary to their position.
Concerning DRA's request for clarification of which particular rates we cap, we clarify that we cap the residential flat rate and residential measured service offered by the different ILECs, as well as the LifeLine residential service (including the LifeLine installation rate). No other rates are capped. Similarly, since we now cap all residential basic rates for two years and reject marketing restrictions on bundles offered in areas receiving CHCF-B funds, we believe that the scope of our decision is now clear, and no further clarification is warranted. We add that the Commission has existing processes, such as the petition process, that can provide any further clarification that DRA or other parties require.
DRA's criticism that our decision to modify the audit process is based on one audit experience lacks merit. Our decision was based on an analysis of statutes and past Commission precedent regarding modification of rules as markets become competitive.937
TURN's opening comments focused principally on the issue of market power and were discussed in great detail in the decision above. TURN, however, provides limited comments on specific policies. It argues that the proposed decision provides for inadequate monitoring and does not adequately address the withdrawal and grandfathering of services.938 TURN also seeks clarification of whether Phase II monitoring proposals are restricted to those addressing issues affecting the disabled community.939
Concerning issues affecting the grandfathering and withdrawal of services, we find that TURN's examples and arguments are unpersuasive. TURN's hypotheticals where an ILEC restricts the sale of its services only make sense in a world where the ILECs retain monopoly power. We have found that such monopoly power is not a reality in today's voice communications market. Nevertheless, we note that we require ILECs to continue to offer stand-alone basic residential service. Although we believe that the market would require the provision of this service even if we did not order it, this restriction protects those customers who desire only a minimal connection with the wireline telecommunications infrastructure or who are low-income individuals.
Regarding TURN's argument that the monitoring provisions of this order are inadequate, we respond that we are deferring to the monitoring provisions that the FCC has found adequate for the entire country and which routinely form the basis for the monitoring programs in many other states. We also will consider any proposed monitoring reports in Phase II of this proceeding and adopt those where the benefits exceed costs. We clarify that this consideration applies to all proposed monitoring reports, not just those concerning the disabled community.
DisabRA joins with DRA and TURN in arguing that the market is not competitive; its principal arguments were considered in this decision above. DisabRA adds that "policy issues specific to Californians with disabilities should be addressed in this proceeding."940
In response to DisabRA, we again note that issues regarding the disabled community are before the Commission in R.06-05-028. We also have reviewed DisabRA's filing in R.06-05-028; it is clear that DisabRA has squarely placed all its issues before the Commission in that forum.
CPA argues that "the proposed decision confuses the success of wireless carriers in taking business away from PSPs with effective competition in the provision of network access for payphones."941 Thus, CPA "respectfully urges the Commission to examine critically the broad-brush approach taken by the Proposed Decision in defining the markets for telecommunications services, leading to the across-the-board elimination of price regulation for all telecommunications services provided by the incumbent LECs to business customers, large and small."942
In response to CPA's comments, we have considered the record carefully and are confident that our actions are consistent with the facts of this case, California law, and actions where many other states have addressed similar matters. If an ILEC engages in anticompetitive action, CPA can bring an action for redress before this Commission.
Cox asks that we make multiple clarifications. It requests that we clarify that we are not imposing stricter provisions on CLECs than on ILECs.943 Cox additionally urges us to clarify that we are not deregulating either special access or switched access services.944 On that point, Sprint Nextel asks for speedy resolution of special access issues.945
Regarding Cox's and Sprint Nextel's comments, we note that we have revised our decision to ensure that CLECs do not face more restrictive rules than ILECs. We also clarify that the deregulatory actions taken today do not apply to switched access or to special access. Concerning special access, we recognize the importance of this network interconnection service, and we will address this issue in Phase II in a timely manner. We decline to adopt a specific and detailed schedule until commencement of that proceeding.
In addition to supporting our market analysis, CSBRT/CSBA requests that the Commission order institute the following: "(1) a reasonable transition period that covers basic business and residential service; and (2) workshops in 24 or 36 months to gather information on marketplace developments and the impact of the policy changes on consumers."946 CSBRT/CSBA more generally requests "that the Commission monitor market-place developments to ensure that the reforms in fact benefit California consumers."947
In response to CSBRT/CSBA, we state that we believe that the freeze on basic residential rates until January 1, 2009, which is adopted in this decision, provides adequate protections. We defer consideration of proposed workshops until Phase II of this proceeding, which will address monitoring more specifically.
In addition to disputing the legal analysis of the decision and the findings concerning competition in the voice communications market, TWTC renews its requests that the Commission adopt a price floor methodology and that we ensure that CLEC regulations are not stricter than those affecting ILECs.948 We have have addressed the issue of price floors in great detail above. We further note that record testimony indicates under the "total of the floors" approach to "price competition would be undermined and an administrative nightmare would result."949 On the issue of CLEC regulations, we have made revisions to ensure that the pricing freedoms afforded to ILECs are also available to CLECs.
While it supports our efforts to rely on market forces in the voice communications market, CCTA expresses criticism for our interim measure of maintaining revenue neutrality during the period in which we continue to freeze basic residential rates.950 In response, we note that this decision now clarifies that the principle of revenue neutrality is narrow and is meant to offset regulatory-mandated reductions in prices still subject to price controls. Moreover, in situations where the principle is invoked, the Commission will determine the reasonableness of any proposed increases to mandatory rates or surcharges.
C. Review of Comments and Replies
In conclusion, we note that we have reviewed the comments and replies of all parties. Where appropriate, we have revised the proposed decision in response to these comments and replies. On many topics, parties simply reargued points and positions already addressed in their briefs or testimony, but we frequently elected to discuss these topics again in order to demonstrate our full consideration of the issues.
In other cases, we determined that further discussion of a particular point would add nothing to the record of this decision and carried the risk of diminishing the clarity of the order. In those cases, we have not specifically referenced a party's position or argument, but as our discussion regarding Cox's comments makes clear, we have duly considered and weighed the filings in this proceeding.
1. NRF is eighteen-years-old and does not reflect many market advances and statutory changes.
2. NRF predates the Telecommunications Act of 1996, which opened local telecommunications markets to competition.
3. NRF predates the development of VoIP communications and the dramatic growth in Internet and wireless technologies.
4. NRF has its roots in monopoly cost-of-service regulation of incumbent local exchange carriers (ILECs), 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 voice communications 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, spanning three days, explored the policy proposals of active parties.
7. This proceeding has included four days of evidentiary hearings, including oral arguments made before the Assigned Commissioner.
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 provides direct guidance on the means regulators should employ to achieve these goals.
10. California statutes 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 support major social policies, including the provision of telecommunications services to Californians who have low incomes and/or reside in high-cost areas.
12. It currently is not possible for the Commission to adopt a completely uniform regulatory framework that applies to all communications carriers, because the Commission does not have jurisdiction over all communications service 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 largely would maintain the status quo.
14. The pricing of special access services was not part of this phase of the proceeding.
15. Economic theory indicates that a reasonably competitive market will, over the long term, yield a system of rates that approximates the costs of providing goods or services because of the inherent political, bureaucratic and procedural factors that influence and slow regulatory decision making.
16. Economic theory shows that the rates and range of services that result from a competitive market likely will be better than those that a regulated market would produce.
17. Verizon's survey data regarding customers who have "cut the cord" indicate that many customers consider mobile telephones and landline telephones to be close substitutes.
18. Verizon's evidence on the changing pattern of telecommunications use - such as the decrease in landline access lines coupled with the increase in mobile lines - makes it unreasonable to conclude that landline and mobile services are complements.
19. VoIP service qualifies as another close substitute to circuit-switched communications service. As compared to traditional circuit-switched voice communications service, VoIP frequently offers more features and functionalities at any given price point.
20. VoIP provided by cable telephone companies is a direct substitute for circuit-switched wireline service.
21. The historic practice of finding that each telecommunications service constitutes a separate "market" is no longer a relevant factor for analyzing or explaining the dynamics of today's technologically diverse voice communications environment.
22. AT&T witnesses Harris and Taylor convincingly demonstrate the obsolescence of historic market distinctions.
23. A service need not be identical to provide a competitive substitute.
24. Telecommunications technologies and products are constantly changing.
25. All consumers, including the disabled, can benefit from expansion of consumer choice in a competitive marketplace.
26. Availability of a substitute provides competitive discipline in a market segment.
27. 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.
28. The FCC has found that competition in voice communications services in local communications markets is not impaired when UNE-L is available.
29. Verizon, AT&T, SureWest, and Frontier are subject to the unbundling requirements of the Telecommunications Act of 1996.
30. Verizon demonstrated that the federal program to open local markets to competition has resulted in the presence of competing carriers throughout its service territory.
31. The demonstrated presence of competitors throughout Verizon's service territory makes it reasonable to conclude that Verizon lacks market power.
32. Verizon and AT&T documented that alternative technologies have provided realistic alternatives to wireline telecommunications service.
33. Verizon showed that wireless technology is the "key killer" of primary consumer lines.
34. Verizon demonstrated that wireless substitution accounts for approximately half of ILEC primary residential wireline losses.
35. AT&T established that wireless, even when purchased in addition to a wireline connection, provides competitive pressure on landline services.
36. AT&T demonstrated that wireless technology already exercises a competitive check on its provision of telecommunications services.
37. SureWest's market power is limited by the presence of six wireless carriers in its service territory, the FCC unbundling scheme, and developments in VoIP technology.
38. Frontier showed that it faces competition from wireless and VoIP technologies and that it also is subject to unbundling requirements.
39. Wireless service is a substitute for wireline service.
40. The evidence available does not support the conclusion that wireless service is a complement to wireline service.
41. Wireless services accounted for twenty-three percent of all minutes in 2003 and are increasing in their portion of total communications minutes.
42. The increase in usage of wireless minutes, coupled with a decrease in usage of wireline minutes, indicates that the relevant market is voice communications services, not wireline communications services.
43. Broadband is available to most Californians.
44. Wherever a broadband connection is available, VoIP provides a competitive alternative to circuit-switched telecommunications services.
45. Verizon showed that VoIP providers have used numbers associated with every Verizon wire center except one.
46. Experts forecast that sixty-four percent of U.S. households will have the option of purchasing VoIP telephony service from their cable companies by the end of 2006.
47. Cox has achieved a forty percent penetration of the voice communications market in Orange County, California.
48. Provision of VoIP telephony service by a cable company requires minimal incremental investment, estimated to be in the $300 dollar range. Thus, entry into the voice communications market by cable providers requires minimal capital investment.
49. Verizon demonstrated that CLECs, wireless carriers, and cable providers of telephony service are present throughout its entire California service territory.
50. 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 the voice communications market, and therefore lack the market power needed to sustain prices above the levels that a competitive market would produce.
51. This lack of market power pertains throughout the service territories of Verizon, AT&T, SureWest, and Frontier, and holds for both business and residential services based on the ubiquity of the UNE-L unbundling scheme throughout the service territories of each of the four ILECs in this proceeding and on the cross-platform competition present throughout California.
52. The calculation of HHI values provides no information relevant to our assessment of ILEC market power, because rapidly changing technological and market conditions undercut our ability to use HHI as a measure of market power.
53. There is no evidence that usage patterns of low-income customers differ from those of other customers, or that competition in the voice communications market will not benefit low-income customers.
54. Verizon developed a record in this proceeding that demonstrates that policy, technology, and market developments prevent the company from exercising market power in its California service territories.
55. SBC's evidence established that policy and technology also limit its market power.
56. Recent investigations of California's voice communications market by the U.S. Department of Justice, the California Attorney General, the FCC, and this Commission found HHI to be of little value in assessing the market power arising from the mergers of AT&T with SBC and MCI with Verizon.
57. Particularly in a rapidly changing industry like telecommunications, market share tests are inherently backward looking and not a good predictor of future developments.
58. No market is perfectly competitive, but many markets are disciplined by threats of entry and the availability of substitutes, which check the pricing power of market participants.
59. 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.
60. Although a loss of market share demonstrates low market power, market share loss is not necessary to demonstrate a loss of market power.
61. The unbundling requirements developed by the FCC and this Commission check the market power of incumbent carriers in local markets. Verizon provided data that support this conclusion.
62. Wireless service is a competitive threat to wireline service.
63. VoIP technologies compete with historic wireline telecommunications services.
64. Abandonment of the UNE-P regulatory strategy does not indicate that the FCC failed to open local telecommunications markets.
65. Establishing a set of basic residential rates in high-cost areas will enable CHCF-B to meet its policy goals.
66. Allowing geographically unfettered pricing for telecommunications services not supported by CHCF-B will likely improve market conditions.
67. Price controls are incompatible with the emergence of competition in the voice communications market.
68. Market conditions support pricing freedoms for basic residential rates that are not subsidized by CHCF-B or LifeLine.
69. 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.
70. Pricing regulation of LifeLine residential rates will ensure that the Commission is able to adequately support LifeLine in accordance with statutory objectives.
71. It is reasonable that the Commission eliminate price caps for basic residential rates that are not subsidized by CHCF-B on January 1, 2009.
72. It is reasonable to maintain price caps on basic residential flat service, basic residential measured service, LifeLine basic residential service and LifeLine connection service as discussed herein.
73. There is a need for the Commission to remain vigilant in monitoring the voice communications marketplace in order to ensure that the market continues to serve California consumers well.
74. There is ample evidence that cross-platform competition already exists in the business segment of the voice communications marketplace.
75. It is reasonable to eliminate all retail price regulations for all business services and, except as expressly ordered otherwise in this decision, all residential services.
76. Neither policy nor market conditions support using regulations to set the price of new telecommunications services. It is unreasonable to continue these practices.
77. We can rely upon market forces, rather than regulatory proceedings concerning tariffing and contracting practices due to the realistic threat of entry by carriers using UNE-L and widespread competition offered by wireless, cable, and VoIP providers.
78. Because ILECs like market power in voice communications markets, it is reasonable to permit all tariffs to go into effect on a one-day filing, but it is also reasonable to require that any tariffs that impose price increases or service restrictions provide a thirty-day advance notice to all affected customers.
79. The proposal to afford new services full pricing flexibility on a one-day advice letter filing is consistent with the statutory framework and current market conditions, because this proposal creates no regulatory obstacles or uncertainties that would delay introduction of new services.
80. Because establishing price floors retards competition in markets where carriers lack market power, it is not reasonable to establish a price floor, supported by cost data, for telecommunications offerings.
81. The existence of UNE-L prices should, for any ILEC service using a loop, simplify the identification and determination of anti-competitive behavior.
82. Tariffing and pricing reforms adopted in this decision provide substantial pricing freedoms applicable to all non-subsidized services.
83. Because company-specific or sector specific regulations inhibit competition in telecommunications markets, it is reasonable to permit companies to terminate company-specific or sector-specific regulations pertaining to voice communications services, such as marketing rules, disclosure requirements and previously-mandated administrative practices.
84. MCI's proposal to detariff telecommunications service deserves serious consideration because it overcomes many of the limitations and inefficiencies of the tariffing process.
85. It is reasonable to explore all legal issues associated with detariffing in an expedited comment cycle.
86. Competition in the voice communications market allows us to rely on the market to assure the reasonable pricing of any bundle of services that does not include a service subsidized by LifeLine.
87. The considerations that led to our restrictions on the general pricing of LifeLine residential service also lead us to require that bundles be made available to LifeLine customers at a discount equal to the LifeLine subsidy.
88. It is reasonable to permit bundles to include any and all telecommunications services.
89. Just as any service may be included in a bundle, both subsidized and unsubsidized services may be featured by a promotion.
90. It is reasonable for California to rely on the federal regulatory policy for promotions, and not impose state-specific restrictions on promotion duration.
91. An appropriate limit on the use of promotions is provided by the federal regulatory policy that requires that carriers' promotions lasting longer than ninety days be subject to resale requirements. It is not reasonable to impose additional limitations in voice communications markets.
92. Consistent with the Commission's policy permitting different prices in different areas of a carrier's service territory for services not subsidized by CHCF-B, it is reasonable to permit carriers to limit offering of bundles to particular geographic areas.
93. The communications market is ready to adopt the contracting practices commonly used in other competitive markets.
94. Current regulatory reviews of contracts no longer serve the public interest.
95. Competitive contracting practices will better serve customer needs than regulated contracting practices that impose reviews that delay the effectiveness of executed contracts.
96. Public policy and the level of market competition advise against the continuation of monopoly era regulations, which limit the ability of carriers to withdraw or grandfather services that are no longer attractive to customers.
97. Policies continuing to impose monopoly era requirements on ILECs are incompatible with statutes that direct us to act in a technologically and competitively neutral fashion.
98. Although service quality reports are a large percentage of all monitoring reports, parties in this proceeding did not present any details regarding service quality issues.
99. NRF monitoring reports were little used.
100. Parties are in general agreement that California should streamline its monitoring and auditing requirements.
101. It is reasonable to end all NRF-related monitoring reports.
102. It is reasonable for California to rely on the monitoring reports provided by carriers to the FCC for state regulatory purposes.
103. It is reasonable to consider the costs and benefits of any new monitoring program proposed in Phase II of this proceeding.
104. There is no reason to continue to mandate a set of regulatory accounts with California jurisdictional adjustments or to require California-specific affiliate transaction rules.
105. FCC and SEC affiliate transaction rules provide adequate protection for voice communications markets.
106. Current accounting requirements create a confusing proliferation of regulatory accounts that make utility operations less transparent, and regulatory adjustments no longer serve a ratemaking purpose.
107. Service quality issues are under consideration in R.02-12-004.
108. Allocating to ILEC shareholders one hundred percent of all ILEC gains and losses from the sale of all ILEC assets, including land, is a reasonable revision of current rules, which already adopt this policy for all property acquired in the last twenty years.
109. Allocating to ILEC shareholders one hundred percent of all gains and losses from ILEC assets, including land, will have minimal impact on rates and is consistent with the principle that those who bear the risk should reap the reward.
110. There is no longer a need for company-specific or sector-specific regulation of marketing practices, disclosure rules or administrative procedures associated with the sale of voice communications services.
111. Nearly twenty years ago, the adoption of NRF broke the link between costs and rates.
112. Adopting a policy that allocates all gains or losses from sale of ILEC assets to ILEC shareholders will simplify our regulatory regime, will have minimal impacts on ratepayers, and is consistent with the economic principle that those who bear the risks should reap the rewards.
113. Shareholders of companies competing with ILECs retain all gains or losses from the sale of their companies' utility property.
114. All parties support elimination of most Commission earnings regulations.
115. There is no longer a need for the NRF regulatory apparatus of price caps, annual price cap filings, productivity factors, and all residual elements of rate-of-return regulation, including the calculation of shareable earnings.
116. Firms factor in the risk of future regulation and its potential appropriation of gains in their investment decisions.
117. Mandated reports of "regulated" earnings may distort firms' decisions and conflict with reports required by financial markets.
118. It is no longer reasonable to continue to report Yellow Page revenues in regulatory accounts. Such a practice has no effect on ratemaking and causes California accounts to depart from standard accounting practices.
119. This decision does not apply to special access.
1. A new regulatory framework should comply with state and federal statutes and should endeavor to meet the policy goals and conform to the policy preferences incorporated into statutes.
2. Specific state policies for telecommunications are set forth in Public Utilities Code § 709 and California regulatory practice should reflect these policies.
3. 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. With respect to our universal service commitment, Public Utilities Code § 709 instructs us to seek to assure continued affordable and widespread availability of high quality telecommunications services for all Californians.
7. Public Utilities Code § 739.3 directs the Commission 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 voice communications 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 has different levels of jurisdiction over different voice communication service providers.
10. Often the Commission's jurisdiction overlaps with that of other regulatory authorities, such as the FCC, and California regulatory policy should accommodate the realities of shared jurisdiction.
11. California's regulation of the telecommunications market should reflect the changes in conditions that result from the dramatic growth in Internet and wireless communications technologies.
12. The pricing of special access services should be considered in the next phase of this proceeding.
13. California regulatory policy should reflect the fact that wireless telecommunications services compete with wireline services.
14. California regulatory policy should reflect the fact that VoIP technology competes with circuit-switched technology in the provision of voice communications services.
15. There is no compelling economic or legal reason to segment the market by user characteristics, such as income or usage patterns, or to partition different groups of customers into separate markets. Our regulatory practice should not impose such distinctions.
16. Verizon and AT&T confirmed that ILEC market power is limited by the FCC's unbundling scheme, which makes it possible for competitors to provide telecommunications services in every wire center located in their service territories. California regulatory policy should reflect the existence of this check on the market power of ILECs.
17. The demonstrated presence of competitors throughout Verizon's service territory further supports the conclusion that Verizon lacks market power in the voice communications market.
18. Testimony showing the limited market power of AT&T was persuasive and supports the conclusion that AT&T lacks market power in the voice communications market.
19. Testimony showing the limited market power of SureWest and Frontier was persuasive and supports the conclusion that these two ILECs lack market power in the voice communications market.
20. Since the ILEC participants in this proceeding lack market power, the regulations pertaining to the pricing of telecommunications services should be modified to bring pricing practices more in line with the operation of competitive markets, particularly since this is a goal of California statutes.
21. The regulatory framework concerning the pricing of telecommunications services adopted in this proceeding is consistent with California and federal law.
22. The reliance on HHI calculations is neither legally nor economically justified in this proceeding.
23. Substantial legal precedent acknowledges the dangers of relying on market share as a measure of competition in regulated markets.
24. Since Verizon, AT&T, SureWest, and Frontier lack market power in their service territories, price regulation is no longer needed to ensure that their prices are just and reasonable. Such price regulations should be removed.
25. We need not find that a voice communications market is "perfectly competitive" in order to permit an increase in pricing flexibility and modify monitoring and report regulations as we have done here.
26. We do not need to demonstrate that incumbents carriers have lost significant market share to competitors in order to justify modifications to the regulatory program adopted herein.
27. Neither statutory directives nor market conditions warrants continuation of our geographically averaged pricing policy for services that are not subsidized by CHCF-B. Consistent with the discussion herein, the Commission should eliminate the policy of requiring geographically averaged prices.
28. The combination of FCC-mandated unbundling policies, required provision of stand-alone DSL service by Verizon and AT&T, and substantial cross-platform competition obviates the need for continuing price controls on services not subsidized by CHCF-B. These price controls should be removed.
29. The Commission should eliminate price caps for basic residential rates that are not subsidized by CHCF-B on January 1, 2009.
30. The Commission should maintain price caps on basic residential flat service, basic residential measured service, LifeLine basic residential service and LifeLine connection service until January 1, 2009 as discussed herein.
31. The basic residential service in California should remain affordable and should not trend above the current highest basic residential rate in the state. This is a goal of proceeding R.06-05-028.
32. The Commission retains the authority and firm resolve, should it see evidence of market power abuses, to reopen this proceeding and promptly investigate any such abuses.
33. The Commission should eliminate all retail price regulations for all business services and, except as expressly ordered otherwise in this decision, all residential services.
34. There is no public interest in maintaining outmoded tariffing procedures that require review of cost data and delay service provision to customers and this practice should end.
35. All tariffs should go into effect on a one-day filing, but any tariffs that impose price increases or service restrictions should require a thirty-day advance notice to all affected customers.
36. Public Utilities Code § 495.7 authorizes the Commission to eliminate tariffing for all services, with the exception of basic service, as long as certain criteria are met.
37. Current regulatory reviews of contracts no longer serve the public interest and should be substantially changed
38. Contracts should be effective upon execution.
39. Contracts should be filed with the Commission within fifteen business days of execution in order to enable the Commission and interested parties to ensure that carriers do not violate anti-discrimination requirements embedded in statutes.
40. With the exception of basic residential (1MR and 1FR) and basic business (1MB) services or where withdrawal of service would raise public safety issues, it is reasonable to permit the withdrawal or grandfathering of any service after a thirty-day advance notice to customers and a one-day filing period before a related advice letter becomes effective.
41. Bundles should be tariffed under the same rules that apply to the tariffing of any telecommunications services and may be geographically targeted.
42. Bundles should be made available to LifeLine customers at a discount equal to the LifeLine subsidy.
43. California should rely on the federal regulatory policy for promotions, and not impose state-specific restrictions on promotion duration.
44. The Commission should permit the flexible pricing of all promotions and all bundles, unless otherwise provided by this decision, on a one-day tariff filing.
45. Since there is no longer a need to rely on the imputation of costs to ensure that the price of any tariffed service is reasonable, there is no reason to retain a similar requirement for bundled services.
46. Regulations requiring special disclosures associated with a bundles should be discontinued since they are applied asymmetrically and limit the ability of companies to provide services to customers.
47. ILECs should be permitted to include any service in a promotion because this enables them to respond to competition in the market and provide customers with additional choice.
48. An ILEC's promotion should be tariffed under the same one-day rules that apply to the tariffing of individual telecommunications services and may be geographically targeted.
49. All carriers should face similar rules concerning the initiation and withdrawal of promotions.
50. Service quality issues should be reviewed in the proceeding already opened to consider this issue, R.02-12-004.
51. The Service Quality OIR offers an appropriate venue for determining how the Commission should act to promote service quality in the new competitive voice communications marketplace.
52. The Commission should defer all service quality issues to the Service Quality OIR.
53. Parties should be able to modify their tariffs to eliminate asymmetric or company-specific restrictions on marketing practices, disclosure requirements or administrative processes.
54. To comply with the statutes encouraging uniform treatment of carriers and efficient regulation, it is reasonable to 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 deemed to satisfy any auditing requirements under the Public Utilities Code.
55. The Commission should defer to FCC standard accounting practices for California carriers.
56. The Commission should defer to the FCC affiliate transaction rules for all California carriers and eliminate all California company-specific affiliate transaction rules and reporting requirements.
57. The Commission should eliminate all NRF-specific monitoring reports and instead rely on the FCC ARMIS data.
58. The Commission should determine in Phase II of this proceeding what information and reports best meet our needs in the new competitive voice communications environment.
59. The Commission should permit ILEC shareholders to retain one hundred percent of all ILEC gains and losses from the sale of all ILEC assets, including land.
60. Allocating to ILEC shareholders one hundred percent of all gains and losses from the sale of all ILEC assets, including land, is consistent with the rules under which carriers competing with ILECs now operate.
61. The Commission should end all the vestiges of the outdated NRF framework and rate-of-return regulation.
62. The Commission should eliminate 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.
63. The Commission should end the reporting of Yellow Page revenues, because the reporting is not required by statute and causes California accounts to depart from standard accounting practices.
64. 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 AT&T, Verizon, SureWest, and Frontier, the four largest ILECs regulated under NRF, the geographic averaging requirement shall be lifted for all services addressed in this proceeding that are not subsidized by CHCF-B.
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 R.06-06-028.
3. Price caps on basic residential services that are not subsidized by CHCF-B shall be automatically lifted on January 1, 2009.
4. Basic residential rates of any ILEC shall not fall below AT&T's current 1 MR and 1 FR rates, unless the Commission, after deliberation, formally adopts some other policy consistent with the statutory scheme.
5. For AT&T, Verizon, SureWest, and Frontier, all retail price regulations are eliminated for all business services and, except as expressly ordered otherwise in this Decision, for all residential services.
6. Measured residential basic service, flat-rate residential service, LifeLine measured and flat service and LifeLine installation prices for AT&T, Verizon, SureWest, and Frontier shall remain subject to the pricing controls discussed herein until modified by R.06-05-028 or R.06-06-028.
7. Measured residential basic service, flat-rate residential service, LifeLine measured and flat service and LifeLine installation prices for AT&T, Verizon, SureWest, and Frontier shall continue to be offered on a stand-alone basis.
8. AT&T, Verizon, SureWest, and Frontier shall be authorized to provide new services with full pricing flexibility on a one-day advice letter filing.
9. 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 thirty-day advance notice to all affected customers.
10. We shall 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.
11. For AT&T, Verizon, SureWest, and Frontier, contracts shall be effective upon execution, but contracts must be filed with the Commission within fifteen business days of execution.
12. With the exception of basic residential (1MR and 1FR) and basic business (1MB) services or where withdrawal of service would raise public safety issues, AT&T, Verizon, SureWest, and Frontier shall be authorized to withdraw and/or grandfather services effective on a one-day advice letter filing, but a carrier must provide at least thirty-day advance notice to affected customers before withdrawing or grandfathering a service.
13. All CLECs shall be permitted to follow the same flexible tariffing procedures adopted for AT&T, Verizon, SureWest, and Frontier and need not follow more restrictive rules.
14. AT&T, Verizon, SureWest, and Frontier may offer bundles of any telecommunications services.
15. Bundles shall be made available to LifeLine customers at a discount equal to the LifeLine subsidy.
16. Pursuant to FCC regulations, AT&T, Verizon, SureWest, and Frontier shall offer for resale the services in all promotions that last over ninety days.
17. All service quality issues shall be deferred to Service Quality Order Instituting Rulemaking 02-12-004.
18. We shall defer to the FCC's standard accounting practices and affiliate transaction rules for California carriers. We will no longer require a set of regulatory accounts with California jurisdictional adjustments. Unless subsequently ordered otherwise, AT&T, Verizon, SureWest, and Frontier should follow the FCC's standard accounting practices and affiliate transaction rules in all filings and reports made to this Commission.
19. We adopt for all carriers the policy that we instituted for AT&T in D.93-02-010, where periodic staff review of the accuracy of monitoring reports was deemed to satisfy any auditing requirements under the Public Utilities Code.
20. One hundred percent of all gains and losses from the sale of all assets, including land, by AT&T, Verizon, SureWest, and Frontier shall be allocated to their respective shareholders.
21. With the exception of conditions relating to basic residential rates, all asymmetric requirements concerning marketing, disclosure, or administrative processes shall be eliminated.
22. 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.
23. The reporting of Yellow Page revenues in regulatory accounts is eliminated.
This order is effective today.
Dated August 24, 2006, at San Francisco, California.
MICHAEL R. PEEVEY
President
GEOFFREY F. BROWN
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
Commissioners
I reserve the right to file a concurrence.
/s/ GEOFFREY F. BROWN
Commissioner
I reserve the right file a concurrence.
/s/ DIAN M. GRUENEICH
Commissioner
R.05-04-005
D.06-08-030
Concurrence of Geoffrey F. Brown, Commissioner
Our current wireline telephone regulatory regime is unsustainable. For almost the entirety of the past century, regulators have helped create and prop up a subsidized industry. Originally done in the name of universal service, customers of what we now call basic phone service had equal access and paid roughly the same rate. The cozy relationship between the incumbent phone company and the regulators was a byproduct of this agreement. More recently regulators acquiesced to requests by the incumbents to separate the accounts for the highly profitable advanced services that run on top of the subsidized network phone. Company profits soared while rates for what became "basic service" remained largely unchanged. This was the point when things got really out of balance.
"Basic service" was protected and still massively subsidized by everything from terminating access charges to geographic averaging. If people wanted "advanced services" they were free to choose them at whatever price the monopolists decided to make them available. While this regulatory structure achieved universal service goals and enabled higher returns on investment, it was hardly the byproduct of a natural market. The long term sustainability of that market disappeared when the local market was opened to competition by wireless providers and competitive carriers.
This Commission, along with the FCC at the federal level, decided setting wholesale rates at cost (plus a reasonable profit) ensured pricing control by the market and sustainability of the universal service mechanisms. As it turns out, that market structure was not sustainable for anything other than the business market, as evidenced by the effectively zero residential customers that have access to alternative providers. Heralding the arrival of competition will not negate that fact.
Despite the failure of initial attempts at residential competition, we are truly on the cusp of an era of competitive telecommunications. This new market is a result of advances in wireless technology, especially the spectrum beyond the grasp of regulated providers, and the cable industry. This new market is the one that I hope this decision will protect and nurture. The surest way we will do so is by removing the subsidies we have built up over so many decades. Part and parcel of that is pricing flexibility.
Certainly some rates will go up, and certainly some rates will go down. This Commission now has the responsibility to ensure two things. First, that the pricing flexibility necessary for the health of the market is not abused. Second, we must reform universal service mechanisms to ensure they are available to any customer regardless of the technology they chose for phone service.
This Commission must also correct the shortcomings of this decision, which errs by failing to more closely examine the metrics by which it should determine the effectiveness of competition. This decision also errs by failing to establish a procedural mechanism to ensure a forum for that examination.
While residential and small business line losses, so touted by the incumbents as evidence of competition, appear to be largely related to eliminating second lines when choosing broadband, not to "cutting the cord," the overwhelming majority of homeowners and renters still have to purchase residential landline service from a geographically-dominant incumbent monopoly. As to this huge segment of the market, discussions about wi-fi, VoIP, and cellular competition miss the point. Currently, monopolists own these (and most other) segments of the market, lock, stock and barrel. Until security and reliability issues are addressed by competitors and regulators, incumbent companies will retain their inordinate market share and power.
This decision's basic infirmity is its core conclusion (at p. 111) that incumbents "lack the ability to limit the supply of telecommunications services in (sic) voice communications market, and therefore lack the market power needed to sustain prices above the levels that a competitive market would produce. We find that this result holds throughout their service territories and for both business and residential services." In reality, there is insufficient evidence to support this conclusion; it is founded on its author's fond hope that wishing will make it so, coupled with a general recognition that its assertion stands as a condition precedent to sweeping away the existing regulatory scheme.
The reality is that there is not a single market for voice services. There is a segmented market, with sweeping amounts of geographic and service-specific market power by the incumbents. For example, the decision seems to assume that a customer who gives up his landline in preference for wireless is a loss to the incumbent; in fact, many who migrate from landline to wireless choose a carrier owned by the incumbent.
This decision does a wholly inadequate job of analyzing this market power, relying upon anecdotal and vague, speculative evidence. Its conclusions (which are clearly not supported by a preponderance of the evidence) may not even meet the much lower "substantial evidence" test.
What is also true, something consumer advocates gainsay, is that fundamental change is coming in telephone markets, largely because a major, unregulated competitor (cable) is finally entering the telephone market. This entry, coupled with cellular and other wireless technologies, will, at some point in the not too distant future, change the dynamics of the market to such a degree that state regulatory power may be irrelevant.
The existing state regulatory scheme is infirm and warrants massive change, both because of the prohibition on regulation of comparable technologies (due largely to congressional and FCC preemption) and because of California regulators' inability and abject unwillingness to analyze and monitor market behavior.
Under such circumstances, perhaps the most effective enforcement mechanism against market power abuses lies in the initiation of anti-trust litigation. Monopolists have historically hidden behind the "filed rate" doctrine to avoid subjecting their market power to anti-trust scrutiny. This exemption from accountability derives from the legal fiction that a tariff provides adequate remedy to one who is abused by a monopolist.
My primary reason for acquiescing to this appalling and inadequate rationale for eliminating any regulatory protection against market power abuses lies in the author's enthusiastic promise to explore elimination (in this proceeding's next phase) of the tariffs that monopolists use to insulate themselves from responsibility for anti-competitive behavior. Such tariff elimination will permit private personal injury attorneys to undertake the anti-trust obligations that this commission has chosen to forbear.
The general direction this hurried decision takes appears inevitable. It could have (and should have) been carefully fashioned for gradual relinquishment of regulatory power when competitive benchmarks were met. Such nuanced gradualism was not the preference of the author and this commission's operative majority. Instead, it chose to cut the Gordian knot. Only time will tell whether this anticipatory optimism will benefit the market's myriad non-competitive regions and segments. To the extent that our hasty electricity deregulation serves as a template, it affords an unsettling prophesy.
It is my fervent hope that this Commission, despite this order of deregulation of prices, will be vigilant to see that incumbent utilities do not take advantage of customers in those sectors of the market where they retain market power. This is the Commission's remaining responsibility, and given the latitude we have afforded incumbent utilities, it is more important today than ever.
August 24, 2006
/s/ GEOFFREY F. BROWN
Geoffrey F. Brown, Commissioner
COMMISSIONER DIAN M. GRUENEICH
CONCURRENCE REGARDING DECISION ON THE
ASSESSMENT AND REVISION OF THE REGULATION OF TELECOMMUNICATIONS UTILITIES
I expressed support for this rulemaking when we embarked in April of last year upon our journey of reassessing the Commission's regulation of telecommunications utilities. Regulatory agencies should routinely review their rules and regulations. For California, a major look at our regulatory framework was long overdue, especially in light of the sweeping structural, economic, and technological changes in the telecommunications industry.
In voting to adopt the Order Instituting Rulemaking for this case,
I stated that "I strongly believe that a new regulatory framework must be based on a thorough understanding of the state of competition in the telecommunications market and must take into account different levels of competition over time and in different geographical and demographic markets." This belief holds true more than ever today.
Many know that I support strongly the Commission's obligation to protect California's low income, non-English fluent, and rural customers. In our efforts to rely upon competitive markets to provide the same consumer protections we would otherwise provide via regulations, it is essential that the Commission recognize that affirmative steps must be taken-beyond the Decision approved on August 24, 2006 and beyond a reliance upon markets-to ensure that all California consumers, regardless of income level, ethnicity, or geographic location, have reliable and affordable service.
In the Order Instituting Rulemaking (OIR) issued last year, we stated that "the adopted framework should ensure, to the extent practical, that every person and business in California has access to modern, affordable, and high quality telecommunications services." The Decision fails to meet that commitment in several ways.
First, all recognize that there is variation, geographically and by market segment, in telecommunication services offered in California. The basic thrust of this Decision is that market mechanisms will drive companies to offer customers a range of competitive services. While I believe this is generally true, I disagree with the statement on page 111 of the Decision that "[o]ur review of the extensive record in this proceeding convinces us that Verizon, SBC, 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." This statement may be true for some geographic areas and some market segments but not for all. I therefore disagree with finding of fact 50 on page 247.
The second way in which the Decision fails to meet the commitment of the OIR is the absence of reasonable safeguards to assure that customers have affordable service. The Decision provides for the removal of price caps on basic local exchange service on January 1, 2009. Many parties argued that a longer period of 3 years, with a review prior to the release of the price caps, is more appropriate. While the Decision reflects Assembly Bill 2987, which extends an earlier proposed cap period of two years, the additional five months do not realistically address the underlying concern that we may be moving forward without adequate safeguards. The Decision does not provide an opportunity during the transition period for the Commission to ensure that competition is adequate to support the final removal of the price cap. The Decision does not provide an opportunity at the end of the transition period for consumers to be assured that they will have the "access to modern, affordable, and high quality telecommunications services" that the OIR and this Decision promises.
This leads me to my third area of concern: the failure of the decision to include even the most basic monitoring, reporting, and audit commitments. We act today without any assurance of monitoring or auditing before and/or after 2009 to ensure we meet and continue to meet our commitment set forth in the OIR - that every person and business in California has access to modern, affordable, and high quality telecommunications services.
I am very troubled that the Decision specifies that the criteria to be used to determine reporting requirements will be whether the cost of the reports outweighs the benefits. A far more appropriate statement would have been that the Commission will require all reports and audits necessary to determine whether our commitment in the OIR is being met. The decision's focus on industry cost rather than consumer service does not engender consumer confidence in this Commission's commitment to consumers.
Finally, I note that while the text of the Decision states an intent to conduct a Phase Two on reporting requirements, there is no Ordering Paragraph requiring this next phase, and thus parties have no assurance as to the scope, timing, or even existence of a second phase establishing the key reporting and auditing requirements.
Despite my serious concerns, I vote today for the decision because we do need to move to simplify and update the 18-year-old regulatory framework for California and provide flexible pricing in the markets that are competitive.
This Decision states that "competition doesn't have to be perfect." For the sake of California's most vulnerable consumers, the Commission could and should have acted to ensure that competition is less imperfect.
Dated August 24, 2006, at San Francisco, California.
/s/ DIAN M. GRUENEICH |
Dian M. Grueneich Commissioner |
881 Where parties identified either a typographical or factual error, we corrected the error in the decision text, frequently without comment.
882 Opening Comments of Pacific Bell on Proposed Decision at 1 (Aug. 15, 2006).
883 Opening Comments of Verizon on Proposed Decision at 1 (Aug. 15, 2006) (citation omitted).
884 Id.
885 See Opening Comments of Citizens on Proposed Decision at 1 (Aug. 15, 2006); Opening Comments of SureWest on Proposed Decision at 1 (Aug. 15, 2006).
886 Opening Comments of CSBRT/CSBA at 1 (Aug. 15, 2006).
887 Opening Comments of DRA on Proposed Decision at 4 (Aug. 15, 2006). The Opening Comments of DOD/FEA on the Proposed Decision (Aug. 15, 2006) also express support for this particular position.
888 Id. at 12, 5.
889 Id. at 6.
890 Id. at 3.
891 See, e.g., Harris Testimony at 28, Ex. 19.
892 DRA Opening Brief at 13.
893 Case 04-C-0616, Proceeding on Motion of the Commission to Examine Issues Related to the Transition to Intermodal Competition in the Provision of Telecommunications Services, Statement of Policy on Further Steps Toward Competition in the Intermodal Telecommunications Market and Order Allowing Rate Filings, (Issued and Effective Apr. 11, 2006). We took official notice of a recent order of the New York Commission concerning intermodal telecommunications competition on our own motion.
894 Id. at 57.
895 Id. at 66.
896 We also note that DisabRA endorses the market analysis of TURN (Opening Comments of DisabRA on the Proposed Decision at 17 (Aug. 15, 2006)).
897 Opening Comments of TURN on the Proposed Decision at 2 (Aug. 15, 2006).
898 Id. at 7.
899 Id. at 10-12.
900 Id. at 13
901 Id. at 12
902 Id. at 17.
903 Id. at 7.
904 TURN and DRA share as similar position on this issue, as noted in the discussion in Section V.B.5 above.
905 See Reply Comments of Verizon on the Proposed Decision at 8 (Aug. 22, 2006) for a discussion of this point.
906 Id.
907 Harris (for AT&T) at 12-13, Ex. 18.
908 Taylor (for AT&T) at 10, Ex. 29.
909 Opening Comments of Cox on the Proposed Decision at 2-5 (Aug. 15, 2006). We note that in this position they are also joined by TURN. See Opening Comments of TURN on the Proposed Decision (Aug. 15, 2006) at 14.
910 Opening Comments of Cox on the Proposed Decision at 4 (Aug. 15, 2006).
911 Id. at 7.
912 Id.
913 See Section V.B.5.
914 Reply Comments of Verizon on Proposed Decision at 2 (Aug. 22, 2006). We thank Verizon for adding up the multiple citations to the record.
915 Id. at 11.
916 Id. at 12.
917 Cox Opening Brief at 7
918 Opening Comments of Pacific on Proposed Decision at 2-6 (Aug. 15, 2006).; Opening Comments of Verizon on Proposed Decision at 3-8 (Aug. 15, 2006).; Opening Comments of SureWest on Proposed Decision at 3-9 (Aug. 15, 2006).; Opening Comments of Citizens on Proposed Decision at 4-9 (Aug. 15, 2006).; Opening Comments of Greenlining on Proposed Decision at 1-2 (Aug. 15, 2006)..
919 Opening Comments of Pacific on Proposed Decision at 2 (Aug. 15, 2006). Opening Comments of Verizon on Proposed Decision at 3 (Aug. 15, 2006)..
920 Opening Comments of Pacific on Proposed Decision at 11 (Aug. 15, 2006)..
921 Opening Comments of Pacific on Proposed Decision at 12 (Aug. 15, 2006); Opening Comments of Verizon on Proposed Decision at 12 (Aug. 15, 2006).
922 Opening Comments of Citizens on Proposed Decision at 10 (Aug. 15, 2006); Opening Comments of SureWest on Proposed Decision at 10 (Aug. 15, 2006).
923 Opening Comments of Pacific on Proposed Decision at 6 (Aug. 15, 2006); Opening Comments of Verizon on Proposed Decision at 10 (Aug. 15, 2006).
924 Opening Comments of Verizon on Proposed Decision at 10 (Aug. 15, 2006); Opening Comments of Citizens on Proposed Decision at 9-10 (Aug. 15, 2006); Opening Comments of SureWest on Proposed Decision at 9-10 (Aug. 15, 2006).
925 Opening Comments of Pacific on Proposed Decision at 13-15 (Aug. 15, 2006); Opening Comments of Verizon on Proposed Decision at 10-11 (Aug. 15, 2006).
926 Opening Comments of DRA on Proposed Decision at 16 (Aug. 15, 2006).
927 Id. at 18.
928 Reply Comments of Cox on the Proposed Decision at 4 (Aug. 22, 2006).
929 Reply Comments of TURN on the Proposed Decision at 8 (Aug. 22, 2006). TURN also argues that the policy of geographic deaveraging is inconsistent with Public Utilities Code § 739.3.
930 Reply Comments of TWTC on the Proposed Decision at 4 (Aug. 22,2006).
931 Id. at 17
932 Opening Comments of DRA on Proposed Decision at 16 (Aug. 15, 2006) at 20.
933 Id. at 21.
934 DRA Reply Comments at 12 (Sept. 2, 2005).
935 Cox Opening Comments at 16 (May 31, 2005).
936 SBC Reply Comments on OIR at 41 (Sept. 2, 2005) (citing Harris Reply Comments at 37).
937 D.93-12-010 (where periodic staff review of accuracy of monitoring reports was found to satisfy the auditing requirements of the Public Utilities Code).
938 Opening Comments of TURN on the Proposed Decision at 21 (Aug. 15, 2006).
939 Id. at 22.
940 Opening Comments of DisabRA on the Proposed Decision at 10 (Aug. 15, 2006).
941 Opening Comments of CPA on Proposed Decision at 3.
942 Id. at 4.
943 Opening Comments of Cox on Proposed Decision at 14 (Aug. 15, 2006).
944 Id. at 17.
945 Opening Comments of Sprint Nextel on Proposed Decision at 5-13 (Aug. 15, 2006).
946 Opening Comments of CSBRT/CSBA on the Proposed Decision at 6 (Aug. 15, 2006).
947 Id.
948 Opening Comments of TWTC at 6-9 (Aug. 15, 2006).
949 Taylor (for AT&T) at 24, Ex. 28.
950 Opening Comments of CCTA on the Proposed Decision at 6 (Aug. 15, 2006).
