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STATE OF CALIFORNIA GRAY DAVIS, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

March 12, 2003 Agenda ID # 1866

TO: PARTIES OF RECORD IN RULEMAKING 01-09-001
AND INVESTIGATION 01-09-002

This is the proposed decision of Administrative Law Judge (ALJ) Thomas previously designated as a principal hearing officer in this proceeding. An earlier, incorrect version of this decision was mailed to the parties on March 4, 2003; the attached decision takes the place of that decision. The attached decision will not appear on the Commission's agenda for at least 30 days after the date it is mailed. This matter was categorized as ratesetting and is subject to Pub. Util. Code § 1701.3(c). Pursuant to Resolution ALJ-180 a Ratesetting Deliberative Meeting to consider this matter may be held upon the request of any Commissioner. If that occurs, the Commission will prepare and mail an agenda for the Ratesetting Deliberative Meeting 10 days before hand, and will advise the parties of this fact, and of the related ex parte communications prohibition period.

The Commission may act at the regular meeting, or it may postpone action until later. If action is postponed, the Commission will announce whether and when there will be a further prohibition on communications.

When the Commission acts on the proposed decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties.

Parties to the proceeding may file comments on the proposed decision as provided in Article 19 of the Commission's "Rules of Practice and Procedure." These rules are accessible on the Commission's website at http://www.cpuc.ca.gov. Opening comments are due on April 2, 2003. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages; however, in view of the length of the decision, the parties may make opening comments not to exceed 25 pages in length. Reply comments are due on April 9, 2003. Finally, comments must be served separately on the ALJ and the Assigned Commissioner, and for that purpose I suggest hand delivery, overnight mail, or other expeditious method of service.

/s/ ANGELA K. MINKIN

Angela K. Minkin, Chief

Administrative Law Judge

ANG:jyc

Attachment

ALJ/SRT/jva/jyc DRAFT Agenda ID #1866

Decision PROPOSED DECISION OF ALJ THOMAS (Mailed 3/12/2003)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Commission's Own Motion to Assess and Revise the New Regulatory Framework for Pacific Bell and Verizon California Incorporated.

Rulemaking 01-09-001

(Filed September 6, 2001

Order Instituting Investigation on the Commission's Own Motion to Assess and Revise the New Regulatory Framework for Pacific Bell and Verizon California Incorporated

Investigation 01-09-002

(Filed September 6, 2001)

(See Appendix A For List of Appearances)

INTERIM OPINION REGARDING PHASE 2B ISSUES

SERVICE QUALITY OF PACIFIC BELL AND

VERIZON CALIFORNIA, INC.

Table of Contents

INTERIM OPINION REGARDING PHASE 2B ISSUES SERVICE QUALITY OF PACIFIC BELL AND VERIZON CALIFORNIA, NC.......................................2

I. Summary 22

II. Scope of This Phase 55

III. Comparison of Pacific's and Verizon's Results 77

IV. Measures of Service Quality 88

V. Preliminary Remarks About Service Quality Data 2222

VI. Pacific's Service Quality Performance 2626

VII. Self Monitoring - Pacific 7777

VIII. Customer Satisfaction and Service Quality Surveys - Pacific 7979

IX. Pacific's Surveys 8484

X. Verizon's Service Quality Performance 104104

XI. Comments on Proposed Decision 146146

XII. Assignment of Proceeding 146146

Findings of Fact 146146

Conclusions of Law 172172

ORDER ............................................................................................181181

Appendix A - Appearance List

I. Summary

In this decision we evaluate the service quality of Pacific Bell (Pacific)1 and Verizon California, Inc. (Verizon) over the period January 1, 1990 through the present. We ordered such a review in Decision (D.) 89-10-031, which established the New Regulatory Framework (NRF) as a means of regulating both carriers. NRF is a form of incentive-based regulation that offers an alternative to rate-of-return regulation. The NRF framework, implemented in 1990,2 relaxed rate regulation of certain large telephone companies in California with the goal of promoting lower costs, innovation and price stability.

The Commission acknowledged in setting up NRF that the incentive to cut costs might hurt customers and service quality if the carriers cut too deeply. Recognizing that the availability of high quality service was one of the central goals of NRF,3 we set up a process for monitoring Pacific and Verizon's service quality to ensure that they were striking the appropriate balance between cost cutting and good customer service. The Commission stated that if the monitoring efforts revealed that ratepayers were being harmed through deteriorating service quality, the Commission would take immediate steps to rescind or alter NRF.4

This decision reviews the results of several types of data, including Commission- and Federal Communications Commission (FCC)-mandated reports, informal and formal complaints, and customer surveys to determine how the performance of Pacific and Verizon has fared in the 12 years since we instituted NRF.

We find that over this 12-year period, Pacific had a number of key service quality problems. These problems are reflected in the following areas:

      · Repair intervals, or the time it takes Pacific to complete repairs once a customer notifies the company of problems and number of trouble reports, especially reports of service outages (see Section entitled "Network Reliability, Trouble, and Repair - Pacific," below).

      · Answer times (see Section entitled "Answer Times - Pacific," below).

      · An increasing pace of formal complaints aimed at serious service quality problems and related issues (see Sections entitled "Complaint Data - Pacific, Formal Complaints," and "Marketing - Pacific," below).

      · Negative trends in service quality in some of the Commission's informal complaint data (see Section entitled "Complaint Data - Pacific, Informal Complaints," below).

      · A significant deterioration in the perceptions by residential and small business customers of Pacific's service quality (see Section entitled "Customer Satisfaction and Service Quality Surveys - Pacific," below).

      · Failure by Pacific to file required service quality reports (see Section entitled "Other Customer Surveys - Pacific," below).

In addition, we are concerned that, in Pacific's increasing use of affiliates to offer services formerly provided by the regulated utility (see Section entitled "Movement of Functions to Unregulated Affiliates - Pacific," below), Pacific has posed challenges to our regulatory authority that may be detrimental to our ability to protect service quality.

Verizon's service quality results are better than Pacific's, but still show some problems in need of correction. The problems are focused in the following areas:

      · Residential and business installation intervals and business installation commitments met (see Section entitled "Installation - Verizon," below).

      · Business trouble reports for repairs (see Section entitled "Repair - Verizon," below).

      · Staffing levels (see Section entitled "Staffing - Verizon," below).

Compared to Pacific's results, however, Verizon shows positive customer perceptions as measured by a survey conducted by the Commission's Office of Ratepayer Advocates (ORA).

Overall, we find that, as presently constituted, NRF fails to ensure high quality service for residence and business customers of either Pacific or Verizon. NRF's impact on service quality was a key concern when we adopted the new framework in 1989, and we find we had reason for concern. We have dedicated the upcoming Phase 3B of this proceeding to, among other things, an examination of changes in NRF that may be required by our factual findings on the two carriers' service quality. In view of the findings we make here, we believe that the service quality aspects of NRF must be strengthened, and invite parties' input on ways to enhance NRF to ensure better service quality in the future. Any changes that we make to NRF should be coordinated with revisions to General Order 133-B that result from the rulemaking we recently opened to make such revisions, Rulemaking 02-12-004.

1 Since hearings in this case, Pacific changed its name to SBC. Because we occasionally discuss Pacific's affiliates in this decision, we will retain the "Pacific" moniker as a means of referring to the regulated utility for purposes of this decision. 2 D.89-10-031, 1989 Cal. PUC LEXIS 576, 33 CPUC 2d 43 (1989), 107 PUR 4th 1 (1989). 3 D.89-10-031, 33 CPUC 2d at 92, 197. 4 Id. at 153.

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