VIII. Single-Line Basic Business Rates

Although there is only one market for voice communications services in California, the record concerning basic business services was developed in great detail. We, therefore, focus on pricing policies for basic business service in this section so that we can address parties' specific arguments and supporting evidence at greater length.

A. Position of Parties

AT&T proposes that the Commission authorize the ILECs to exercise full pricing flexibility for single-line business basic services (1MB).⁶⁰⁰ SureWest and Frontier also support this proposal.⁶⁰¹

AT&T maintains that there is no justification for a price cap on single-line business basic service. AT&T notes that there are a number of competitive alternatives for business customers, and there is robust competition in that market.⁶⁰² The ILEC notes that basic business service rates are not subsidized by public policy programs, like residential basic rates are for universal service reasons.⁶⁰³ .

AT&T asserts that artificially regulating the price of a service that can (and should be) set by the competitive process harms customers.⁶⁰⁴ AT&T argues that regulation can restrain the ability of telecommunications carriers to respond to competition.⁶⁰⁵ In contrast, prices move toward cost and the full benefits of competition flow to customers when the competitive process is allowed to function without regulatory distortions.⁶⁰⁶

Verizon proposes to cap single-line business basic services (1B)⁶⁰⁷ prices and associated non-recurring costs (NRCs) at their current levels for three years beginning on the effective date of this decision.⁶⁰⁸ Verizon contends that this three-year transition period to full pricing flexibility would provide the Commission with "additional assurances that the new framework will achieve its intended result."⁶⁰⁹ Verizon adds that the transition period would give the Commission time to address other important public policy initiatives beyond the scope of this OIR, such as reforming the universal service subsidy programs.⁶¹⁰ At the conclusion of this three-year transition period, the caps would automatically sunset without the need for further Commission action or litigation.⁶¹¹

DRA urges the Commission to cap the 1MB price at current levels and to retain related monitoring.⁶¹² It also recommends that the Commission review 1 MB in three years.⁶¹³ DRA explains this review is necessary for determining whether the service should be fully price de-regulated, because currently the record supports retention of price caps "for basic single-line business services and the usage associated with those services."⁶¹⁴ DRA states that regulating the price of access lines without regulating the price of associated usage will enable the incumbents to avoid any meaningful price constraints on basic exchange services.⁶¹⁵

TURN supports granting downward pricing flexibility subject to its price floor constraints, but TURN, like DRA, proposes that 1 MB be subject to a three-year price cap.⁶¹⁶ TURN argues that there is little or no competition for local exchange service that, for the purpose of this proceeding, encompasses residential and business primary lines; local usage; ZUM; EAS; recurring and non recurring charges; and additional lines for business and PBX trunks. Thus, TURN concludes that the Commission should not grant complete pricing flexibility for these services at this time and should instead re-examine this issue in three years through another proceeding.⁶¹⁷

DOD/FEA agrees with Verizon, Cox, CSBR/CSBA, and DRA in urging the Commission to continue limited price protection for small businesses.⁶¹⁸ DOD/FEA, however, recommends a revenue cap instead of a price cap. Under this proposed revenue cap, each respondent's total revenues from residential and business basic local services would be capped at a certain revenue level.⁶¹⁹ DOD/FEA further suggests that these revenue caps remain in effect for three years, "at which point the Commission would review their effectiveness as well as the existing state of competition in California."⁶²⁰

Given the demise of UNE-P availability, DOD/FEA observes that small business customers may not benefit from competition as much as residential customers. DOD/FEA notes that while competitors may offer local service telephony to mass market customers as part of an attractive package including television and/or high-speed Internet access, small businesses, which usually do not need either television or high-speed Internet access, are less likely to find cable service packages attractive.⁶²¹ DOD/FEA consequently urges the Commission to follow the path of most of the other states, which have gone through deregulation, and retain price regulation for basic business services at least for the next few years.⁶²²

CSBRT/CSBA recommends that the Commission continue to regulate basic business rates for at least the near future and does not propose any changes in rates or current regulatory procedures. CSBRT/CSBA contends that the current level of competition is unable to check ILECs' market power over basic business rates. Citing the FCC's latest Local Competition Report, CSBRT/CSBA indicates that there are fourteen zip codes in California where there are no CLECs and another thirty-two zip codes where there are only one to three LECs.⁶²³ CSBRT/CSBA also points out that the FCC's latest Wireless Competition Report indicates that the penetration rate for wireless service in less densely populated areas is twenty percent below major metropolitan areas, and there are some rural areas with few, if any, wireless service providers.⁶²⁴

Furthermore, CSBRT/CSBA maintains that regulating basic business rates in the near term will give the Commission time to attain better information about the deployment of competitive services.⁶²⁵ CSBRT/CSBA urges this Commission to support the FCC as it prepares its Section 706 report on the provision of new technologies and services,⁶²⁶ and notes that in the near future the FCC may clarify some issues related to VoIP service.⁶²⁷

Time Warner advocates that the Commission set price caps for basic business service at current rates and allow inflation adjustments annually thereafter.⁶²⁸ Time Warner also urges adoption of a policy in which the price would be above a cost-based price floor.⁶²⁹ Cox and CCTA generally support Time Warner's proposal.⁶³⁰

Time Warner states that the record indicates that AT&T and Verizon continue to dominate the business market. It points out that DOD/FEA shows that the ILECs, together, control seventy-three percent of the medium/large business/institutional market and eighty-six percent of the residential and small business market in California. Time Warner adds that DRA's confidential data confirms the ILECs' market dominance.⁶³¹ Time Warner asserts that these large ILEC market shares, which have persisted after "12 years of competition . . . are a testament to why there cannot be flash-cut symmetric regulation of ILECs with their smaller competitors in the business market."⁶³²

B. Discussion: Full Pricing Flexibility for Basic Business Service Is Reasonable

State and federal statutes are relevant to this analysis in two central ways. First, the statutes encourage reliance on open and competitive telecommunications markets. Second, the statutes instruct regulators to use technologically and competitively neutral measures to encourage further development of new technologies. Neither of these statutory policies limits our ability to allow pricing freedoms for basic business rates; indeed, these policies support greater pricing freedoms.

We, therefore, next consider whether market conditions will place sufficient checks on ILECs' power over pricing basic business rates. This analysis is not as restricted as CSBRT/CSBA suggests it should be. While there are fourteen Zip codes in California that lack a CLEC, this statistic alone does not indicate that ILECs continue to have market power in those fourteen Zip codes. We also must consider the potential for CLEC competition and the entry of VoIP and wireless into the voice market.

We turn back to our analysis in Section V. First, we saw that unbundling requirements continue to apply throughout the service territories of SureWest, Verizon, AT&T, and Frontier, and the threat of market entry by a CLEC checks market power throughout entire ILEC service territories.⁶³³ Second, we cited evidence that shows that broadband is available in one hundred percent of all California ZIP codes.⁶³⁴ This widespread availability of broadband makes it possible for any business with access to broadband to purchase VoIP services, either directly from the broadband provider or from a "pure play" VoIP provider, like Vonage.

Moreover, wireless competition plays a particularly role in the basic business segment of the telecommunications marketplace. AT&T notes that "78 percent of small business owners use mobile wireless service and over three fourths of these consider mobile wireless service to be essential or important to their business operations."⁶³⁵ AT&T also states that "25 percent of small businesses spend more on wireless than on local and long distance combined."⁶³⁶ These statistics convince us that there already is significant cross-platform competition among providers of basic business service.

In conclusion, there is no evidence concerning the basic business segment of the telecommunications market that causes us to reassess the conclusions reached in our general market analysis. Indeed, the evidence that we have supports our two major conclusions - that there is a single market for voice communications and this market is subject to significant competition by different technologies. Consequently, we find that it is reasonable to eliminate all price regulations of basic business service effective immediately.

⁶⁰⁰ SBC California Opening Brief at.58-59.

⁶⁰¹ Frontier RB at 18; SureWest RB at 21-22 Frontier RB at 18; SureWest RB at 21-22

⁶⁰² SBC California Reply Brief at 25, citing Dr. Taylor, Exhibits 28, 29.

⁶⁰³ SBC California Opening Brief at 82.

⁶⁰⁴ SBC California Opening Brief at 63.

⁶⁰⁵ SBC California Opening Brief at 63.

⁶⁰⁶ Id. at 25-26.

⁶⁰⁷ Verizon's 1B is equivalent to other NRF ILECs' 1 MB; both are referring to single-line business basic services.

⁶⁰⁸ Verizon OB at 24-26.

⁶⁰⁹ Verizon OB at 24.

⁶¹⁰ Verizon OB at 24-25.

⁶¹¹ Id.

⁶¹² Comparison URF Proposal

⁶¹³ Comparison URF Proposal

⁶¹⁴ DRA OB at 6.

⁶¹⁵ DRA OB at 6.

⁶¹⁶ TURN OB at 34.

⁶¹⁷ Id.

⁶¹⁸ DOD/FEA OB at 10-11.

⁶¹⁹ DOD/FEA OB at 10.

⁶²⁰ Id.

⁶²¹ Id.

⁶²² Id.

⁶²³ CSBRT/CSBA Opening Comments at 7.

⁶²⁴ CSBRT/CSBA Opening Comments at 7.

⁶²⁵ Id. at 8.

⁶²⁶ Id. at 8.

⁶²⁷ These issues include E-911, universal service support, and bundling of broadband and voice services.

⁶²⁸ Comparison URF Proposals

⁶²⁹ Time Warner OB at 7. The price floors proposal of Time Warner is addressed in detail in Section XI, below.