Chong Comment Decision Attachments Comparison of URF Proposals
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STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION

505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

July 25, 2006 Agenda ID #5850

TO: PARTIES OF RECORD IN R.05-04-005

This is the proposed decision of Commissioner Rachelle Chong. It will not appear on the Commission's agenda for at least 30 days after the date it is mailed. The Commission may act then, or it may postpone action until later.

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," accessible on the Commission's website at http://www.cpuc.ca.gov. Pursuant to Rule 77.3 opening comments shall not exceed 15 pages.

Comments must be filed with the Commission's Docket Office. Comments should be served on parties to this proceeding in accordance with Rules 2.3 and 2.3.1. Electronic copies of comments should be sent to ALJ Reed at jar@cpuc.ca.gov and Tim Sullivan, Advisor to Commissioner Chong at tjs@cpuc.ca.gov. All parties must serve hard copies on the ALJ and the assigned

Commissioner, and for that purpose I suggest hand delivery, overnight mail or other expeditious methods of service. The current service list for this proceeding is available on the Commission's web site, www.cpuc.ca.gov.

/s/ ANGELA K. MINKIN by J.A. ECONOME

Angela K. Minkin, Chief

Administrative Law Judge

ANG:vfw

Attachment

COM/CRC/mei DRAFT Agenda ID #5850 (Rev. 1)

Decision PROPOSED DECISION OF COMMISSIONER CHONG
Mailed 7/25/2006

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking on the Commission's Own Motion to Assess and Revise the Regulation of Telecommunications Utilities.

Rulemaking 05-04-005

(Filed April 7, 2005)

OPINION

Table of Contents

OPINION 11

Findings of Fact 224224

Conclusions of Law 234234

ORDER 241241

I. Summary

In this proceeding, we evaluate both statutory guidance and market conditions in determining whether we may rely more heavily on competitive forces to produce "just and reasonable" rates for California's telephone consumers.

As a result of our statutory and market analysis, we grant carriers broad pricing freedoms concerning almost all telecommunications services, new telecommunications products, bundles of services, promotion, and contracts. We simplify all tariff procedures, making tariffs effective after one day, although we require all carriers to provide a twenty-five-day notice to customers of any proposed price increase. We make contracts effective when executed, ending the necessity of post-signing reviews by this Commission. With few exceptions, we permit carriers to add all services to "bundles" and to target services to specific geographic markets.

We find, however, that continued pricing regulation is warranted in a few specific circumstances relating to public policy programs. In particular, when a particular service receives a social program subsidy, such as LifeLine residential service and basic residential service in areas receiving the California High Cost Fund-B (CHCF-B) subsidies, we adopt certain restrictions. In particular, we adopt a two-year price freeze on the price of basic residential service in order to address the statutorily-mandated link between the LifeLine rate and the basic residential service rates in our pending Universal Service Public Policy Program OIR. In addition, we prohibit the inclusion of basic residential service in "bundles" or "promotions" in those areas receiving a CHCF-B subsidy. Similarly, we prohibit the inclusion of LifeLine services in "bundles" or "promotions."

We also reduce and eliminate many of the vestiges of rate of return regulation, such as "accounting adjustments" and other rules that cause regulatory accounts to diverge from financial accounts. We believe that these regulatory adjustments, which no longer serve a ratemaking purpose, simply make a utility's accounts less understandable. We instead standardize on Generally Accepted Accounting Principles (GAAP) accounting standards and streamline our audit practices. We eliminate the price cap index, price cap filings, earnings "sharing," and gain-on-distributions no longer appropriate in open and competitive telecommunications markets.

We eliminate all monitoring reports tied to the now outdated New Regulatory Framework (NRF) governing the incumbent local exchange carriers affected herein, and instead standardize our reporting requirements to the comprehensive reports provided by all carriers for the Federal Communications Commission (FCC). We set Phase 2 as the proceeding for determining what reports are needed and permit parties to recommend reporting requirements consistent with the new rules that we adopt today.

With our last major review of the telecommunications regulatory framework establishing NRF being eighteen years ago, we acknowledge that this review is overdue. Our review of current market structuring regulations adopted by the FCC as a result of the Telecommunications Act of 1996 and subsequent actions by this Commission, as well as the observed rapid pace of technological developments in telecommunications, convinces us that competitive pressures now are sufficient to check incumbent local exchange carriers' (ILECs') exercise of market power in all but a few instances.

In particular, we find that the market for voice communications services has dramatically changed in the eighteen years since our last review in NRF. This market now includes multiple wireless carriers, competitive local exchange carriers (CLECs),1 cable television companies who have added Voice over Internet Protocol (VoIP) telecommunications products to their "triple play" voice, video and data offerings, and pure-play VoIP providers such as Vonage or Packet8, who will add a voice communications service to any broadband connection.

With these market changes, the mid-size and large ILECs2 have urged the Commission in this proceeding to give them greater pricing flexibility to meet the new competition. Currently, ILECs are subject to complex regulations that were first enacted eighteen years ago under the NRF regime which had strong roots in cost-of-service regulation. There, the Commission's control of prices was viewed as critical to ensuring that rates were just and reasonable. Moreover, since only one incumbent local telephone carrier provided the telecommunications services, delays in the change of a price or the introduction of a service had few market consequences, because customers could not take their business elsewhere. The NRF framework is no longer relevant to today's competitive communications marketplace, because it predates the Telecommunications Act of 1996, the addition of multiple wireless industry players,3 the rise of the Internet and its revolutionary VoIP technologies, and broadband technologies delivered through ILEC Digital Subscriber Lines (DSL) or cable modem technology.

NRF mapped all ILEC services into categories, and established different pricing rules for each service. As a result, ILECs who now attempt to serve the needs of consumers by offering a bundle of telecommunications services face a patchwork quilt of different regulations that apply to different parts of the bundle. Moreover, it can take months to work through the complex NRF-related regulatory issue.4

ILECs face pricing difficulties not only in bundling their legacy services, but in their new service offerings as well. Under current regulations, a NRF utility must file an advice letter 30 days in advance of the introduction of a new product service, or technology.5 Along with the advice letter filing, the ILEC is required to justify its pricing with cost data and provide other data depending on the category of the service.6 If no protest is received and the Commission does not initiate a suspension, the new tariff is approved and the service, technology, or product may be offered.7 If the new service is protested by a competitor, a complex regulatory process is triggered, in which the ILEC can respond to the protest, the Commission staff drafts a Commission resolution, the resolution is subject to a public comment period, and must be publicly distributed 30 days in advance of a Commission meeting. If there are no additional complexities, the protest will commonly add at least four months (and as long as a year or two) of regulatory process delaying the introduction of a new service. One can see that competitors have much to gain by protesting any new ILEC service.

AT&T,8 Frontier, SureWest, and Verizon argue that these price controls no longer serve a public interest. With the ending of telecommunications monopolies and the introduction of competition by the federal Telecommunications Act of 1996 and subsequent regulations, the ILECs no longer possess market power. Telecommunications customers can take their business to other carriers rather than wait for regulatory approvals. In addition, the ILECs have argued that the wireless industry's dramatic growth, the proliferation of new wireless services and technologies, and the dramatic reductions in wireless rates, have occurred under the FCC's policy of forbearing from price regulation. They argue that this offers a powerful example of how pricing freedoms can benefit both consumers and the telecommunications market.9

In response to these new market realities, the ILECs, therefore, recommended we adopt a new Uniform Regulatory Framework (URF). Specifically, they proposed reforms that would significantly expand their freedom to price telecommunications services, and would reduce the reporting, monitoring, and auditing apparatus that have evolved along with regulation of their prices over the decades.

In undertaking our review, we have found that, since the initial adoption of NRF, the statutory framework setting telecommunications policy in the nation and in California has evolved dramatically. A national decision to rely on competition whenever possible was made by Congress "in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies."10 California statutes now endorse a reliance on open and competitive markets in the telecommunications industry unless the elimination of regulation would result in rates being set above "just and reasonable" levels.11 Other California statutes further instruct us to use technologically and competitively neutral measures in order to encourage the development of new technologies.

A central question in this proceeding, therefore, is whether ILECs possess market power in the current regulatory and market environment that limits the ability of the Commission to rely on market forces, rather than price controls, to produce "just and reasonable" rates consistent with a statutory framework that now dictates open markets, competitive and technological neutrality, and pricing freedoms. Before we address the issue at hand, we note that determining that carriers lack market power would not be a novel conclusion in telecommunications regulation. This Commission and the FCC have followed a path of relaxed regulation in the competitive long-distance wireline and wireless markets, so that currently neither this Commission nor the FCC regulate the prices of telecommunications services in these two markets. Further, many of the reforms we consider today have already been adopted in other states.12 Thus, the regulatory road that we travel in this decision is consistent with direction provided by state and federal statutes, follows the same path traveled in long-distance and wireless markets, and tracks paths taken in the local telephone rate market by other forward-looking states.

In this decision, we recognize the importance of universal service public policy programs such as LifeLine that bring affordable telephone service to low income Californians. The Legislature and this Commission has made it clear that connecting as many Californians to the telephone system is important to enhance the value of this system and to serve important public safety goals. We explicitly acknowledge that we must continue to support these codified social policy programs. However, in places where social policies are not impacted, the law encourages us to rely on open markets and competition when seeking to achieve broad consumer benefits.

Our decision today results from a close adherence to the statutory guidance provided by California and federal law, from an acknowledgment of the regulatory accomplishments of the last ten years to open local communications markets, and from a recognition that market developments including increased competition from VoIP and wireless technologies preclude ILECs from the exercise of market power.

1 The CLECs often provide service on Unbundled Network Element-Loops (UNE-L) leased from the ILEC and their own telecommunications switching infrastructure.

2 For the purposes of this decision, general discussion of "ILECs" only applies to mid-size and large California ILECs, which include AT&T, Frontier, SureWest, and Verizon.

3 These new wireless competitors include Personal Communications Services, Specialized Mobile Radio, and other FCC-licensed wireless technologies,

4 See, e.g., Ex. 33, Opening Declaration of Timothy McCallion at 8 (McCallion testifying that when Verizon attempted to offer a bundle of services called "Local Packages" it took close to a year to work through the regulatory issues and it ultimately required Verizon to tariff a service that few customers wanted and to remove "unlimited local directory" service from their package).

5 General Order 96-A, Sections III-V; D.05-01-032, Appendix A.

6 General Order 96-A, Section V; Order Granting Limited Rehearing of D.89-10-031 but denying rehearing of D.89-12-048, D.90-04-031, 36 CPUC 2d 276 (1990) (amending Ordering Paragraph 30 to D.89-10-031); Alternative Regulatory Frameworks for Local Exchange Carriers, D.94-09-065, 56 CPUC 2d 117, 263-264 (1994); D.05-01-035, Appendix A.

7 See Comments of Emery G. Borsodi for SBC California at 34 (May 31, 2005).

8 AT&T was known as Pacific Bell Telephone Company and SBC California in prior phases of this proceeding, and any company filing will be referenced in accordance with the company's name as it is listed on the title page of the filing. In the text of this decision, however, we will refer to the company only by the name it presently does business as (AT&T) when describing positions it has taken.

9 See Comments of Emery G. Borsodi for SBC California at 34-35 (May 31, 2005).

10 47 U.S.C. pmbl.

11 Cal. Pub. Util. Code § 451 ("All charges demanded or received by any public utility, or by any two or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable. Every unjust or unreasonable charge demanded or received for such product or commodity or service.").

12 En Banc Tr. at 167 (testimony of Dr. Ed Rosenberg) (indicating twenty-one states already have engaged in telecommunications deregulation).

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