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Response to State Rate Deregulation

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Response to State Rate Deregulation Powered By Docstoc
					Assessing Pricing
Behavior Under
Deregulation
David Brevitz
June 14, 2006
NASUCA Mid-Year Meeting

                          1
Current Environment
  Flood of legislative deregulation of telephone
   rates under ILEC political pressure,
   Commissions also deregulating
  Massive AT&T and Verizon construction
   programs
  Emphasis on bundling of telephone, internet
   access, cable TV
  Basic local exchange rates are being increased
   for revenue not cost reasons

                                                2
Rate Deregulation
  Most states have had ILEC-initiated
   deregulation bills in the legislature, some are
   now passing
  Policy Objective: “promote market based
   competitive forces”
  Many bills focus on deregulation of service
   bundles
  But basic local service also addressed in some
   bills, subject to separate treatment

                                                 3
Legislative Rate
Deregulation
  Between October 2004 and September 2005,
   22 states deregulated services—NRRI State
   Rate Report, April 2006
  A growing list of states face deregulation of
   basic service rates for residential consumers,
   now or in the next few years
  “Many states have already deregulated
   bundled services”—NRRI State Rate Report,
   April 2006
                                                    4
Legislative Rate
Deregulation
  Flood of legislative deregulation embraces
   policy of reliance on competitive market forces
  Policy is ill-conceived and ill-considered
    Deregulating into likely cable/ILEC duopoly
    Independent operating status of VoIP providers not
     assured
    Continuing industry consolidation
  Policy change cannot be immediately reversed,
   but consumer advocates must gather and
   maintain information to address abuse of
   market position and prices
                                                          5
Verizon Fios Program

  Verizon plan for extensive fiber optic upgrades
   and deployment to add TV and very high
   speed internet to bundles
  $6-7 billion to be spent over 5 years
  Per the Wall Street Journal:
    “by far the most expensive and extensive plan”
     among the telcos
    Based on worries Verizon is spending too much,
     investors have “hammered” Verizon stock price

                                                      6
AT&T Internet TV Service
  New internet technology is to be used to
   deliver TV signals, avoids cost of fiber optics to
   home
  Planned spending of $4.6 billion to make
   “IPTV” available to 19 million homes in 41
   markets by the end of 2008
  $800 million being spent in Texas, $247 million
   in Kansas based on recent legislation
  Plan has a number of financial community
   skeptics, as does Verizon’s plan
                                                    7
Verizon and AT&T Pricing
  Fairfax County, Va
    Cox Cable: $102.04 per mo. for telephone, cable
     TV and high speed internet
    Verizon: $104.85 is the least expensive package
     including unlimited calling
  San Antonio, Tx
    “controlled launch” to “hundreds” of subscribers,
     pricing not yet available
    SBC statement that bundle price will move toward
     $90

                                                         8
Verizon and AT&T
Business Focus
  Focus is on the very high speed internet &
   Cable TV bundle
  Urgency is to address financial community
   concern that there is no return for 5-10 years
  No concern about basic service except to
   increase revenues, offset Wall Street worries,
   migrate customers to bundle, pay for
   broadband infrastructure

                                                    9
Basic Local Exchange
Rate Increases
  Increasingly permitted by legislation and
   Commissions
  ILEC’s real reason for increases is to
   increase revenues and cash
  Cost arguments are used for PR
   purposes
  “Migration Strategy”—service bundles
   are excepted from price increases
                                               10
BLES Rate Increases
  Basic service rate increases “going in”
    Idaho, up to 10% rate increase, then deregulation in
     2-4 years
    Iowa, $1 per month up to $19 cap, deregulation
     procedure is available (10 Qwest exchanges
     deregulated)
    Indiana, $1 per year to 2009, then BLES is
     deregulated
    Oklahoma, deregulation and $1.90 increase a/o
     April/07
    Wisconsin, $2.50 annual limit 1st two years, then
     BLES is deregulated

                                                        11
BLES Rate Increases

  Missouri, basic telephone rates up 10-
   13%, $.93 to $1.26 per month
  Increase will not apply to bundles
  AT&T states “we need the revenue to
   continue providing good service and to
   invest in new technology”


                                            12
Reliance on “Market
Forces”
  Competition is assumed, not
   demonstrated, policymakers are
   deregulating into a two-wire, duopoly
   market structure
  Markets are very highly concentrated, not
   even close to “many buyers, many
   sellers” competitive market construct

                                           13
Reliance on “Market
Forces”
  Primary competition will be between cable
   company and ILEC
  Some locations have only one choice—ILEC
   only or cable only
  Rivalrous behavior now between cable and
   ILECs, as each are expanding into the other’s
   markets
  But, when duopoly equilibrium is reached,
   deals will end and prices will rise

                                                   14
Reliance on “Market
Forces”
  ILEC incentive to move customers from lower
   revenue basic services to higher revenue
   bundles
  Lack of comparably priced functionally
   equivalent BLES alternatives
  BLES prices increase, subject only to “cap” of
   the bundle price
  SBC (AT&T) has stated BLES prices are
   protected by the “cap” of the bundle price

                                                    15
Monitor Prices Under
Deregulation
  Collect and track prices in states where BLES
   has been deregulated, versus those states that
   have not deregulated
  Provide data support for future policy debates
   regarding pricing behavior in the market, as
   experienced (duopoly)
  Provide “rapid response” capabilities for
   anecdotes from other states in legislative or
   commission hearings
  Demonstrate experienced pricing patterns
   under deregulation
                                                16
Prices to Monitor

  For all 50 states:
    Basic local exchange service
       Urban
       Rural
    Lifeline service
    Bundle prices
       “basic” bundle
       Complete bundle package

                                    17
Collection of Price Data
  Has price data already been collected?
     No doubt varies by state
  How far back does data need to be collected?
     1995 (pre-date Telecom Act)?
     2000?
  Separate collection of billing elements (SLC, BLES,
   surcharges, taxes, etc)
  Which ILECs should be tracked in each state?
  Ways to keep price data current and up to date
  Need to understand state specific reasons for some
   price increases—e.g, inclusion of Touch Tone, price
   cap adjustment, rebalancing or legislated increases

                                                         18
FCC Reference Book
  Contains limited price information
  Rates for cities in 40 states as included in BLS
   Urban CPI survey, beginning in 1986
  Omitted states are Delaware, Idaho, Kansas,
   Nevada, New Hampshire, North Dakota,
   Oklahoma, South Dakota, Vermont and
   Wyoming
  Not all states are “complete” for monitoring
   needs—Nebraska: Grand Island included, but
   not Omaha
                                                  19
FCC Reference Book
                        BLES    SLC      Surcharges Taxes     Total
 Huntsville        2001 $ 16.30 $   5.00 $     1.32 $    2.23 $ 24.85
 Alabama           2004 $ 16.30 $   6.50 $     1.11 $    2.93 $ 26.84

 Pine Bluff        2001 $ 15.17     $    5.00   n/a          $   4.92   $ 25.09
 Arkansas          2004 $ 16.85     $    5.21   $     2.44   $   3.03   $ 27.53

 Kansas City       2001 $ 11.25     $    5.00   n/a          $   4.43   $ 20.68
 Missouri          2004 $ 11.26     $    5.21   $     1.28   $   2.06   $ 19.81

 Grand Island      2001 $ 18.15     $    5.00   n/a          $   3.10   $ 26.25
 Nebraska          2004 $ 18.15     $    4.89   $     0.51   $   5.20   $ 28.75

 Milwaukee         2001 $ 26.23     $    5.00   n/a          $   3.52   $ 34.75
 Wisconsin         2004 $ 25.41     $    5.06   $     0.73   $   2.64   $ 33.84

 Source: FCC Reference Book data files

                                                                                  20
2 States Not Included in
BLS CPI Urban


                    BLES    SLC      FUSF
      Urban    2001 $ 14.05 $   5.00 $    0.47      $ 19.52
      Kansas   2004 $ 15.70 $   5.21 $    0.48      $ 21.39

      Rural    2001 $ 13.45   $   5.00   $   0.47   $ 18.92
      Kansas   2004 $ 15.70   $   5.21   $   0.48   $ 21.39

      Maine    2001 $ 17.03   $   5.00   $   0.54   $ 22.57
               2004 $ 19.08   $   6.38   $   0.57   $ 26.03




                                                              21
“Model” legislative
language
  Once ILEC is deregulated, experience shows
   much less cooperation (data) can be expected
  Deregulation acts should include language that
   requires the ILEC to provide pricing data
   regularly as needed for the price monitoring
   program
  NASUCA effort to provide draft model
   language to accomplish this in future
   deregulation legislation?
                                                22
BLES Deregulation

  Like it or not, basic service prices are being
   deregulated
  Data and information is needed, not
   anecdotes, for future efforts to slow down or
   rectify deregulation
  Consumer advocates should take steps now to
   create database of prices to be able to
   demonstrate actual pricing behavior under
   deregulation
                                                23

				
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