FORBEARANCE

					Deregulation and Price Increases:
  The Hallmarks of a
    Competitive Market?
             Presentation for the
         National Association of
    State Utility Consumer Advocates
       Annual Meeting, New Orleans, LA
             November 18, 2008

              Susan M. Baldwin
    ECONOMICS OF DEREGULATION

Rates:
      Logic -
      In competitive markets, rates move toward cost
      Perfect competition: marginal revenue = marginal cost

      Reality -
      After deregulation, rates for basic service and for
      discretionary features are increasing

November 18, 2008              Susan M. Baldwin             NASUCA Annual Meeting
    ECONOMICS OF DEREGULATION

Rates:
      Analysis -
      Have services been priced below cost? Are rates rising to
      “market” levels? (Verizon’s argument in DC price cap case)

      Flaw -
      No reasonably comparable market substitutes for stand-alone
      basic service exist so it is difficult to determine “market” rate.

November 18, 2008               Susan M. Baldwin          NASUCA Annual Meeting
    ECONOMICS OF DEREGULATION
Rates:
      Flaw –
      Net cost to ILECs of offering basic services should be declining if
      ILECs properly assign and allocate costs to new lines of business:

           “*U+sing their common local loop platform, carriers are now
           generating billions of dollars in digital subscriber line (‘DSL’)
           revenues that they did not generate five or ten years ago.”
           [Source: FCC, Order on Remand and Report and Order and Further Notice of Proposed
           Rulemaking in Docket 05-337/96-45 et al., November 5, 2008, Appendix A: Chairman’s
           Draft Proposal, at A-139, quoting NASUCA’s “refresh-the-record” comments, filed July 7,
           2008]

November 18, 2008                         Susan M. Baldwin                     NASUCA Annual Meeting
   ECONOMICS OF DEREGULATION
  ECONOMICS OF DEREGULATION

Rates:
      Conclusion -
      Markets were prematurely deregulated
      Rate increases are evidence of market power




November 18, 2008         Susan M. Baldwin    NASUCA Annual Meeting
    ECONOMICS OF DEREGULATION

Service Quality:
          Logic -
          In competitive markets, service quality should increase
          Reality -
          Service quality for basic service has been declining



November 18, 2008             Susan M. Baldwin        NASUCA Annual Meeting
    ECONOMICS OF DEREGULATION

Service Quality:
          Analysis -
          Consumers theoretically could be willing to wait longer
          for dial tone installation and repair if they got a price
          break, but there’s no evidence that consumers prefer
          worse service quality at the same or higher rate




November 18, 2008              Susan M. Baldwin       NASUCA Annual Meeting
    ECONOMICS OF DEREGULATION

Service Quality:
      Conclusion –
      Any competition that exists is for the ILECs’ resources, which are
      being diverted away from basic service to new lines of business.

      No penalty in the market which suggests one or more of the
      following:
                    - Consumers are locked into bundles
                    - There is no substitute for POTS
                    - There is “competition” but the “market level” for
                      service quality is low.

November 18, 2008                      Susan M. Baldwin            NASUCA Annual Meeting
    AFTERMATH OF DEREGULATION

Prices charged to consumers:
     Rates are higher

Service quality is deteriorating:
    Lower value of service is an effective price increase

Infrastructure:
     Broadband is deployed selectively


November 18, 2008         Susan M. Baldwin      NASUCA Annual Meeting
          RISING ILEC RATES - WHY?
ILECs retain market power:
    No substitute for stand-alone BLES
    Duopoly for broadband platforms and bundles

What is to gain?
    Encourage consumers to move to bundles
    Profit (low price elasticity of demand because no
    substitutes)

November 18, 2008         Susan M. Baldwin     NASUCA Annual Meeting
BROADBAND MARKET IMPERFECTIONS

Unprofitable areas lack broadband access

Unlike dial tone model of 20th century, no 21st
century obligation to provide broadband

Carriers deploy only where profitable

At best a duopoly

November 18, 2008    Susan M. Baldwin   NASUCA Annual Meeting
            National Residential High-Speed Lines
             by Technology as of June 30, 2007
                                                           SDSL and
                                                  Fiber
                                                          Traditional
                                                  1.7%
                                                           Wireline
                                                             0.2%

                                               Other
                                               10.0%




                                                                   Cable
                                                                  Modem
                                       ADSL
                                                                  50.6%
                                       37.5%




[Source: FCC, Wireline Competition Bureau, Industry Analysis and Technology Division, High-Speed Services
For Internet Access: Status as of June 30, 2007, rel. March 2008, Chart 6: Residential High-Speed Lines by
Technology as of June 30, 2007.]
 November 18, 2008                             Susan M. Baldwin                      NASUCA Annual Meeting
     National Residential Advanced Services Lines
          by Technology as of June 30, 2007
                                                                      SDSL and
                                                        Fiber        Traditional
                                                        1.9%          Wireline
                                                                        0.2%
                                                Other
                                                10.0%




                                                                    Cable
                                        ADSL                       Modem
                                        34.1%                      53.9%




[Source: FCC, Wireline Competition Bureau, Industry Analysis and Technology Division, High-Speed Services
For Internet Access: Status as of June 30, 2007, rel. March 2008, Chart 8: Residential Advanced Services Lines
by Technology as of June 30, 2007.]
  November 18, 2008                             Susan M. Baldwin                       NASUCA Annual Meeting
November 18, 2008   Susan M. Baldwin   NASUCA Annual Meeting
 SERVICE QUALITY ON THE DECLINE

Longer waits for repair

Longer waits for installation

Fewer lines repaired within 24 hours

Longer wait times at call centers

November 18, 2008      Susan M. Baldwin   NASUCA Annual Meeting
                             Service Quality Is Deteriorating:
                          Customers are waiting longer for repairs
             AT&T Repair Intervals
        40


        35
                                                                               32.2
                                                                        31.2
        30                          27.4
                             25.9
        25
                                                                                       22.2     22.3
                   21.0
                                                    20.0                                                19.8
Hours




        20
                                            18.9

        15


        10


         5


         0
                                    2002                                               2007


              AT&T (SW Bell)        AT&T (PacTel)     AT&T (SNET)        AT&T (Ameritech)       AT&T (BellSouth)

        [Source: FCC ARMIS Report 43-05 Service Quality report.]
         November 18, 2008                           Susan M. Baldwin                       NASUCA Annual Meeting
                            Service Quality Is Deteriorating:
                       Customers are waiting longer for repairs
             Qwest Repair Intervals
        40


        35


        30


        25
Hours




        20
                                                                  17

        15                      13.6

        10


        5


        0
                                2002                              2007

    [Source: FCC ARMIS Report 43-05 Service Quality report.]

        November 18, 2008                      Susan M. Baldwin          NASUCA Annual Meeting
                             Service Quality Is Deteriorating:
                        Customers are waiting longer for repairs
             Verizon Repair Intervals
        40
                                                                                                 36
        35


        30

                                           24.1                              24.1
        25
Hours




        20
                             15.5
        15


        10


         5


         0
                                    2002                                              2007


                                    Verizon (GTE)                      Verizon (Bell Atlantic)


        [Source: FCC ARMIS Report 43-05 Service Quality report.]
         November 18, 2008                          Susan M. Baldwin                         NASUCA Annual Meeting
           Recent Performance Shows Serious Decline:
                              Repairs Cleared within 24 Hours
         AT&T in Connecticut – 2007-2008 vs. 7-year Average
100%


90%


80%


70%


60%


50%


40%


30%


20%


10%


 0%
          Oct       Nov      Dec         Jan       Feb        M ar       Apr       M ay        Jun        Jul       Aug        Sep



                                   2007-08 Performance                             7-Yr Average Performance

 [Source: Connecticut DPUC Docket No. 99-07-28, AT&T Semi-Annual Performance Report, (For July 2007 - December 2007), January 29, 2008;
 AT&T Semi-Annual Performance Report, (For January 2008 - June 2008), July 30, 2008; AT&T Compliance Filing of 10/30/2008.]
       November 18, 2008                                  Susan M. Baldwin                               NASUCA Annual Meeting
DECLINING SERVICE QUALITY - WHY?

Lack of Accountability:

  Insufficient accountability to regulators – lack of
  enforcement and financial incentives

  Insufficient accountability to consumers – lack of
  market consequence for poor quality (i.e., lack of
  competition)


November 18, 2008         Susan M. Baldwin      NASUCA Annual Meeting
DECLINING SERVICE QUALITY - WHY?

What is to gain?

  Redeployment of resources to Verizon FiOS, AT&T U-
  Verse, and Qwest Connect

  Cost-cutting helps bottom line




November 18, 2008       Susan M. Baldwin   NASUCA Annual Meeting
              NO ILEC ACCOUNTABILITY

Service quality regimes not working:

    e.g., Verizon MA consistently misses the DTC repair
    standard and so receives zero “points” for this service
    quality metric, but nonetheless its overall SQI is
    sufficiently high that it avoids paying an SQI penalty




November 18, 2008         Susan M. Baldwin      NASUCA Annual Meeting
                     STATE BATTLES

Iowa – legislative mandate for deregulation:
      Default was deregulation so became uphill battle for consumer
      advocates

      Statute deregulated basic local with option for 2-year extension

      As a result of statute – burden was on consumer advocate to
      justify regulation rather than on ILECs to justify deregulation



November 18, 2008              Susan M. Baldwin         NASUCA Annual Meeting
                    STATE BATTLES

New Jersey and DC:
      Regulators’ compromise/contradiction:

      PUCs conclude that there’s plenty of competition but
      protect basic local for a few years to make
      deregulation palatable



November 18, 2008         Susan M. Baldwin     NASUCA Annual Meeting
    DISTRICT OF COLUMBIA: VERIZON

Because ILECs possess market power, unless consumer advocates and
regulators intervene, consumer rates will increase and service quality
will decline:

In price cap case, PSC acknowledged need to regulate stand-alone, based on
difference in competitive landscape between bundles and POTS:
          “Classifying all basic business services in the competitive services basket does not protect small
          businesses that desire only basic individual line and additional line business services, not
          bundles of business services or high-volume usage services, from unreasonable rate increases.”

          Freezes basic rates for two year and then caps increases thereafter: “Because of Verizon DC’s
          traditional and continuing dominant position in the District of Columbia telecommunications
          marketplace…”
          [Source: Verizon DC Price Cap Order, Case No. 1057, September 8, 2008, at 10-11, 19.]


   November 18, 2008                              Susan M. Baldwin                          NASUCA Annual Meeting
   DISTRICT OF COLUMBIA: VERIZON
DC PSC retains oversight of possible withdrawal of
basic services:
      “The withdrawal of basic services on 30 days’ notice is more problematic for
      the Commission. While many consumers may seek advanced
      telecommunications services, there will always be some consumers who
      choose only basic services. The Commission needs to ensure that these
      consumers will always have access to basic services. Thus, before the
      Commission can find this provision to be in the public interest, a provision
      stating that the Commission must approve any withdrawal of basic services
      prior to the withdrawal must be added to section5 (b) of Modified Price Cap
      Plan 2007.”

      [Source: Verizon DC Price Cap Order, Case No. 1057, September 8, 2008, at 16.]


  November 18, 2008                              Susan M. Baldwin                      NASUCA Annual Meeting
                        WHAT CAN BE DONE?

Protect customers at both ends of purchasing
spectrum:
            Basic POTS customers lack reasonably comparable
            substitutes
            Triple play customers vulnerable to duopolistic pricing

Monitor returns on equity

Consider revenues flowing from discretionary
services, DSL and video
=




    November 18, 2008              Susan M. Baldwin         NASUCA Annual Meeting
                     WHAT CAN BE DONE?

Acknowledge limitations of a duopoly in
yielding competitive rates


Seek re-regulation where so warranted


Expand scope/eligibility for Lifeline


 November 18, 2008         Susan M. Baldwin   NASUCA Annual Meeting
                      WHAT CAN BE DONE?
Critically view requests for universal service funds:
          Are urban rates indeed going down, and are rural rates going
          up?
          Are ILECs unable to earn a reasonable return on investment
          without an USF infusion?

Critically view requests to be “made whole” when access
rates go down:
          Access volume declining
          Lower rates stimulate new demand
          Lower rates decrease all carriers’ costs for intercarrier
          compensation
  November 18, 2008               Susan M. Baldwin          NASUCA Annual Meeting
 New Hampshire: FairPoint/Verizon

Not a deregulation case, but major transaction – although no
explicit PUC analysis of competitive landscape, PUC recognizes
need for rate and service quality protection

Settlement reflects some consumer advocate concerns:
           Consumer Advocate advocated for service quality
           improvements and rate protection

FairPoint agreed to some basic service rate protection:
       To maintain a stand-alone basic service offering
       Freeze rates for five years
 November 18, 2008              Susan M. Baldwin       NASUCA Annual Meeting
  New Hampshire: FairPoint/Verizon

FairPoint agreed to service quality commitments:
       1997 service quality standards
       Customer refunds if it fails to meet standards
       Limitations on future acquisition is if it does not meet
       standards

FairPoint agreed to broadband deployment




 November 18, 2008             Susan M. Baldwin         NASUCA Annual Meeting
   New Hampshire: FairPoint/Verizon

NH PUC agrees with Consumer Advocate, stating:
“The statement in OCA’s brief – that Verizon ‘demonstrates no intention of achieving PUC-
established service quality standards before selling its landline assets to FairPoint,’ OCA Brief
at 59 – is a fair one.”

“FairPoint has agreed to achieve all of the standards established in 1997, some of which
Verizon has argued in past proceedings are too strict and should be reduced. FairPoint not
only agreed to achieve the standards, but also agreed to financial consequences in the form
of customer refunds, if it does not meet them. FairPoint also agreed to limitations on future
acquisitions if it does not improve service quality to acceptable levels. We find that the self-
enforcing penalties and the limits on business acquisitions FairPoint has agreed to in the
settlement agreement particularly meaningful incentives to insure FairPoint will improve
service quality and achieve the relevant benchmarks. The commitments FairPoint has made
to improve overall service quality and to eliminate the long-standing and increasing
inventory of double poles are significant public benefits.”

   November 18, 2008                      Susan M. Baldwin                  NASUCA Annual Meeting
   New Hampshire: FairPoint/Verizon

NH PUC agrees with Consumer Advocate, continued:

Consumer Advocate was able to gain a commitment on the part of FairPoint (and
adopted in the settlement agreement) to maintain a stand-alone basic service
offering (NH Order, at 70. The settlement agreement also freezes rates for five
years).

[Source: Verizon New England, Inc., Bell Atlantic Communications, Inc., NYNEX Long Distance Co., Verizon Select Services, Inc. and FairPoint
Communications, Inc. Petition for Authority to Transfer Assets and Franchise Order Approving Settlement Agreement with Conditions, New
Hampshire Public Utilities Commission DT 07-011, Order Approving Settlement Agreement with Conditions, Order No. 24,823, February 25,
2008, at 71.]




   November 18, 2008                                        Susan M. Baldwin                                  NASUCA Annual Meeting
                   Susan M. Baldwin
     17 Arlington Street ▪ Newburyport, MA 01950
        (978) 255-2344 (v) ▪ (978) 255-2455 (f)
               smbaldwin@comcast.net




November 18, 2008     Susan M. Baldwin   NASUCA Annual Meeting

				
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